Investors On A Flight To Quality

The flight to quality, in the sense of rebalancing portfolios to lower risk, continues while investors are trying to decipher an increasingly more complex financial and geopolitical environment. Yesterday, SPLV, the S&P 500 index low volatility ETF, rose +0.8% to new all-time highs while its high beta counterpart fell -0.6% below 50-DMA support. In addition, (XLU) and (ARCA:XLP), the consumer staples and utilities ETFs, also moved to all-time highs.

On the above chart, the top indicator pane shows the YTD performance of SPY, 1.63% as of yesterday's close. The second indicator pane shows a chart of (SPLV), the low volatility S&P 500 index ETF, with a YTD return of 4.71%, displayed on the third indicator pane. The fourth pane shows a chart of SPHB, the high beta S&P 500 index ETF, with a YTD return of just under 0.4%. The difference in performance is huge and shows the massive flight to low risk equities while waiting for the financial and geopolitical situation to become more clear. 

Note that this flight to low volatility equities is often the last step of the process before a bear market starts, which usually occurs when investors terminate rotation and start moving into cash and other markets. At this point it is not clear at all what the situation is because now there a new paradigm based on the use of quantitative easing to keep long-term interest rates down and provide reserves to institutions for equity purchases. As long as there is no paradigm shift, many investors believe that they are safe in low volatility stocks. But eventually, if high beta stocks are hit too hard, the uncertainty will spill over to low volatility stocks too because at the end of the day everything is inextricably related and no sector can exist without the others. Thus, I am not too optimistic about the future of this market if the geopolitical conflict is not resolved fast and financial conditions do not start to improve, especially as far as putting an end to an accelerating wealth inequality. 

Managing Your Risks

In order to be a successful trader, one needs to understand how to manage risk.Here is some important information that is vital in understanding the risk of Margin Trading:

• The concept of Margin Trading

GCM offers direct access to the world’s international financial markets. A key advantage of GCM products offering is that all transactions are traded in margin (or initial deposit). This means that for a small amount of money, investors can obtain exposure to a much larger trading position hence a possibility of making a large profit with a relatively small stake. Margin is a good faith deposit giving the investor the right to buy or sell the value of the underlying contract of an investment product.

• Leverage (also known as gearing)

The idea of leverage – i.e. the use of debt to increase the expected return on your capital outlay has the distinct advantage of depositing less to gain greater exposure to a market than if you were to make a purchase in your market through a stockbroker or any other share-dealing service. Trading in these larger volumes, in turn allows investors to take full advantage of small price movements. This application is called leveraging (or gearing) and is the key to trading these volatile markets.

For example, a traditional share transaction on, for example 500 shares of IBM trading at US$80.00 per share, requires the full payment of US$40,000 to purchase US$40,000 worth of shares, additional commission charges are also necessary.

However, with Margin Trading, you only put up a small portion of the underlying value. In this case, a typical requirement is 20%; therefore, US$8,000 of margin is all that is required to open a Margin Trade in the equivalent of US$40,000 worth of IBM shares.

In summary, the major difference is that the physical share trade requires payment of the full US$40,000 (plus commission) to enter the trade, whereas with Margin Trading you take a position of equivalent size and only deposit US$8,000 .The maximum potential profit is the same with both transactions but the maximum potential loss in Margin Trading is limited to your initial margin, or risk amount, of $8000.

Now that you fully understand the risk of Margin Trading, you need to know how to manage these risks. GCM allows you to manage your risk on every trade you place. To do so an automatic stop loss order is attached to every trade that you take. In addition, you can use Limit Orders to take profit. You can place Stop and Limit Orders online using our trading platform, allowing you to implement your personal trading strategy efficiently.

GCM provides an execution only service and does not offer investment advice. Before placing orders, you should ensure you fully understand the risks and seek independent financial advice if necessary.

Introduction to Stock Trader Types

Being a stock trader can be both profitable and gratifying. To maximize the financial benefits and your own enjoyment, you need to decide what kind of stock trader you want to become. The right fit depends on personality, time availability, and capital investment.

