Sunday, January 03, 2010

The Top Three Investment Themes to Watch in 2010

Happy New Year...and New Decade! Let's dive into some of the top investment themes to keep an eye on in 2010...but first, a haiku:

09 Reflation
Can it continue for long?
Dollar may foil!

1. The US Dollar: The Linchpin

The dollar, which topped out in early March roughly around the time the stock market bottomed, has been looking frisky of late. It's not above it's 200-day moving average yet, so there is some potential resistance in the short-term, but it's looking stronger by the day.

Can the re-flation trade continue to motor along if the dollar mounts a sustained rally? If the first wave of the global meltdown was any indication, then probably not. We haven't yet seen any evidence to invalidate the "all the same markets" hypothesis.

Is the dollar's recent upturn tipping off an impending markets downturn? In my opinion, this is THE theme to keep an eye on in the first quarter of 2010.

I do get a kick out of the financial media's explanations for the dollar's recent strength - leave it to them to justify the charts with "news"!

2. China: The Global Economic Savior

China has been billed as the posterchild of the global economic bounceback. Which seems appropriate, as it was also the star of the 2003-2007 credit fueled equity liftoff globally.

"China is fine," pundits say. Well, perhaps. But rather than rely on various analysis and opinions on China, I'll stick with the lazy man's approach - watching the stock market itself.

In late November, we pointed to a potential downturn in Chinese equities as some dark clouds on the financial horizon.

How's China done since then? While still perched above it's 200-day SMA, the Shanghai Composite appears to be embarking upon a third attempt to take out its early August highs.

China's rally stalls.
(Source: Yahoo Finance)

A third failure would increase the likelihood of a Chinese breakdown, and a breach of the 200-day SMA (red line above) definitely would. And if that happens, look out! I'm not sure the re-flation trade could withstand this.

3. The Banks: Still Not Lending, and Breaking Down Too

I was tempted to stop the list at #2, because we know that all the markets are still correlated...but then I pulled up this foreboding chart of the bank stocks:

Bank stocks breaking down.
(Source: Yahoo Finance)

The bank stocks are trading right around their 200-day moving average, since making their rally highs in October. So while the blue chip indices have continued to rally and make new highs, many secondary indices have failed to confirm, especially "crap" like the banks.

Summing It Up: Deflation Likely to Return (Again)

To sum it up, it looks like the re-flation trade may be running out of which case, it would be time for the dollar to rally, and for deflation to once again take the upper hand.

A couple of months ago, I reviewed my favorite inflation and deflation arguments. Since then, I don't think anything has changed. We remain at a key inflection point in the inflation/deflation battle, at least as far as 2010 is concerned.

I personally think the odds favor the scales tipping once again in the favor of deflation. Then it will get really interesting, as we'll see our heroes at the Fed again swing into action. I'm skeptical they'll be able to do much of anything useful, as I don't think they "saved" us from anything the first time around either. The markets were oversold, and set for a huge rally - and rally they did. Where they go from here will be the true litmus test.

My 2009 Trading Review: Ouch, I Suck

Usually at the end of each year, I pat myself on the back for a year well done. Well this year, unfortunately, I got rocked. So rather than dwell on it too much, I'd rather focus on learning something from my mistakes - and hopefully you can too!

In no particular order, I made a few key ones:

1. Taking position sizes that are too large. You really shouldn't risk more than 2% of your overall capital on any given trade. Because, if the trade goes against you, the most important thing is to live to see another day.

This is the top way that traders go "bust" and lose all of their capital. Something I'll try to (finally) accept in 2010!

2. Not catching market turns properly. Since 2007 or 2008 I've predominantly traded with the trend, which I believe is the right thing to do. BUT, I've gotten burned on trends switching on me. My solution? Use a more robust system for catching turns, including investor sentiment that may indicate when a move is close to bottoming, or topping.

3. Lacking a set plan for exiting a trade - whether a winner, or a loser. Stops are life savers - it's important to honor them, and again, live to see another trade!

Overall no complaints, investing and trading is often an expensive tuition, and the only way to learn it is to do it. So I'm grateful to still have a fair amount of capital intact (off of a small initial stake), and look forward to continuing to improve in 2010!

Thanks for reading!


peter2o10 said...

Hey Brett, been reading your blog for about 6 months and I totally agree with you about the USD being the key.

If you remember in 2008, the dollar did not take out everything at once, it hit Silver, oil, Gold, and other commodities at different times, the key thing is that technical and sentiment indicators show a trend change.

There is also no conviction to the S&P move higher.

White Bear said...

1. From Jsmineset, the trader Dan commented on how the COT commericals are net short the USD at a bigger amount than during the USD spike in 2008. Given that the USD was just up from 74 to its current 77 and the COT commericals are already at its all-time high, I just don't see how the USD can muster further strength upward.

2. Just after your comment, financials have been up the last few days. XLF back to 15. ^BKX above 200MA. GS up 10 the last 2 days. COF up 2.

Are you sure that the market will correct???

Brett Owens said...

Hey thanks Peter, and great point...the markets did indeed roll over one at a time.

Agree with you on the S&P, and while the conviction has been waning since Oct/Nov, I concur that things look quite exhausted on the upside here.

Brett Owens said...

WB, I'm never sure of anything to be honest, I just try to piece things together best I can.

Personally I believe the dollar is heading north of 90, and despite an up week, I think the financials are toast. But again, just my opinion.

peter2o10 said...

Think about the rally since March in commodities and Stocks. That is all USD loans at a certain price. Think about the sheer magnitude of those loans. As trillions in capital/wealth has been "created".

A continued rally in the dollar could domino-smoke players out of their asset plays.

Brett Owens said...

Yep great point...the crash would be like 2008, only more intense!

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