OPENING POSITION
July 2003
The value of the US dollar is falling, the 30-year Treasury bond yields are hitting lows not seen in the last 45 years, inflation measures are dipping, unemployment is at eight-year highs, apartment vacancies are rising, and factories are seeing excess capacity: It's no wonder economics is known as the "dismal science." All these factors point to excess supply and not enough demand, the end result of which may be falling prices, wages, and profits. Does this mean that deflation is a possibility? Open up any newspaper and you can't help but notice the word appear in at least one headline. In recent testimony to Congress, Alan Greenspan, chairman of the Federal Reserve Board, stated that the chances of a period of deflation are remote, but the situation needs to be monitored. In addition, the current budget deficit and plans for further tax cuts pose more problems. Conditions are no better overseas. With the rising value of the euro and tight monetary policy, businesses in Europe will be negatively affected. In Asia, the one region that was showing some signs of economic strength was unfortunately hit by the SARS outbreak, which turned that strength into weakness.
It's interesting that in spite of poor economic fundamentals, analysts are not afraid to make buy recommendations, just because of the rally in the equity markets that started in March 2003. If you look closely at the rally, you will see that the trendline had a very gentle slope upward, and volume did not show any strength. But the market was trending, and it's trends that make you money. That's what originally attracted Victor "Trader Vic" Sperandeo to trading. Find out more in the STOCKS & COMMODITIES interview with him this month, which starts on page 62. There's nothing wrong with jumping into a trend, whether it's short-term or long-term, but remember to monitor that trend closely. If you look at the chart of the Dow Jones Industrial Average or the Standard & Poor's 500 index, you'll see that it took just one day's fall in value to break that gently sloping trendline and bring the bears rolling back in. You have to be ready to close your long positions once the trend shows signs of an end. How do you know when the trend is over? There are several ways, and one useful method is discussed in the feature article by Martin Boot starting on page 20. In the article, Boot discusses an alternate method of applying the commodity channel index (CCI) to improve your trading results. The market has a mind of its own, and you don't want to get stuck in something that only appears to be a trend.
Here's to good trading!
Jayanthi Gopalakrishnan,
Editor
Originally published in the July 2003 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2003, Technical Analysis, Inc.
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