Economics in One Lesson - a classic

This is an excellent and easy to read book. I recommend it to everyone. Ever want to know how a free-market Austrian Economist would suggest handling the main issues of the day? Then this is the book for you. Click Here.

Hillary is trying to strong arm the Swiss Banks (who have operations over here)

So says J.H. Huebert.

CLICK HERE FOR THE ARTICLE

Our loving government wants to enable the IRS to stroll through the accounts held in Switzerland. The Swiss have strict laws against this. In fact, they have criminal penalties for disclosing client information. However, the U.S. government, in all of its glorious omnipotence and wisdom is likely to threaten to shut down U.S. operations of Swiss banks that decide that they should follow their own laws rather than ours.

Although, not part of the article, it might be advisable when considering a Swiss account, to choose a bank that does not have offices over here.

S&P 500 Update 7/27/09

(all charts in this post are expandable by right clicking or double clicking to open in a new tab or window)

My last update on the S&P 500's technical condition and trend was here.

Here is the bottom line: the trend, as measured by the 13 and 40 week moving averages is currently up. The key support level for this trend is 869.72. If prices were to fall below that level, we would consider the trend either down or neutral, depending on the action surrounding the break.

If you have been following my posts on this market since last year, you know that after this blog's sell short stance ended in March of 2009, we have held a mostly neutral stance, with some tips for more aggressive traders wishing to try to catch some of the uptrend that was emerging.

Our long-term view is that we are in a secular bear market that will include multiple primary and intermediate term bull and bear movements. Ultimately while, having this view, we try to follow the major price trends that emerge, even if they go against our expectations.




The chart above is a weekly bar chart of the S&P 500, showing the 13 and 40 period moving averages, and a thick red line at the key level mentioned above. Using a trend following methodology is pretty simple. We are in an uptrend now, so a trend follower will position in the trend utilizing money management and possibly a trailing stop that is more aggressive (sensitive) than the basic signal of the two moving averages or other trend method. They will then sit back and wait, letting the trend end the position for them; either cutting a loss short or letting a winning trend run. That's about it in a nutshell.

I also employ Elliott Wave analysis, and end up getting a lot of questions about my opinion of the current Elliott Wave pattern and position. Below are my current thoughts on that.

As shown in the monthly bar chart above, we are most likely in a primary degree second wave to the upside. This movement should not penetrate the all time high, before further downside action at the same degree of trend.

The chart above is a daily bar chart of the same S&P 500 - a closer look at the action. There are three Elliott counts shown and listed in order of probability from Top Count, through ALT-1 and on to ALT-2.

Problems with the top count:
>Some internal pattern ambiguity
>Wave (B) is proportionally small, having failed to even reach a retracement level of 38% (often considered the proportional minimum)

A break below the key level of 869.32 would indicate that one of the alternate counts was in play. The ALT-1 count is not much different than the top count, except wave (C) is much shorter. ALT-2 would mean that wave (B) was underway rather than complete.

Now, if we look at the shorter term, we might see more clues and even a potentially high probability trade set up emerging.


Directly above is a 60-min chart of the S&P 500 index. The labels represent a clearly impulsive (technical Elliott Wave term) pattern. It appears that the highest probability is that this short-term movement is almost complete. When it is complete, the set up should emerge.

A corrective three wave structure to the downside would indicate further upside potential against the key level we have been discussing. Strong downside action through that key level would indicate that either wave [3] down (very bearish), or wave (B) down (intermediate term bearish) are underway. Under the first scenario, the bullish position can be placed with a stop loss order just below 869.31. Under the second scenarios, bearish positions can be placed with the initial stop at the high of the turn / termination of the current uptrend.

"End the Fed" Debate with Tom Woods

....can be found here:

http://www.youtube.com/view_play_list?p=8BE83801B1A1324C

Enjoy.

Supplemental information:

"How to Return to Gold" at Tom Woods website.

The Three Phases of a Trader's Education: Psychology, Money Management, Method

By Jeffrey Kennedy

The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. Now through August 10, Elliott Wave International is offering a special 45-page Best Of Trader’s Classroom eBook, free.

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Aspiring traders typically go through three phases in this order:

Methodology. The first phase is that all-too-familiar quest for the Holy Grail – a trading system that never fails. After spending thousands of dollars on books, seminars and trading systems, the aspiring trader eventually realizes that no such system exists.

Money Management. So, after getting frustrated with wasting time and money, the up-and-coming trader begins to understand the need for money management, risking only a small percentage of a portfolio on a given trade versus too large a bet.

