Posted by: Bevan | June 2, 2012

May 2012 Trading Commentary

Once again the worm has turned in May, with a significant downturn in market sentiment, as has happened for the past couple of years.  The market certainly has an ability to only focus on a singular factor at a time.  The US economic situation had been the focus but things have now shifted back to Europe.  Is this justified?  The main change in that situation has been the possibility of democracy putting to an end the bailout train for Greece.  Parties opposed to the austerity which is a condition of the bailouts came close to forming a government, and the Greek people sent an apparently definite message that enough was enough.  As is so often the case though they wanted to have their cake and eat it too.  Although they violently opposed the cutbacks to the unaffordable benefits they had been enjoying for years, they still wanted the benefits of staying in the Euro as well.  Since another election has been announced, the poll results have swung widely, probably reflecting the people’s indecisiveness.  The fact is that Greece needs to live within its means.  It can either learn to do that by major reforms to their way of life and slashing the unaffordable benefits and tax breaks they have enjoyed, or they can have a sudden economic collapse whereby they completely default and leave the monetary union.  It is actually not that hard a choice to make, although of course each option involves sacrifice.  Major changes are needed to the way Greeks work, live and pay taxes, which if done correctly will see them begin to recover in another few years.  Of course they probably won’t ever enjoy the unaffordable fantasyland of the last ten years again, but then again few countries of the world are productive, hard-working or resource-rich enough to enjoy that.

The month saw three losses in our trading, all caused by fairly quick but severe whipsaws in Crude, Eurodollars and Corn.  Crude saw an upward spurt before collapsing with the negative economic outlook.  Some analysts say that the effect of the Iranian embargoes is now reversing as well, as Iran is supplying cheaper crude to the non-participating countries thus forcing down Brent and WTI due to reduced demand.  That downtrend is attractive, but unfortunately we cannot participate at the moment as the volatility risk is too high at present.  There is a chance though that we will enter a short position next month.

Eurodollars also saw a brief move higher before declining back into their range.  Although one would expect them to be increasing with the risk in the market, I think they are being held back by the fear in the European money markets forcing up the Libor rates. In fact they could head down lower as they often do (see November last year) in times of low liquidity in the European banking system.  I would assume though that in a repeat of that the ECB would engage in another round of LTRO.

Corn has been a difficult market to trade this year.  It has quite simply been a wild ride with massive up and down moves and no trends emerging.  We had one very successful trade late last year, but both trades this year have been losers, the most recent by 0.6R (a ratio of the loss to the initial risk taken).  At the moment this is another market that we are out of due to the excessive volatility – hopefully there isn’t the launch of a major trend!  If there were one though it would be unlikely to have a good risk to reward ratio, so I’m happy that we are out of the market at the moment.

Although the month saw another loss (-6.49%) we are continuing to apply an approach which is proven to work over the long run.  We continue to manage our risk, cut off our losers and await the outsized winners which give us our profits.  It is possible that those trades might be some that are open now.  We have a short position in the Euro which is profiting very handsomely at the moment.  Despite the pundits usual talk of ‘oversold’ conditions, we’ll see what eventuates on that position.  Our long position in 10 Year Treasuries could also be another one of those trades that makes our year.  After hearing that Treasuries didn’t have any more upside, they seem to be making record highs, even exceeding those of the financial crisis!  Fortunately we don’t listen to the pundits, and although we don’t know what the eventual result will be of these trades we will manage our risk and let them run to their natural conclusion.



  1. Greece is a spoilt child and had always received everything they wanted on a silver tablet. Now that Germany (or the whole Eurozone for that matter) is imposing stricter rules on them, Athens fights back and even insults Lagarde for her demand to pay their due taxes. They cannot be disciplined and need a radical change, or simply get kicked out altogether.

    Regarding trends, I believe that your EUR/USD position is a good play. Actually it should be accelerating lower after bulls were unable to stem prices at the monthly 200 EMA. I’m currently short the GBP/USD since 1.60 and want to continue holding it as I see another large wave down. Especially once the horizontal support around 1.525 is be penetrated. Gold is rising aggressively from 1515. I was looking to short it after the break, but this also appears to be up for another large recovery wave higher, so I got long. All in all we have been at a crucial juncture in all markets, and Friday has marked the decision where they want to go.

  2. I’d like to write another piece really on the whole lack of leadership and vision in the Euro implementation, and the response to the crisis. Its good that Germany are talking about a Banking Union etc, however people are talking about it being a ‘Krushchev-Kennedy’ moment. I don’t think it is, as they are still making it conditional upon some sort of fiscal union, and they are absolutely right in that. In fact now is probably the only opportunity where Europeans will be sufficiently desperate that they will agree to it (otherwise they would all want to continue having their cake and eating it too). If they can’t get to that point, then the Euro is doomed.
    I hadn’t realised about the monthly 200MA, in fact its quite hard to plot that on the online chart sites I use! We’ll see if the move has legs, it all depends on how the market reacts to Germany’s perceived softening and whether the ECB decides to come in with the big guns again.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s


%d bloggers like this: