Market Commentary: Lack of Volatility has Left Many Red Faced

The last 2 month have been very uncomfortable for most traders with dismal levels of volatility providing no acrobatic price action which is needed to provide good quality technical setups.  Most often traders are ill prepared for market conditions such as these and end up reaching a psychological breaking point.

There have been a number of variables which could have come into play presently which could explain why we might be seeing the lowest levels of volatility since the Financial Crisis in 2008. Firstly we are seeing an extended bull run which has been in place for a while. One piece of data I found interesting was the fact that the S&P 500 has recorded its 400th day above its 200 day moving average. 

As the index keeps going higher more participates get weary of the lofty the levels the market sits at and start off loading stock or simply hold onto current stock creating uncertainty and lack of any movement.

We have seen volatility pick up in the last 2 weeks or so but we can attribute that to the end of the 2^nd quarter and the 1^st half of the year. The fact that the 2 come together does allow some fund managers to adjust their portfolios and we'll begin to see volumes start perking up.  

There have been a few and fair amount of market commentators that have called for a correction in the last few months, much of which have proven futile in their quest to call the top. If there’s one trading philosophy which any trader or investor should stick too is that a market can stay irrational longer than you can remain solvent.

From a personal stance, my trading has remained subdued of late with not much opportunities presenting themselves and if an opportunity does come along the time it take to start working takes a while which would require a large degree of patience.  That I can say I have exercised well having experienced these types of conditions fairly early in my trading career and being able to identify them soon enough has helped me adapt to it.

I've found that in times like these some traders gravitate towards instruments with greater volatility such as forex and indices. This can prove rewarding if you have the right setups in place but you need to take note that these instruments suffer the same fate as any other instrument.  They also tend to be more leveraged which can lead you to take larger than expected losses.

If you are going to trade these instruments your trading style should start leaning more in the favour of higher probability setups together with accuracy. Obviously this is a trade-off we face and at times you will find stages of boredom and strain in place. Remember complacency is punished in these markets and you need to stay tentative to the goings and comings.

Alternatively you can take some time out and focusing on learning. Trading is a constantly changing game and if you’re not up to date chances are you falling behind.  There are heaps of new and existing techniques which can go further to enhance your edge and better prepare you for when the market does eventually start moving again.  

Finally pay close attention to price action. Lack of volatility negatively affects conventional indicators too produced false signals. When it comes to assessing where the market is going price action remains king.  

If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR 

Looking Back on the Last 25 Years of Financial Markets

Since June marks the 25^th year of my life I thought it would be interesting to see how much the world and its people have changed since the day I was born. Taking a step back and observing what has happened over the last 25 years allows us to see what trends have emerged and what the next 25 years might hold for us.   

The Sleeping Giant: China Awakens

A phenomenal story of exponential scales, China which once had an economy with an annual GDP of $310 Billion now boasts one of the world’s most impressive growth stories. After the collapse of communism this populous Asian country has gradually relaxed their policy and allowed the free market mechanism to take hold. 

China has now displaced Japan to become the world’s second largest economy with GDP now sitting at $8 Trillion and growth never seemingly slowing down. What makes this particular economy an important one is the fact that it is a developing nation, much of which would otherwise be shifted aside when it comes to worldwide policy agenda. China’s role has now been cemented as the leader and representative of developing nations around the world, something which most developed nation have sat up and taken notice.    

China’s mammoth population of 1.5 Billion people has meant a large amount of manufacturing processes which require human skill has been taken up by China to the detriment to other developed nations such as Japan, Europe and the United States.

Although there are many challenges that lie ahead for this nation I expect that the next 25 years will see a shift in sentiment towards China and its developing stages towards its eventual greater role as a main player in the world economy and a balanced policy view.  

Leading the Way to Innovating Energy

Sasol has to be one of the darling’s on the JSE and will be for many years. In June 1989, Sasol was quoted at R12.50 and today it’s well over R600 a share representing 48 times its value 25 years later.  This is only the capital gain and excludes the dividends paid out over the same period.

This is the kind of share any long term fundamentalist wants in their portfolio and the last 25 years is proof that there are still shares out there that grow gradually and over a number of years the returns to shareholders is mind blowing. A great case study for students and prospective investors of how the notion, slow and steady works in a stock exchange.

What I like most about this company is its innovation in the field of fuel technology, taking energy sources which might have laid dormant and creating petroleum. The world’s demand for cars keeps growing and with a few decades of oil reserves left the world has begun its path to creating sustainable energy.

Going forward there is plentiful opportunities coming forth and Sasol is well positioned to take advantage of these; one of these opportunities is in the United States where shale gas is being used to create petroleum. 

Once a Promising Story Now a Regressive Dilemma

Those old enough to remember will recall the time when Japan was set to overtake the United States as the world’s largest economy by the year 2010. That was predicted in 1980 and what seemed to be a promising story turned out to be a long receding tale of a time that once was. 

  

The Nikkei 225 reached its highest point in 1989 and it has been all downhill from there. A strengthening currency against all other major currencies, a propensity to save rather than spend and abnormally low inflation rate for prolonged periods of time have led Japan’s economy to a state of inertia.  

