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Blog

High prices do not mean a bubble in commodities. High prices are just high prices. Humans are horrible at best in predicting either the frequency or the magnitude of such moves, yet novices (and some pros) are dazzled and entertained with the white noise of predictions. Don’t be one of them.

Prediction as an art in the US is miserably unsuccessful, and unfortunately we have to deal with the endless barrage of prediction that floods our senses via social media. That is the downside of the ease of internet publishing for sure.

If you make the mistake of reading some of the recent asshat articles that I’ve seen stating that we have a bubble in commodities, you may sell your longs fearing that we have put in the tops for these markets. Don’t be fooled and get psyched out of your long positions. As long as the price charts are positively sloped stay long.

There is a long way to go before we see the type of inflation and hyperinflation that the massive printing of US dollars can cause. There is no economist within 1,000 miles of the White House (I cringe at capitalizing these terms anymore) who can predict how high markets can go. After that, you can use the Sperandeo 123 Trend Reversal pattern to trade these same markets short.

Part of the problem is that msm report price changes, and not percent changes. If wheat has doubled in price, then a 10% pull back is going to be twice as large as it had been. So if you’re using prices for position sizing, you might consider trimming the position so your equity does not get whipped around. Keep in mind that this is as much an emotional decision as a financial one for you to make.

A word about short selling: if you put up 5% of the notional value as margin, all you need is a 5% move down for your to double your money or earn a 100% RoR on your position. If the number was 8%, then the same will hold. There are articles out there that have suggested that you can only make 100% by being short. That is not true and you can earn several hundred % by being short wheat, for example, from $9.00 to $4.50.

Position sizes will dictate what impact these moves have on your overall equity. In high volatility markets, as well as the potential for inflation or hyperinflation, you don’t need large positions in commodity trading to earn out-sized gains. That’s my prediction.

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vz.t.spread

(click for larger, clearer image)

…and I took the trade less traveled? What’s the ending to this…? Why am I bringing Robert Frost into my blog?

I was reading Dan Frommer’s article at TBI which was basically a recap of Walt Mossberg’s thoughts on the new Verizon iPhone. They tickerized the headline with VZ and APPL, but I think that is a mistake here and they just being traffic whores.

The trade is between AT&T (T) and Verizon (VZ). Apple and the iPhone are catalysts, but not part of the trade directly. The question is, “do you think that Verizon is going to eat AT&T’s lunch now that they have the iPhone on their network?”

Some might think so, and that might account for the divergence in the % appreciation when you compare the stocks to one another. The divergence (spread is widening) is represented by the widening gap between the red and blue lines on the chart. If they move closer to one another, they are converging and the spread is narrowing.

If you think VZ is going to outperform T, then you can create a pairs trade or spread by:

Buying VZ
Shorting T

This can also be called a “relative value trade” because the trade here is the relationship between the two stocks, not the direction of either one as an outright trade. It is lower risk, however, if you over-leverage the trade you can still lose big because both can go against you if you’re wrong.

Disclosure: I use an Android device, so I don’t have a dog in this race. I’ll be back next week in full force blogging again. Off to teach the Master Class on Friday and finishing the third and final revision of my book.

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President Obama Wants You To Become A Trader

From the transcript of the SOTU:

“None of us can predict with certainty what the next big industry will be, or where the new jobs will come from. Thirty years ago, we couldn’t know that something called the Internet would lead to an economic revolution.”

“What we can do – what America does better than anyone – is spark the creativity and imagination of our people. We are the nation that put cars in driveways and computers in offices; the nation of Edison and the Wright brothers; of Google and Facebook.”

“In America, innovation doesn’t just change our lives. It’s how we make a living.”

— President Obama

Isn’t that what traders do…innovate? Traders have gigantic creative sparks and imagination. And we combine those aspects with the need to learn new skills almost daily. We need to read like we’re in the CIA. We need to eat right and have healthy spiritual lives and exercise.

We develop and deploy models that are either systematic or discretionary in order to do something else that is terribly American: we make money.

Fight the power. Become a trader. Join the capitalists.

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victorsperandeomichaelmartin

The Master Class with Victor Sperandeo on Friday, February 4 in New York City is almost full.

Victor is going to teach you the proprietary rules he uses himself to this day. These rules are not in any of his books. Click on the link to see the full agenda.

Register for the Master Class and change your life.

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