Fundamental Trades

[kam75]

I would like to hear from others experiences regarding Trades based mainly on fundamentals .One example of a trade which I think shows a good risk/reward would be shorting the dow using some of support/resistance lines for stops.Time frame would be a few days to a few weeks.

I'm curious to ask, why would you want to do a trade based 'mainly on fundamentals'? If you know the fundamentals, why not combine this with technical analysis to get your entry timing right? After all, you never can know for sure what a market will do. It's about managing your risk. I don't know a better way to manage risk than using technical analysis and a bit of maths.

 

[questionall_42]

...
It is an interesting topic, as there is a lot of talk about fundamentals all over various blogs, forums, but there is very very little on it's application and actual effects on price, and as you say, time horizons.

Personally, I believe each individual trade has to be taken, with some kind of wide or logical stop encase you are wrong (either price or time stop), and has to be constantly re-evaluated. For me, long-term means anything 12+ months.

I am with you on that MRC. I think that the very nature of the term "fundamental" has some stability inherently implicit in the term so that it can lull you into a false sense of security... but "fundamentals" change, and change frequently, and after a passive buy and hold (and hope) strategy during the bull years, long term for me is beyond 12 months, but not much further, rather than a 5 year guess. But this has ramifications for the bigger picture issues and developments and how it affects choice, in this case investment choices. Over time I have become more active in my investing/trading because the "fundamentals" change and, as you say, the effect on price can be dramatic and swift when fundamentals change or are in the process of changing.

...
However, if we go as far as to see the USD collapse, there will HAVE to be a reserve currency, as pegged exchange rates will need something to mirror and thus, will need to keep excess reserves to maintain the peg. Or, could we possibly revert back to the gold standard, and have paper currencies pegged to gold?

This is something that I am struggling with. Given that there is a real possibility that the fundamental rules will change (e.g. Roosevelt, Nixon), does it necessarily mean there has to be a reserve currency, or a standard, globally? Is it possible for regional or direct trade-related pegs or reserves. Therefore there could be many different "mirrors" in existence depending on what you were wanting to exchange. Would this result in more volatility? Any suggested further reading on this would be welcome.

 

[MRC & Co]

Good points again, and to be honest, I am not exactly sure, the area of exchnage rates and currencies is one I am a complete and utter novice in, hence, my recent attemps to try and understand:

1) how changes in a given countries fundamentals, will impact on it's currency and that of it's trading partners, and:
2) what impact changes in these currencies will have on other currencies.

With a clear understanding of these 2 points, it would be a lot easier to understand the flow on effects.

The questions you asked, are in a different basket all-together, but I imagine it would create greater volatility.

Anyone game to try and understand and explain any of this?

As to your first point, not only do fundamentals change and this can alter price, but this change in price, can then feedback and further alter fundamentals. It is these extremes I am most interested in trading.

 

[waza1960]

I'm curious to ask, why would you want to do a trade based 'mainly on fundamentals'? If you know the fundamentals, why not combine this with technical analysis to get your entry timing right? After all, you never can know for sure what a market will do. It's about managing your risk. I don't know a better way to manage risk than using technical analysis and a bit of maths.

I agree that you need a balance of T/A and F/A in your trades however I think there is room for some trades with minimal T/A

 

[Cartman]

I agree that you need a balance of T/A and F/A in your trades however I think there is room for some trades with minimal T/A

good thread Wazza (plus one zed) and good input from the boyz ---

in my humble opinion, fundamentals represent the broader market and are where we will end up in "real terms" in time ---------- T/A is simply an example of traders doing their job to manipulate/distort/create subterfuge/extract money from weaker hands/ etc etc ------

this game is all about money --- greed is an unfortunate bi-product of what drives human beings ---- markets will never reflect true fundamentals while ever there are deep pockets who have the ability to manipulate proceedings ----- trading successfully is more about thinking like a deep pocket trader and how they might perceive to extract maximum benefit out of a given market ---- if we can decipher just one market, all the riches in the world become available ------- (that still wont make you happy long term though --- its just a game !! treat it like a game and you'll most likely be a lot better at it

 

[ceasar73]

good thread Wazza (plus one zed) and good input from the boyz ---

in my humble opinion, fundamentals represent the broader market and are where we will end up in "real terms" in time ---------- T/A is simply an example of traders doing their job to manipulate/distort/create subterfuge/extract money from weaker hands/ etc etc ------

this game is all about money --- greed is an unfortunate bi-product of what drives human beings ---- markets will never reflect true fundamentals while ever there are deep pockets who have the ability to manipulate proceedings ----- trading successfully is more about thinking like a deep pocket trader and how they might perceive to extract maximum benefit out of a given market ---- if we can decipher just one market, all the riches in the world become available ------- (that still wont make you happy long term though --- its just a game !! treat it like a game and you'll most likely be a lot better at it

its not greed..its envy.