  

The Japanese reliance on technologies and commitment to producing the highest grade quality goods at reasonable prices has meant that much of the emphasis has been placed on mechanisation and massive investment into skills required to produce further technologies.  Japan in its own right is one of the world’s most innovative nations yet this has led their society to become disconnected with the real world.

Although Japan may be well ahead of its times it is the first of a few developed economy’s who are beginning to face these circumstances. Man’s expectation on technology may inevitably lead to the downfall of its own economy. 

The Printing Press Never Stops

The 1980’s economic policy was largely dominated by two people, Ronald Reagan and Margaret Thatcher. They both supported growth without any increase in money supply, instead looking for the inefficiency which had been created by previous administrations to correct themselves by means of increasing productivity.  Although much of their terms in office were marred with controversial decision making and hard line policy, they did lead their economy’s out of the mess they were in.

Fast forward 25 years after their tenure ended and what we find is a very much different situation. 

The above chart is that of a US Treasury Bond with a term of 10 years.  As more money is created the interest rate gets lower and lower. What we see here is 25 years of mass money creation which has lead these interest rates hitting a 70 year low.

 What can we deduce from this chart? Thatcherism and Reagonomics are extinct and the world is one large inefficiency. The problem comes in when these rates are left are abnormally low rates  the amount of debt being borrowed increases at alarming rates and we all know that debt has to be paid off some time or another.

I believe that the Financial Crisis in 2008 is only the tip of the iceberg and I further believe that debt in developed world is going to be very problematic for policymakers. If enough is not done to start eroding the piles of debt the world sits on we could just be sitting on rubbish dump of disaster. 

If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline:https://twitter.com/CadeTradeR 

Energy in the Next 20 Years, How Shale Gas is Changing the Landscape.

Cars have formed an intrinsic part of our living and it would be hard to imagine life without them. They have driven progression to the next frontier yet there lies a further problematic issue which the future holds. How do we find more sustainable energy sources to abate our ever increasing consumption of motor vehicles and their demands of fuels needed to drive them?

#108875899 / gettyimages.com

The fact of the matter is fossil fuels are a non-renewable resource, once they have been used they cannot be replaced. As the worldwide economy’s start joining the global trend of urbanisation there is an increasing reliance of oil. It also doesn't help that the majority of the oil production comes from nations who belong to OPEC (Organisation of Petroleum Exporting Countries) who have an openly collusive agreement to control the supply of oil being released into the markets which have dire consequences on the price levels.

However as time has gone by innovated countries have taken it in their stride and produced technologies which allow the consumer to drive further distances at the same amount of fuel consumption. In other parts of the world there has been large sums of money gone into researching the viability of electric cars.   

Recently there has been quite a debate around the next possible solution to the energy crisis. Hydraulic Fracturing: the process whereby shale gas is extracted from rock beds underground and brought to the surface. This gas in turn goes through a process whereby it is refined and then converted into petroleum. 

Various environmental issues have been presented in objection to this and it has certainly got policymakers scratching their heads. One of the first countries to begin this process is the United States of America which has set down a goal of becoming petroleum independent by 2020.

The U.S is the largest consumer of oil in the world and has been for many years. Due to their lack of crude oil supplies they have become oil dependent and because the use of this fuel is one of the factors which drives their economy and contributor to large trade deficits.

These developments have led to some interesting trends emerging. Let’s first see how the price of Brent Crude Oil has done in these markets.

It seems as if the price of Brent has been subdued over the last 2 years. It’s formed a triangle shape which could break out either way. Going back to the highs of 2008 we are noticing a long term trend where there are a series of lower highs which could shift the likelihood to the downside.

  

Let’s now see US Crude Oil Productions

Towards the end of 2011 we see the beginning of a production drive in crude oil in the U.S and that trend has continued for the last 3 years. Shale gas has helped tremendously to bring down the U.S consumers reliance on oil imports. This is one of the reasons we may be seeing a stronger dollar.

But let’s step back for a minute and look at this from a longer term point of view.

This is the same chart as above just on a longer horizon from 1950 to present. We know that OPEC was formed in 1960 and in this period we saw an increase in U.S crude oil production as the government tried to fight off the price effects of the new monopoly supplier. This ran into the early 70’s where we see a peak in production. It was at this time where there was an oil embargo declared as a result of a war.

Governments around the world implemented fuel restrictions reduced the number of oil consuming power stations and even cut down the speed on highways so they could curb the demand on petroleum. 

This lasted until the 1980’s when the price of oil had skyrocketed, there was little demand at the price levels for which it stood. This created an oil glut which prompted the prices to dramatically drop and from the chart above we see that the crude oil production started decreasing and would descend for the next 25 years.

Then came the 2008 Financial Crisis where the price of Brent crude oil peaked at $147 a barrel only to tumble back down to below $40 in a matter of months. This once again sparked debate amongst American policymakers, a debate which was started more than 50 years ago. How do we sustain our energy usage?

We see current production has reached levels last seen in the late 1980’s early 1990’s and in a short span of time can only signal one thing. The U.S means business when it says it wants to become crude oil dependent. As new drilling plants are built and more shale gas brought to the surface we will begin to see a surge in the production rate again.