Depending on how much risk they’re willing to incur, traders usually focus on one or more areas involving growth, value or income building.

• Growth-centered trading involves the practice of buying stock in companies that are poised to grow and expand their profits. This type of trading might focus on investing in new companies, which offer rapid growth potential. As a company grows, the value of its stock will rise, bringing the stock trader profits. Growth-centered trading may include potentially risky ventures like buying into a business IPO (Initial Public Offering). IPOs are a good example of how growth-centered trading can potentially bring great rewards; but it also carries a high risk of failure. Traders who pursue a growth-oriented stock-trading strategy must have the confidence to trust their own instincts rather than seeking reassurance from sure facts.

• Value-focused investing is one in which traders are on the lookout for underpriced stocks at companies that have the potential to perform better than their stock price seems to indicate. One way is to find companies that have significantly lower stock prices than that of their major competitors. It is important to ensure that the company in question has not manipulated its dealings to make the stock price fall instead of rise. Once honesty and integrity are established, along with the fact that the company’s share price is under-valued, the value trader is now in a position of less risk.

• Income-oriented investing is the most conservative of common stock trading strategies. In income-oriented trading, the focus is on capital preservation, with low price fluctuations being of the utmost importance. Since a steady income is the objective, an income-oriented investing style will focus on the biggest and best-known companies, those that dominate their particular market segment and can be counted upon for steady growth and profit. The emphasis is always on acquiring prestigious or blue chip stocks. This lower risk can be established by using bonds and time deposits as well as targeted investments in selected equities. Income-oriented traders usually end up focusing on older, more established firms with good market positions, established management teams and good cash flow.

After studying the ideas and practices of traders who apply all of these types of investing, you will be better equipped to find your own comfort zone using a style that suits you.

The world has many stock exchanges and many investors. An understanding of the following rule makes for simplification: “For every one buyer there must be one seller.”

Almost all types of stock trading are potentially profitable. But profitability is not only about picking the best stock. One must pay attention to complex rules governing matters like money management, risk management and trade management rules.

You should be flexible enough to use several different types of strategies in your market system and your business plan, so that you can adjust to the market, be it bearish, bullish or even range bound.

For a beginner in stock trading, making decisions can seem to be an overwhelming task. You may even wonder where to begin. One of the most helpful ways to get past this initial fright is to study the stock trading strategies of experienced and successful investors. By absorbing the ideas and knowledge of seasoned traders, you can form your own ideas about the style of stock trading that will best serve you in your particular situation. And the more you know, the more you’ll enjoy trading.

Why China's Currency Tangos With The USD

It takes two to tango, but unless both partners move in perfect cohesion, a sequence of graceful manoeuvres can be reduced to a series of clumsy moves. The latter depiction seems to be particularly apt when it comes to explaining the gyrations between the Chinese yuan and the U.S. dollar, thanks to China’s recalcitrance on the topic of yuan appreciation and the United States’ reluctance to be a partner in this currency tango.

A great deal is at stake here. The contentious issue of yuan revaluation has implications not just for the world’s two largest economies and the global economy, but also for your personal well-being through its potential impact on your expenses, investments and perhaps even job prospects.

An Economic Miracle 

China commenced its transition to a global powerhouse in 1978, as Deng Xiaoping ushered in sweeping economic reforms. In the three decades from 1980 to 2010, China achieved GDP growth averaging 10%, in the process lifting half of its 1.3 billion population out of poverty. The Chinese economy grew five-fold in dollar terms from 2003 to 2013, and at $9.2 trillion, it was easily the world’s second-largest economy at the end of that period.

But despite a slowing growth trajectory that saw the economy expand by “only” 7.7% in 2013, China appears to be on track to surpass the United States as the world’s largest economy sometime in the 2020s. In fact, based on purchasing power parity - which adjusts for differences in currency rates - China may pull ahead of the U.S. as early as 2016, according to a report on global long-term growth prospects released by the Organization for Economic Cooperation and Development in November 2012. (It should be noted that such bullish estimates about China’s long-term growth prospects are viewed with considerable skepticism by a growing number of economists and market watchers.)

