In the world of investments, you'll often hear about stocks and bonds. They are both feasible forms of investment. They allow you the opportunity to invest your money with a specific company or corporation with the possibility of future profits. But how exactly do they work? And what are the differences between the two?
Bonds
Let's start with bonds. The easiest way to define a bond is through the concept of a loan. When you invest in bonds, you are essentially loaning your money to a company, corporation, or government of your choosing. That institution, in turn, will give you a receipt for your loan, along with a promise of interest, in the form of a bond.
Bonds are bought and sold in the open market. Fluctuation in their values...
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Articles
As of this writing (March 17, 2008), the status of interest rates sends some important messages to the stock market investors. This article aims at reading and decoding these messages.
Debt Securities and the Stock Market
In his book, "Intermarket Technical Analysis" (see [2]), John Murphy stresses the positive relation between the bond market and the stock market: "The bond market usually leads the stock market". This relation is not limited to long term bonds but it also extends to debt securities of all maturities (T-Bills and T-Notes). There are three main reasons this relation exists and all of them are based on the fact that the debt securities prices move in the opposite direction of the interest rates:
1. When interest rates...
Can a sector rotation strategy improve performance of investment returns? In this article the author looks at sector rotation within the US markets.
Investors can most certainly use a sector rotation strategy to produce returns which outperform the market, or even some hedge funds, despite what was described in a recent article. Many hedge funds would be wise to consider such a strategy. However it's not as easy as the plan described in the article's abstract. Nor should we expect it to be; the market is not easy-pickings. But recognize what market returns we are talking about: since say 1990, the S&P has had about an 8 pct compounded annual rate of return, while experiencing about a 46 pct maximum drawdown. Those numbers can be...
So why do I trade US shares intra-day?
The prime mover market in the world is in the US. Here in the UK we are essentially influenced by the US economy and its stock market. How many times, for example, have you seen the London market open at a level dictated by what happened in the US the previous evening after London closed? Of course, the Far Eastern and European markets have an influence, but although they, like the UK, do have substantial domestic and local factors, they are also largely driven by the United States.
Clearly there are advantages to trading the principal world stock market rather than the others. For example, you are in at the beginning of a move, seeing the immediate reaction to changing dynamics and trading...
Recently, I had the opportunity to teach a session of OTA XLT Forex. In the class, we were identifying potential trades that were to play out in the next few days to weeks. One of the comments that I made in the class resulted in a flood of emails being sent to me from the students. I was discussing inter-market analysis and mentioned that bonds and stocks tend to move together in the same direction.
This came as a shock to most of the students who believed that the bonds and stocks should move in the opposite direction. In studying to become a Chartered Market Technician, I was required to study the relationships between asset classes, and as a trader, this has benefited me greatly. By understanding these relationships, a trader can...
For daytraders and scalpers looking for a quick trades or even a bit longer hold from 5 minutes to 1 hour, it's not easy to do. When day trading stocks, not knowing which way the market will go or the sentiment of the next few minutes is the fastest way to go broke. So watching the breadth such as the composites such as NASDAQ, DOW, or S&P 500 is a fundamental tool used to day trade effectively. Getting an idea what the immediate sentiment is crucial is seeing when and where the buyers or sellers are coming. Believe it or not, stocks are not islands and are not random. Participants move in and out for reasons others prices of stocks. There is always a correlation to some type of data, be it news or other related stocks. So finding a...
PM: = Paul Mullen (Interviewer)
RJ: = Richard Joyson (Mr Charts)
PM: What markets do you trade and what do you do?
RJ: I trade almost entirely U.S. shares on a day trading basis. I'm in trades for really anything from half a minute to as long as two or three hours. So, there isn't an average length of time that I'm in a trade. I'm in a trade as long as it's going my way, and if I get a signal to exit the trade, I take the signal. If the signal comes a minute after I enter, then I exit. If a signal doesn't come for another two hours, then that's when I exit.
Basically, I trade the U.K. afternoon, (which is the U.S. morning). Occasionally, I trade in the evening, but generally not. I used to trade the evening and the evening only...
P: = Paul Mullen (Interviewer)
J: = James (Equities Analyst)
You can listen or download this interview by clicking this link:
Equity Analyst Interview
P: Hello, and welcome to everyone. My name is Paul Mullen. I'm also known as Trader333 and I'm the Content Development Editor for Trade2Win.
