Well another week of wild trading has left many on Wall Street bruised, battered and not sure what to think. Is the oil bubble bursting? Are commodities and resources heading lower? No one can say for sure, but this type of uncertainty causes a lot of angst in financial markets and that can make for very volatile trading indeed.
I myself got caught in these wild swings this week, something I usually am quite good at avoiding, but alas all traders get hit with this once in awhile. I was long soybeans a fairly small position but the market has had some incredible swings as of late and I was forced to liquidate. This is the new world of volatility we live in and without a proper risk management system in place the pain can be immense.
Luckily with strict adherence to my very defined trading rules I never risk more than I can afford or want to lose on a given trade — this is surprisingly not something that many investors do. We all want to be part of something when it’s making money but statistically most traders deny when a position is going badly and that denial can be fatal financially.
My Resource Trader Alert gold trade has locked in some solid gains, I can afford to hold this position for a further run higher. If, however, it does not move higher or even falls back, I can recoup equity or, if need be, even absorb a small loss. Right now, I am not having to do either. I’m just being patient.
Soybeans and the State of Crops
Soybeans have been extremely volatile to say the least. I am not convinced in any way that all these rosy crop reports will come to fruition once harvest time rolls around. They’re just a lot of wishful thinking, in my book.
Jeff Caldwell, in a great article for Agriculture Online, hits the nail on the head:
“The USDA’s June acreage report didn’t tell the whole truth. Data were taken before flooding washed the productivity away from thousands of acres in Iowa, Illinois, Indiana, Minnesota, Missouri and Wisconsin.
“While another USDA report later this month will aim to get a better idea of what those acres will raise, University of Illinois economists are looking to trim some of the uncertainty from the ‘08 crop year forecast by applying weather models and historical data.
“‘Corn and soybean yield prospects are always uncertain, and that uncertainty is magnified this year due to much of the crop being planted later than usual, extensive flood damage and extensive replanting in some areas,’ according to a report by University of Illinois economists Scott Irwin, Darrel Good and Mike Tannura.”
Bottom line is nobody knows what lies in store for crops from now until harvest, and there are a lot of hot, dry days ahead. My feeling is that this pullback in beans is an incredible opportunity, but one that could still see further pullbacks, so options are the best way to go.
One thing I always stress with everything I do is to work a good defense as well as an offense. Let’s face it, no football team ever won the Super Bowl just because they had a great offense; they had to have good protection for their star quarterback, too. Using risk management in every portfolio is vital, not only a trading portfolio but an investment portfolio too.
It’s very important to understand the difference between an Investor and a Trader. I happen to have both an investment portfolio and my trading portfolios, two very different animals. I treat them differently, allocate risk differently and have different goals for each.
A Note on Currency Markets
I want to end today’s update with a note on the currency markets from my old friend Jack Crooks. Jack and I go back several years, and I can honestly say he is one of the traders/newsletter writers cut from the same mold as I. We are a rare breed in this business.
Jack is one of the sharpest minds in currency, yet he’s eternally humble. I want to leave you with his thoughts from his Currency Currents:
FX Trading — Fighting an Economic Fire with Molotov Cocktails
“I flipped on the Travel Channel last night to catch a program titled Secrets of the U.S. Mint. Besides discussing how the U.S. Mint operates, the program also touched on counterfeiters and coin collectors. But as the hour wound down, the final segment briefly introduced the U.S. Federal Reserve.
“The reason it tied in the Federal Reserve Bank at the end of the show, as the narrator pointed out, was because the Federal Reserve is responsible for protecting the money printed at the U.S. Mint, the people’s money.
“Yeah, I thought that was pretty funny too.
“But a few minutes later, after some dated clips of Alan Greenspan and various other shots from inside the walls of the Fed, a spokesman for the Federal Reserve appeared on camera and summed up the segment quite nicely. He said something along the lines of this: The Federal Reserve isn’t here to make the economy grow powerfully; that’s up to the people. The Federal Reserve is here just to see that the conditions are right for the people to make this happen.
“After that first quip about protecting money, I found this last quip regarding the Federal Reserve’s job description to be rather simple, and surprisingly reasonable. But as is clear from recent events, the perceived job description of the Fed, by the Fed, is much more convoluted.”
Thanks, Jack. It’s always good to hear you.
That’s all for today. I hope to see as many of you as possible in Vancouver at the Agora Financial Investment Symposium.
Yours for resource profits,
July 21, 2008