Know thy investor psychology - Business Times; April 25th

I came about to read the above article (Executive Money section) which i thought i share with most of you.

While most people debate on the strategy of using fundamental or technical analysis, I had often pointed out, that there is a third which i had often used, which contributes to global speculators/investors mindset. This would entirely explain the illogical explanation of how an asset class move in extremes.

Remember: Markets can stay much ILLOGICAL much longer than an individual can stay solvent.

There is no easy answer. To get a grip of how individual investor psychology work, one has to read countless of financial articles from various financial distributors to form an opinion of where the cattle mentality is headed.

Individual investors may use either Fundamental or Technical Analysis or both. There is NO right or wrong answer as long as Money is made!

However, to have a better undertstanding of financial markets and the possible directions of where the market is heading, WE use all three of them to form an opinion and thus the strategy in diversification, asset allocation, coupled with dollar cost averaging depending on the cycle of the market!

Glossary

Investing: Something to cheer about!

My speculation is that when you wake up later today, Global markets are set to rise at least another 0.8 - 2% until end of week taking cue from B Bernanke delivery of the Fed fund rate and statement.

In summary,

• QE2 will end in June,
• No change in Fed fund rates of 0-0.25% for another 1-2 Fed meetings (3 months)
• probabilty of QE3 has fallen;  as inflation has risen;

As a result

• Commodities add to gains there was no Fed surprise - Gold (closes at record $1528) silver and crude oil rose
• Commodity currencies strengthen as speculators take on more risk while VIX is at the low end around 15.35
• USD index closed at the low for 2011 at around 73.3!
• DJI, Nasdaq and S&P 500 (up 0.6% at 1356, highest since June 2008) all closed at record 2011 levels!
• US 10 year note yield rises 5 bp to 3.36%

If all is well, I would see continued risk appetite in equities, comodities and commodity currencies. Inflation to continue on the rise with respective countries using various monetary policies keeping inflation in check

However, risk appetite will be kept in check (temporary) with

• Geopolitical situation in MENA
• Earthquake (after shocks) in Japan and
• Possible situations in PIIGS with Greece and Portugal in focus

unless situations worsen.

Happy Investing!

Year to date – Review

Let’s wrap up the events that happen!

·         MENA tension – triggered Q1 bearish sentiment in Asia, higher oil prices to-date

·         PIIGS sovereign debt issues – have not triggered events in Asian markets, yet!

·         Japan – Earth quake, Tsunami and nuclear crisis – triggered Asian markets bearishness the week following Mar 11th

·         S&P negative outlook for US debts – triggered Asian markets for 1-2 days beginning Apr 18^th.

(We all know there are many negative sentiments always, but the financial markets do NOT move until the event is triggered. Just like Lehman and Greece (May 2010). We all know the event is there but constant monitoring will identify the trigger and pro-active (and reactive) management will help us to seek low yielding asset classes!)

As of April 26^th, today

·         A much lower USD index at 73.8 thereabouts – higher commodity prices.

·         VIX (Volatility index) - 15 to 16 thereabouts. < 20 is considered low!

·         QE2 consequences – lower USD, much higher commodity prices, property prices, higher inflation,

·         US markets closed at highest point for Year 2011 – a better corporate earnings report (so far)

·         Asian markets recovered with S Korea breaking new high, STI back at 3200 level today, HK back at 24000 level, Mumbai – rose from 17500 to current 19500 and so on.

My interpretation to the market bullishness

Investors ignoring negative sentiments, taking opportunity to buy when equities retrace

USD is weak and VIX is comfortably LOW. There is (still) an on-going sign of Risk appetite seeking higher yielding assets in MOST asset classes

From now onwards, we will be watching how the Feds will conclude QE2 in June. There MAY/ may not be a discussion by B Bernanke tonight following FOMC rate decision, Thursday 1230 am. BUT analysts will be screening his speech/language word-by-word to decipher where his directions would be!

S&P issues a negative outlook on the US debt rating

Fundamental, Techincal or global investors' mindset?

From East to West,
Japan - earthquake, tsunami and nuclear crisis,
Europe - PIIGS and now
US.

I stress again and again, markets are extremely volatile. The consolation is that despite the volatility being higher, the trend is upward sloping. Caution will be noted, if techically, the support is broken!

US - The latest being Standard & Poor's, (becomes the first major credit rating agency) to issue a negative outlook on the US debt rating, while affirming its AAA rating. (The USD Impact was less straight forward).

If we get down to a point where the U.S. has its debt downgraded, the deflationary effects will be felt globally, A lot of credit is priced off U.S. denominated debt and those effects will be felt around the world.

The news bore particular significance when S&P said there is a 1/3 chance of a credit downgrade in the US long term trading within 2 years. The news immediately triggered sell orders in the USDX.

So the MAIN QUESTION BECOMES, will the USD extend last weeks selloff on the S&P news (the USD actually strengthen!, ironic it may sound)?, OR, will it continue to stabilize following the accumulated selloff in US equities and US treasury bonds on the risk aversion play?

The answer to that question is anybody's guess. In other words, the direction the herd is going.

While risk aversion is at play, commodity currencies weaken as a result of unwinding of carry trades. The carry trade currencies - CHF, JPY and USD strengthen!

Gold surge to a new lifetime high of USD 1,497.60 while Silver is at 43.54! This would continue until QE2 is withdrawn. Meanwhile, Crude Oil is nuetral.

I suspect, the Asian markets will follow through, Tuesday morning. From past experience, a similar event lasted 1-3 days.

What would i be looking for?
Improved investor sentiment, for e.g.  from a better US ciorporate earnings season, more M&A or response from US spokesman on improved debt situation.

What might happen in 2011 Q2?

From a fundamental point of view –

·         The much awaited US Non Farm Payroll data (Friday, 2030 Singapore time) exceeded expectation!

·         Unemployment rate was much better at 8.8% - improved US Economic data,

·         Coupled with China Manufacturing data growth

From the above (two biggest global economies), global speculators tend to take on more risks!

As a result,

Currencies - Commodity currencies (USD, NZD, CAD) strengthen, carry trade currencies (JPY, CHF) weaken.

Gold (safe haven) plunged. Global speculators leave safe haven and take on riskier assets while

Crude oil strengthen as a result of economic growth leading to higher demand, coupled with uncertainties from Libya and MENA.

What does this mean?

Carry trade is getting attractive!

Equity markets will strengthen as global speculators will take on more risk from improving economic data, encouraging corporate earnings release, future M&A.

Situations in MENA and Rising oil prices will continue to prompt some caution but currently not enough to outweigh the bullish sentiment.

My speculation

I am speculating

Equities - South East Asia, Korea, India, Thailand, Singapore and China to perform better than their peers.

Commodity currencies to continue strengthening against the USD, particularly the CAD.

JPY and CHF to weaken against the USD with carry trades activities and the strengthening of US data

Mining commodities – Gold to weaken as carry trade activities increases, with caution on flight to safe haven from MENA and Japan’s nuclear crisis. Crude Oil is heading further North with improved global data, M&A – factors for global growth.

What’s important this week in currencies?

Europe’s monetary policy announcement on Thursday and chatters from Fed officials on QE2 and inflation concerns and potential rate increases.