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Any Funds To Invest In Now While Everything Is Cheap?


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HOLA441
I think my charges over the long term should be less than 0.3%. For example, I tend to buy blue chips stocks in reasonable size chunks, so my trading costs are

Stamp duty: 0.5%

Broker commission: 0.1-0.2%

Bid/Ask spread: <0.1%

I hold forever, so my ongoing costs are for my SIPP charges which should average around 0.1% pa over the lifetime of the pension

I tend to split my pot between medium and short term, probably about 30% short term, the charges/fees on the short term are a lot higher as it's generally small amounts, some of which come off, some don't. The short term trades that end up not working are quickly reclassified as medium term and either held or dumped at a loss. I would like to hold onto the loss making ones longer in the hope one day they turn a profit, but I'm quite risk adverse.

When you say you hold forever, did you sell any or reduce holdings in anything when the market peaked with a view to rebuying when it falls?

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HOLA442
I tend to split my pot between medium and short term, probably about 30% short term, the charges/fees on the short term are a lot higher as it's generally small amounts, some of which come off, some don't. The short term trades that end up not working are quickly reclassified as medium term and either held or dumped at a loss. I would like to hold onto the loss making ones longer in the hope one day they turn a profit, but I'm quite risk adverse.

When you say you hold forever, did you sell any or reduce holdings in anything when the market peaked with a view to rebuying when it falls?

"When you say you hold forever, did you sell any or reduce holdings in anything when the market peaked with a view to rebuying when it falls?"

No, because as much as I try, i find I have no ability to predict the future

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HOLA443
"When you say you hold forever, did you sell any or reduce holdings in anything when the market peaked with a view to rebuying when it falls?"

No, because as much as I try, i find I have no ability to predict the future

But, buying shares and holding suggests you are trying to predict the future, that they will increase in value over time and yield more than cash over that time.

If I invest in the upstage of an economic cycle, and withdraw to a safe haven during a downturn, then reinvest near the bottom of that downturn it will surely beat holding over the whole cycle. I realise there are risks involved in timing the exit and entry, but I am not prediciting the future, I'm following a regular trend.

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HOLA444
"BoE inflation report, unemployment - IMO not factored in by the markets"

The consensus for CPI is 4.2% YOY and -0.2% MOM. Are you saying that you think the numbers will be in excess of this?

I think the CPI forecasts are about right for this month (IMO 0% to -0.2% MOM) but there is a real risk of CPI at around 5.5% by December, which is higher than the consensus. I think the BoE report will show a risk of higher inflation. PPI figures will also be horrendous next week - just bad news all week, affecting that most important of factors - sentiment.

Last month we had the first time that there were votes for a rate increase and decrease at the same MPC meeting since May 2006. That was the turning point for a change in the direction of rates.

This would also be bad news for stocks.

Edited by Crash Buyer
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HOLA445
charlie if you want some good timing signals RK is the man.20/50 week,is well sued.I think RK has one using the 9o week.saw it posted the other day in a thread in this mini forum.search it out or pm him and get him to psot on here.

Has this been proven to outperform buy and hold. If so, please post the link.

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HOLA446
But, buying shares and holding suggests you are trying to predict the future, that they will increase in value over time and yield more than cash over that time.

If I invest in the upstage of an economic cycle, and withdraw to a safe haven during a downturn, then reinvest near the bottom of that downturn it will surely beat holding over the whole cycle. I realise there are risks involved in timing the exit and entry, but I am not prediciting the future, I'm following a regular trend.

After reading lots of research which shows that people are hopeless at predicting anything, I am more than happy to stick with the current strategy. IMO, by the time you realise that a downturn/upturn is happening, the market has already priced it in.

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HOLA447
Has this been proven to outperform buy and hold. If so, please post the link.

I'm amused that you're still thinking in terms of strategies which have been shown to be successful in the past. I can't think of an approach less likely to be successful in the future... people adapt - even if they don't appear to learn.

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HOLA448
I'm amused that you're still thinking in terms of strategies which have been shown to be successful in the past. I can't think of an approach less likely to be successful in the future... people adapt - even if they don't appear to learn.

" can't think of an approach less likely to be successful in the future"

Are you Nostradamus?

How do you propose to devise a for the future when you don't know what the future holds.

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HOLA449
After reading lots of research which shows that people are hopeless at predicting anything, I am more than happy to stick with the current strategy. IMO, by the time you realise that a downturn/upturn is happening, the market has already priced it in.

I respect your views, but I do find it odd that you don't think it's possible to beat the market without it being luck. There has been plenty of opportunities to get out of stocks over the past years where, to me, it was obvious the market was about to fall.

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HOLA4410
I respect your views, but I do find it odd that you don't think it's possible to beat the market without it being luck. There has been plenty of opportunities to get out of stocks over the past years where, to me, it was obvious the market was about to fall.

I have yet to find evidence to the contrary (except in a few cases). Maybe you have the edge that others lack.

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HOLA4411
" can't think of an approach less likely to be successful in the future"

Are you Nostradamus?

How do you propose to devise a for the future when you don't know what the future holds.

