Tag Archives: seeking

How High Is High? How Low Is Low?

How high is high? When asking this question it would also be wise to ponder the following, how low is low? Markets are capable of making extreme moves and we should remember trees don’t grow to the sky and markets don’t go up forever. As someone who has traded commodities for decades I would strongly recommend anyone considering jumping into the super high risk snake pit of commodity trading to steer clear of it. While I have had victories I have also gone through a slew of painful losses and been bludgeoned by markets and price swings that have defied all logic. Adding to a trader’s pain and woes is that when you are caught on the bad side of an ugly trade the speed that a vicious market can dish out its brutal assault is usually extremely underestimated. After over 30 years of trading commodities I will flat out state without any reservations that lies and manipulation run rampant. If you think anyone is looking out for the small independent trader in the stock market or commodity market you are wrong. A recent article caught my interest; it said: It is always darkest before the dawn. In other words, the energy market could see crude-oil prices tumble further in the coming days after closing near seven-year lows. January West Texas Intermediate crude tumbled $2.32, or 5.8%, to settle at $37.65 a barrel. At least one chart pattern followed by technical analysts is pointing to more pain for the WTI contract as oil tilted below $37 a barrel in early Tuesday’s trade. Talk has surfaced of 20 dollar oil at the same time some analyst said it is time for investors to jump in and “pick a bottom” pointing out energy stocks are now a bargain. History has shown that markets defy logic and our opinions are often wrong. Five years ago few market gurus predicted oil would trade at such low prices today. It is difficult to say where the price of oil will be next month. After asking the question of how high is high I must also ask, how low is low? Markets can make extreme or wild moves that charts often are unable to predict. This means it is both dangerous and difficult to pick a market top or bottom. Various technical trading systems while indicating an overbought or oversold market fail when asked to answer these two questions that would make us infallible and legendary investors. Today markets have added a couple new dimensions that will play an interesting role in just how violent and savage price swings are going forward. One of those is that computers now do a great deal of the trading and they are programmed to prey on the weaknesses of human trader using computing programs that exploit where stops are placed, this improves their ability to wash the weak out of their positions. Another factor is many people have grown far to complacent. The “buy the dip” mentality and the idea that the central banks coupled with the too big to fail financial institutions will keep these distorted markets elevated has become entrenched in the minds of many investors. This has lessened the importance of economic fundamentals and the question of how sustainable this market is. It has also put on the back-burner the question and issue of, how high is high. I have seen and heard far too many comments by those bullish on higher equity prices and ever higher markets basing their strategy on a policy of “don’t fight the Fed” and “buy the dips.” While this has worked since 2009 it is no guarantee that it will continue to produce positive results in the future. The “buy the dip mantra” will prove very costly when a real drop in the market does occur. A saying often used cautions traders they should never try to catch a falling knife. One problem we face in the current stock market is a lack of traders holding short positions. Several of the stocks that were recently on strong uptrends appear at heart to be fundamentally unstable and may have been driven higher by bears capitulating and buying back their positions rather than market fundamentals. We have witnessed massive moves in several speculative stocks like Amazon (NASDAQ: AMZN ), Tesla (NASDAQ: TSLA ), and Netflix (NASDAQ: NFLX ) that are hard to defend by any other reasoning than shorts being squeezed out of the market. It is logical to think the higher a market goes the more vulnerable it becomes to a major violent decline or sudden savage downward price moves. A lack of short positions will bode poorly for the market if it falls rapidly because in such a situation as shorts take profit and buy back their positions they act as a floor under the market giving it support. The floor under this market is questionable and with contagion a growing concern it is understandable that junk bonds have begun to take a beating. The point of this post is to remind all of us the world of investing is a dangerous place and that much of how people react to events depends on how things are set up or how the cards are stacked when things happen, develop, and unfold. We often see that market reaction has more to do with timing and perception rather than being driven by reality. The economy tends to develop loops that feed back upon themselves, to this market driver we must add cross border money flows, central bank intervention, currency manipulation, and derivatives. This is only part of the list of pitfalls we face when we develop expectations that drive prices. To top things off we should recognize that at any time an unexpected black swan crisis is always lurking in the wings. This reinforces the idea that we should remain humble in trying to answer the questions of, how high is high, and how low is low. I have learned some valuable lessons over the years: markets don’t go in just one direction, values constantly shift, and after you lose your money it is to late.

