28th April 2007
I have lost almost a third of my capital. Why? I believe the reason lies in deviating from my own analysis, as well as overtrading. I strayed away from my system of reasoning, shifting to other timeframes and trying to time the market with a strict technical system. With that, I starting trading very often, resulting in the fatal mistake of overtrading. I sufferred a long string of losses.
However I came to realize something from this. Even when I flip a coin, there will be both heads and tails. Why is it that my losing streak can sustain for such a long period of time? I have found the answer and it lies in my attitude and state of mind. Instead of aiming for money, I should participate in the market to prove my views. Only when I have a thesis about current market states should I participate. I must get rid of my money making attitude and start making smart decisions.
My current view of the market is that the dollar has been battered down to its lowest point against several currencies like the pound, euro and aussie. This low point has long reaching effects. Firstly, it has enabled the stock market to reach never before heights, reaching 13,000 within 6 months as companies reported spectacular quarterly earnings due to the the weak dollar, which greatly boosted export demands. The FED took a hawkish stance at the previous FOMC due to fears that the weak dollar might let inflation creep it. However, inflation has not been that rampant and I believe the FED could be softening due to the slowing economy. Although corporate profits and the stock market are at spectacular heights, there are several problems in the economy. America have yet to feel any spillovers from the sub-prime mortgage market but I feel that it is bound to come. America is famous for its wealthy but debt-laden population, with most of their assets created through mortgage financing and re-financing. This surge in debt was made possible as foreign direct investment from its major trading partners; China and Japan poured in to sustain its trade deficit. Large amounts of US debt instruments were bought and this created a huge amount of cash lying in banks. The banks then took this excess and lent it to the people. Faced with the sub-prime mortgage debacle, an evident proof that the economy is getting tougher, should the banks tighten its lending rates, the people will suffer greatly. Another factor is the property market. Should the prices of US homes fall, there will be a recession as a huge number of foreclosures will be filed. Therefore the US is in a precarious position. The economic data for the US economy has shown evidence of slowing and I believe that though the FED have still been speaking hawkish, their stance will soon change and rates will be lowered. The exchange rate will dip to lower levels. This will allow the country to encourage exports and discourage imports. Inflation might creep in, and that is where the FED comes in. The power of the FED lies in its power of authority. It should lower rates but still retain a firm stance on inflation. The prevailing bias in the markets have been on a weaker dollar. However due to the extreme heights of the crosses, I fear. Indicators are at overbought levels and the way to these heights have been very smooth and uninterrupted. I will be going in only if there is correction of at least 38.2 percent.
What disturbs me the most is not the extreme weakness of the dollar but rather, of the extreme heights that the other currencies are in. The pound has tried to reach the 2 dollar mark at least 3 times within the past 15 years and never before was it able to remain there. Why should this case be any difference? Is the economy really strong enough to withstand the strong pound along with the high interest rates? I believe the answer is no. Firstly the economy has not really been doing well. The only reason why interest rates are at 5.5 is because of inflation, which seems to be peaking. Moreover, the high pound will cause exports to suffer as demand drops. The only country in which I feel can sustain the high rates is the eurozone countries. The eurozone has been performing well with even italy and france showing good improvement. I have positions in the euro against the dollar which I intend to stick to.
Australia is a country which I do not have good knowledge of, but I do know that it is a commodity based country on which it exports certain commodities like gold and iron. These commodities will always have demand for them and I think that even with the aussie dollar at such heights, it should be able to sustain. However, the last CPI figure measuring inflation showed a disappointing figure and despite that, the aussie dollar only dropped a little and there was no catalysmic reaction, showing the strength of the aussie.