I am neither Nostradamus nor a soothsayer - I don't proclaim prophesies.

While I don't know what the future holds, to varying degrees of certainty, I know what it doesn't hold... and from this I can make predictions.

I'm absolutely sure that people will age (or die); that all my peers are already born and that no-one is immortal.

I'm pretty damned sure that a contraction in credit will lead to a reduction in economic demand.

I expect that most in the UK with non-trivial debts are not in any position to repay quickly.

I know that any revival in British manufacturing will require significant prior capital investment.

I think it remarkably unlikely that people won't continue to be greedy, envious and crippled by pride.

I expect most of the population to remain somewhat superstitious and not to become analytical overnight; I expect entrenched political affiliations to remain independent of obvious fact.

In addition, there are other beliefs which, while fundamentally strong, are subject to probability. For example, a profitable business - over the long term - is likely to have a higher value than an unprofitable one; an efficient small business with an innovative and effective product or service is more likely to see substantial capital growth... while a stayed large organisation rife with inefficiency, hampered with limited revenue potential is likely to fare worse.

As I take greater and greater risks with my conjectures - I'd be willing to suggest that if we see an ongoing contraction of western credit over a period of years... while asset prices might be extremely volatile... I expect to see a downward trend in all asset prices. I think that analysis of the credit crisis strongly suggests an ongoing problem for many more months - if not years - and that this makes declining asset values more likely than appreciating asset values. This leaves me with a huge dilemma: can this stance be invested, or are we in an environment where everyone loses - and those who accept risk lose more than those who don't? The trade I'd like to make (if it can be done at suitable cost) is that I anticipate - on average - falls in mean asset prices across the developed world over the next 18 months. Obviously this means I could sell any equities I hold - but can this be taken further without enduring unacceptable short term risks or equally unacceptable costs? I remain entirely uncertain about this... even if we assume an unwavering conviction in this - my core current expectation - that, on average, asset prices will fall... and that no asset class will be immune.

Edited by A.steve
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HOLA4412

"(M&G Index Tracker a FTSE all share tracker is 0.3% per year charge)"

Charlie, You raise another important point. Reading the prospectus you think the charge is 0.3% however always look for the TER which is actually 0.46% or point another way 50% above the headline 'management fee'.

"When you say you hold forever, did you sell any or reduce holdings in anything when the market peaked with a view to rebuying when it falls?"

This is where I differ a little. Just as I am always buying the worst performing asset via £ cost averaging at regular intervals I also sell the % of each asset class that has deviated in a +ve direction from my desired allocation. Trying to buy low and sell high....

Edited by wish I could afford one
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HOLA4413
Steve,you're back :lol:

Pleased to amuse.

My monopoly money shorts aren't looking so healthy... The Google spreadbet is 4 points underwater (or 8% of allocated capital gone - plus previous gains, of course) - as Google's share price rises on news that it spunked $1bn on a stake in AOL that is now "impaired" - and my Apple short is 12 points underwater - or ~48% of allocated capital gone. My Google option is now valued at 48.30 - down 10.70 on its purchase price.

On one hand, I'm out of pocket - on the other, all three of my positions are still open... and the fat lady hasn't yet sung. I couldn't have hoped for better news to support my opinion on Google - but, so far the market doesn't much care about either. Time will tell.

I am still genuinely interested to establish if there is a way to invest my insight (ignoring entirely whether or not it is correct) - is there a practical way to benefit from anticipating a decline in asset prices other than by simply not buying them? Do I need a stronger opinion to justify a short position... and, if so, how strong?

Edited by A.steve
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HOLA4414
"(M&G Index Tracker a FTSE all share tracker is 0.3% per year charge)"

Charlie, You raise another important point. Reading the prospectus you think the charge is 0.3% however always look for the TER which is actually 0.46% or point another way 50% above the headline 'management fee'.

I used that fund to make the point that trackers are a lot lower in charges than managed funds. However, you're right, the difference of 50% is quite alarming and proves that you can never do enough research and digging.

"When you say you hold forever, did you sell any or reduce holdings in anything when the market peaked with a view to rebuying when it falls?"

This is where I differ a little. Just as I am always buying the worst performing asset via £ cost averaging at regular intervals I also sell the % of each asset class that has deviated in a +ve direction from my desired allocation. Trying to buy low and sell high....

Does it work, or do you get stuck with all the poor performing bits? I usually try and realise a profit when I'm ahead and I think the position is likely to change, I probably sell too early most of the time. If I'm left with loss making funds/shares I either take the hit and sell or hold, but there's only so long you can hold before you start missing other opportunities. I used to cost average in, but I now just pay bigger lumps a few times during the ISA year.

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HOLA4415
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HOLA4416
Pleased to amuse.

My monopoly money shorts aren't looking so healthy... The Google spreadbet is 4 points underwater (or 8% of allocated capital gone - plus previous gains, of course) - as Google's share price rises on news that it spunked $1bn on a stake in AOL that is now "impaired" - and my Apple short is 12 points underwater - or ~48% of allocated capital gone. My Google option is now valued at 48.30 - down 10.70 on its purchase price.