Today, I'm interviewing James, who is an equities analyst working in London, so a very warm welcome to you James. We'll start straightaway by asking you what is an equities analyst, assuming that is what you are?
J: Yes, that is what I am. It's quite a complicated role because I think the way it's perceived is people see the end product being written reports, generally, with recommendations and price targets, and so on. That's actually a very...
You should ignore analysts on TV, the radio, the newspaper and all other TALKING HEADS when it comes to investing!
What stocks do they talk about? - The same old group, every day of every year - Why? Because they don't know any better, they are sheep like the general public, repeating what every economic textbook says and every other economist tells them to say. Everyday, the same companies are highlighted on the evening news -
Why?
They aren't going anywhere. Some of the stocks that make the headlines every night were leaders of the market 20 years ago. New cycles bring new leaders; this has been proven year in and year out. So many of these TALKING HEADS shout out about "buy and hold" but what are they really holding? They hold old...
Whether I am trading or instructing a stock, futures, or options class, our lowest risk and highest reward trade each day is typically the opening gap entry. As soon as I suggest the trade to the class, someone always says: "I was told we are not supposed to trade the open because it is not for the novice trader". That is not exactly what we say. What we say is that the open is not for the novice trader. It is, however, a fantastic opportunity for the astute trader who knows how to identify a novice trader. Most of the time, our entry is within seconds to minutes of the opening bell. There is a reason for this?
Why do prices gap up? They gap up because there are more buy orders at the open than there is available supply at the prior...
Recently I showed some students a chart of the XLF which is the ETF for the financial service sector. I showed a demand (support) level and suggested this would be a low risk area to buy the XLF for a bounce, not a long term trade. After receiving many questions on this trading opportunity from people who bought the XLF as planned and from those who didn't, I thought it would be a good idea to revisit the chart as the questions in the emails were all the same.
As you can see below, price in the XLF touched our level on 10th January 2008. For those who bought it then, the trade had a gain of $2.00 in the past two days, congrats. You can certainly move your stop to breakeven at this point and consider exiting some or all of the position...
The following interview was originally published in Trader's Journal (TJ) November 2007 issue and is reproduced with their kind permission.
Part I: On Trading
TJ: John, when and how did you get started into trading?
JD: I got started in 1968 as a biology and physics teacher in Milwaukee, Wisconsin. I was the Director of the teacher investment club with a $100 per teacher contribution in a pool and some hopes and dreams. I read Harry Browne's book in 1970 about Nixon closing the "gold window" for the USD. The title of Harry's classic book is How to Profit from the Coming Devaluation and it changed my life and all I have touched in this space forever.
TJ: What did you find trading interesting?
JD: The daily intellectual challenge of...
The eagerly watched for retest (of the prior lows) finally came to fruition on Wednesday of last week. Although, the ER2 (Russell 2000) didn't quite make it down far enough to touch the recent nadir. This was not the case for the S&P and the Dow. These two benchmarks actually exceeded their prior low points before the Bears finally decided that - enough was enough - and began covering or buying back their short positions. In addition, the market sell-off had gone far enough that the Bulls found a perceived "value area" in which they could put new money to work. This chain of events created a massive order imbalance that precipitated the violent reaction that is the rebound. Much like a rubber band that is stretched to its limit, the...
Welcome to the wonderful world of equity options. You may have heard that option trading is high risk, and indeed it is, for much the same reasons that spread betting is high risk. The instruments themselves are derivatives from the cash markets, and are highly geared, but options themselves were originally introduced to the US markets in the mid 1970s as a tool for hedging risk. In other words they were a form of insurance. You paid a premium, a bit like car insurance, which covered you in the case of an accident. In the financial markets you bought some protection in case the market went in the opposite direction. In this article we look at equity options, which are those derived from the cash market share or stock.
In the early...
A study by Alan Saunders of ShareHunter.com on the successful share selection techniques promulgated by Stan Weinstein in his best selling book "Secrets for Profiting in Bull and Bear Markets"
Most trading systems that I come across are given to using too much jargon or gobbledegook and are complicated - unnecessarily so in my opinion. And that is why I appreciated - and now benefit from - the brilliant simplicity of Weinstein's "Stage Analysis" approach to the buying and selling of shares.
