A More Effective Way, Wave Strength Market Report
TaipanFinancialNews.com’s WaveStrength Market Report
October 25, 2006
A More Effective Way
Macro Outlook
“Why do they sit there meeting after meeting whining like an old man on a porch, warning the local kids that one of these days he is going to get up out of his chair, come down off this porch and take a whupping to that old inflation?”
Trading Tactics
We can devise a more effective way to maximize our gains while limiting our losses on our trading positions. Here's how…
Macro Outlook
Fed does nothing for third meeting in a row.
Here's the first thing you will read today in the mainstream media that will be wrong: “Fed Acts…”
The Fed did exactly as I predicted: It did nothing, but held the door open for doing something later, if they have to.
While everyone else was hitting “refresh” over and over again waiting for this bit of scintillating news, I was on the air with Jeff Crouere on KVOL out of Lafayette, LA. I asked Jeff to do something interesting for someone in that part of the country: Forget about Katrina for a moment.
Everyone's shouting about how energy costs are down big-time. The question that matters is “Compared to what?” Let's take gas at the pump: It is indeed down some 15% compared to the insane speculative days that followed Hurricane Katrina's demolishing of the Gulf.
But now I will ask you to do the same thing I asked of Jeff: Zero Katrina out of the equation. Drop 2005 from the calculation, and you'll find that gas is still waaaay up. We're talking 8.70% over this week in 2004, 42% over 2003, and 52% over 2002.
Heck, take gas completely out of the equation if you like: Doesn't matter a bit. The core rate is still up 0.6% in September. So why isn't the Fed doing something about this?
Why does it sit there meeting after meeting whining like an old man on a porch, warning the local kids that one of these days he is going to get up out his chair, come down off this porch and take a whupping to that old inflation?
Because costs are not the only thing that moved 0.6% in September: Industrial output is down by just that much. And gas isn't the only thing to move about 40% either: GDP growth for the first quarter of 2006 came in at +1.86%. Second quarter was: +0.96%.
That's a 48% drop. Do that again in the third quarter and we are less than a rounding error away from a dead halt. Or quite possibly the first failing quarter of the next recession. And that is why the Fed can't act against inflation. At this point, it can point to the excesses of the previous Fed chairman and paste his moniker on that recession. If they were to actually raise rates after this pause, it would be labeled “Bernanke.”
Adam Lass
Trading Tactics: Placing Stop-Limit Orders
Given the recent trading activity in our position in iShares Russell 2000 Growth Index (IWO:AMEX) and Frontier Oil (FTO:NYSE), I thought it would be a good idea to explore the protective stop orders we're placing with the idea of seeing if we can devise a more effective way to maximize our gains while limiting our losses on our trading positions.
As a baseline definition, a “protective stop” is a strategy that aims to limit potential losses to a desired amount. Therefore, a “stop-loss order” is an order placed with a broker to sell a security when it reaches a certain price. It is designed to limit an investor's loss on a security position. In other words, setting a stop-loss order for 20% below the price you paid would limit your loss to 20%. This is what we advise in our WS Trader and WS Professional services whenever we issue a new trade.
When you place a protective stop, you're essentially setting an order to be executed if (or when) your trade moves down to a certain price level. While good in theory, there are some limitations to the strategy that floor traders are able to expose, which may have happened in our latest IWO and FTO trades.
For example, say a particular asset is trading between $2.55 and $2.60 per contract. If floor traders notice that a large majority of traders wish to sell a position for $2.30, they can quickly drop prices (using volatility tinkering) down to the $2.30 stop loss order, fill the orders, and simultaneously tick the prices back up to $2.55 to $2.60. The result is that these option prices moved down for a second -- which filled the stops -- and then ticked them back up. While not technically “illegal,” this practice is certainly unethical and represents a big “grey area” on the trading floor.
Therefore, I feel it's now a good idea to transition over and place “stop-limit orders.” By definition, a stop-limit order is an order that combines the features of stop order with those of a limit order. In other words, a stop-limit order will be executed at a specified price (or better) only after a given stop price has been reached. This way, a floor trader will only be exposed to your order after a designated price has already been triggered.
Once this designated stop price is reached, the stop-limit order then becomes a limit order to buy (or sell) at the limit price or better. The obvious benefit is that a floor trader cannot artificially move prices only for the purpose of filling stop-loss orders, because they won't know they exist until a price has already triggered.
The downside is that your trade isn't guaranteed to be executed for your price. For example, your order becomes executable once a set price has been reached and is then filled at the current market price. Therefore, you may end up getting filled below your stop limit price. Nevertheless, I think this is a risk worth taking when you have floor traders willing to compromise their integrity to artificially move prices to trigger protective stops.
From now on, you can look for stop-limit orders in our trading alerts.
Bryan Bottarelli
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