On one hand, I'm out of pocket - on the other, all three of my positions are still open... and the fat lady hasn't yet sung. I couldn't have hoped for better news to support my opinion on Google - but, so far the market doesn't much care about either. Time will tell.

I am still genuinely interested to establish if there is a way to invest my insight (ignoring entirely whether or not it is correct) - is there a practical way to benefit from anticipating a decline in asset prices other than by simply not buying them? Do I need a stronger opinion to justify a short position... and, if so, how strong?

No sh1t.

I was tempted to post earlier saying that 460 region looks like a near-term bottom. I have no idea at all what Google are up to and don't much care. They're headed back to the 510 area however - That is simply my view based on glancing at the chart - so don't bet your shorts on it! (I know you won't). You may be in luck when the DOW sells off heavily again in the next week or two, but I still think 460 will form a base.

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HOLA4417
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HOLA4418
No sh1t.

I was tempted to post earlier saying that 460 region looks like a near-term bottom. I have no idea at all what Google are up to and don't much care. They're headed back to the 510 area however - That is simply my view based on glancing at the chart - so don't bet your shorts on it! (I know you won't). You may be in luck when the DOW sells off heavily again in the next week or two, but I still think 460 will form a base.

Why do you think I'm using monopoly money? ;)

Conversely, 500-520 in the near term is entirely consistent with my view. I was calling a downward trend based upon 486, not that 486 was necessarily the top. I remain convinced that going short (on a 6 month horizon) was appropriate... and while I was highly leveraged in the sense that I'm using gearing, I'm not highly leveraged from a 'portfolio wide' perspective. I allocated 5% to highly risky speculative plays... of which I envision 10, two of the three I've chosen are Google... and I see no reason at present to change my view. Volatility was expected - the real short-term gamble (from my perspective) is that my stop-loss would be hit early. I'm expecting a decent profit from shorting Google... though I'm less confident about Apple. That said, I think Apple remains with break even potential on a January 2009 time scale.

but she's warming up I fear.................

For shorts, or for longs - that is the question.

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HOLA4419
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HOLA4420

I ll get back to you (Steve and Noel) about stockmarket valuation, dividends and PE's etc...I m writing a piece(unfinished as yet) which is quite long about this for my website which is in its enfancy. I ll post my piece on here to see lay out my premise and you can take what you want from it...however I use it to help make my investment decisions and I will try to answer the queries you brought up the other day Noel. Also I ll post the links to those books. Good to see you back Steve :) , I was missing your rationalistations, which I think are good by the way...but I dont agree with at times all the same. But hey life would be boring if we all thought the same.

In the mean time, we have alot of food for thought...valuations, commodity "bubbles" and deflation/inflation.

However, I want to take something up with Noel, surprise surprise...eh Noel? :D

I do my research on the fundementals., and use my technical system for making exact entry points and exits, risk control, trade management and so forth. Now for me, I cannot see how you can think success is down to luck. If I make trade decisions based on logic and fundamentals, then I don' think its down to luck. My good trades/investments, when the price shoots up doesn't leave me surprised, because I have a conviction that my research kind of made it inevitable. Although nothing is inevitable. You have to be flexible that we can be wrong...hence we have risk control and stop losses as insurance. For me I look at a trade from the view that it is right, the way I would look at my house. It probably wont burn down, but I ll take insurance just in case. House insurance is the stoploss of trading in my view.

When I say oil, gold, commodities are not a bubble, you state that " where have we heard that before?" where you are obviously eluding to house prices. However, I m not basing this commodity bubble theory on news clippings or what the politicians are telling us. I m basing it on my own research, and based on my findings, and the reality from which I see, I just can't see it is a bubble.

I wrote a response today on the NI section of this forum, who had stated that price of oil and wheat were bubbles and was down to excessive speculators, as wheat had doubled in value in 12 months. He was responding to me as I had said the price wasn't down to speculators.

I posted my research and my fundamental analysis of wheat to explain where I was coming from. I ll post again here, so that everyone can see my reasoning and logic, and my thought process in making these decisions.

Poster on other thread said this...

sorry but totally disagree with you there. Rice/Wheat are speculated and traded in the same way as oil...guess them food riots in the far east are just a figment of someone's immagination then....nothing to do with the fact wheat has more than doubled in 12 months.

Traders/Speculators to the oil price are like petrol to a BBQ imo

My reply...

Subby what is your opinion based on? That because we had riots that meant speculation was to blame? That means you assume it is speculators because the price doubled in 12 months?

Rice by the way is not traded on a futures exchange...so I dont know where you get the speculators from that side of things?

I can assure you speculators have very little to do with the rising prices...

The media and the politicians and the scapegoaters like to blame speculators. Its a politically palliative measure. They don't understand how futures markets work and they don't understand basic fundamentals of supply and demand, never mind,understanding price volatility in a tight market, econometric models of how price behaves in a market where supply and demand are tight, and whether or not commodity prices are driven more by supply or demand.

Let me explain....