Risk Asset Update: Vast Majority Agonize Since The S&P 500’s August Lows

The fact that lower energy prices are not providing the anticipated windfall to economic sectors that should benefit from lower oil prices continues to confound analysts and economists alike. Rapidly falling oil and commodity prices have hampered energy stocks, materials stocks and resources-dependent exporting countries. Yet investor trepidation has spread to other risk assets as well. If risking one’s capital in non-U.S. stocks, small-cap U.S. stocks, high yield bonds, foreign bonds commodities, and a wide range of U.S. sectors is proving detrimental, what’s left? Weren’t lower oil prices supposed to act like a “tax cut” for U.S. households? If families spend less at the gas pump, then they will spend more of their dollars at the mall. At least that’s what mainstream media cheerleaders like CNBC’s Jim Cramer have insisted throughout the year. In contrast, the S&P SPDR Retail Index (NYSEARCA: XRT ) demonstrates that investors are not particularly impressed by the prospects of American retailers. The current price for the exchange-traded fund tracker is lower than the price during the summertime stock market correction. What’s more, XRT is trading 14% below its 2015 high. Well, okay. Maybe consumers are pocketing some of their gasoline savings. Maybe they’re choosing to pay down some of their debts. No matter. Lower energy costs surely must boost bottom line profits of transportation companies – truckers, airlines, shippers, railways. Maybe not. The iShares DJ Transportation Average ETF (NYSEARCA: IYT ) shows that investors see big troubles for American transportation corporations. The current price on IYT is near a 52-week low and sits approximately 10% below a long-term 200-day trendline. Equally troubling, IYT is trading near the lows of the August-September sell-off and it remains down 16.5% year-to-date. The fact that lower energy prices are not providing the anticipated windfall to economic sectors that should benefit from lower oil prices continues to confound analysts and economists alike. For one thing, most of them have completely missed the cons of of commodity price depreciation; that is, gains for commodity users would be offset by losses for the producers (e.g., energy, materials, natural resources, etc.). Second, if the losses by the producers become bad enough, the number of resources-dependent exporters crimping global world product (GWP) can play into the notion of worldwide recessionary pressures. In other words, the U.S. is not an island; the well-being of the global economy matters more for risk taking in market-based securities than a simplistic assessment of oil savings benefiting retailers and/or transporters. Just how bad do resource-dependent exporters have it? The second largest non-OPEC provider of oil to the world is Canada. The iShares MSCI Canada ETF (NYSEARCA: EWC ) is in a bear market with price depreciation in the realm of 32%. Myopic S&P 500 bulls dismiss the bear market in energy stocks and energy-dependent producers like Canada. Yet the problems extend far beyond the oil patch. There is a 46% bearish decline across the entire commodity complex via the GreenHaven Continuous Commodity Index ETF (NYSEARCA: GCC ) due to weakening demand for “stuff” in the developing world and a surge in the U.S. dollar. When China, the world’s second largest economy and the world’s largest trader of goods witnesses year-over-year import declines of 18.8%, something’s not quite right. Rapidly falling oil and commodity prices have hampered energy stocks, materials stocks and resources-dependent exporting countries. Yet investor trepidation has spread to other risk assets as well. The demise of appetite for high yield bonds in the SPDR Barclays High Yield Bond ETF (NYSEARCA: JNK ) has been blamed on everything from energy company debt woes to the collapse of the mutual fund, Third Avenue Focused Credit. However, an in-depth look at the high yield bond space shows that “Ex-Energy” high yield bonds have been diverging from the S&P 500 throughout the year . In other words, people want out of junk bonds because they are lowering their overall risk profile, not simply because of the asset class association with the beleaguered energy sector. It is worth noting, then, that a wide range of risk assets are trading at prices that are in the same shape or in worse shape as they were back when the S&P 500 hit 52-week lows (1867). Energy stocks, retail stocks, transportation stocks, oil exporting countries, high yield bonds, commodities – each of these asset types are struggling mightily. And that’s not all. The iShares MSCI ACWI ex-U.S. Index ETF (NASDAQ: ACWX ) is more or less constrained. Small-cap U.S. stocks via the iShares Russell 2000 ETF (NYSEARCA: IWM ) are timid. In fact, both ACWX and IWM are below respective long-term moving averages and both are more than 10% off 52-week peaks set back in the first half of the year. If risking one’s capital in non-U.S. stocks, small-cap U.S. stocks, high yield bonds, foreign bonds commodities, and a wide range of U.S. sectors (e.g., energy, materials, utilities, retail, transports, etc.) is proving detrimental, what’s left? Large-caps via the S&P 500 and the NASDAQ . Even here, though, some of the leadership in biotech names have yet to recover former glory. The SPDR Biotech ETF (NYSEARCA: XBI ) trades lower today that it did when the S&P 500 hit its 1867 bottom; it is 25% off its 2015 pinnacle and well below its long-term trendline. In sum, leadership across risk assets is so narrow, risking one’s capital in anything other than the large-cap indexes may not be worth it. Indeed, one may wish to keep in mind that while the S&P 500 has been resilient in 2015, it has remained below its May record (2134) for close to seven months. More resilient? Long-term treasury bonds in the face of a Fed that intends to hike overnight lending rates. The iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) is 5% higher than it was in the heat of July. For Gary’s latest podcast, click here . Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

The Dynamics Of Liquidity And Investing

I’ve been getting questions recently about liquidity , specifically in the context of exchange traded funds ( ETFs ). Liquidity is a hot topic in financial markets these days, so let’s spend a little time going over it. First, we’ll explore what we mean by “liquidity” and then we’ll explain what it means when it comes to ETFs. Defining liquidity When I think about liquidity, I think about a transaction: I am able to buy or sell something at a known price. The more liquid an investment, the easier it is to buy and sell without affecting the asset’s price. More fully, liquidity has three main components: price, time and size. If an asset is liquid, I can trade it quickly, and I can trade a large amount of it, without moving its price. In reality, most investments involve trade-offs between these three components. Want to trade quickly? You may not be able to trade a large amount, or you may impact the price you are going to receive. Want to trade a large amount? Do it slowly, or be prepared to impact prices. A general rule of thumb for liquidity for most investments is that you can get two of the three attributes, but not all three at once. If we consider liquid assets, a large cap stock is a good example. Unless you are trading a significant number of shares, you can generally trade fairly quickly at a price that is close to what you see on the exchange. A home, on the other hand, is relatively illiquid; you can get an estimate on its price, but until a buyer signs on the dotted line and you have a check in hand, it’s unclear what you’ll actually get when selling your home. And it will generally take you a while to sell your home, no matter what its size. Liquidity and ETFs When it comes to a security like an ETF, I can see that it’s trading at a certain price, and I can generally buy or sell that ETF at a price that’s pretty close to the quoted price. I can generally trade fairly quickly, as long as my trade is not large compared to the security’s volume. A large ETF trade is in some ways similar to a large equity trade; I need to trade over time or risk impacting the price. Let’s take it a step further and look at bond ETFs. If you want to go out and buy a bond, you can’t just buy it on the open market via an exchange. Instead you would buy it over the counter, in a negotiated transaction with a broker. The price you would trade at is often unclear, and it can be difficult to trade a large amount, or trade quickly. In fact, some investors may find that individual bonds don’t have any of the three aforementioned features of liquidity. With a bond ETF, which is a basket of bonds traded on an exchange, you have much more price transparency. You can actually see the price at which a bond ETF is trading and have a sense of the price of a trade and how many shares might be available to trade at that price. As the bond ETF trades on an exchange, you can generally trade it with the same speed as an individual stock. The liquidity rule of thumb still applies to bond ETFs; it can be difficult to trade in large size, quickly and without impacting price, but overall, exchange trading liquidity can be greater than liquidity in underlying markets . And that is an improvement that all investors can benefit from. This post originally appeared on the BlackRock Blog.