TRADE Focus

03/19/2009

If any questions, comments, observations or more importantly any answers, please feel free to contact us at : 1 800 321-5810 ; email cbands@cbandsbrokerage.com

Both the Trade Focus market analysis and the commentary portions of this edition were prepared during the course of the trading day on Thursday, March 19th.

It's a pleasant feeling being able to begin this week's commentary saying positive things about this week's stock prices. We realize this is not a stock market forum and that there are many markets worthy of note, but for the obvious reason the effects the Dow has on the public mood we feel it deserves the space it is given. That being said, there was follow through to the rally that began last week. Some of the reasons sighted over the first portion of this week have been Fed Chairman Bernanke's appearance on 60 minutes where he said recession could end and recovery begin later this year, Larry Summers' comments that no tax increases are slated for this year, the surprising report on housing starts and permits and positive action on the TALF. It seemed surprising to us during the course of this rally, which has covered some 900 Dow points, that the attitude was not more bullish. Maybe we weren't listening in the right places but from what we were able to glean from CNBC for example, there was a more hesitant attitude. There was a conspicuous lack of "The Bottom Is In" rhetoric from the various media. It wasn't until this morning where we read from one of our favorite daily commentators that there had been, in his view and based on input he gathered, an up tick in optimism. And then the Fed spoke. And what a mouthful. Not only did the stock indices catapult higher but foreign currencies and precious metals also. Gold and silver which had been dramatically lower throughout the course of the day made a powerful about face. Gold, which had been 34 dollars an ounce lower on the day when at its low moved to that much higher on the day. The euro soared to more than 400 points higher. T-Bonds drove to more than 6 full points higher on the day. The S&P 500 finished 16 plus points higher and the Dow nearly 91 higher. One point of interest we discovered is that the S&P cash did stop virtually right on its 50 day moving average. For the remainder of this week we will be concerned with the effects expirations will have on stocks and other financial markets as it is a triple witch. We will be best to expect volatility and suggest to all to take this into consideration.

The incredible reaction to the surprise inside the Fed announcement brought to mind a few principles worth sharing. The obvious is to not take anything for granted and never abandon money management application. We talk about that frequently enough that we feel we can devote more time to a few other things. And of course, one day does not a market make. The first we would like to mention, however, is trading relationships between different commodities or sectors. Sometimes the trading relationship between the stock indices and the interest rate futures, for example, are virtually the direct opposite of each other. But, there are times that they will trend in the same direction. Many times we have seen traders take a position in one based on movement in the other. The principle is to always trade the market you are trading based on its own merit. A day like today where the Fed statement has such an impact can be ruinous. Today stocks, interest rates, currencies, energies and commodities all went the same direction. That was up and it was up in a dramatic way. This one event changed the relationship that many of the markets had been following. Therefore selling T-Bonds because the stock indices were up would have likely led to disaster. Another principle that is often violated is where a trader will sell the stronger trading month within a commodity market or commodity group thinking that because he is bearish that the one that has exhibited the most strength has the most to fall. There is a reason why one is stronger than the other and it is usually inadvisable to try to out smart the market. Sell weakness and buy strength. We believe you will find this works out more favorably in the long run. We heard it too, long ago, from a CME pit trader that this was a big mistake and to always buy the strong one and sell the weak one. Quite frequently he noted, traders would choose to sell the stronger month of hogs, for example, instead of the weaker. His experience was that this was just the wrong thing to do and these traders consistently shot themselves in the foot. He said quite simply and emphatically to "always sell the weak one; buy the strong one." An interesting example of this that we have seen over the years occurs in trading decisions following the release of USDA agricultural reports such as the Quarterly Hog and Pigs, Cattle On Feed and Crop Production. There have been times where one of these will dramatically affect the price direction of one of the market constituents. Especially in the "old days" when the result would be a locked limit up or limit down situation, traders would choose to, for example, sell cattle if hogs were limit down thinking the cattle would have to catch up or as a way to protect themselves from adverse hog positions they had on the books. Quite often the result would be a double negative once the hogs which had been locked limit began to trade. The cattle would go up and the hogs down and the trader was holding two positions going against him that now required decision making capital instead of only one. Decisions are difficult enough to make without adding to them.

Note: We are archiving the Traders Focus from here on so that those interested can follow more easily.

Archive

Futures and options trading contain substantial risk of loss and may not be suitable for all investors.