The suggestion that speculators are pushing up the price means that the price is an artificial one out of all proportions to the fundamentals of supply and demand. In that case if the price was an artificial one then we should see excess supply, and stocks/inventories building,as the higher price curbs demand and and higher margins for producers lead to more investment in production as they have larger margins to invest. This leads to supply rising, and demand destruction which will lead to falling prices.

What is a speculative bubble?

I like to define a bubble in this way. A true bubble I believe has many different components...

(1) After prices collapse, prices shall remain deflated and depressed for a number of years, a minimum of 5, however, historically much much longer, 15-20 years infact. Look at a long term chart of house bubble crashes, DOW after Great Depression, Japanese land prices, Japanese Stock market bubble, FTSE, NASDAQ, Stock Exchange of Thailand SETR index and so forth.

(2) Another component of a bubble is that after it bursts we should see a rapid change in the supply and demand fundamentals. And this is a very important one that all bubbles exhibit. We have an excessive supply and a complete demand destruction of that once coveted asset. I ll show examples of this below.

(3) Anecdotally we have signs of irrationality, newspapers are a good gauge of this and other popular media outlets. This is less important and only adds confirmation.

(4) Accounting scandals and fraudulent activity come to the forefront. Bankruptcies result.

Examples

The US Housing Bubble: The US housing market was/is a bubble. Take a look at this chartpost-13039-1218228335_thumb.jpg It can be seen that as prices rose, rental vacancies rose. This was a sign that the market demand could not absorb the supply. As over supply of housing went up, the saturated demand broke down. The supply side and life blood of housing is credit, as credit was contracted, demand dropped. The rapid change in the fundamentals of supply and demand occurred. This is exhibited in the fact that US housing inventories are their highest since 1982.

Irrational Sentiment Indicator: Newspaper article about people in California, Florida giving up their jobs as they had bought a house that was appreciating more than their yearly salary was giving them. This is where I think newspapers are useful, exception, Financial Times. Great paper.

Dotcom Bust At one point one share in google cost more than twice the price of a computer. A yahoo stock cost more than a computer. PE's were sky high. Talk of new paradigms, and earnings didn't matter anymore. Companies were worth billions on paper even though they had no earnings.What the!!!!???We can see that the NASDAQ fits nicely into my defintions of a bubble. Huge over supply of dotcom companies that the demand in the maeket couldn't absorb..shown by the number than went bust.

Irrational Sentiment Indicator: Playboy magazine running a cover story with a porn model talking about buying tech stocks. Porn has its place in this world, however, I think this was a once in a lifetime chance to make a trading decision while looking at Playboy. Although I dont advise making trading decisions based on Playboy :lol:

Japanese stock and real estate bubbleThe Nikkei was trading at unbelievably high PE's. The bubble burst. The rapid change in the fundamentals showed that there was far too much over capacity and capital formation in the Japanese economy. The demand for credit and all assets dropped from what were once the most coveted assets on earth.

Irrational Sentiment Indicator:Talk that the land under the Emperors Palace in central Tokyo was valued at more than all the land in California. A true bubble.

Northern Ireland Housing Bubble or UK: I come from here, so I use this as an example. House prices were rising 25% and 40% a year for the last 2 years. House prices were selling at 15 times average salary. Fundamentals show the historic norm to be 3.5 times earnings. The bubble burst. We can see that the change in the fundamentals, 15 houses for sale for every one mortgage available. True excess.

Irrational Sentiment Indicator Our local news running a main story at 6pm saying that a house in Belfast had went up £30,000 in one day...with ten different bidders. EA's saying that prices would level off.

As can be seen, true bubbles can be seen by paying attention to the fundamentals. When they show that prices start to show excess, and a rapid change in the fundamentals occur we are in bubble territory. By doing analysis of the supply and demand relative to what historic norms show we can get a good gauge. When we start to see excessive supply relative to what demand can aborb we know we are in dangerous territory. Example of rising houing vacancies in the US is a good example.

This brings me on to my response to the poster on the other thread. Where he stated...

sorry but totally disagree with you there. Rice/Wheat are speculated and traded in the same way as oil...guess them food riots in the far east are just a figment of someone's immagination then....nothing to do with the fact wheat has more than doubled in 12 months.

Traders/Speculators to the oil price are like petrol to a BBQ imo

As he mentioned wheat as an example I showed by fundamental analysis of wheat, and why I believe we are not in a bubble, as I see no signs of excess. If anyone wants to show me the excesses in commodities I am all ears and eyes.

Fundamental Analysis of Wheat and Price Action.

Supply Side

There are many components on the supply side of a commodity that can lead to higher prices, and in this case wheat is no different.

The acreage of land dedicated to wheat farming has been falling in a longterm trend..check out this chartpost-13039-1218232131_thumb.png The area of land dedicated to wheat farming was at its lowest in 35 years in 2006. Less land means potentially less production=tightening future supply. No excess here.

Next we have ending stocks. Ending stocks are supplies of wheat that are ready to come on to the market. post-13039-1218232878_thumb.png A look at these fundamentals show that ending stocks have been in steep decline for 28 years. This component will play a part in a near term price volatility.

