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Blog

Past performance is not indicative of future results. What’s true for mutual fund managers is true for S&P. Paul Krugman misses this point about the S&P downgrade in his Op-Ed piece Credibility, Chutzpah, and Debt.

With the downgrade, S&P has called America’s political girlfriend ugly. It’s about time. I don’t think this is about finances, debt, nor the creditworthiness of the US. It’s about the breakdown in our political system. No one but the S&P has called them on their audacity and in reading their remarks, you get the feeling that Washington is in a state of incredulity.

After the President spoke today the market voted — it sold off further. Worse, it closed at the lows for the day. It’s normally bearish when the DJIA closes at the lows of a day that’s down 100 points. The magnitude becomes exponential when you close at the lows of the day where the DJIA is off 634 and the S&P 500 is off 80…

That is a mandate: Americans want our political climate to change.

And since the markets closed at their lows today, and that the downgrade is not about debt, there is more downside in the market to come. No one has been in this place before and no one can handicap the level of uncertainty due to the breakdown in politics.

What Mr. Krugman misses is that the stock market is saying that neither the President, the House, nor the Senate has any credibility anymore and no one believes them. Both political parties are to blame for S&P’s recent stance and Americans are tired of the jawboning. I know I am.

As far as I’m concerned, S&P could have blown their last 9 calls in a row. They got this one right.

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SPU1 300x108 Equity Market Weak, Scared

After running into resistance near 1350 several times, the S&P 500 looks like it will trade significantly lower in the coming weeks. The recent failed top is what should scare traders and investors alike.

Does anyone still follow the Dow Theory? You should…

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A few weeks ago, Agrimoney.com reported that the Wasde report showed a hit to corn supplies that was the equivalent of wiping out the crops of both Canada and Russia. Then in early July, the USDA crop report came out suggesting a bumper crop in corn. Curiously, most of us who follow the fundamentals as well as the technicals were stunned by this new news.

I spoke with almost a dozen analysts for my article Hungry Hogs Lift Corn Prices which was published in Barron’s on June 27. Not one had mentioned the possibility of a bumper crop in corn. And these are guys who have people on the ground all over the world feeding them information.

Yesterday, agrimoney.com ran an article that suggested that the USDA was now going back on their original assessment and bringing their forecast back in line with the original Wasde report:

“Corn futures soared 3% in Chicago after US officials, citing China’s spate of import orders, curbed expectations for domestic supplies of the grain despite the largest sowings since World War II.

The US Department of Agriculture lifted estimates for corn inventories for both 2010-11 and next season, reflecting data two weeks ago showing farmers had planted far more of the crop than had been thought, and that stocks left over from last harvest were bigger than had been expected.

However, the increases were less than the market had been expecting, reflecting the impact of lower price expectations fostered by the raised supplies in stoking demand.”

If you can charge Goldman Sachs with price manipulation in crude oil, how is the USDA any different if they pull the same nonsense in the corn market?

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sugar 300x190 When Technicals and Fundamentals Align

The trading environment is ripe for profits when the technicals and the fundamentals are in alignment. Admittedly, it is hard for the new trader to find good fundamentals. You can still follow the fundamental reports in the news and marry them with the price action.

Sugar is one such market. You can see in the chart above that it is in a strong uptrend. The fundamentals seem to show tightness as well. “Sugar prices exploded, hitting a five-month high in London, amid growing fears for Brazilian sugar output, which is expected to fall for the first time in more than a decade, with rising oil prices seen adding a further kicker.”

A trader needs to have his personal fundamentals and technicals in order too. It’s as important to know what you’re doing and why you’re doing it. That is the subject of my upcoming book. More on that later.

Traders like Michael Marcus or Jim Rogers who have expert level fundamental insight can trade on that information. They often put trades on long before the rest of the world takes action. They are likely to be long at the early stages of the move…when there is less certainty or proof that a move is underway or eminent.

I have a question for you: If someone allocated you $1MM in new assets for a separately managed account, how would you trade sugar? The answer is not “I would follow my rules.” A real client (someone in the know) will ask you what the expectation of a trade is for a late-stage rally, like the sugar chart above. The one you’ve been quoting people is the average expectation of all your trades.

Most of the “expert” system followers are either clueless or have a great deal of faith that a move will emerge. By buying early-stage breakouts you’re effectively saying that you have a great deal of faith that one will show up. But to say that fundamentals are not important is a completely ignorant thing to say. When you lose money trading a system, your mind will still ask “why” this happened. The answer to that question is a fundamental.

I think it’s much harder to admit the difficulty in understanding fundamentals or that it takes a decade to become proficient at understanding them, than to just trade new highs and pose as a commodity expert. Don’t kid yourself, the best commodity traders have a deep understanding of the world we live in and how commodity markets are affected by our consumption and production.

I bring this up b/c I had a conversation this weekend with someone who thought he was an expert systematized trend follower (his words, not mine). And maybe his is, but when I asked him if he was using that title/moniker to mask his insecurity about his ignorance about commodity fundamentals, he blanched, as if to say, “Please don’t ask me anything too technical about commodities.”

It’s true that you can trade without knowing too many fundamentals. My belief though is that unfortunate quote about “funnymentals” has been misinterpreted and misrepresented by would-be’s as meaning that fundamentals are not important. Nothing could be further from the truth.

You need to know build a robust trading system with Mechanica, but you need to understand the fundamentals also. Doing so will help you in your coding…

As a trader, it’s important to know why you say what you say and the emotions behind your statements. Having integrity with yourself is the first step to having it with your clients.

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Bono calls a blind fan from the audience up to the stage to play “All I Want Is You.” After the song, he gives the fan his green guitar.

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