Hi everyone. Aside from the Yen, which lost a lot of ground after newly appointed Japanese finance minister Naoto Kan said he prefers the Yen to continue its current decline, the markets remained within ranges, most likely waiting for the NFP release later today. We do expect the data to possibly cause a breakout, and in our case, we dont care in which direction. The 1.42 level has held nicely and most recently the 1.4300 figure on EUR/USD. Fundamentals are mixed all across the world, except in Australia, where retail sales jumped to 1.4% last month, much higher than the anticipated .4%; however, if you take a look at historic figures, the data is very volatile and should be taken with a grain of salt. We favor a break below 1.4200 to test 1.4000. Were setting this up for the News! Trade service. If youd like to see how we trade the news, please register at the following link: www2.gotomeeting.com News! Trade: Trading Non-Farm Payrolls Live When: Friday, January 8, 8:00am US Eastern time (2:00pm Amsterdam, 5pm Dubai, 10pm Tokyo) We look forward to seeing you there. Until then.
As we expected, the dollar continued gaining ground against the majors. As we reported yesterday, the breakout last week had no momentum and the reversal late last week signaled for further dollar strength. Will it continue? Thats the magic question. We think so. There is a lot of global uncertainty and we think the dollar will benefit from it as it did during the first crisis 2 years ago. We dont know how quickly or how long the dollar appreciation will last, but on the longer term charts …
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Most long time investors have heard that diversification is the only free lunch on Wall Street. If you have used a financial advisor to pick your investments for you, you may have been told you were diversified but the way it usually works out your diversification is weak at best and in some cases is almost non existent. Obviously you just need to learn the proper way to diversify.
Usually a financial planner will invest your money in a mix of stock and bonds. Yes, this is better then only being invested in one of the two asset classes but it is still not really diversified as there are several other asset classes with different economic drivers.
When you are properly diversified you will be invested in all liquid asset classes and sometimes even a few that are relatively illiquid investments. In addition to being in several asset classes you will also be in several different types of strategies with multiple time horizons. Global macro traders have known for years that if you dont cast your net wide you will have a hard time performing in all market types. If you just have a bunch of global stocks then all your investments are extremely correlated which means when a few drop the rest drop. One of our goals as investors is to avoid that.
The world of global macro trading will have you looking at several different asset classes such as domestic stocks, foreign stocks, Treasury bonds, investment grade corporate bonds, junk bonds, foreign government bonds, foreign corporate bonds, commodities, real estate, and currencies. In fact some traders will get even more diversified by investing in collectibles, private equity, venture capital, etc. Basically anything that has different economic drivers is worth looking at as for a potential investment as it diversifies your risk.
Global macro traders would all agree that one of the most important goals of an investor is to look for the best risk to reward opportunities. This is in stark contrast to most financial planners who just say buy and hold stocks for the long run. Yes, it can work for the long run but sometimes the long run is 30 years before you even see a positive return. Most of us dont live forever so lets plan accordingly.
As previously mentioned we can diversify not only by investing in several asset classes but also by investing in strategies with different time horizons. There are successful long term and short term trading funds and if you invest in both you are even more diversified as their returns depend on different factors.
If you diversify wide and deep your investment returns will be far more consistent and in most years will be better off then the standard stock and bond mix that so many so called professionals push you into. There is no guarantee that you will make money every day, month, or even year but by following these concepts you can really improve your risk adjusted returns.
If you prefer to do all of this on your own then you will be well served to learn how to build or just buy several good models so that you can more easily track several asset classes. For instance you will want a few models for the stock market, a few for commodities, etc. The more efficient you set up the process the better your returns will be as you will miss less great risk to reward opportunities.
About the Author:
The Macro Trader does research for a newsletter that gives the Global Macro Trader actionable trading ideas each week. Mean Reversion is but one of the many strategies that we use to help find the best risk to reward opportunities across the globe.
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Feb 20 2010