Baltic Exchange Dry Index, Commodity Prices, and Global Economy

First here are some background and explanations of Baltic Exchange Dry Index:

The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange, which traces its roots to the Virginia and Baltick coffeehouse in London's financial district in 1744.

Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand). The supply of ships (cargo transports) is much less elastic than the demand for them, so the index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as building materials, coal, crude oil, metallic ores, and grains.

Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.

Now, let us look at the index chart below from InvestmentTools.com.



The index is free falling like a waterfall. It penetrates three major bottoms from 2008, 2005 and 2001 respectively. It is really ugly.

Below are charts of CRB index and Gold (GC) with the index.

BDI and CRB



BDI and GC



It looks like commodity prices still have rooms to go down. How about the global economy? Good Luck to us.

Unprecedented Volalitity

The market volatility this month is unusual both in concentration and in magnitude. There are four large moves that are more than 7%, two upside and two downside. This kind of market behaviors happen only during the Great Depression era.



From the chart above, I wonder whether this kind of market volatility might stay with us for a relative long period of time. The chart below also shows the unprecedented volatility happenning now in the current market. Bands in the chart marks two standard deviations.

Money As Debt

I just finish watching the video "Money As Debt". It is the best work I have ever seen in explaining how money works in the current society. You might like it too.

Dramatic and Sudden Events

In daily life, we are used to normal events and average changes. They make us feel comfortable and safe. So our minds are programmed to think in a normal and average way. But things that cause fundamental changes in all aspects are sudden and dramatic events.

This principle applies to the trend-following trading very well. The trend-following trading uses sudden changes of market behavior, such as breakout, to enter a trade; it ride along to expect a dramatic trend; and it uses a sudden abnormal reaction against the trend to exit a trade.

Also trend-following uses the stop loss to control the risk. So if a dramatic and sudden event is against a trade, the trade has a small loss. If the event favors a trade, it has a huge profit.

Currently, a dramatic event are developing in the global financial system. The following chart gives us a nice picture of it.



Where does this event leads to us? No one knows. But I feel the interview below is very interesting.

RAY SUAREZ: Finally tonight, we return to a subject on many minds these days: the financial crisis. Our economics correspondent, Paul Solman, checked back in with one particularly prominent voice in the investment world and his colleague, who guided his thinking.

Here is the pair's sobering conversation on what may lie ahead.

PAUL SOLMAN, NewsHour Economics Correspondent: One of the world's hottest investment advisers these days, Nassim Nicholas Taleb, author of "The Black Swan," who's been warning of a crash for years, betting on one, and winning big.

He's been ubiquitous in the financial media of late, from cable TV's "Colbert Report" to the BBC's "Newsnight," where he was infuriated by what he called "bogus accounting."

NASSIM NICHOLAS TALEB, Scholar and Author: The first thing I would get immediately, immediately, I would suspend something called value at risk, quantitative measures of risk used by banks, immediately.

PAUL SOLMAN: We sat down with Taleb and the man he calls his mentor, mathematician Benoit Mandelbrot, pioneer of fractal geometry and chaos theory. And even more than feeling vindicated, they're both scared.

NASSIM NICHOLAS TALEB: I don't know if we're entering the most difficult period since -- not since the Great Depression, since the American Revolution.

PAUL SOLMAN: The most serious situation we've been in since the American Revolution?

NASSIM NICHOLAS TALEB: Yes.

PAUL SOLMAN: Professor Mandelbrot, can that possibly be true?

BENOIT MANDELBROT, Mathematician: It's very serious.

PAUL SOLMAN: More serious than the Great Depression, possibly?

BENOIT MANDELBROT: Possibly. I hope not.

...... See the source below for the full interview.

Source: PBS: Top Theorists Examine Rippling Economic Turbulence

Pivot Points

Pivot points are turning points in price movements. They are places where buyers or seller give up their positions, so they involve emotions. The more intense the emotions are, the more important the pivot points. At extreme cases, one pivot point, such as price spike or crash, might define the turning point for a secure long term trend. Most of cases, more than one pivot points connect to a trend line. The break of a trend line may decide the direction of a trend.

So pivot points and trend lines are important tools to use to decide the entry and exit of a trade. Here are three steps that Jesse Livemore used to enter his trades.

1. Watch the tape.


2. Establish your pivot points.


3. Be ready to trade along the line of least resistance.

Pivot points are easy to see in hindsight but difficult to spot when they are developing. It is even hard if you like to have information from media and your mind is strongly biased.

Keep your mind open, clear and objective, then pivot points and lines of least resistance come to you. you go with the flow.

Below are some charts with clear pivot points and lines of least resistacne. I feel disappointed I find them in hindsight but not they come to me natually.

Japanese Yen



Australian Dollar



Canadian Dollar

Dollar and Other Currencies

Last Friday, Dollar had a largest upside move in many years. It also broke out a six-month base. Other major currencies, such as, Euro, Australian Dollar, Canadian Dollar, British Pound, Swiss Franc had the largest one-day drops within years.

Dollar Index



Euro

Cut Loss Short and Fast

In trading, cut loss short and fast is one of principles to achieve consistent and profitable results. Following this principle is one of the common attributes of successful traders, though, they might implement it in different ways.

Here are my understandings of this principle and I like to follow them consistently in my trading.

• Always have a stop loss in place.
• In a trading session, I enter a position but I have a loss around the close of the session. I close the position.
• After I enter a position, I have profits for a while. Then the market stalls, goes again me, and gives me a loss. I close the position.

It seems that traders have tendency to let loss run. They are unwilling to experience feelings of loss. They hope the market can come back to their way again.

The Postive Intentions of Failure and Loss

Failure and Loss normally bring people negative feelings, such as pain, anger, frustration, and so on. People also are unwilling to experience those feelings, so they regard failure and loss bad and try to avoid them.

But negative feelings of failure and loss have positive intentions:

• They tell us that something is not working or doesn't function properly any more, let it go.
• We might be able to learn something from our mistakes that cause the failure and loss.
• We might study more in the areas that we are undertaking.
• Others.

Failure and Loss are the part of a process. We might embrace them. Willingness to experience feelings of failure and loss gives us the courage to trial and error and can help us to learn from failures and to grow. A Chinese saying that I like:

Failure is the mother of Success

Refllatio

Source: London Banker

Alpha to Beta

Facts You May Like To Know

There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.

Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion.


Source: MISH'S Global Economic Trend Analysis

The Quote of Today

"Capitalism demands the best of every man – his rationality – and rewards him accordingly. It leaves every man free to choose the work he likes, to specialize in it, to trade his product for the products of others, and to go as far on the road of achievement as his ability and ambition will carry him."

-Any Rand

Some Thoughts on entries and exits

There are many ways to evaluate market conditions. Personally, I think relative strength, sentiment, and market correlation dynamics are three most important factors. I use them to evaluate market and sector conditions, then use the price action of individual markets to choose markets for entries. Here are my three ways for entry:

1. Regional breakout.

2. Relatively strong in a weak market (accumulation) and relatively weak in a strong market (distribution).

3. Extreme reversal.

One thing that is very important to the entry is to choose a right time and a right price to enter a position, a right position. If a position has a good profit right at the start, it means I have a right position with the market. Then I hold the position. If the position has a loss or struggles to have a profit after I enter it, the market tells me that I have a wrong position. Then I exit it.

Ways for Exits are much more challenging and difficult to define than those for entries. Here are my three ways for exit:

1. one of effective ways to exit is to close a position when a market has a extraordinary move with a huge volume (at least more than 10% price move and more than triple average volumes) in my favor direction. This kind of move is normally an exhaustive move. Also I have a windfall profit, then take it.

2. Swing high/low stop.

3. Multiple ATR trailing stop.

The Quote of Today

"The secret of happiness is freedom. The secret of freedom is courage."

-Thucydides

Loan Pawns Have Good Business

When the economy conditions are tough, lots of people sometimes don't have enough income sources to support their daily life. They also have difficulties to borrow money from credit lines. So they might temporarily take loans from loan pawns, even pay quite high interest rates. Look at the stock chart of a loan pawn below. It seems prospering.

EZPW

Short Selling and Market Behaviors

Short selling can drive the stock price sharply low, but it also work as a support force when the short covers. From this point of view, the short selling might make a stock more volatile.

XLF



I wonder what happens when a stock doesn't have the support force from either inside buying or short covering with poor general conditions. It might just keep drifting down.

Divergences Between Commodity and its Commodity Stocks

Today, Crude Oil, Soybean, and Copper close to all time high. But most of commodities stocks, which are also recent leaders of stock market, close sharply lower. This type of divergence happens not quite often.

Copper and FCX





Soybean and a Fertilizer Company





Crude Oil and a Energy Company

My Favorite Quotes

"There is only one side to the stock market; and it is not the bull side or the bear side, but the right side."

"For when I am wrong only one thing convinces me of it, and that is, to lose money. And I am only right when I make money. That is speculating."

"My losses have taught me that I must not begin to advance until I am sure I shall not have to retreat. But if I cannot advance I do not move at all."

"The game taught me the game."

"If the unusual never happened there would be no difference in people and then there wouldn't be any fun in life. The game would become merely a matter of addition and subtraction. It would make of us a race of bookkeepers with plodding minds. It's the guessing that develops a man's brain power. Just consider what you have to do to guess right."

"I can't tell you how it came to take me so many years to learn that instead of placing piking bets on what the next few quotations were going to be, my game was to anticipate what was going to happen in a big way."


-Jesse Livermore

Supportive Forces of the Stock Market

Higher Oil and commodity prices might hurt economy in general, but now they are actually the forces that support the current stock market. Many natural resource and energy stocks are in the new high territory. It seems that the Fed does a good job to give money to investment banks, so the banks can use the money to boost the commodity prices.

Knowing where the money flows to and going with it seems a good way to make money in financial markets as well as in business in general.

USO



DBC

The Las Vaga Game Houses and Royal Caribbean Cruises

I know they are different things in many ways. But one thing seems in common, this is, they are nice places for entertainments. From the stock charts of these companies, it seems that people visit them less now.

MGM



LVS



RCL

New Lows in the DOW 30

There are 12 stocks out of Dow 30 in the 52 week new low list. They are MMM, AXP, AIG, BA, C, GE, GM, HON, JPM, PG, and UTX. Industrial, Defense, and Consumer staple stocks, such as, MMM, BA, HON, PG, and UTX, just appeared in the list last week. It seems the weakness of the stock market is getting broader.

PG



UTX

Weakness in the Defense Stocks

Three defense stocks, BA, HON and UTX, which are also DOW 30 components, break down quite heavily. BA and HON are in multiple year low.

BA

Trading Moving Markets

One of my favorite rules is trading moving markets, but it is very difficult to follow. It is counter intuitive. I have tendencies to look for breakouts from the congest areas. If a market is moving, I like to wait for it to consolidate and to enter when it breaks out again. To trade good, I just have to jump in the moving river and flow with it. Otherwise I might keep losing lots of good opportunities.

ANR



AXL

Regional Bank Brothers

Regional banks are moving lower for a while already. Today many of them move sharply lower. They look like panic sells. For those lucky short sellers of these stocks, it might be a good time to cash in some profits.

FITB



RF

More sectors are in new low territory

While resource and energy stocks dominate the new high list, sectors of stocks that are in new low are growing. Here are a few of them: Bank, Automobile, Tire & Rubber, Food, Department store, Hotel, Entertainment, Newspaper, Big Drug Company, Airlines.

CTB



PBG

A Nice Poem I like very much

If I Had my Child to Raise Over Again

If I had my child to raise over again

I'd build self-esteem first and the house later

I'd finger paint more and point the finger less

I would do less correcting and more connecting

I'd take my eyes off my watch and watch with my eyes

I would care to know less and know to care more

I'd take more hikes and fly more kites

I'd stop playing serious and seriously play

I would run through more fields and gaze at more stars

I'd do more hugging and less tugging

I'd see the oak tree in the acorn more often

I would be firm less ofter and affirm much more

I'd model less about the love of power

And More about the power of love.

-Diane Loomans

Dow Jones Leaders and Laggards

Wal-Mart (WMT) is the leader among Dow Jones Compoments.



There are five laggards, American International Group (AIG), General Electric (GE), General Motors (GM), Merck (MRK), and Pfizer (PFE).

AIG



GE



GM



MRK



PFE

Hot Coal

Coal, as a traditional energy source, gains more attention than before. As a consequence, coal stocks keep flying higher and look quite hot.

JRCC



PCX



In trading, one of principles is buying the strongest and shorting the weakest. It becomes more and more obvious to me, though I still can not consistently follow it. If it happens that you can get in a position of which instrument has a strong trend, you keep ride it until its end. You never know how high or low it can go.

Grains and Fertilizers

Grains break out their consolidation areas and move higher. Both Corn and Soybean Oil are at all time high now.

Corn



Soybean Oil



Fertilizer makers seem benefiting from this "Grain Boom". Many of them are also at all time high.

MOS



It seems that commodity booms tie together with industry booms, like Oil with energy industry, Grain with agriculture industry.

Shanghai Stock Exchange Composite Index

Shanghai Stock Exchange Composite Index closes 50 percent off its all time high. It starts to test 3000 mark. The 2600 - 3000 zone might become a major playground.

Banks Oh, Banks!

While resource and energy stocks make new high day in and day out, bank stocks keep going down. Look at charts of some big banks, I wonder what are happening with them.

Bank of America



Barclays

The Attentional Move of Crude Oil

Crude Oil has the largest price move in its history. The July contract jumps about eight percent and closes at 138.55. Trading volume is also highest in recnet years.



For those lucky ones who still ride the Oil trend might be a good time to take some profits now. The volatility might kick in soon.