Newsletter: 14 May 2023
What’s Going On:
US Inflation Hits Two-Year Low
Inflation has been one of the major themes in markets over the last 12-months and I think we are all aware that the cost of living has risen in recent years. But the past week has seen some good news with inflation in the USA falling for the tenth month in a row.
So what are the markets to watch and where might the opportunities be? There is an obvious example here.
The main one for me is the US dollar – specifically, the US dollar index. This is the dollar against a basket of other currencies. You can read the full breakdown here.
US Dollar Index: Last 25 Years
As the Federal Reserve raised US interest rates to try and combat inflation, the dollar index benefitted up to September last year, hitting a 20 year high.
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But markets are always looking ahead and there comes a point when the future impact of the likes of interest rate rises is “priced in” and I think that’s what we have seen for much of this year as the dollar index has slipped back to a 12-month low.
US Dollar Index: Year To Date
Of course, there comes a point when trends change and I wonder if what we have seen over the last three months for the US dollar index is the sign that this market is making a base. Only time will tell – but clearly it has an impact on many other assets. It remains one of my favourite markets to watch.
Trading Tip:
Dull, Dull, Dull
Trading is meant to be exciting, isn’t it? Sat in front of loads of screens. Buy low, sell high. Log off and spend the rest of the day deciding what colour your new Lamborghini should be.
Of course, that is not the reality and I have found the last six weeks or so not the most exciting with plenty of the markets I watch trading in a sideways range. So, what's the trick to prosper when markets are dull?
For me it comes back to something I have mentioned before – patience. I think for a lot of us, it is hard to be patient when trading. We put a trade on and then watch it, wondering why the market hasn’t immediately agreed with our great insight and started moving in the direction we want.
This is the case even when markets are more volatile - I find it is rare that the market moves that quickly after I have opened a trade so it is far more useful to log off and go and do something more productive.
I still prefer medium-term trades over the short term. I realise that a lot of people have an appetite for short-term trading which is why I added that module to my trading course last year.
I then traded that approach for three months and it made around 55% return – you can see the full details here.
But short-term trading is hard work. Let’s not over-egg it – it's not hard work like having to do a shift in a hospital, or hard like lugging bricks around all day on a building site. But it is mentally draining. And because you are going to have losing streaks along the way, it can be tough from a psychological point of view, particularly for newer traders. This is another reason why so many lose and give up - it is not as easy as you think it is going to be.
NASDAQ 100 Index: Year To Date
So, my tip – and probably one I have mentioned before in these newsletters – is when markets aren’t doing what you think they should be then take a step back. Don't push it just for an excuse to have a trade. Perhaps take a look at the bigger picture and trade higher time frames.
One of the longer running trades I have at the moment is on the NASDAQ. I put the trade on in the middle of February and that trend is still chugging along and it is around +800 points in profit. I did a similar trade in this NASDAQ video here.
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I think if you are finding trading difficult then looking at the bigger picture should help reduce the stress and perhaps even results in a much healthier P&L.
What Am I Trading:
Is Copper Set To Soar?
I am still bullish on stock markets, particularly the NASDAQ 100 and have had a trade running on that for the past couple of months, looking to see how high this recovery will go.
But there is another market that is perhaps being held back by the ongoing worries about a global recession - and I wonder if there is going to be an opportunity here in the days and weeks ahead.
The price of copper is historically an interesting one for financial analysts. It is often referred to as a good leading indicator for the economy. Because it is used in so many business areas e.g., building, electrical, transportation - then strong demand for copper can suggest that industrial activity is increasing - and vice versa if copper demand drops.
Copper: Last 10 Months
Of course, this isn’t perfect and no rule of thumb works every time. But we have seen copper stage a recovery since last summer and the price has rallied by around 20%. For much of this year, the price has been in decline which has brought it back to the lows from early January. Back then, this was seen as an attractive buying area and there was a strong rally.
I wonder if perhaps the pessimism towards copper has been overdone by fears of a global slowdown. I don’t have a trade on yet but I think it is an interesting one to watch to see if the trend since July resumes.
As usual, trade examples are for educational purposes only - always do your own research.
Who Do I Trade With?
We are spoilt for choice when it comes to brokers and trading platforms and, on the face of it, there is not much to choose between one company and another. Which is an interesting point – if we are all looking at broadly speaking the same information then why do so many struggle to make money?
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An important consideration for me is the analysis of my OWN trades. Where can I improve, where do I have some possible bad habits - and how can I fix it. I made a short video explaining why I trade with who I do – and you can try them out too.
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You can watch the video here.
That's it for this week.
Good luck with your trading.​
​David
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