TRADE Focus

05/07/2009

We invite you to call and ask about any of these market situations we have discussed or to ask about our considerations for the best trade opportunities for the day or for the week. We also welcome any comment on our weekly commentary as well. We believe, through our years of experience, that what we offer is of value. We are confident enough, in fact, to say to you to tell your friends, relatives and neighbors about us too. Please feel free to contact us at 1 800 321-5810 or email to cbands@cbandsbrokerage.com

The Trade Focus commentary was written on Wednesday, May 6th and the market analysis section was written on Thursday, May 7th.

There was not a large amount of economic news on the calendar this week but what was released was worthy of note. Three key reports revealed optimistic surprises and included Pending Home sales jumping by 3.2 pct versus expectations for them to be flat from the previous month. Construction Spending showed an increase of 0.3 pct against expectations of another 1.5 pct decline and the ADP payroll employment estimates for the month of April showed a loss of only 491,000 jobs where a drop of 650,000 was expected. The impact of the swine flu pandemic appears to have abated and this was not a factor infiltrating traders' minds this week. A major focus for the first part of the week, though, centered on the bank stress tests scheduled for release following Thursday's market close. Naturally, the market saw much of the test results leaked and this seemed to satisfy market participants. The big ones were Bank of America which supposedly will need $35 billion in capital and Citibank which is believed to need somewhere in the area of $10 billion. We thought at least at first glance that the BOA number was rather large but apparently the market thought otherwise as Bank of America shares and those of the financial sector were up materially. Optimistic reports emerged from China with expectations of 7 - 8 pct growth for this year. Many commodity markets made gains along with the stock markets including energies, metals, grains and softs. The big question is will these price advances continue. We believe that a continuation in the stock market recovery will help fuel many of the other commodity markets. There appears to have been a major breakout that has occurred in stock indices and in the case of the S&P 500 we believe there to be an objective as high as 1080. There is a need for additional confirmation of this but as it sits prior to the end of the trading week, that possibility has been opened. Crude oil too, has exhibited a breakout of sorts and we see potential opening for a move to $80.00 or so if the $60.00 level can be overcome. There are always two sides to a coin so where there is potential for gain there is at least equal potential for pain or more explicitly, for loss. Traders we have contact with caution that the stock indices have now begun to display overbought conditions and with some divergence among the indices themselves. A correction could be coming and we would think that most of us would prefer any break in the action to be temporary prior to the resumption of the uptrend. The start of a new leg downward taking indices below their March lows could spell hard times to come.

There aren't too many things about the business of trading that are easy. We often talk about the emotional aspect as one that needs to be filtered out because as humans we are prone to feelings and even though trading is not a human relationship it is a personal one and on top of that it involves real money which is something hard not to be attached to. We often see in others and find it in ourselves too that a trading position becomes too much a part of us and therefore a personal issue. This incredibly seems to occur more frequently when holding a losing position as opposed to one that is going the right way. It becomes more difficult to part with the loser particularly, it seems, as unfavorable movement intensifies. There are likely a number of reasons for this but in general there is a fear of taking a loss and also a fear that getting out will be precisely at the time that the particular market position will turn back in the other favorable direction. Another thing that occurs during these times of emotional attachment to a position, winner or loser, is the loss of objectivity. This is an issue we would like to stress with this commentary. Rules are rules and just because it is distressing to admit being wrong, the fact is that a market that has established a pattern of lower highs and lower lows is by definition a downtrend, at least in some degree, and holding long positions through this period of time is not a good and sound idea. This is just one very general example but our point is that if a market is breaking a trader's rule the trader must not make excuses for the action or attempt micro managing a macro position. What occurs is the loss of the ability to see and react to market action objectively. There simply is no room for this approach or way of thinking. We often refer to this as the "yeah buts." For example, the market has broken an uptrend line and a key moving average, but because the position the trader is holding is a long position we often hear an excuse that begins with "yeah but" and is then followed with something like, "it doesn't apply to me" (this situation). This is flat out wrong. When entering a trade there are parameters that include knowing where the position has gone wrong. When this price has been reached it is time to exit with no ifs, ands or buts about it. This helps to keep the decision making more simple and we believe those able to stick around for the long run implement this tact religiously and without fail. When wrong admit it promptly and exit the trade without second thought or looking back. Exercising the pre trade plan solves the problem of losing objectivity. The trade is essentially already complete and there is no need to micro analyze and risk losing objectivity as the trade develops. Many will find this odd, but we found some help regarding this from the Dali Lama in his book "The Simple Path." We interpreted some of his message as not allowing pains of the past to distort the perception of reality. Applied to trading the value in this could be not allowing a previous pain (loss) caused by being stopped out of a position that turned around favorably, to keep from using stops for trades made today.

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