Next we have world wide ending stocks herepost-13039-1218233102_thumb.pngWorld wide ending stocks have decreased 50% in recent years. This is a huge drop. In a bubble we expect to see an excessive supply. So far in my analysis I finding it difficult to see any signs of excess.

Next on the supply side fundamentals we have a production/world wide consumption chart.post-13039-1218233280_thumb.png This chart is very telling. It shows that far from their being excessive supply of wheat, since the bull market in commodities began at the start of this decade, more often than not we have had deficits in supply, wheat shortfalls. This is NOT indicative of a speculative bubble.

Next chart...This chart...post-13039-1218233432_thumb.png tells three stories. It shows that the biggest producer of wheat the US, production has been steadily in decline. The yellow areas on the chart show beginning stocks of wheat. They have been in steep decline. This component of the supply side equation demonstrates that combined with factors I have mentioned above points towards longer term supply problems. It take years for these stocks to mature. The other point is the blue areas on the chart. The blue areas show that over the last ten years the US has started to import wheat. A structural change. This has been caused by demand growth elsewhere. The reason this is bullish for higher prices is that wheat is priced in the reference currency of the world...the USD. This means that USD have to leave the USA in the foreign exhange market, thus reducing the value of the USD which in turn will help to push up the price of wheat in USD terms.

This chart post-13039-1218233864_thumb.png shows that the yield from a wheat crop is below trend. And in the last few years, the yield had a steep decline.

Last chart for supply side fundamentals.post-13039-1218234941_thumb.png This chart shows that inventories of wheat stocks are at their lowest for decades. No excess for here sure. The opposite. By 2007, wheat stock/usage ratio shows at below 10%. If world wide wheat production stopped or we had severe floods, then the world would only have 30 days of wheat supply to feed itself...

All of the above supply side components for me do not show any signs of bearishness or excess. The combination of these fundamentals on supply side are so bullish. Far from exhiting bubble like fundamentals. They are the opposite. We have suppy deficits. None of the bubble characteristics of rising housing inventories, too many dotcoms or any playboy models posing in a wheat barn. We have a very tight market on the supply side of wheat.

Demand Side Fundamentals

According to the supply side of the equation the only thing that could prevent a up surge in prices was if there had been a much faster falling demand than supply. However, on the contrary. Take a look at this chartpost-13039-1218234555_thumb.png It shows we have had steady rising wheat demand for years with no abating. This is a perfect upside price potential when looked at relative to supply side. The blue sections show wheat used for feed. As world meat production increases expect more wheat dedicated to meat production. This will put more pressure on human consumption on supply side.

Other points on the supply side...At world population growth rates we have 77 million new mouths to feed each year.

Merrill Lynh report that dessertification increasing at 12% a year...actually this is more supply side.

Quantifying the Fundamentals.

So how does this incorporate into a trading strategy...Firstly, we need a way to quantify the fundamentals...This is my suggestion...

I start with an excel spreadsheet, and I have a supply side column and a demand side column. The number can be arbitrary however I start with the number 10. On the supply side I start with the number +10 and on the demand side I start with -10. Each time I get a new piece of information on either side of the supply and demand side I add add or take away 1. So if I get bullish information about supply like falling starting stocks for example I take away 1, which gives me -9. On the demand side if I get something which shows me demand is increasing I will add one.

This shows me what way the demand and supply curves are moving. I then graph it. Supply line and demand line. I then use a short term moving average to get the trend in each side of the fundamental..supply and demand... If the lines start to move towards each other then I know that I can expect at some point increasing price volatility on the upside. If they move away from each other falling prices. If the lines cross, and demand moves upabove supply or at least gets very close and they stay tight then I position myself I am not long already for a price surge.

My lines got very tight in 2007, but the price action was in a range. Chartpost-13039-1218236249_thumb.png You can see on the chart that price volatility was low. This was for me the calm before the perfect storm for upside movement that was brewing. I have marked in the lines. We can see the black line on the price channel which formed. Markets usually move from very low volatility to high, and then back to low again. The supply and demand curves were crossed and this was a tight market

How to Trade It

Above the price channel that had formed, put in abuy order a certain distance above this channel,,, and wait for the move. You can see on the chart the green arrows. This is the technical side of my system. I add more to my original position after prices drops a couple of standard deviations to the downside. We can see these were only corrections and prices shot up.

The other option would be to buy call options outside the channel.

Commodities are Supply Side Driven

I think that people think that because we get these abrupt price moves to the upside in commodities that it must be speculators. They are comparing them with stocks which are demand driven. Commodities are supply side driven. This can lead to these huge price spikes. In my analysis the demand was rising for a vefry longtime. All the risks were on the supply side. Any small news about some supply problems meant this market would erupt...which it did.

Econometrics

These models show and in my experience that has the supply and demand curves get closer together, price volatility increases. Wheat is in a very tight market. The models show that perhaps a 1% decrease in supply can lead to a 10-15% increase in price. So in a tight market

Are Speculators to Blame for the Higher Prices

In a word...No. The supply and demand is tight. The world has deficits in wheat supply also in years. The potential is most certainly still there for more and a continuing tight market. The worlf producded circa 600 million metric tonne a year and the world consumed 600 million tonne a year.