#183943058 / gettyimages.com

There are a few things which the above analysis does present. One is that this is not the first time the U.S has tried to fight off OPEC’s dominance on worldwide oil supply. The U.S sees this dominance as a tool to hold the world to ransom when a political issue arises.

The next point is that from the previous attempt we can see there was a short term effect when production increased however that didn't last long. Seeing the evolution of how we manufacture petroleum in the future one seriously needs to question whether the direction the U.S is headed is the best one.

As stated previously there have been environmental issues related to fracking, issues which may not necessarily take effect now but much later in the future. One only needs to look at the B.P oil spill in the Gulf of Mexico. Although it was an accident the damaged has been done cannot be reversible.

In conclusion the world needs a long term energy solution and the more political wrangling that lays around the slower the process takes. What we need to realize is that our sources of energy are depleting at alarming rate and we don’t want to be stuck in a compromising position where we are left with nothing. 

If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR 

A Tale of Two Economy's

There was much hype surrounding the JSE All Share Index last month as the index soared passed 50 000 for the first time ever marking a new high in a bull market, which doesn’t seem to lose momentum. If there’s one was thing I had learned about numbers it is that they can exhibit distortion and in this case there is no exception.   

The JSE All Share Index - is a representation of all the shares listed on the Johannesburg Securities Exchange weight-based on their market capitalisation. The larger the company the more the daily movements count towards the points gained or lost in a given day.  

This is a monthly chart taken over 18 years and a quick glance one could say that the index has done incredibly well in those years. From 1999 the South African share market has seen a massive uptrend in place with the index now 8.3 times higher.

The first point I’d like to highlight on the chart is the massive rally up until the red arrow. Why the red arrow?  Rallies such as these are usually characterised by a catalyst which aid the market to surge to new heights. South Africa’s catalyst was radical policy changes which central focus became the poor.  

To break it down, the new government was tasked with reforming policy and for the first five years we can see a slow and directionless market as the economy began its transformation. Once the foundational pillars were in place the construction phase would take precedent and we see, as a government was taken under the curatorship of Mr Thabo Mbeki, the economy was rapidly growing. This phenomenal growth lasted for almost 10 years under his tenure but was abruptly stopped in its tracks with the Financial Crisis which was a worldwide issue.    

On the chart below is the South African GDP Growth Rate; which may help us explain why JSE All Share Index saw the massive Bull Run. The co-relation between the two graphs is quite close. There was a large pool of poor people in South Africa and with the central focus now shifted towards them what we saw was an emergence of a new middle class which now had money to spend on purchasing: houses, cars, furniture and more for the first time. This in turn spurred business to grow at exponential rates. Some of these businesses are listed on the JSE and benefitted substantially from this.  

   We can see that the JSE All Share Index and the GDP Growth Rate followed each other quite closely up to the point of 2008 with the dawn of the Financial Crisis which was mentioned in the previous paragraph.  The green line of the chart above shows clearly the momentous growth path South Africa had embarked on. Developed nation such as United States or Japan can only wish to see growth rate such as these.

The period between 2008-2012 is an interesting one; both charts once again track along the same path as governments around the world pursue a goal of bringing the world economy back to normality.  Again we see a close relation between the two charts up until the beginning of 2012.

The analysis thus far would suggest that the ANC government had been very successful in diminishing the plight of poverty and bringing wealth to those who previously had no access to it. It can also be said that due to the financial crisis which had created turmoil worldwide, their plans had to be placed on hold. We can also conclude that if South Africa sees economic growth it can be implied the mechanism of transformation is working well.  

However herein lays the distortion, from the beginning of 2012 till present we see a divergence between the two charts. The All Share Index has once again surged ahead but the growth rate has been decreasing. This would suggest that in the last 2 years the economy and stock exchange have not moved in tandem as they have previously. But how can this be?

In today’s world we have seen a transformative move towards globalisation.  This has led many of the top JSE companies begin to diverse their assets to other countries besides South Africa. The Top 5 companies currently earn more in foreign currency than they do in Rands. These same shares make up a large portion of the index.  The distortion comes in here, if the Rand begins to weaken these shares will increase as their earnings will be much larger in Rand terms. 

However this is not the point I wish to make. This divergence would suggest that a trend is beginning to emerge where local companies are increasingly investing outside South African borders and no longer investing in the domestic story. Thus it can be said that the All Share Index is not a true reflection of the condition of the South African economy.

From a technical perspective on the GDP Growth Rate we see a descending triangle forming and should a downward movement occur we could possibly see a recession begin. Probabilities are likely that we will see that in the next 3-6 months.

This paints a very disturbing picture for South Africa going forward. Some would say there have been a serious mismanagement of the economy and a lack of urgency to solve the problem. Others argue that government haven’t backed business enough for it to feel comfortable investing in the South Africa story, opting instead to go in the direction of China and Africa.

The disappointing part is that South Africa still has large pools of poor people, people which hold potential value creating benefits for the economy yet without a proper co-operation between labour, business and government, the biggest losers turn out to be the poor. This would contradict the stance in which the ANC stand for. 

If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR