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Is the coronavirus’ impact on financial markets overblown?

  
  Analysis
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A look at the key question in markets right now

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The Coronavirus continues to see an outbreak globally with the latest estimates putting the death total over 900 persons. With fear continuing to spread and millions disrupted, financial markets have certainly been impacted.

Typically, most problematic geo-political or economic events have always managed to yield some material effect on markets. This was seen earlier this year with the rising tensions between the US and Iran.

However, the Coronavirus is itself an entirely different animal, whose impact is far more globally reaching. This article will explore how the virus has correlated to financial markets and which instruments should be looked at.

How does the virus affect global markets?

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What were the financial lessons of the 2010s?

  
Analysis, Education
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The next decade is often different from the prior one

The next decade is often different from the prior one
“Financial markets tend to base their expectations of the future on the experiences of the recent past”
That’s a part of human nature that has repeatedly led to folly. Nowhere moreso than in financial markets.
We’ve started a new decade with the same enthusiasm that ended one of the greatest decades in stock markets. Yet few people are out there to remind market participants that the S&P 500 had an average annual total return of negative 0.95% from 2000 through 2009.
One is the WSJ’s Jason Zweig who wrote the Heard on the Street column edited the latest edition of Benjamin Graham’s classic the Intelligent Investor.
In a recent article he highlighted how investors (and traders) tend to pile into trades that have worked recently. A parallel from the 2000s decade as the carry trade. Buying NZD/JPY was a spectacular trade, until it wasn’t. In the most-recent decade the market fell in love with the US dollar.
Market patterns don’t reverse in 10-year cycles like clockwork; there’s no guarantee that the coming decade will be the opposite of the one that just ended. But before you bet that the future will be like the past, it’s worth remembering that this decade hasn’t turned out the way investors predicted it would 10 years ago.
Here is how FX returns looked in the past 10 years:
FX returns from the past decade
What that doesn’t include is emerging markets. The South African rand lost 48%, the Russian ruble 52%, the Brazilian real 56.5% and the Turkish lira 75%.

How Trump has trapped himself in China talks

  
Analysis, Politics
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He needs to be both tough-on-China and friendly to markets, but he can’t be

He needs to be both tough-on-China and friendly to markets, but he can't be
President Trump faces a dilemma.
If he stays tough on China, he risks hurting markets and in his mind, the Dow Jones Industrial Average is a top barometer for his Presidency.
If he softens on China and signs a deal that rolls back tariffs while getting little in return, he risks getting outflanked on an issue that has united Americans and has Democratic candidates talking tough.
The core belief among market participants is that he will cave on China and try to spin his deal as a good one — similar to what he did on NAFTA. That would keep markets happy.
But Trump may be considering another playbook. Top advisor Peter Navarro doesn’t believe that tariffs will hurt the domestic economy and he’s undoubtedly told Trump that the effects are overrated. At the same time, Trump invited Powell to the White House for an impromptu meeting on Monday and it may have been to feel out how the Fed would react to a deal falling apart.
Trump may believe that markets and the economy will hold up fine if he stays tough on China and Powell cuts.
The line from today’s Reuters report that really stands out to me is this:
Trump and U.S. Trade Representative Robert Lighthizer recognize that rolling back tariffs for a deal that fails to address core intellectual property and technology transfer issues will not be seen as a good deal for the U.S., a person briefed on the matter said.
I don’t think Trump has made up his mind but I do believe he’s weighing both courses of action.

Booking Losses Before They Occur

  
  Education
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There is a meaningful difference between trading to win and trading to not lose. The average person feels more psychological pain over a loss than they feel pleasure over a gain–particularly once they have already “booked” that gain mentally.

When we enter a trade, we expect to be paid out. Mentally, we book a potential profit. When a loss materializes, it is the unexpected event–and we respond more strongly to the unexpected than to the familiar.

What is the solution to this dilemma? The answer, surprisingly, is to book losses before they occur.

It’s human nature to not want to think about such unpleasant things as losses. But by knowing our maximum possible loss in advance and by mentally rehearsing what we’ll do on those occasions when the loss occurs, we normalize the losing process. That divests it of its emotional grip.

We can never eliminate loss from life or trading; nor can we repeal the basic uncertainties of markets. What we *can* do is develop an edge in the marketplace and, over the course of many trades, let that edge accumulate in our favor.

