Extreme volatility likely to continue to plague the markets for one good reason

After taking a break from blogging about stocks, Forex and other equities I certainly haven't stopped trading them. I've been more focused on my portfolio than keeping up a blog. But I've decided to start writing again about what's on my mind and trades I'm in or going to make. There is something that worries me in this current scenario and I'd like to share it in this opening post.

If you think the markets are recovering from Monday's plunge, you may want to think again. This not just simply a 'correction' as often referred to by many traders and investors. The Dow is slowly but surely cutting its losses after the 1,100 + drop (the most I've ever seen it drop in one day), somehow almost 75% is recovered, and they make it seem like everything is just fine and it was just a 'wild ride'... but is it? Some say it was an issue with computerized trading that may have affected Monday's crash. I believe that there is something a lot more serious going on! This may just be a prelude of what's to come and set the tone for the rest of the year and beyond.

Many (new) traders forget that there's still a major underlying issue, it's something that's not much talked about for some odd reason. It's almost like no-one really wants to hear about it, even though they know it's a major indicator regarding the the state of the markets.

Since the big recessions of 2008 this has been going on. It's called the Fed rate:

The Federal Reserve has not really adjusted the U.S. Funds rate since the great recession - not to the levels seen before 2008 anyway. To me that is pretty alarming. Yet the Dow is climbing and climbing - more money is pumped into the markets, but the rate still stays the same. Does that make sense? The US dollar is still very weak, which is a good thing according to some traders and investors. 'It makes U.S. products cheap so more American goods will be sold abroad'. But it actually hurts the U.S. / global economy - it only drives up inflation and only the 1% will benefit from it. This is just another bubble that's about to burst! The same scenario we saw in 2008!

10 years ago I started this blog as a result of the market crash that happened back then. All these 'financial experts' were all dead wrong. Everything was fine. Remember Jim Cramer saying "don't be silly on Bear Stearns"? He even gave a buy recommendation - and look what happened! Now guys like him are doing exactly the same thing. Nothing was mentioned last week about being cautious in the markets. In fact, there were reports that stocks 'were cheap' - and a few suggestions were given. See the resemblance? Once again only the wealthiest are only getting wealthier because they are playing the same trick in the book, and believe it or not most of them are falling for it.

What's happened in 2008 is going to happen again. Extreme volatility is going to continue to haunt the markets. Usually volatility is a good thing, of course you need some up and down swings to make money - extreme volatility on the other hand can hurt your portfolio, it simply carries a tremendous amount of risk.

Four essential indicators I'm using right now for trading equities and you should have your eye on are the VIX, the US dollar strength index, the Dow and the global markets. Right now the market crash on Monday is kind of brushed off like nothing ever happened, however the VIX is still extremely high: it doesn't add up, therefore use extreme caution when making a trade.

As of this time of writing the U.S. Dollar is gaining some its strength back, but the markets are still very wobbly. Again the core problem is the Fed. What do they know that the rest of us don't. Why haven't they raised the rates? Why do they want money pumped into the markets and not savings? So many questions that are unanswered at the moment. Whatever the case is, we haven't been in a sound trading environment since the beginning of 2000. Therefore I advise extreme caution when making a trade. If you do, keep a close eye on it and definitely don't use the 'set and forget strategy', and perhaps think about going short more than going long.

Next week after I've done some research I'm going to post a few tips and trading recommendations on the site.

Another recession like 2008?

The Dow Jones Industrial average lost more then 12% of its total value in the last three months.

A sign another recession is coming up? Will it be anything like what we went through in 2008? Most newscasts and articles on this topic claim that it will never be anything like 2008, the main reason being lessons learned from the great recession, banks that are better structured and have more cash on hand and a lower unemployment rate. Over and over again I hear; “This is not 2008”. But it makes me wonder, even with all those figures factored in, how do most analysts come to the conclusion that it will be nothing like we have seen in 2008? There's more turmoil in the world then in 2008, think Middle-East and Europe with their debt problems. On top of that the U.S has built up more debt, so bad the debt ceiling even had to be raised, doing so losing favor with the public. China, Brazil and other merging economies are becoming stronger and stronger, yet they claim it will be nothing like 2008. How about something like 2008 but worse? Something along the lines of the past three months something happened with the global economy. It was recovering at a pretty steady pace, slow but steady, something changed and we all have to figure out where to go from here.

I'm not trying to be all doom and gloom here, but as a trader I have to be cautious where to put my money. To tell you the truth I still believe the economy is recovering only at a very slow and sluggish pace, getting a lash once in awhile from the great recession but the bottom line is that the economy is recovering. I base that analogy on the fact that the unemployment rate is nothing like or heading towards what we have seen in 2008.

But in these volatile times it is hard to determine what works and what not.

Especially last week was a hell of a ride, something I've never seen before. One moment the Dow was down over 400 points then it was up about the same amount, quite a roller coaster ride if you ask me. Many people on- and offline ask me pretty much the same question when it comes to this subject; “what's going on and where should I put my money”. I'd be confident answering these questions under 'normal circumstances' if the banking sector wasn't performing so poorly, especially one giant in the playing field Bank of America, (BAC). 

I always try to be positive in bear markets like these (although it's pretty difficult) and look at it as a big bargain bin of stocks, how low can a stock go before it's cheap enough to buy?

I mentioned Bank of America earlier, take a look at the stock below;

with the help of fundamental and technical analysis and a bit of common sense it should be relatively easy to determine whether or not the stock price is bound for an upswing.

My point is, that I see a bear market as a positive thing, stocks are cheap – BAC being an example. In times like these look at the majority of stocks and compare them to their 'usual performance' under 'usual times' and determine if the stock looks cheap enough to buy. I wish I would have bought some stocks in 2008 because they were so dirt cheap.

On a last note and I really want to emphasize on this fact that I have been saying all the time about the level the volatility index (VIX, VXX) was trading; Since the beginning of this year I said it all along that anything that trades under 20 points is a bargain. The VIX is one of the most important indicators that you should have on your radar when you trade stocks, etfs or options. The VIX and the Dow Jones index give you a general idea where the economy stands, even at a global level; since the economies are all connected.

VIX now trading in extremely high territories and until this index is not going down to in the 20's again (normal trading levels) which will be soon (another reason I recommend a short position on the VXX, the ETF that tracks the VIX) I don't recommend buying any stocks right now, rather buying ETF/ETN's, something that's easier too analyse. Same goes for OIL and Gold (GLD). I see gold rising to the $2000 level by the end of the year... more about that in another post.