READ WELL, EARN BETTER
December 5th 2008 03:04
Say, was that up or down? This question came to mind while I was browsing the net early the other day. A story headline read: “Oil rises above $47 after US inventories fall.” Hu?! But didn’t I just read that the price of oil fell to $48…?
Hold on, lemme drink that coffee first and refocus my irises…
Oh, of course…
The market never sleeps if you consider that yours is not the only market and that oil is a commodity bought, sold and used practically the world over. But… dang, (depending on where you’re coming from and what time of the day you checked the market), that headline can be a bit confusing.
Okay, so maybe headlines like that is a non-issue to the veterans of the ever changing and sometimes topsy-turvy world of investing. But somehow, it needs a little of getting used to for some newbies like me.
Now, I only say that because in this world “reading” does not only mean deciphering the written words and how they were put together, but understanding how a lot of things work as well.
Let’s take the case of oil for example. A few months ago, the price of oil will go up every time the prices of stocks and the value of US dollars drop. Lately, the price of oil drops along with the prices of stocks, though the price of oil still appreciates every time the US dollar weakens.
Reading how the market will move given certain immediate developments can get tricky, but not knowing how to read, it seems, can be disastrous. And that is probably more so if you are a swing or a day trader.
Again, let me clarify that I am only writing these things in the hope that there are other stock market newbies out there who are, like me, wading thru dangerous waters, trying to find out how the other newbies think. No doubt, market veterans will consider this topic nothing but rubbish.
I try to read as much as I can as a newbie (so much that another would be investor had to ask: “Do I have to read as much as that if I want to invest?”) and one of the things that I think one has to consider “reading” about is the difference between the economy and the stock market.
Someone out there has written that: “The stock market is not the economy and the economy is not the stock market” and that to me has clarified and clouded a few things at the same time.
Well, if you have not heard or read that line before, it would be easy to think that the only reason the stocks are down these days is because of what is happening to the world economy, which may mean that an investor has currently no other way of making money except by going short, or that the market will not go recover for as long as the economy is down. But then, that is not necessarily true.
The last several trading days have shown the US market appreciating, except on the day NBER announced that the US is actually in recession since December 07 and then of course, last night.
I even read somewhere else that the markets usually begin to appreciate months ahead of economic recovery.
An investor friend who has a lot more money than I have who has been shorting the US market for a while now, asked me on the second day the US market has risen if I think the climb of the US market will continue. Quite frankly, I was surprised I was asked. This friend engages the services of a broker and has access to more newsletters prepared by market experts than I have.
Anyway, I responded by saying that I am not confident the market will continue to rise at the moment. I added that maybe the trick is to identify a stock that you want to buy early on, make sure it is a good one, wait for a big drop, buy it at that point and then sell it when the market recovers the following day or the next few days.
But then, that is just an opinion of a newbie and all this newbie does is read – and probably not even yet that well. And please bear in mind, it's riskier these days.
Hold on, lemme drink that coffee first and refocus my irises…
Oh, of course…
The market never sleeps if you consider that yours is not the only market and that oil is a commodity bought, sold and used practically the world over. But… dang, (depending on where you’re coming from and what time of the day you checked the market), that headline can be a bit confusing.
Okay, so maybe headlines like that is a non-issue to the veterans of the ever changing and sometimes topsy-turvy world of investing. But somehow, it needs a little of getting used to for some newbies like me.
Now, I only say that because in this world “reading” does not only mean deciphering the written words and how they were put together, but understanding how a lot of things work as well.
Let’s take the case of oil for example. A few months ago, the price of oil will go up every time the prices of stocks and the value of US dollars drop. Lately, the price of oil drops along with the prices of stocks, though the price of oil still appreciates every time the US dollar weakens.
Reading how the market will move given certain immediate developments can get tricky, but not knowing how to read, it seems, can be disastrous. And that is probably more so if you are a swing or a day trader.
Again, let me clarify that I am only writing these things in the hope that there are other stock market newbies out there who are, like me, wading thru dangerous waters, trying to find out how the other newbies think. No doubt, market veterans will consider this topic nothing but rubbish.