When the price of wheat doubled, the world consumed more wheat than it produced. If thisd had been a sepculative bubble and prices were pushed artificially above their supply and demand equilibrium then we would expect to see production 700 million and consumption 500 million as an example...and building supplies. We didnt get this. With higher prices the supply demand equilibrium stayed the same, until very recentely some more production came on. Which lead to the price drop. This is not a bubble. Where is the excessive mountains of wheat?

In this analysis, I think it is based on reason and logic. I dont feel as if I was lucky in the outcome of this price movement up.

Poster said

guess them food riots in the far east are just a figment of someone's immagination then

Wheat is competed for in the global market. The countries where the riots were are dollar pegged countries. However, their per capita income is much lower than other countries who compete for wheat on the global market with them. The USD has been devalued also, which of course is another factor in the large price movements. These countries maintain their peg by printing money to buy dollars. So riots were symptomatic of a low per capita income country, with a dollar peg competing on a market for a globally used commodity.

I do study this and I genuinely hate when politicians and vested interest groups and media feed us with misinformation. The ironic thing is they couldnt spot a bubble when it was real, and now there isnt a bubble they shout "bubble"

The reason being that rising house prices were in their short term interests and the public were enjoying buying new cars and getting "illusory wealth"...so why spoil the party? Pour more punch infact...

However, now we have rising food costs and a burst asset bubble, the public dont like it, and they turn to the government. So the government defer the heat from themselves onto some othe scape goat. Very convenient.

Edited by VedantaTrader
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Also I ll post the links to those books. Good to see you back Steve :) , I was missing your rationalistations, which I think are good by the way...but I dont agree with at times all the same. But hey life would be boring if we all thought the same.

Erm, yes, those books, what were they called, and who wrote them... you've still not said, have you? :P

If you agreed with my rationalisations, or kept quiet about your objections, I'd learn nothing by posting - so I'm pleased that they're at least a little controversial... I try to keep them somewhat close to my current thinking - partly to test my ideas - and partly because I see nothing enjoyable about trolling.

On the topic of being controversial, I disagree with your post... mostly because I disagree with your definition of bubble. You seem to be focused upon scale, whereas I think the key issue is not scale but rationale. I'd define a bubble as being what happens when rising prices re-enforce further rising prices that are not justified by a perfect understanding of supply and demand... accepting, of course, that no individual speculative participant has a clear understanding of supply and demand. A speculative bubble is, according to me, an inflated price that can substantially correct without additional supply. For example - while Oil is still up on a year ago, I'd say that the rapid fall in price from $147 to $114 is clear indication that the price was speculatively driven rather than being underpinned by real economic demand. I think there are vast numbers of bubbles - each with a different scale and time frame... maybe what matters most is not defining what is or is not a bubble, but quantifying the extent of irrational escalation in price beyond some unspecified supply/demand optimum?

We get really big bubbles where they are bubbles in speculative capital investment - because errors of judgement can take a long time to be exposed. With commodities like rice, wheat, soy - etc - then irrationally inflated prices are exposed more quickly... since supply is more flexible. Where prices are supported on credit, there's an additional complication where asset owners must refuse to sell at the market price for fear of damaging the collateral that secures their debts - even this is inefficient as a strategy for them.

I do study this and I genuinely hate when politicians and vested interest groups and media feed us with misinformation. The ironic thing is they couldnt spot a bubble when it was real, and now there isnt a bubble they shout "bubble"

Maybe what has really happened is that there has been a substantial debasement of currency - the real problem - that most politically motivated commentators are too ignorant or biased to recognise? The thing about prices is that different prices affect different people. The groups who spend a significant proportion of their available money on food are a vocal and dangerous group - whereas those who don't own assets and must work to meet their daily expenses are likely to remain bemused but placid while they are still able to cope. Eventually, of course, this won't wash - and, likely still bemused, a lumpenproletariat will lash out at everything and everyone... perhaps by arbitrarily voting for a different political party; maybe by deciding that their prospects are hopeless and committing desperate acts inspired by whatever ideology offers a glimmer of hope. I think this is the real backdrop to terror - a situation where egotists have asked to be trusted with currencies and regulations and legislation - and failed the electorate. If I were an MP who'd spent a decade living a high life while pretending to be protecting the interests of working people, I'd be positively terrified by recent developments... even if the only part I played was ignorance and dereliction of duty. The sham of economic progress, growth and affluence is all predicated on debt - which, at best, was a dishonest ploy to secure re-election. I'm reminded of "Straw Dogs" (1971) and wonder if Darling and Brown (and everyone else associated with the Treasury) have nightmares that a million dispossessed hungry homeless British people will besiege their residences, a few dozen each night, holding politicians responsible for their poverty? When I see Brown shaking - or his cabinet looking as if they've seen a ghost of Christmas past, I feel sure that they feel utterly helpless and unable to cope... abandoned by their good time vested-interest advisers, who took the effort out of thinking, they stand dazed - unable to come up with plans as credible as those you'd expect from children.

