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The analyst framework occupies 80% of the time that goes into making an investment decision. The execution of ideas (trader framework) requires only 20%.  So, It's very important to develop your analytical skills so that you are not swayed by daily market swings, tips from friends, advice from pundits, the news media etc.

Everyday, financial markets are influenced by political news, earnings, economic indicators (unemployment numbers, GDP growth etc), energy prices, inflation/deflation, FED statements, natural disasters etc etc etc…

For ex// In March, Japan was hit with a 9.0 magnitude earthquake and tsunami.  How you trade this news?

An as independent Trader/Analyst I found this to be very challenging indeed but eventually figured it out!  And I will share that with you in future posts. 

Infact, I'll talk about each of the components (listed below) in more detail so you have a better idea of how to interpret and analyze these items. 

The name of the game is: How do you formulate an investment thesis and turn it into a executable trading strategy?  I spend majority of the time thinking in this mode.  It requires 80% analysis and 20% trade execution.

what do I trade?  I mostly trade stocks/ETFs!

So, where’s the trading plan?  Personally, I believe you should start with figuring out your investment philosophy and your beliefs about the markets.  Ask yourself why want to trade?  Why do you think you can  do it?

Most start with the idea that they can make easy money.  It’s far from the truth.  This is a profession like any other and can’t be learned or mastered overnight.  That is why I believe most people give up or end up losing their capital.  The ones that do make it  overcome many obstacles and persevere through the tough times and make it in a big way.

The framework I posted above is how I approach the markets everyday!  It’s an intuitive process now but not when I first stared out.  I had a piece here and there figured out but I could  never put it all together. It was only after I realized that the most important component (‘psychology of trading’) was missing.   Indeed, this final piece of the puzzle is what enabled me to become a consistently profitable trader.

So, If you’re just beginning to delve into the markets, take your time and understand that this is a long process that requires you to make many mistakes, lose a bit of money and have sleepless nights!  And if after weeks/months of frustration you’re still there but barely surviving, congrats, you’re halfway there…good luck!

I got into trading and investing because I wanted to build an expertise in financial markets.  I knew the only way to learn is to trade with real capital and dive into the markets with both feet. 

I knew it would help my career in the financial services industry if I developed a trading/investing skillset and pursue the CFA designation.

But quickly realized that many variables have to be factored in to analyze markets and stocks in general.

So, my quest began:

1st component was to learn to trade/invest

• so I started trading with real capital
• I studied great traders/investors on how they achieved success
• And I read many many books about trading and investing to enhance my knowledge.

2nd component was to learn to be an analyst

• For this, I am currently pursuing the CFA designation (Just wrote CFA L2 this June)
• Although it's a very tough program, the CFA curriculum is top notch! and I gained tremendous knowledge and  enhanced my analytical skills while preparing for the exams.

So, is the distinction between the 2 components that significant?

Can you master one component and do well in the markets?  I think it's possible.  But, personally, I think mastering both components gives you a upper hand vs the other market participants.

The diagram below gives you a breakdown of a company and it's stock:

An analyst looks at the real world metrics of a company and formulates an expected stock price based on fundamentals.  A trader on the other hand looks at the technicals to make short term bets on the movement of the stock. 

In the end, fundamentals trump technicals because earnings are what drive a stock price higher.

* – The above diagram is inspired by a presentation I watched by Ralph Acampora explaining the 2 components of analysis

I hope this post was helpful in assisting you to chart a path for your own quest to become a an independent trader & analyst

This is what I'm watching for in the markets to see how they shape for a rally going into the end of the year. 

My analysis of the markets is very simple! I operate in the daily/weekly timeframe and do not daytrade.  So, for me I don't need to know every intraday move and it's significance. 

So, as of Jun 20 there are several macro events that could have an adverse affect on the markets. 

• Greece is causing a lot of nervousness in the markets.  How will the world markets handle a default if Greece decides to go with that option.  This is particularly significant if it occurs late Aug/Early Sep. Traditionally, a bad time of the year for the markets.
• Of course, the end of QE2 (at least in it's current form) also has implications on the market's ability to rally from here. 
• And finally the US economy – With lackluster job growth and recent GDP growth reductions from the IMF and Goldman Sachs, the economy looks to stagnate in the next few months.  This of course doesn't help the markets either.

Below are weekly charts of the major indices!  The most noticeable pattern common to these charts is a possible H&S (Head & Shoulders) Pattern.  This is showing up on the weekly charts of the Dow industrials, Dow Transports, NASD and SPX.  However, the Canadian market (TSX) is signalling something different.

Normally, H&S patterns are bearish and signal a possible top.  But notice in 2010, the markets formed a similar H&S pattern only to see it fail and then rally from July 2010 to April 2011 of this year.

We look to be setting up for another possible H&S pattern fail and rally.  Of course, if everyone knew ahead of time, then the market will do something else.  But For now, it's worth watching.

Canadian Index (TSX) is a resource heavy index.  Interestingly, tt's signalling something different! but don't know what it is.  Maybe commodities won't lead the next rally? not sure! Will be watching this one closely.

• For a fund manager, Performing fundamental analysis is a lot easier.  They have access to analysts reports, access to management and sophisticated tools that enable them to make investment decisions.
• But if you're an independent trader/analyst, you have to exclusively rely on financial statements provided by the company.  And we learned from Sino Forest that financial statements are not to be trusted even if they have been signed off by a reputable accounting firm.

So,What's the solution?