‘Trading To Win – The Psychology of Mastering the Markets’

  
  Education
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1. Learn to function in a tense, unstructured, and unpredictable environment.
2. Be an independent thinker versus a conventional thinker.
3. Work out a way to handle your emotions and maintain objectivity.
4. Don’t rely on hope and fear in the conventional sense.
5. Work continuously to improve yourself, giving importance to self-examination and recognizing that your personality and way of responding to events are a critical part of the game. This requires continuous coaching.
6. Modify your normal responses to certain events.
7. Be willing to face problems, understand them, and recognize that they are in some way related to your behavior.
8. Know when problems can be resolved and then apply methods to solve them. That may mean giving up some control in order to gain a different control. It may mean changes in your personality, learning self-reliance, or giving up independence and ego to become part of a trading team.
9. Understand the larger framework in which trading occurs—how the complexity of the marketplace and your personality both must be taken into account in order to develop the mastery of trading.
10. Develop the right mind-set for trading—a willingness to commit to the kinds of changes in personal habits and beliefs that will drastically alter your life. To do this requires a willingness to surrender to the forces of the game. In order to be able to play at a maximum level, you have to let go of your ego and your need to have things your way.

Three basic reasons why traders don't succeed

  
  Education
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1) They are trading a market and time frame that lacks opportunity;
2) They are trading a method that does not possess an objective edge in the marketplace;
3) They have a promising market, time frame, and method, but are not executing it properly.
Of these reasons, #3 is the most frustrating for traders. They feel as though they have the tools to succeed, but they themselves get in the way of their own success. Many times this is because emotional factors interfere with sound decision-making.

Trading Psychology Observations

  
  Education
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-From working with developing traders, I’d say that 90% don’t/can’t sustain the process of keeping a substantive journal. Among the group that does journal, well over 90% of the entries are about themselves and their P/L. I almost never see journal entries devoted to figuring out markets.

-A sizable proportion of traders who have been having problems are trading methods and patterns that used to work, but are no longer operative. The inability to change with changing markets affects traders intraday (when volume/volatility/trend patterns shift) and over longer time frames (when intermarket patterns shift).

-Some traders habitually look for tops in a rising market and bottoms in a falling one. There’s much to be said for countertrend methods, but not when the need to be right exceeds the need to make money.

-An underrated element in trading success is mental flexibility: the ability to shift views and perceptions as new data enter the marketplace. It takes a certain lack of ego to form a strong view and then modify it in the face of new evidence.

-Many traders fail because they’re focused on what the market *should* be doing, rather than on what it *is* doing. The stock market leads, not follows, economic fundamentals. Some of the best investment opportunities occur when markets are looking past news, positive or negative.

Ari Kiev – The 10 Cardinal Rules Of Trading

  
  Education
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The Ten Cardinal Rules

1. Learn to function in a tense, unstructured, and unpredictable environment.
2. Be an independent thinker versus a conventional thinker.
3. Work out a way to handle your emotions and maintain objectivity.
4. Don’t rely on hope and fear in the conventional sense.
5. Work continuously to improve yourself, giving importance to self-examination and recognizing that your personality and way of responding to events are a critical part of the game. This requires continuous coaching.
6. Modify your normal responses to certain events. (more…)

Is market a battlefield for you?

  
  Education
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Have you ever heard something like “The market is a battle, be ready to fight with all you’ve got,” or “The market is a war,” or any variation of this theme?  I bet you have, it’s a fairly common theme. But is it true, or better question might be: is this a mindset that you want to adopt? 
Don’t get me wrong – by no means do I want to present a marketplace as a happy place where  refined gentlemen high-five your each win (hmm, do refined gentlemen high-five at all? or they back-slap only?) and console you with fine whiskey and cigar after each loss. No, they are out to get you just as much as you – them. In that sense, anyone in the market is an enemy of anyone else. But that’s not really the point. The point is, is kind of attitude toward the marketplace and its happenings going to help you survive it, navigate it successfully? Or is it going to undermine your success? 
 
If the market is war for you, you are going to be in the fighting mode all the time. Can you function well for long in a constant fight mode? It’s extremely tense mode which is going to wear you out rather quickly. Instead, allow me to offer you a very different attitude – one where a market is a natural environment for a trader – environment where certain patterns govern all the comings and goings. Is it a dangerous place for a trader? Of course it is. Think of it as of ocean. It’s a dangerous place to be and swimming in it is a dangerous thing to do – just as trading the markets.

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