 

[haunting]

Most of the big money based their investment on FA, working out the fundamental value of a stock or a company they are interested in, while TA serves a very unscientific approach in gauging the market sentiment. If apply "properly" they can complement each other. For example, currently the fundamental issue to watch out for is debt over-leveraging, high cost of refi or borrowing, scarcity of capital - causing many companies to offer great discount to their share price just to get instos backing for their capital raising. BBG for example has to mark down their share price to 7.50 in order to get their debt refi-ed, a hefty discount. More company will be following suit, it therefore makes sense to keep an eye on companies that have large debt, high debt/equity ratio but are yet to announce any plan in dealing with their debt.

This kind of fundamental information/deduction is useful whether you are trading or investing, as It makes sense to avoid such company. Moving forward, a bigger issue facing ASX and the many small to mid size companies is the scarcity of capital and the high cost in obtaining such capital. Many companies and miners will be going bust and many mining projects will be closing down due to the lack of funding. Again, ask yourself if it is advantageous to know which of them has the necessary financial backing?

Corollary, knowing which company does not have issue of debt and has done its capital raising would naturally provide a layer of "comfort" and price support since a potential risk factor due to capital raising has been removed. If safety with your capital is a priority, this bit of fundamental info may be what you want to know?

 

[MS+Tradesim]

US inflation likely to become policy?

Strengthens the case for China winding down more of its USD reserves. Watch their metal stockpiles continue to grow. I think it's all but inevitable they will unpeg the yuan from the USD. And I think another commodity bull market could unfold out of Asian recovery - for two reasons (1) the big miners have mothballed new projects, (2) China hoarding metals. Both = lower supply once global demand resumes. Will depend on how much of their future demand is accounted for in their stockpile. That could be positive for Aussie miners and the AUD.

Ps. All of this supports a very bearish case for the USD.

Very simple broad brush strokes here but everything I'm reading supports the way I see China's future unfolding.

 

[MRC & Co]

in my humble opinion, fundamentals represent the broader market and are where we will end up in "real terms" in time

Yes, this is what I once believed after my first introduction to the writings of Buffett and in most cases, an oscillation around some form of 'equilibrium' is probably the case.

However, my recent endeavours to understand Soros, have me really re-inventing my views on some scenarios. Perceptions (and therefore prices), influencing fundamentals, influencing perceptions and a feedback loop really makes sense on occassions.

Tradeism, I agree completey with you and have actually changed my views of a deflationary period. Funnily enough, you can add Soros to that list of experts, talking of inflation in the not so distant future, and you can also see what is expected insofar as the current yield curve, which is rather steep IMO, pricing in higher interest rates (obviously targeting a higher rate of inflation into the future and some kind of recovery).

All spells doom for the USD and makes the unpegging of the yuan more likely and that potential over-shoot of gold Explod has been waiting for much more likely.

I also agree on the potential for another commodity bull, which will probably hold up the Australian market, but I still expect to see this off-set by falling prices of bank stocks, particularly as we enter into a downturn in the housing market and moves come in from the Political arena to force banks to pass on rate cuts resulting in a decrease in their dividend yields.

All interesting times and I have a sneaky suspicion that a real coup could be enjoyed here for those positioned right (as you already mentioned earlier).

Keep the opinions coming guys.

Right now, we have long base metals, agribusiness, energy, precious metals, short USD. I would also add in short Australian House Price Index (particularly if we get the derivative contract come along in August) and short Australian bank equities.

Another sector I am moving in to study is that of the bio-techs in the US. They seem to be on a great run lately, but I want to investigate the reasons behind the general run of the sector and particularly, any fault in that logic.

As I type, I'm in the process of analysing the previous currency questions I posed earlier.

Cheers

 

[MRC & Co]

For example, currently the fundamental issue to watch out for is debt over-leveraging, high cost of refi or borrowing, scarcity of capital - causing many companies to offer great discount to their share price just to get instos backing for their capital raising. BBG for example has to mark down their share price to 7.50 in order to get their debt refi-ed, a hefty discount. More company will be following suit, it therefore makes sense to keep an eye on companies that have large debt, high debt/equity ratio but are yet to announce any plan in dealing with their debt.