Psychology. The third phase is realizing how important psychology is – not only personal psychology but also the psychology of crowds.

But it would be better to go through these phases in the opposite direction. I actually read of this idea in a magazine a few months ago but, for the life of me, can’t find the article. Even so, with a measly 15 years of experience under my belt and an expensive Ph.D. from S.H.K. University (i.e., School of Hard Knocks), I wholeheartedly agree. Aspiring traders should begin their journey at phase three and work backward.

I believe the first step in becoming a consistently successful trader is to understand how psychology plays out in your own make-up and in the way the crowd reacts to changes in the markets. The reason for this is that a trader must realize that once he or she makes a trade, logic no longer applies. This is because the emotions of fear and greed take precedence – fear of losing money and greed for more money.

Once the aspiring trader understands this psychology, it’s easier to understand why it’s important to have a defined investment methodology and, more importantly, the discipline to follow it. New traders must realize that once they join a crowd, they lose their individuality. Worse yet, crowd psychology impairs their judgment, because crowds are wrong more often than not, typically selling at market bottoms and buying at market tops.

Moving onto phase two, after the aspiring trader understands a bit of psychology, he or she can focus on money management. Money management is an important subject and deserves much more than just a few sentences. Even so, there are two issues that I believe are critical to grasp: (1) risk in terms of individual trades and (2) risk as a percentage of account size.

When sizing up a trading opportunity, the rule-of-thumb I go by is 3:1. That is, if my risk on a given trading opportunity is $500, then the profit objective for that trade should equal $1,500, or more. With regard to risk as a percentage of account size, I’m more than comfortable utilizing the same guidelines that many professional money managers use – 1%-3% of the account per position. If your trading account is $100,000, then you should risk no more than $3,000 on a single position. Following this guideline not only helps to contain losses if one’s trade decision is incorrect, but it also insures longevity. It’s one thing to have a winning quarter; the real trick is to have a winning quarter next year and the year after.

When aspiring traders grasp the importance of psychology and money management, they should then move to phase three – determining their methodology, a defined and unwavering way of examining price action. I principally use the Wave Principle as my methodology. However, wave analysis certainly isn’t the only way to view price action. One can choose candlestick charts, Dow Theory, cycles, etc. My best advice in this realm is that whatever you choose to use, it should be simple. In fact, it should be simple enough to put on the back of a business card, because, like an appliance, the fewer parts it has, the less likely it is to break down.

For more trading lessons from Jeffrey Kennedy, visit Elliott Wave International to download the Best of Trader’s Classroom eBook. It’s free until August 10.

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Jeffrey Kennedy is the Chief Commodity Analyst at Elliott Wave International (EWI). With more than 15 years of experience as a technical analyst, he writes and edits Futures Junctures, EWI's premier commodity forecasting service.

The Elliott Wave Principle

In the 1930s, Ralph Nelson Elliott, a corporate accountant by profession, studied price movements in the financial markets and observed that certain patterns repeat themselves. He offered proof of his discovery by making astonishingly accurate stock market forecasts. What appears random and unrelated, Elliott said, will actually trace out a recognizable pattern once you learn what to look for. Elliott called his discovery "The Elliott Wave Principle," and its implications were huge. He had identified the common link that drives the trends in human affairs, from financial markets to fashion, from politics to popular culture.

Robert Prechter, Jr., president of Elliott Wave International, resurrected the Wave Principle from near obscurity in 1976 when he discovered the complete body of R.N. Elliott's work in the New York Library. Robert Prechter, Jr. and A.J. Frost published Elliott Wave Principle in 1978. The book received enthusiastic reviews and became a Wall Street bestseller. In Elliott Wave Principle, Prechter and Frost's forecast called for a roaring bull market in the 1980s, to be followed by a record bear market. Needless to say, knowledge of the Wave Principle among private and professional investors grew dramatically in the 1980s.

When investors and traders first discover the Elliott Wave Principle, there are several reactions:

• Disbelief – that markets are patterned and largely predictable by technical analysis alone
• Joyous “irrational exuberance” – at having found a “crystal ball” to foretell the future
• And finally the correct, and useful response – “Wow, here is a valuable new tool I should learn to use.”

Just like any system or structure found in nature, the closer you look at wave patterns, the more structured complexity you see. It is structured, because nature’s patterns build on themselves, creating similar forms at progressively larger sizes. You can see these fractal patterns in botany, geography, physiology, and the things humans create, like roads, residential subdivisions… and – as recent discoveries have confirmed – in market prices.