The real problem is accountability... accountability of business; accountability of regulators; accountability of politicians... until we can trust our currency to retain its value, all other progress is a pipe dream, IMHO.

Edited by A.steve
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Snip.....

How to Trade It

Above the price channel that had formed, put in abuy order a certain distance above this channel,,, and wait for the move. You can see on the chart the green arrows. This is the technical side of my system. I add more to my original position after prices drops a couple of standard deviations to the downside. We can see these were only corrections and prices shot up.

The other option would be to buy call options outside the channel.

A very well considered and interesting post VT.

It does occur to me, however, that you could have arrived at the above "how to trade it" without the fundamental analysis. I accept wholeheartedly the voracity of your analysis, which isn't my point at all. My point is that given the fundamentals, the price still fell 50%. Does it matter if that is because it was in a bubble or not? Your goal is still to make money. If you bought at 1300 and held you would be 50% down or maybe 100% out. Knowing if it is a fundamental bull market or a bubble does not of itself help you much there. I would suggest you still have to trade the price itself.

On the technical side, I am interested in what signal gives you the green arrow. They appear to be added as lows after the lows unless there is something I am missing due to the scale? They don't appear to be Fib retracements (if they are then they're not the same %), and they don't appear to be consistent. i.e. the first one is the first pullback after a breakout, the 2nd one isn't etc. Also the 2nd one could have been placed in a couple of other places which weren't lows. Hence my question. I'm not sceptical, just interested where they come from.

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Does it work, or do you get stuck with all the poor performing bits? I usually try and realise a profit when I'm ahead and I think the position is likely to change, I probably sell too early most of the time. If I'm left with loss making funds/shares I either take the hit and sell or hold, but there's only so long you can hold before you start missing other opportunities. I used to cost average in, but I now just pay bigger lumps a few times during the ISA year.

Does it work? In all honesty I don't know yet. I'm generally following the strategy defined in 'The Intelligent Asset Allocator' by Bernstein. As I mentioned I'm a 'time in the market' person and in my relatively short investing career I haven't been through a true U shaped bear market. I think maybe 2 years from today I'd be able to give you an answer to your question.

Do I get left with all the underperfoming bits? I'm only buying indexes with my smallest asset class reallly being a country or commodity index. Based on this I won't outperform the market but hopefully over 20 years I won't lose out through underperformance either.

In an earlier post I mentioned this year alone I am down 7% but given that I am shorting nothing then I guess this is expected with just about every asset class down. I can't expect to compete with gains reported by some people on this site. What does feel strange about the strategy is that when everyone else is saying hold cash over the past year I'm selling down my cash and have been buying comercial property and equities. What didn't feel too strange is that yesterday I was forced to buy commodities to rebalance my portfolio.

Commodities are a strange one for me as they don't give a yield, dividend and are highly volatile. In the long term I think they will only help me by being relatively uncorrelated with my other asset classes helping me to smooth my long term growth curve.

If I can average 3.5% pa net of all fees and tax I'll achieve my long term objectives. Not a huge expectation I know....

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A very well considered and interesting post VT.
It does occur to me, however, that you could have arrived at the above "how to trade it" without the fundamental analysis. I accept wholeheartedly the voracity of your analysis, which isn't my point at all. My point is that given the fundamentals, the price still fell 50%. Does it matter if that is because it was in a bubble or not? Your goal is still to make money. If you bought at 1300 and held you would be 50% down or maybe 100% out. Knowing if it is a fundamental bull market or a bubble does not of itself help you much there. I would suggest you still have to trade the price itself.

Hi Rk,

You are dead right I could have traded this without the fundamentals. I use to be a pure price and technical trader. I still think everything is the price, and I guess it is. However, breakout systems are a very popular trading method with technical traders who dont use fundamental analysis. The success of this method I think has meant it has been a victim of its own success. The markets are much more efficient than people believe these days. So much so in fact that we now have technical traders who actually fade the break outs.

When I tried to use breakout systems before based purely on price I found that a market could give a false breakout either side of the channel. Therefore it wasn't a "legitimate breakout"...This lead to lots of losing trades.

For example that wheat chart that I posted lastnight had formed a nice channel. Now lets say the breakout came on the downside as a pure price trader I would have taken this short trade,only to find that I got stopped out as price quickly reversed. Perhaps this would happen a few times, and I would have three straight loses.

However, after doing my fundamental analysis and finding out that the market was bullish, any downside breakouts of this channel would not have traded. Instead I would look to buy on the reversal, as I m bullish.

Markets breakout of channels all the time to the upside and downside. By doing my fundamental analysis, I can deem a breakout to be "legitimate" or "illegitimate" In the example of wheat if a breakout to the downside had occurred before the upside breakout, I would have measured it against the fundamentals and marked it down as illegitimate, and any break out of price on the upside was legitimate. Combining the fundamentals with the technicals I find that I m not fighting the fundamentals by taking illegitimate trades. This acts as my filter on the technical system to the upside or the downside. So it provides the bias to trade long or short, not both.

For example, the wheat chart didn't give an example of a break to the downside, but lets say the euro/yen. Lets say a channel had formed, and I traded it as a pure technical trader, and had quite afew losers in the breakouts to the upside and the downside. Then lets say, I get frustrated, which I did happen me, I wasn't confident in my positions I would second guess, make impulsive mistakes...etc etc. However, lets say this frustration led me to look at the fundamentals, and I then seen the fundamentals for euro/yen were favouring the euro, I would then say to myself, why was I taking those short trades, I have been swimming against the river and the longterm fundamental trend.

You are dead right, I could have used pure price in the case of this wheat chart, however, in other similar examples where I was bullish on the fundamentals, there could have been breakouts to the downside before the upside which would have led to losers that I didnt need to take.

The other reason, I do this is that if I trade against the fundamentals, my risk/reward scenario is much less favourable. My fundamental anaylsis on the longside means that price generally will move much further meaning I can get a good R-multiple risk, as I believe that I you really need to capitalise on these trends with high return for the risk. Trading against the fundamentals would mean I dont get enough price movement to give me this good R-multiple scenario.

On the technical side, I am interested in what signal gives you the green arrow. They appear to be added as lows after the lows unless there is something I am missing due to the scale? They don't appear to be Fib retracements (if they are then they're not the same %), and they don't appear to be consistent. i.e. the first one is the first pullback after a breakout, the 2nd one isn't etc. Also the 2nd one could have been placed in a couple of other places which weren't lows. Hence my question. I'm not sceptical, just interested where they come from.

The chart is zoomed out alot. The point was to show the basic strategy from a bird eye view and the green arrow were rough places of the trades not pin point positions. However, I have marked the black line highlighting on this chartWheat_Future_2.png the area in question regarding the series of lower lows where I could have entered. The original chart I had removed other indicators to stop it looking cluttered as it was zoomed out.

Here is a zoomed in chartWheat_Future_Zoomed.png of the area, which I think is the part you are alluding to when you said..."Also the 2nd one could have been placed in a couple of other places which weren't lows." I have a method for exact entry

The green arrows show the places of possible trades. The blue MA is a SMA (3) (HIGH+LOW+CLOSE/3), to give the average of the last 3 day median prices. For me this is useful indicator of fair value, balance between buyers and sellers. A close above the median is bullish, and close below bearish. The red MA is a SMA(3)(Close)

I like to see(when bullish) in a reversal to see the SMA © move above the SMA(H+L+C/3) as it shows that buyers have more momentum.

The first green arrow on the left shows where this occurs... Before I would have bought if the price moved above the high the next day, however, I found this was giving me many false signals...

What I do now is this...I take the median price of the crossover candle,ie, high+low/2 and then add that to the low,ie median price of high and low...I then take the ATR(14) and add this to the median price and use this as my buyentry signal. This means my entry is higher than the high of the previous day.

So on the first arrow to the left, we can see that the price moved above the high the next day after the SMA crossover, if I had taken this, I would have lost as the price reveserd. However by taking the ATR from the median the entry is higher and adjusts for volatility. My entry was not hit on the first green arrow, therefore no trade.

The second green arrow my entry was hit, but the trade reversed stopped out.

The third green arrow, entry buy not hit...

Fourth green arrow, entry again not hit...

5th green arrow, entry hit on 21 st of November... and the I had found my bottom of the correction. This method reduces my losers when bottom fishing, and the price went up from 740 circa to 1080.

Other rules, I like to see a a doji formation or a shooting star ot a pin candle...

I like to take the reversals also when the price has crossed over the 20 SMA ob the Bollinger band...

Also, I like to take trades from areas of low volatility to high rather than high to low.

Risk and money management rules

I like to pyramid. The initial trade, I like to look for a R-multiple of 6...the second I like to take an R-multiple of 5, the Third trade, an R-multiple of 3, and the fourth trade an R-multiple of 2...

The reasoning behind this is that at the initial trade the trend has most potential, we hope. So a good R-multiple is possible. The second trade...still good trend potential but less, so I ll take less...

As the trend progresses the likely hood of it continuing forever fades, so by the fourth trade an R-multiple of 2 is good, as the trend in all likelyhood is exhuasting itself, looking for a R-multiple of 6 like the initial trade is not likely...

The reason I didnt buy at the top is that the volatility was sky high and began to decline(falling bolliner bandwidth and declining ATR from loft heights...I find that when a market moves from such high volatility that it usually goes into a range. Also news on supply side in the falling trend after the last spike about larger production in 2008 meant that it didn't make sense to keep going long. It had went up already 120%. It is now in a range, like I thought and a nice channel has formed again, with nive S+R...I think I will trade the breakouts again to the upside as the fundamentals are very tight in this market. 50% is a good correction also. Tha could why the arrows look inconsistent, as I myself dont predict the bottoms, and I dont know where it will be until it happens. This is where the people who TA is bull are wrong. They believe it trys to forecast it doesn't for me, unless you use it like that. I use it follow pure price.

post-13039-1218304195_thumb.png

post-13039-1218304363_thumb.png

Edited by VedantaTrader
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