China’s rapid growth since the 1980s has been fueled by massive exports. A significant chunk of these exports goes to the U.S., which overtook the European Union as China’s largest export market in 2012. China, in turn, was the United States’ second-largest trading partner in 2013, its third-largest export market, and by far its biggest source of imports. The tremendous expansion in economic ties between the U.S. and China - which accelerated with China’s entry into the World Trade Organization in 2001 - is evident in the more than 100-fold increase in total trade between the two nations, from $5 billion in 1981 to $559 billion in 2013.

China’s Currency Policy

A cornerstone of China’s economic policy is managing the yuan exchange rate to benefit its exports. China does not have a floating exchange rate that is determined by market forces, as is the case with most advanced economies. Instead it pegs its currency, the yuan (or renminbi), to the U.S. dollar. The yuan was pegged to the greenback at 8.28 to the dollar for more than a decade starting in 1994. It was only in July 2005, because of pressure from China’s major trading partners, that the yuan was permitted to appreciate by 2.1% against the dollar, and was also moved to a “managed float” system against a basket of major currencies that included the U.S. dollar. Over the next three years, the yuan was allowed to appreciate by about 21% to a level of 6.83 to the dollar. In July 2008, China halted the yuan’s appreciation as worldwide demand for Chinese products slumped due to the global financial crisis. In June 2010, China resumed its policy of gradually moving the yuan up, and by December 2013, the currency had cumulatively appreciated by about 12% to 6.11.

The true value of the yuan is difficult to ascertain, and although various studies over the years suggest a wide range of undervaluation - from as low as 3% to as high as 50% - the general agreement is that the currency is substantially undervalued. By keeping the yuan at artificially low levels, China makes its exports more competitive in the global marketplace. China achieves this by pegging the yuan to the U.S. dollar at a daily reference rate set by the People’s Bank of China (PBOC) and allowing the currency to fluctuate within a fixed band (set at 1% as of January 2014) on either side of the reference rate. Because the yuan would appreciate significantly against the greenback if it were allowed to float freely, China caps its rise by buying dollars and selling yuan. This relentless dollar accumulation led to China’s foreign exchange reserves growing to a record $3.82 trillion by the fourth quarter of 2013.

Opposing Viewpoints

China views its focus on exports as one of the primary means of achieving its long-term growth objectives. This viewpoint is backed by the fact that most nations in the modern era, notably the Asian Tigers, have achieved sustained increases in per-capita incomes for their citizenry mainly through export-oriented growth.

As a result, China has consistently resisted calls for a substantial upward revision of the yuan, since such a revaluation could adversely impact exports and economic growth, which could in turn cause political instability. There is a precedent for this caution, going by Japan’s experience in the late-1980s and 1990s. The 200% appreciation in the yen against the dollar from 1985 to 1995 contributed to a prolonged deflationary period in Japan and a “lost decade” of economic growth for that nation. The yen’s steep rise was precipitated by the 1985 Plaza Accord, an agreement to depreciate the dollar to stem the surging U.S. current account deficit and massive current account surpluses in Japan and Europe in the early 1980s.

Demands in recent years by U.S. lawmakers to revalue the yuan have grown in direct proportion to the nation’s burgeoning trade deficit with China, which soared from $10 billion in 1990 to $315 billion in 2012. Critics of China’s currency policy claim that the undervalued yuan exacerbates global imbalances and costs jobs. According to a study by the Economic Policy Institute in 2011, the U.S. lost 2.7 million jobs - mainly in the manufacturing sector - between 2001(when China entered the WTO) and 2011, resulting in $37 billion in annual wage losses because these displaced skilled workers had to settle for jobs that paid much less.

Another criticism of China’s currency policy is that it hinders the emergence of a strong domestic consumer market in the nation because:

a) the low yuan encourages over-investment in China’s export manufacturing sector at the expense of the domestic market, and

b) the undervalued currency makes imports into China more expensive and out of reach for the ordinary citizen.