Natural systems, including Elliott wave patterns in market charts, “grow” through time, and their forms are defined by interruptions to that growth.

Here's what is meant by that. When your hands formed in the womb, they first looked like round paddles growing equally in all directions. Then, in the places between your fingers, cells ceased growing or died, and growth was directed to the five digits. This structured progress and regress is essential to all forms of growth. That this “punctuated growth” appears in market data is only natural – as Robert Prechter, Jr., the world's foremost Elliott wave expert and president of Elliott Wave International, says, “Everything that thrives must have setbacks.”

The first step in Elliott wave analysis is identifying patterns in market prices. At their core, wave patterns are simple; there are only two of them: “impulse waves,” and “corrective waves.”

Impulse waves are composed of five sub-waves and move in the same direction as the trend of the next larger size (labeled as 1, 2, 3, 4, 5). Impulse waves are called so because they powerfully impel the market.

A corrective wave follows, composed of three sub-waves, and it moves against the trend of the next larger size (labeled as a, b, c). Corrective waves accomplish only a partial retracement, or "correction," of the progress achieved by any preceding impulse wave.

As the figure to the right shows, one complete Elliott wave consists of eight waves and two phases: five-wave impulse phase, whose sub-waves are denoted by numbers, and the three-wave corrective phase, whose sub-waves are denoted by letters.

What R.N. Elliott set out to describe using the Elliott Wave Principle was how the market actually behaves. There are a number of specific variations on the underlying theme, which Elliott meticulously described and illustrated. He also noted the important fact that each pattern has identifiable requirements as well as tendencies. From these observations, he was able to formulate numerous rules and guidelines for proper wave identification. A thorough knowledge of such details is necessary to understand what the markets can do, and at least as important, what it does not do.

You have only just begun to learn the power and complexity of the Elliott Wave Principle. So, don't let your Elliott wave education end here. Join Elliott Wave International's free Club EWI and access the Basic Tutorial: 10 lessons on The Elliott Wave Principle and learn how to use this valuable tool in your own trading and investing.

Market Timing vs. Buy and Hope in the S&P 500

Recently, I did some testing on various long-term trend following signals on the S&P 500. My purpose was to find results that could be used for filtering intermediate term trend signals. Going in, I had a second tier purpose as well. I assumed that, as I have discussed before, the long-term trend following signals could be more useful to the average investor than simply using a buy-and-hope approach. I found some interesting results.

I tried to keep the methodology for the test extremely simple. Weekly open-high-low-close data was used, with a start date of 1/15/95 and an end date of 3/22/09. For the trend following part of the test, the execution price was the weekly open price for the weekly bar following the weekly price bar that produced the trend signal.

To create a buy and hold example that could be compared to the price trend following examples, I performed two buy-and-hold tests. The first simply represented a buy on the test start date of 1/15/95 and a sell on the test end date of 3/22/09. To better represent the buy-and-hold approach of purchasing on a periodic or semi-periodic basis, a second test was then performed in which a purchase of the S&P 500 index was recorded on the first of every quarter. These positions were then held until the end of the test, which recorded an exit of all buy-and-hold positions at the price on the opening of the week of 3/22/09, which was 772.31.

For the market timing system, a simple 13 week and 40 week moving average crossover signal was used. I wanted to pick a method that could be replicated by the part-time investor who wanted to use an easily managed technical approach for timing buy and sell actions in the market. Buy signals were given when the 13 week moving average crossed above the 40 week moving average. Sell short (or use inverse ETF) signals were given when the 13 week MA crossed below the 40 week MA. This is a stop-and-reverse system, so a new buy signal would both close out an existing short position and enter a new long position. Likewise, a sell signal would both close out an existing long position and enter a new short sell position. For the test, buy or sell-short signals were executed at the open of the week following the week the signal was given on. Waiting till the end of the week to make sure the signal was valid was part of the process. This timing system is always positioned in the market -either short or long the market as per the direction of trend as defined by dual moving averages.

For ease and simplicity of analysis, only S&P points gained or lost between entry and exit signals are recorded for all tests. Of course the results for the tests would have been more realistic if position sizing, compounding capital, and pyramiding sub-systems would have been tested as well. But, It is important that things were kept simple for this test. I did not want money management systems, which are extremely important, to be included. I wanted to compare buy-and-hold vs. market timing, and that is why only points gained or lost instead of dollars are used.

However, given the history of the S&P 500 over the 14 years of the test, the results for buy-and-hold would have been exponentially worse if I would have included a measure for increased contributions every year or quarter (as incomes & contributions increased). Similarly, the trend following system would have most likely shown exceptionally higher profits if position sizing and pyramiding units would have been utilized, since it followed the actual price trend while exiting losing trades. Therefore, I think I have given both buy-and-hold and technical market timing a fair shake. The S&P 500 covers 500 of the largest capitalized stocks on the NYSE, so I think it would be unlikely that I am not representing at least the average holdings in the stock portion of anyone's portfolio.

Results:
1) Buy-and-hold, with only one entry and one exit at the beginning and end of the test window, respectfully:
a)Number of trades: 1-round trip trade
b)Points P/L: +306 S&P points

2) Buy-and-hold, averaging in a new position at the opening price of every quarter and exiting out of all positions at the end of the test window:
a) Number of trades: 57 trades, consisting of 56 entries, and 1 exit.
b) Points P/L: -17,737 S&P points. (yes, that is a seventeen thousand point loss)

3) 13 & 40 week moving average cross timing signals:
a) Number of trades: 12 round trip trades
b) Points P/L: +1,435 S&P points

This test included bull markets, bear markets and non-trending markets. It was a good test of the usefulness of these basic investing and trading systems, methodologies and philosophies over a long-period of time covering many market scenarios. Clearly, the winner is market timing using an empiricist approach of looking at what the market is doing -which direction it is trending- and following its lead objectively with a set of specific entry and exit rules.

As we can see, someone using a methodology of automatic quarterly investments is at a severe disadvantage; even more so than someone buying only at the beginning of the test to close only at the end. For such a methodology to work, the investor might need to simply be born at the right time in history. Likewise, this investor would need to be lucky enough to have reason to exit the market at the right time in history. But, as the losses sustained by many baby boomers in recent years has shown, this will not always work out. Truly, it is better for the investor to believe that any position they take in the market may, in fact, be at the worst time. Investors should always have an exit plan for profit or loss. The main problem with the buy-and-hope methodology is that it is void of an objective philosophy. It's claim is that the market always goes up, and since no one can know when it is going to do this or that, investors should simply roll the dice on a portfolio and see what happens. I say, if that is your view of the market, then why not go to Vegas, where the same results are achieved at a faster pace. At best, average investors will add some type of blind diversification or sector rotation into the philosophically void behavior of making a move and hoping for the best. I tested the index of the 500 largest capitalized stocks on the New York Stock Exchange, so this "diversified" stock portfolio many hold onto should be fairly represented in the test.

If you are going to put your capital on the line, you owe it to yourself to have an objective methodology for timing of entries and exits. Any methodology, or group of methodologies, that pass the test of objectivity must have price action as the final determining factor for its entry and exit signals. Additionally, if a methodology is going to be objective, it must respect the fact that prices do not just go up for significant periods of time and distance. Prices go up, down and sideways for sustained periods of time and distance. While earning a profit is very difficult, and posting a loss more likely, during the sideways / non-trending periods, profits are readily available in the both the up and down trending periods.

My question to those still buying (or selling) and hoping, is this: If it has not worked for the past 14 years, when do you expect your bets to pay off?

Below is a weekly bar chart of the S&P 500 index for the period tested:

EWI: Futures Junctures Free Week

FDIC Insurance Fund Doesn't Actually Exist, according to Vern Hill

Click Here for Source Article

Wow! My long time friends and family usually assume I am the biggest skeptic in the room, but even I thought the FDIC insurance fund existed. I just thought it had to be severely underfunded for systemic risks. I also thought it was immoral because it gives a false sense of security to market participants.

Vern Hill cites former FDIC chairman, Bill Isaac in making his claim that "the FDIC Insurance Fund is an accounting fiction". Hill goes on to explain that the "insurance premiums" collected from banks for the FDIC fund, therefore must go to the general funds. Therefore, Hill calls this a tax rather than a premium.

When the government intervenes in the marketplace, distortions are caused and malinvestments are made by market participants responding to these distortions. Blind faith in bank liquidity was the result of the FDIC "insurance" program; more properly called the FDIC unfunded edict. Bottom line: your bank is probably not safe.

Our friends at EWI talk about Deflation

Deflation is Winning. Are You? The mainstream media couldn't predict the biggest bear market in 100 years; how do you expect them to anticipate what will unfold next? Watch this quick video clip from financial analyst and sought-after speaker Steven Hochberg about why you should challenge the consensus view for inflation. Then access the full 20-minute video, FREE. Deflation is Winning. Are You? Watch the full presentation, FREE. Click Here!