I try to read as much as I can as a newbie (so much that another would be investor had to ask: “Do I have to read as much as that if I want to invest?”) and one of the things that I think one has to consider “reading” about is the difference between the economy and the stock market.
Someone out there has written that: “The stock market is not the economy and the economy is not the stock market” and that to me has clarified and clouded a few things at the same time.
Well, if you have not heard or read that line before, it would be easy to think that the only reason the stocks are down these days is because of what is happening to the world economy, which may mean that an investor has currently no other way of making money except by going short, or that the market will not go recover for as long as the economy is down. But then, that is not necessarily true.
The last several trading days have shown the US market appreciating, except on the day NBER announced that the US is actually in recession since December 07 and then of course, last night.
I even read somewhere else that the markets usually begin to appreciate months ahead of economic recovery.
An investor friend who has a lot more money than I have who has been shorting the US market for a while now, asked me on the second day the US market has risen if I think the climb of the US market will continue. Quite frankly, I was surprised I was asked. This friend engages the services of a broker and has access to more newsletters prepared by market experts than I have.
Anyway, I responded by saying that I am not confident the market will continue to rise at the moment. I added that maybe the trick is to identify a stock that you want to buy early on, make sure it is a good one, wait for a big drop, buy it at that point and then sell it when the market recovers the following day or the next few days.
But then, that is just an opinion of a newbie and all this newbie does is read – and probably not even yet that well. And please bear in mind, it's riskier these days.
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Comment by britishbulldiog
One of your interesting articles again. So here is my response.
The stock market does respond to economic conditions both usually and in aggregate. But in volatile times like this, not so much. For instance if there is very bad news, investors may hope that this will provoke the authorities to cut interest rates or taxes as they have indicated this in the past.and so stocks rally. Then there are surprise news statements during the trading day that can move markets.
For instance on Wednesday night the US was 2% down on bad economic numbers then 2 pieces of news came through 1. Good On-line sales from Amazon and 2.More credit for collateral swops for the banks for three months from the fed. The financials in particular rose on the second piece of news and the market rose 2.5%.
I'm financial short right now and was furious, but that's life right now, for these are not normal times at all!
As for oil it will usually drop if stock markets do, as this is usually for bad economic news which is bad for both the demand and price for oil and demand and price for stocks. Oil and other dollar denominated commodities will also usually drop with a stronger dollar, but not if Opec announce that they're taking 5 million barrels a day out of production!
So what I'm saying is that investment is full of uncertainty right now. Anyone could make money beween 2003 and 07, but right now, I'm struggling to as I was short financials on Wednesday night and I went to sleep here thinking I was right to be, as this week there are the two biggest monthly US macro econ reports. Last Monday was industrial production and today non farm payrolls or in other words employment.
I think that each month this first week is a good week to be short as long as the macro econ down side shocks keep coming, but the rest of the time stocks usually go up for some of the reasons above. Overall this is not a bad strategy,but things are so uncertain, there's no guarantee my strategy will work. Right now in December history suggests that stocks rally but if GM goes bankrupt they probably won't.
I'm not sure if all this helps and maybe you can be so well infomed that you can no longer see 'the wood for the trees', and so maybe you should just trade short term trends like stocks are up two days running - i'm long or vice versa.
For my part I expect stocks to rise in December and fall in January, but conditions are such that I have little confidence in my educated calculation. Such is life for investors right now, but one thing is for certain.
If you'd sold your stocks at the top of the market in October 07 and gone short immediately, you'd have done very nicely as markets have fallen by a half. Over the long tem strategy would have worked out OK if you'd stayed relatively uninformed other than to go short in Nov 07 and go long in June 09.
My conclusion then is to stay long term strategic not short term tactical and study markets on a monthly not hourly basis. In mid 09 there will be an amazing opportunity to invest in cyclical stocks whether oil or financials or house builders. Do it in a leveraged etf and turn 100,000 pesos into 500,000 pesos over 5 years. Life will prove OK for an investor after all, in the long term.
Regards as always,
British Bulldog.