Market is pricing in a very slim chance rates will go up in 2015


FOMC Rate Hike Probability

Why are these probabilities important? They aren’t just gambling odds for market participants to bet on. These probabilities signal if the bond market is actually ready for a hike rate and if the Federal Reserve has correctly communicated their intentions. In other words, whether or not the bond market has discounted Fed intentions; and if the bond market agrees with the Federal Reserve based on the economic conditions. You see, the Federal Reserve doesn’t control interest rates, bond markets do. And when the Fed wants to hike, while the bond market doesn’t expect it (low probability), things don’t go smoothly. One of the worst FOMC mistakes was tightening rates in 1994, when the probability of a rate hike wasn’t priced in, which sparked a serious bond market crash.

Source: Short Side of Long


Three best practices of best traders


1. Increase your exposure to new and different ideas

2. Spend as much time learning from your trading as you actually spend trading

3. Manage yourself, not just your risk and your positions

Living an examined life – breakout!

Talk vs Do

Living an Examined Life

What unexamined assumptions do we have in the way we live our life? For instance, we expect presidents and movie stars to drive around in bulletproof limousines or big SUVs. That’s what they’ve “always” done. But Pope Francis, who has no problem attracting a crowd, goes around in a little Fiat. He continues to challenge other assumptions about what it means to be a pope. In other words, he makes an excellent case for living a more examined life.

One concept traders struggle with is that their investing capital doesn’t have to be invested at all times

S&P500 Index

One concept traders struggle with is that their investing capital doesn’t have to be invested at all times. There are times like the correction we’re going through now when you should have at least some of your money in cash in order to protect capital and to protect confidence.

1) One of the main reasons we should keep a larger than normal cash position during corrective markets is that 4 out of 5 stocks move with the general direction of the market…no matter how great the company. For example, during the financial crisis of 2008, Apple dropped from $200 down to $80, and that was right at the beginning of two of the biggest product launches in history (the iPad and iPhone).

2) Some of the best traders who ever lived, such as Jesse Livermore and Gerald Loeb, believe that you should only be in the market when probabilities are in your favor, and that the LESS you are in the market, the better.

3) According to the Harvard Business Review, since 1886, the US economy has been in a recession or depression 61% of the time. I realize that the stock market does not equal the economy, but they are somewhat related.

4) We always hear about dollar-cost averaging, buy and hold, and always be invested in the markets. These concepts sound great, but only during market up trends. When a correction comes, these concepts have hurt more investors than they have helped. For example, over the past 15 years we’ve seen two declines of over -50%! Keep in mind it takes a +100% gain to recover a -50% loss.

I simply respect and understand that it’s not always going to go up. When it declines, as it has the past few weeks, my goal is to protect client assets and to protect my confidence. This strategy of keeping large cash positions is more for traders and active money managers. If you are a long-term investor and don’t have the time to dedicate to your investments, I suggest you make the time…in case this correction gets worse. After all, it’s your money and if you’re not going to care for it, who will?