Welcome To The RBJ Financial Group Market Insights Page!
This is a new addition to our site that we've decided to start for 2015. Occasionally as time permits, when we feel there's something important and valuable we want to share publicly, we'll post it here.
This originally started out on The Market Doctor™ Blog, but was later decided that maintaining a blog wasn't going to be a high priority. The information nevertheless was valuable, so it found its way here for your convenience and benefit.
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2015 Market Outlook:
January 15, 2015
Focus: S&P Futures (ES)
This Index is correlated to the Dow Jones Index and will give you an overall general sense of the market as a whole. If the fed does not intervene yet again with another artificial pump, we can expect more downward movement as the market is setting up more and more bearishly.
What does that mean if you're in the market mid to long term? It's a question of whether you're interested in sitting through a bit of an old shaky roller coaster hoping for the best outcome.
Keep in mind that aside from any current pressures economically or on the geopolitical scene, the markets lose back ground they've gained and correct approximately 10% every 12-18 months on average.
That's money you have to make back up before you continue growing your capital again, and this isn't taking into account the loss you experience from inflation along the way.
Since we are not clearly at or near an objective exhaustion point in the market as 3D Apex Predictive Failure Technology™ is so adept at analyzing, you can expect your patience and stress levels to be tested by the current wish-washy and indecisive markets. There simply won't be a clear level of conviction to move up or down at this current stage, without first working through the current murkiness of the market's confused posture.
Basically, the upside potential isn't worth the downside risk at this stage in the market's tone.
The realistic upside potential from all measurable indications is approximately 6%-12%. The downside risk is easily 12%-36% and quite possibly more if the pending correction is indeed allowed to play out as the market is indicating.
Whether a full crash is allowed to ensue from that point into a 50% correction is debatable. However, given the current and recent posture of the Federal Reserve, it's not likely to happen in the near short term. The indications currently suggest a slower rhythmic move to the downside rather than a crash-type scenario from here.
If this plays out, what is likely to be the outcome from a probability analysis standpoint, coupled with recent historical tendencies, is a move down between 3%-12%, with a POMO (Permanent Open Market Operations) move back up towards 1,990 and 2,200 price level.
POMO: When the Federal Reserve buys or sells securities outright in order to permanently add or drain the reserves available to the U.S. banking system.
This scenario would set up the market for a more significant correction that would be more likely to push the market down a steady slope towards a more significant 15%-30% correction from there.
That type of correction may cause the market to capitulate to a deeper move towards the 50% mark as we saw in 2000 and 2008.
If that occurs, we would have to assess the bridge we'd have to cross at that point to know where the market is likely to go from there.
The main driver here is whether the Fed continues to pump the market or decides to let things go naturally for a while to let off some of the artificial pressure created by the fiat printed currency.
So with that in mind, we personally prefer to stay in cash out of the market and only enter for blatantly advantaged situations that produce short term high probability, high reward/low risk profit opportunities to mitigate the unnecessary exposure to the volatility of current geopolitical and economic risk the world is facing.
It's important to clarify that the above analysis is based on highly objective data points that produce probability outcomes utilizing The 3D Apex Predictive Failure Technology™.
See "what is 3D Apex Predictive Failure Technology™" for details on our approach and methodology. With that in mind, we must state that anything is possible in the market, but we don't want to seek what is possible. We want to seek what is probable.
We all have a love/hate relationship with this basic investment element. Most misunderstand or misapply it. Few truly have mastered it.
Because, without risk…there is no reward!
However we want the best of both worlds… A low risk, high reward opportunity.
There are many types of risks in the markets to be defended against. When buying and selling in the world's financial markets, whether for the short or long term, the longer you trade, the higher the chances become that you will have to deal with each of these types of risk.
Other than the risk of your trade’s failure, you have the risk of slippage on entry or exit, gap risk if you hold overnight, risk that your broker or another third party could go bankrupt, exogenous risks from world events, coups, wars, terror, and acts of God.
Many traders just assume that there is nothing they can do about the risks perceived as “systemic,” such as unscheduled news or world political events. The reality is that each type of risk CAN be mitigated with proper strategy.
We have systematically attacked each type of risk, and here are our solutions:
Turning our focus inward to the intra-day session allows us to reduce the risk of a news event occurring while the markets are closed which might produce a violent “disaster gap” opening the next day.
The drastically reduced time exposure of an intra-day position makes it extremely unlikely that we would have an open position if/when a shock event hits the markets.
By measuring and objectively being able to identify where liquidity pools will form, we greatly reduce the chances for missed fills or slippage.
To avoid hidden counter party risks, we choose our brokers well. These brokers weathered the recent shock event well when the SNB (Swiss National Bank) lifted the Franc’s peg to the Euro. This caused a total panic in the market, where many traders got their stops filled after the franc produced a sudden and immediate 30% gap.
These uncontrolled losses have caused one forex broker to file for bankruptcy, and strongly affected other top forex brokers, many of whom have needed to seek outside capital infusion to keep them afloat.
Ross Ditlove, CEO of MB Trading, our choice for trading FX, had this to say after the dust settled…
“Our Forex customers on all of our integrated platforms, including our own MBT Desktop Pro platform, cTrader, and MetaTrader, saw almost no lapses in trading availability. There were definitely fast market conditions in pairs like the USD/CHF and EUR/CHF that caused price gaps for some customer orders, but overall, the impact was immaterial.”
MB Trading also reported that only a small percentage of customer accounts were negatively impacted and that there was no consequential effect on the firm's net capital requirements due to the news.
And the other broker, Interactive Brokers, who is our choice for stocks, futures, and options, took a loss of $120 million, which amounted to just 2.5% of their net worth. Obviously, this reflects how well diversified they are (a critical factor when choosing a broker).
While no risk management effort can ever be 100%, we sleep well at night knowing that the odds are minuscule that any losses will come outside of our normal procedural losses during trading operations.
By focusing on minimizing risk, you can outperform your peers just by avoiding a few of the surprise losses that many of those you compete against will have taken.
Remember, every loss you can avoid through proper actions has the same impact on your bottom line as a winning trade…Don’t believe this can be true?
Imagine that you are up 10% for the year. You see a trade, but choose to pass on the opportunity because you know that there is an important central bank meeting. The results of that meeting cause a knee jerk reaction in the markets, which would have triggered your stop loss had you taken the trade.
The 1%-2% you avoided losing, puts you ahead of all of your peers who got suckered in and took a loss on that trade. The next winning trade they get will have to fill in the hole of that loss before any new performance levels can be hit, while you get to immediately add your profits to the bottom line.
With our "manage risk first" focus, we substantially reduce the risk to our capital, so we never wake up at night with a nightmare of getting “the call” that tells you your net worth has sustained a financial disaster. We look for the special situations that deliver to us our alpha, and trade with calm and without stress as we know our money is on the best possible path to growth.
The Swiss Franc debacle has already taken its toll on a number of brokers, and now the news of the macro hedge fund’s losses are coming in.
One company went from 800 million under management to a total disaster after losing nearly all their capital on just one “blow up”. This highlights the hidden “risk of ruin” that lurks inside many traditional leveraged hedge or pair based strategies.
Our strategies all seek to avoid risks of this nature by trading only AFTER a market has reached an extreme in order flow. By interacting with markets that have ALREADY exhausted themselves, it radically reduces the odds that there is any substantial liquidity lurking out of market to sweep in and cause an uncontrolled loss.
And to those who excuse their losses by blaming them on “manipulation,” I would challenge them to look deeper at their own edges. We live in the time of quantitative easing by the world’s central banks…OF COURSE there is manipulation…the banks are deliberately and openly injecting liquidity in an attempt to keep the markets up during this time of economic crisis.
Why wouldn’t you plan for that force in the market and exploit it’s predictive and cyclical nature?
No one perhaps is better at “gaming government policies” than Goldman Sachs. Much has been written about the ex-Goldman folks who are in leadership positions within the Federal Reserve and the Government. In spite of this advantage, Goldman just reported that their profits from trading operations is down 12% compared to last year’s performance, which indicates to me that perhaps the “crony capitalism” edge is eroding as we come to the end of the QE era.
For market participants utilizing the power of 3D Apex Predictive Failure Technology™, a “bad market” is simply a boring market without many qualified setups. Case in point is the action so far this January. It has been thin and by any objective standard has been pretty terrible.
Yet our proprietary operations continue to produce; albeit, we are trading a bit slower and less frequently than we would in a “good market.”
Of all the trading opportunities we have uncovered this month (at the time of this writing), only three setups have survived our rigorous qualification process.
All three of these trades produced a healthy profit which combined has generated double-digit returns, and our capital was exposed to market risk for a grand total of 131 minutes out of the 4,680 minutes that we have been on the charts this month (in other words, we've only been exposed 2.8% of the time the markets have been open so far for January).
That leaves us sitting on our hands 97.2% of the time. This is horrifically boring, true, but you can’t argue with the results that choosing quality over quantity constantly delivers to us no matter what the current condition of the markets.
Having the emotional maturity to be that choosy is something that sets us far apart from the majority of other market participants. This gives our capital a level of protection from risk that is available to all, but that few ever target deliberately or enjoy, thanks to 3D Apex Predictive Failure Technology™.
To understand the full power of what drives our investment model and philosophy CLICK HERE to get details.