'STAGE ANALYSIS' is straightforward, simplified, technical analysis.
There is nothing new in using technical analysis (TA) to identify shares for investment yet the truth is that TA is considered by many private investors as akin to black magic...
Having been trading stocks and options in the capital markets professionally over the years, I have seen many ups and downs.
One story told to me by my mentor is still etched in my mind:
"Once, there were two Wall Street stock market multi-millionaires. Both were extremely successful and decided to share their insights with others by selling their stock market forecasts in newsletters. Each charged US$10,000 for their opinions. One trader was so curious to know their views that he spent all of his $20,000 savings to buy both their opinions. His friends were naturally excited about what the two masters had to say about the stock market's direction. When they asked their friend, he was fuming mad. Confused, they asked their friend...
In this article we look at the fundamentals behind stock prices and why the P/E ratio is not perhaps the best indicator.
I use the P/E ratio as a secondary indicator for buying and selling stocks but I don't use the ratio in the same a manner as many value investors teach. I will explain the difference in my methodology for using the P/E ratio to your advantage.
Many value investors will pass on a growth stock that has a P/E ratio higher than a predetermined level. For example, they may discard all stocks that have a ratio of 15 or higher, no matter what industry group they come from. Some investors will discard any stocks that have P/E ratios above the industry group averages, concluding that they are grossly overvalued. I am not...
It was once one of the darlings of the FTSE, but over the past year the telecommunications sector has had a rough ride. So is it out of woods yet, or is there worse to come?
Changes in the telecom sector since the turn of the century have made the telcos a markedly different investment proposition since the high flying days of the tech boom. At the height of the bubble incredibly optimistic industry growth projections propelled the share prices to record heights. Inevitably the bubble burst, and in the aftermath investors shunned the sector.
However, today company balance sheets are stronger, prospective earnings multiples are generally in the low to mid teens, and surplus cash is flowing back to shareholders via increased dividends...
A look at what is happening in the markets at the moment and if this is just a correction or the start of a longer term down-trend.
As I was about to write my alert, I happened to see the above quote and figured it was just too good not to put in the letter. In many ways, it explains the serious problems we are currently facing. Our illustrious leaders in the U.S. government (and I direct this squarely at both parties) have failed us in the biggest way. They have depreciated our currency; created incredible debt; run up mind boggling deficits; created a derivatives time bomb; got us into two wars that we can't possibly win (but they cost us dearly in money we can't afford to pay and precious lives); succeeded in making us the world's...
In the first part of this article Return of the Bear - Part One we looked at secular patterns the stock markets move in and the current state of the Bull Market.
The Monetary Background
I've always believed that the "rate-of-change" (ROC) of interest rates is more important than the actual level of interest rates. If levels are so important, how can one explain the extreme economic weakness in the 1930s when rates were in the basement compared to relative prosperity in the 1970s and 1980s when rates were in the stratosphere?
caption: Chart 8. Vertical lines show when ROC crosses above +30, stocks become more risky.
To prove this point, Chart 8 compares the annual change in the level of the Discount Rate to the S&P Composite. The...
Introduction -
There are occurrences in the business cycle when the consensus of my proprietary primary trend indicators find themselves within the confines of the bearish camp. Unfortunately, now seems to be one of those occasions. The last time the technical, economic, and monetary indicators aligned themselves in such a negative way was the turn of the millennium. Then, as now, for the benefit of my subscribers, and their valued clients and investments, I feel duty-bound to publish a Special Report setting out the arguments for the impending scene about to unfold.
In early 2000 it like the market was at, or close to, a secular or very long-term peak (albeit if not in absolute price terms, certainly in inflation-adjusted ones)...
In this streaming video, Bo looks at breakout's from support and resistance levels.
In this example, he demonstrates a simple break-out strategy on IBM pair using a 30 minute chart.
Click here to view the video (will appear in new window).
Is trading just a game of cat and mouse? Do we smaller traders - the mice - get noticed nibbling the cheese (profits) on the mouse traps set by the cats (the major player)?