A good point haunting, and ones without a great cashflow outlook could be real shorting opportunities perhaps?

Have any stocks in mind in this kind of situation?

 

[MRC & Co]

Another sector I am moving in to study is that of the bio-techs in the US. They seem to be on a great run lately, but I want to investigate the reasons behind the general run of the sector and particularly, any fault in that logic.

Scrap that idea. I thought I saw a chart earlier with a booming sector, perhaps I just saw the chart of an individual bio stock.

 

[MS+Tradesim]

Marc Faber on the potential for hyperinflation in the USA.

http://www.bloomberg.com/apps/news?pid=20601057&sid=avgZDYM6mTFA&refer=futures

I have no particular comment. My thinking on it is already reflected in prior posts.

 

[MRC & Co]

Just had a couple thoughts which I posted in the gold thread:

Any further downturn in the US economy or simply a fall of the USD could see decreasing demand for Chinese exports out of the States, slowing the Chinese economy and a ultimately causing a reduction in the demand for commodities, all potentially possible and would have a negative affect on commody prices. Thoughts?

Another theory I have, is to short long-term bonds, as the general public will probably buy these now for the greater yield. However, to combat what is probably going to be impending inflation due to additional liquidity being added as a stimulant, rates will probably rise in the medium-term and push down bond prices. Counter-intuitive and disclaimer: I am no expert in the bond markets. Thoughts?

A very different angle on the longer-term commodity bull. Only way out I can see would be for the Chinese to internally stimulate their own consumer demand as per Tradeisms thoughts..........?

 

[MS+Tradesim]

MRC,

I have no experience with bonds. I agree with the rest of your comments. They're risks to watch for.

What I don't have a clue about is what kind of policy China might adopt to stimulate internal growth. Still keeping an eye out for clues and ideas.

 

[MRC & Co]

Tradism, I would imagine their policy would simply be a massive fiscal expansion. Budget deficit.

Canaussie, one thought, have you hedged your long US ETF's with a short on the USD? Maybe something to consider, considering the AUD strength.

 

[CanOz]

Canaussie, one thought, have you hedged your long US ETF's with a short on the USD? Maybe something to consider, considering the AUD strength.

No, good point though. I am looking at Canadian ETF's now, which will offset USD weakness, but it will complicate things somewhat because they will be purchased with AUD.

There is a USD ETF i believe....the futs contract on the DX would be too much exposure.

Also, now looking at an entry on FXI, the China 25 index ETF.

CanOz

 

[CanOz]

What I don't have a clue about is what kind of policy China might adopt to stimulate internal growth. Still keeping an eye out for clues and ideas.

You mean other than easy credit and the current stimulus based on infrastructure investment?

I can tell you that since the earth has thawed out here and the temperature has improved the construction here and in Xi'an is booming. Everywhere you look there are once again more and more sky cranes and roadworks, subway works, and sewer works in progress.

Cheers,


CanOz

 

[MRC & Co]

Short USD index ETF is UDN I believe. Could use that to hedge (but if you short, you would still need to use USD's to actually go short the US ETF right)? So maybe one like DXDDX, which is 2.5x short.

Can, what is the diff between credit and liquidity? Since China is pegged, they cannot actually alter liquidity as they have no monetary policy.

 

[CanOz]

Can, what is the diff between credit and liquidity? Since China is pegged, they cannot actually alter liquidity as they have no monetary policy.

Whoa, you got me there MRC, they can adjust interest rates to make borrowing cheaper, that's monetary policy to me....

This could go pretty deep, and well beyond my knowledge of macro economics.

These guys have plenty of currency reserves, of the depreciating sort...and they're spending it on assets, causing asset appreciation....what does this mean for them???

I need some help here I'm afraid.

CanOz

 

[CanOz]

For those interested:

CDN Dollar ETFs:

- Claymore Global Agriculture-COW
- Claymore Natural Gas-GAS
- Claymore Oil Sands Units-CLO
- Claymore Global Mining-CMW
- Horizon Beta Bull Oil-HOU
- Horizon Beta Bull Agriculture-HAU
- iShares Energy-XEG
- iShares Materials-XMA
- iShares Comex Gold Fund-IGT
- iShares Gold Fund-XGD

I got these from my other newsletter that i just love: The Technical Speculator, but a list of ETFs is available on IB's website.

CanOz