Implications of Yuan Revaluation

Overall, the effects of China’s currency policy are quite complex. On the one hand, the undervalued yuan is akin to an export subsidy that gives U.S. consumers access to cheap and abundant manufactured goods, thereby lowering their expenses and cost of living. As well, China recycles its huge dollar surpluses into purchases of U.S. Treasuries, which helps the U.S. government fund its budget deficits and keeps bond yields low. China was the world’s biggest holder of U.S. Treasuries as of November 2013, holding $1.317 trillion or about 23% of the total issued. On the other hand, the low yuan makes U.S. exports into China relatively expensive, which limits U.S. export growth and will therefore widen the trade deficit. As noted earlier, the undervalued yuan has also led to the permanent transfer of hundreds of thousands of manufacturing jobs out of the U.S.

A substantial and abrupt revaluation in the yuan, while unlikely, would render Chinese exports uncompetitive. Although the flood of cheap imports into the U.S. would slow down, improving its trade deficit with China, U.S. consumers would have to source many of their manufactured goods - such as computer and communications equipment, toys and games, apparel and footwear - from elsewhere. Yuan revaluation may do little to stem the exodus of U.S. manufacturing jobs, however, as these may merely move from China to other lower-cost jurisdictions.

Mitigating Factors and Glimmers of Hope 

There are some mitigating factors and glimmers of hope on the issue of yuan revaluation. A number of analysts maintain that one reason for the huge increase in U.S. imports from China is due to global supply chains. Specifically, a significant proportion of these imports are from multinational companies based in China that use facilities located in the nation as the final assembly point for their products. Many of these companies have moved their production facilities from higher-cost nations such as Japan and Taiwan to China.

As well, the increase in China’s current account surplus and growth in foreign exchange reserves have slowed down appreciably in recent years. So despite the yuan appreciating by less than 4% against the dollar in 2012-13, some analysts think the currency is not as undervalued as it was previously.

The PBOC said in November 2013 that China sees no further benefit to increase its foreign currency holdings. This has been interpreted as a signal that the dollar purchases that cap the yuan’s rise may be scaled back, allowing the currency to appreciate gradually.

Finally, concerns that China may dump its holdings of U.S. Treasuries in the event of yuan revaluation seem largely overblown. The size of China’s Treasury holdings itself is an argument against sudden yuan revaluation, since an overnight 10% increase in the currency would translate into a $130 billion notional loss on China’s U.S. dollar-denominated Treasury holdings.

The Bottom Line

Little is to be gained by U.S. lawmakers trying to get the U.S. Treasury to cite China as a “currency manipulator” or by introducing bills in Congress that aim to force the pace of China’s currency reform, as these may only strengthen China’s resolve to take its own time to amend its currency policy.

Cooler heads need to prevail when addressing this burning issue, as the worst-case scenario would be an acrimonious trade war between the world’s two biggest economies. A trade war would create global financial turmoil and wreak havoc on investment portfolios, apart from reining in global economic growth and perhaps even triggering a recession.

But that scary scenario is quite unlikely, even if the rhetoric is ratcheted up by both sides. The most likely outcome going forward is one of gradual appreciation of the yuan, accompanied by measured dismantling of currency controls as China moves toward a freely convertible currency. So it may be a few years before the yuan terminates its tango with the greenback and heads out on its own.

Quit Your Job To Trade Stocks?

Trading is often viewed as a high barrier-to-entry field, but this is simply not the case in today's market. Now, anyone with ambition and patience can trade, and do it for a living, even with little to no money. Sound fantastic? It is, and there are so many options available to people with the desire to put in the time to learn.

The New Era of Trading

Changes in technology and increasing volumes on the exchanges have brought about a number of very low barriers-to-entry trading-careers. In some cases no personal capital is required, and in other cases a small amount of capital will be required to get you started, in order to verify your commitment to trading. With markets so interlinked, it's always open trading time somewhere on the globe, and many of those markets can be accessed with relative ease. This means that even people who have full-time jobs or children at home can trade - it is just a matter of finding the right market and the right opportunity.

This is not to say that trading is an easy business - it can be very tough to stay in for the long haul. As we look at some different trading alternatives available in today's market, you will see that you are able to enter the market, but your ultimate success depends on you. We will look at these options in depth to see what they offer career wise, or if they can simply be used to generate additional income.

The Options Available

People often think that full-time traders only work for investment banks, with advanced degrees and a high pedigree. Equally as common is the thought that, in order to trade for one's self, large amounts of capital and expendable time are needed.

It is probably true that, to get into an investment bank or onto a major institutional trading floor, you will need to have connections or a prominent educational background that sets you apart. Therefore, this alternative will not be focused on. In this article we will focus on how the average person, with extensive or very little trading experience, can enter into the arena of trading and creating wealth.

Trade Independently

The first option, and likely the easiest because it is so flexible and can be molded around a person's current life, is trading from home. However, day trading stocks from home is also one of the most capital-intensive arenas. This is because the minimum equity requirement for a trader who is designated as a pattern day trader is $25,000, and this amount must be maintained at all times. If the trader's account falls below this minimum, he or she will not be permitted to day trade until minimum equity level is restored either by depositing cash or securities.

Therefore, potential traders need to be aware of the other markets that require less capital and have lower barriers to entry. The foreign exchange (forex) or currency markets offer such an alternative. Accounts can be opened for as little as $100 and, with leverage, a large amount of capital can be controlled with this small amount of money. This market is open 24 hours a day during the week, and thus provides an alternative to those who cannot trade during regular market hours. 

The contract for difference (CFD) market has also expanded. A CFD is an electronic agreement between two parties that involves no ownership of the underlying asset. This allows for gains to be captured for a fraction of the cost of taking ownership of the asset. As with the forex market, the CFD market provides high leverage, meaning smaller amounts of capital are needed to enter the market. The stock market can also be traded using a CFD. While the stock is never owned, the contract allows profits/losses to be reaped from speculating on the underlying stocks or indexes by mirroring its movement.

High leverage does mean higher risk, but if a trader does not have a large amount of capital, this market can still be entered with very low barriers. Educating oneself on the risks involved and building a strong trading plan are absolute musts before partaking in any trading activity, but when you're highly leveraged, it becomes even more paramount.

Proprietary Trading Firms

Proprietary trading firms have become very attractive with their training programs and low-fee structures. If the idea of trading from home does not appeal to you, then working on a trading floor might. Under this system, the trader is provided with firm capital (or leveraged capital) to trade and the risk is partially managed by the firm. While personal discipline is still very much required, trading for a firm takes some of the weight off of a trader's shoulders.

Working for a firm may also require working in an office during an open market, although some firms allow traders to trade remotely (from home). The perks of working with a trading firm can include free training, being surrounded by other successful traders, constant trading ideas, greatly reduced fees and commissions, access to capital and performance monitoring.

Many proprietary trading firms will accept people who have shown initiative in their backgrounds and have some education in their prior field. This is because the firm can monitor a trader's risk, and those not showing promise can be released with very little overall loss to the firm.

Pay in a firm is based on performance, and is normally a percentage payout of your net profits after fees. Some licensing may be required, but depending on the structure of the company this is not always the case. Passing the Series 7 exam will mean that there are more firms with whom you are available to trade. Each firm operates a little differently, so find one what suits your needs, personality and circumstances. Some require you to use some of your own capital. If you run a search for a list of proprietary trading firms you will be able to see what is available to you. 

Final Notes - The Next Step

After the method of trading that best fits you has been decided, the next step is crucial. If trading from home is the main interest, then you must decide what markets you will trade based on your capital and interests. You must then make a comprehensive trading plan, which is also a business plan (trading is now your business) and decide how you will operate as a trader. From there, explore different online brokers and compare what they offer. Seek out a mentor or someone to help you. Then, it is time to start trading. 

Commodity Types

There are a few reasons that commodities are separated into different types. First of all these exist to make it easier to compare prices. These differences are also there for the convenience of trading as well to make them easier to research. Yet for almost every single one of the types of commodities out there, you will want to know some basics to get started. When it comes to which one is best for you, there are a few different options to consider.