A Game of Cat and Mouse
In my decades of trading, I've learned many lessons about the market. The chief of these lessons is that I don't know anything about the market; at least, in comparison to the market makers on Wall Street. Think about it. The traders at firms like Goldman Sachs, Merrill Lynch and the like pull down salaries of several million dollars each year. I refuse to believe that they are so richly compensated because they don't know anything. They know a lot! It's their job!
As a result, like many individual investors, I engage daily in a game...
Breakouts of long bases on strong volume are frequent harbingers of continued price appreciation. Another harbinger, after the initial up-leg, is a low-volume, orderly pullback towards support.
Kendle International (KNDL)
An analysis of Kendle International's chart illustrates this strategy. As the daily chart indicates, Kendle in February 2005 broke out of a base pattern that extended back almost two years. Some traders, who missed entering early, may have given up on the stock when it doubled by late June, but a closer look at the chart shows why it had more room to move.
Kendle's pullbacks were orderly, coming on lower volume and holding near its moving averages, a key sign of more upside to come. Only once did its pullback break...
There are many ways to trade, but I like combining some fundamental, knowledge or perhaps some news, an understanding of technical analysis, a grasp of how markets behave and the ability to read sentiment as demonstrated in price action, buy/sell pressures and the actual trades printing off - the deals being done.
This may sound a little involved but is actually quite easy with a little knowledge, common sense and reading the market.
On September 1st I made a list of those stocks that were already benefiting from buying interest, (or selling pressure like some insurers), in the wake of the devastating Hurricane Katrina. Building material stocks, alternative energy stocks, insurers, specialist manufacturers of rescue products were of...
What do we do now? The "Bubble" burst, Single Stock Futures, Pairs Trading, Automation, New Platforms and Access. Professional traders are adapting to the new climate.
I'm often asked what traits are common in a successful stock trader, and although there are many, the single thing that I find binds us all together is "adaptability"...plain and simple. We all thrived through the euphoria of the DOTCOM phase, and the NASDAQ meteoric rise through common sense into obscenity. Many a genius was behind a computer when the "buy and hold" mentality permeated the shell of proprietary trading. Swing trading was born from the attitude that "it's gonna go back up, wait and see!" TV and Online Brokers found gigantic audiences in the new...
Ever taken a breakout trade only to see your quick profits erode into a loss? Ever been "sure" that you were on the right side of the markets, only to see price reverse sharply, shake you out and then resume its original course? You may have been the victim of program trading.
Program trading is defined as the purchase or sale of a basket of at least 15 stocks with a total value of $1 million or more and developed as result of 3 primary factors:
Individual investors are learning the value of a diversified portfolio. After the "Bubble Burst" of 2000, many people realize that the old warning not to put all your eggs in one basket has some practical application in trading.
Institutional activity is at record levels because the "Big...
Based on comprehensive studies of the greatest stock market winners going back each decade, the biggest winners of all time consistently show the same seven performance common characteristics before they make huge price advances. These are the stocks that produce 100%, 500%, sometimes even 1,000% and a lot more in returns. Most of these winners were not yet household names, and yet, they were well-managed companies that began to build profits, and the necessary steam to make major price moves. CAN SLIM™ represents a checklist for those common performance characteristics, with each letter standing for a key trait any great stock will possess in its emerging stages. Independent studies by The American Associate of Individual Investors...
Some of the best investing and trading results I have had in recent years have been from riding on the coat tails of investors far brighter than myself, investors who have done far more research on a company than I will ever be inclined to do myself.
It can be a tedious process following all the dealings that get reported through the RNS announcements, but I try to maintain a list of major stakes and holdings in nearly three hundred UK companies. This allows me to keep track of who is increasing or decreasing their stakes in certain key companies. (see this sample)
Companies Act disclosure requirements allow private investors to keep track of the activities of shrewd investors who have a proven track record of successful investing...
There are many good penny stock investments available, which could turn a small amount of capital into a small fortune very quickly. However, to discover these you need to know what to look for and what to avoid. When searching for that one big payoff, steer clear of the following examples.
The Phone Salesman - Anyone who is attempting to sell you investments over the phone should be considered an enemy. They have high-pressure sales tactics, and effective, believable arguments. However, they are not doing you any favors, no matter how good they make an investment sound.
They are operating in their best interest to dump over-the-counter stock on you, and the money you pay in will go into their own pockets, or the pockets of their...