• I believe all investors must incorporate some technical analysis in order to protect themselves from adverse downturns in a stock.  It's simply not worth one's time to hold on to a stock that's falling in price no matter how rosy the story behind the company maybe.
• Remember, Every stock must be sold! period!
• Take a look at the chart below, it should give you an idea of how you should have a plan to either cut your position or cut your losses

Here's a chart of TRE.TO a day before the debacle (June 1):

Follow The Analysts

• Following consensus estimates for stocks is an invaluable method to see if a company is being upgraded or downgraded.
• You can find this information any website.  In this case, I went to globeinvestor.com (click here). 

Here's how to interpret Analysts Ratings:

• Generally, you'd like to see analysts go from Hold -> Buy -> Strong Buy (i.e. A company's earnings are getting better and better).
• What you are now seeing for Sino Forest is the beginning of a downgrade cycle (i.e. Strong Buy to Hold and eventually SELL)

• Remember, typically analysts are behind the news.  Very rarely do you see an analyst upgrading ahead of earnings or downgrading ahead of warnings.
• You as an investor must anticipate what the analysts will do in light of the news disseminated by the company.  This is the only way you can either make money or minimize losses.

_{Source: globeinvestor.com}

Lastly, Follow Market Direction

• Remember 80% of a stock's move is attributed to market direction.  so, if the market is in correction mode or in a general declining, almost all stocks follow suit.  Your imperative is to either cut losses or cut positions ahead of time.
• Remember it's not worth holding onto a losing stock as the market declines.  Many stocks never come back even if the market recovers. 

Ok, I've presented a few methods that should help you protect your portfolio from substantial losses.  If you are unfamiliar with any ideas here, I urge to read more and educate yourself. 

Remember, every stock must be sold1

I'm back after taking a 2 month hiatus as I was preparing to write CFA Level 2 Exam (June 4)

So, Expect more posts from now on…

I sold most of my positions (98%) at the point indicated below (A day before TSX hit a double top).  Now, I'm waiting to short the market or go long.  Will have to watch the next few days to get a better idea of market direction

Yes, it seems everyone is bullish about the markets these days.  Then we have Laszlo Birinyi who's been a super bull predicting S&P at 2854 .  Here's a great article from Bloomberg discussing factors that could keep the rally going.

Some of the Factors listed:

Previous Bull Markets 

Even after almost doubling in 24 months, the S&P 500’s two- year return is about 36 percentage points below the average bull-market gain of 131 percent since 1962, according to data compiled by Bloomberg and Birinyi Associates. The 730-day rally without a decline of 20 percent or more compares with an average duration of 1,407 days, the data show

Profit Growth

Five straight quarters of U.S. profit growth and the biggest yearly increase since 1988 have held down valuations…The U.S. benchmark index is trading at 15.5 times reported earnings, compared with the average ratio of 19.7 at bull-market peaks.

Major Expansion’

S&P 500 companies will boost earnings by 17 percent during the next 12 months to a record $99.82 a share, according to analyst estimates

So is it possible for SP500 to hit all time highs

The Charts indicate that it is indeed possible.  Back in Dec 2010, I posted an article suggesting that SP500 could hit 1330 next year (2011).  Well, we achieved that target. 

For 2011 and beyond.  SP500 looks like it's headed for it's all time highs.  Posted below is a Monthly Chart of the SP500 going back to 2007 high of 1576. 

Chart Interpretation

What you're seeing on the chart is called a measured move, where the 1st leg is (666 to 1219) followed by a correction back to 1010 (38% retracment)  and the 2nd leg is exactly the same as the 1st leg (projecting target of 1576 or above from 1010).  

Ofcourse, the markets do not go up in a straight line.  Could we see all time highs this year, it's possible.  It's also possible that the whole rally could derail.  

I want to be clear – Forecasting Markets is very difficult to do, all we can do is consider possibilities.  This possibility of SP500 hitting all time highs is firmly ingrained in my head.  So, I will trade on the long side until the market conditions change.  so, keep this chart in mind.

Commodites Got Hit on Monday (Apr 11) mainly due to Goldman's sell recommendation on Oil.  

Below are TSX and Gold.  TSX is resource heavy and was hit hard Mon and Tues (Apr 11 and Apr12).  However, looking at the chart, the trendline seems to be intact.  Support comes in at 100-day MA and thats where the trendline support happens to be as well.

Gold's trendline is intact as well…Gold pulled back to the breakout point and reversed back up again.

One last thing: TSX seems to look very similar to the gold chart.  On Mar 30, I posted an article expecting a monster move in gold.  And we got that on Apr 5.  Now, TSX looks to be setting up for a monster move up as well.

I'll post another article focusing on SPX AND TSX..

Looking at the gold chart, it seems to be setting up for a monster move.  Few days ago, we had a trendline break but it has reasserted itself, and looks like it wants to run back to all time highs which could take it to 1600.  I'm watching this move closely! Let's see what happens in the next few days and weeks.  Clearly 1380 is major support right now, and if that breaks, we're in trouble.  However, right now it's aim is the 1450 level and an eventual breakout.   

DownTrend on SP500 broke today.  So far so good.  But we need volume to confirm this up move.   What's troubling prior trends have continued with meager volume.   This has always been a concern that markets are rallying on weak volume.  Here we are again, starting a new uptrend with anemic volume.  Will have to see how this markets sorts itself out.

I only focus on the SPX in this port, but looking at the Dow industrials, transports and QQQQs.  They all show the same pattern.