Energies: The first in our list has been very active in recent times. This one features many different products that provide energy to heat and power homes as well as businesses. This includes petroleum, byproducts of petroleum, crude oil, heating oil, propane, natural gas and even coal. In this section of kinds of commodities there is a minimum price that is set by the exchange. There is also a standard contract size, which is the amount covered by the futures contract.

Grains: The next one on the list of commodity types are grains. This includes wheat, oat, corn, rice and soybean. It can also include a lot of other various agricultural products. The Chicago Board of Trade or CBOT is involved with these types quite a bit. These are usually sold as future trades. These types of commodities have a minimum as well, and also a standard contract size.

Softs: Softs include coffee, cocoa, sugar, cotton and orange juice. The most common exchange for these commodities is the Coffee, Sugar and Cocoa Exchange or CSCE. The reason that the oranges themselves are not traded as types is because eighty percent of them are turned into frozen concentrate, so this is what is traded instead. The New York Cotton Exchanges even has the name Frozen Concentrated Orange Juice or FCOJ as one of the things they trade.

Meat: Meat is another type of popular commodity. This includes live cattle, pork bellies and lean hogs. This is primarily exchanged on the Kansas City Board of Trade or KCBT. This is actually where historically, livestock have been traded. The commodity seems to be less volatile than others. A lot of times this particular commodity type is dependent upon grain as well, since the grain feeds most of the livestock.

Financials: The last one of the commodity types we will look at, are known as financials. This type is mentioned here because most trade in futures or options, instead of the actual goods. This means financial commodities are often listed on the same exchanges. This includes United States Treasury Bonds and can be found on the CBOT as well as the S&P 500 Indexes. This exchange also trades stocks as a financial commodity.

As you can see there are a few different types of commodities that are out there. There are different exchanges where these various commodities are traded. Now that you know the basics, you should feel a bit more comfortable when it comes to navigating this maze of various commodity types.

Market conditions

It is useful to be able to identify the different types of market conditions, as this can help you make trading decisions, such as in which direction you should trade or which particular strategy to use.

There are two types of market conditions: trending and ranging.

Trending market

A trending market is when the price is clearly moving in one particular direction. If the price is moving up, then it is said to be in an uptrend; if the price is moving down, then it is said to be in a downtrend.

Many traders trade in the direction of the trend because there is a higher probability of the trade being profitable. There is a distinct advantage for traders who identify a trend early on — entering the market when a trend is beginning to develop means it is more likely to return a profitable result.

Uptrend

The chart below demonstrates an uptrend. You can clearly see the price is moving up and that the uptrend is made from a series of peaks and troughs — the price does not move straight up, it moves up in waves. The peaks make the swing highs and the troughs make the swing lows.

Higher lows

Higher highs

In an uptrend, the market direction can be identified by a series of higher highs and higher lows.

Downtrend

In a downtrend, the price behaves in the same way, moving down in waves, with a series of peaks and troughs that make the highs and lows respectively. A downtrend can be identified by a series of lower lows and lower highs.

Lower lows

Lower highs

It is important to note that in an uptrend, not every candle is bullish and in a downtrend, not every candle is bearish; in a trending market the price is moving in an overall direction.

Ranging market

The other type of market condition is a ranging market, sometimes referred to as a sideways market. You can see from the chart below that the price is moving within a range; there is no clear sustained uptrend or downtrend.

In a ranging market, the price moves within an upper boundary or resistance level, and a lower boundary or support level. The upper and lower levels may not always be exact or clear to observe, however what you will see is the price rising and falling within a maximum and minimum price zone.

Determining a correction from a reversal

There is a distinct difference between a correction and a reversal and it is important to differentiate between the two.

Corrections

A correction — sometimes referred to as a retracement — is when the market moves in the direction of the trend, pulls back for a short time and then continues on in the original trend direction.

The charts below show a correction in an uptrend and in a downtrend, respectively.

Confirmed uptrend

Correction to the downside

Confirmed downtrend

Correction to the upside

Reversals

A reversal is when the market direction changes completely and reverses the other way. The charts below illustrate a reversal to the downside and a reversal to the upside.

Confirmed uptrend

Reversal to the downside

Confirmed downtrend

Reversal to the upside