2008-11-12

Volatility and Range Bound Market

General Markets

The markets tend to be in two phases - trending and range bound. Trending markets are like thundering herd of bulls or fierce army of bears attacking fearlessly, pushing every thing in their path relentlessly, pausing only for a short breath from time to time. Range bound markets are like hand to hand flight between pigs and vultures with bulls and bear firmly entrenched, peeking their head out from time to time to fire a bullet here and there and then going back to their trenches. Neither side gives up their position and pigs and vultures end up losing money in the process. However any one with experience to combat fighting from the trenches (or with benefit of having read Joseph Heller's Catch 22) knows that life in trenches is not very exciting and finally something or someone has to give way and then the trend start again.

We seem to be stuck into those ranges lately and these seem to the treacherous times when one has to sit in filthy trenches and wait for trends to emerge. Any one brave (or mad) enough to venture out charging at the other side is likely to get torn to pieces. This explains the lack of updates from my end for sometime.

My view points are that October has set lows in the equities markets (and highs in the bond markets) and I am trading accordingly in that line but using more "options" instead of raw "futures". This can help limit my losses and also allows me to get ready for the breakout it arrives.

Some of the commodities are getting interesting as well. Cotton (CTH9) appears to have bottomed out and I would expect bounce soon but once again I lie in wait before a clear signal is on cards.

Cocoa (CH9 on liffe) and Coffee (DF9 on liffe) appear to be making short term high before coming down once again. I have traded them from the short side and I have been out of this trade as per previous updates. I remain on sideline to take next position. So the story can be that people in recession are more likely to clothe themselves instead of indulging into a hot mocha with choclate muffin.

Oil (CLZ8) appears to be following stock market tick for tick and the pricing is more demand driven now then supply driven. However, I feel that such low prices in Oil will sow the seeds for next bull markets as the lack of investment in alternatives and new production will land us in the same (or worse) situation when (and if) the world economy recovers again. So I lie in wait for a turn in Oil before becoming a bull again however current market is too volatile (and has some downside risk) before taking such positions.

As of now I remain short of Gold, Long USD and short TBond.

And I lie in wait in boring smelling filthy trenches.

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-VS