As promised...here goes another looooong story.... I've got to break it into 5 parts just for this chapter.
StockRats now explain: how to read and ride the wild market [Part 1 – The Big Ride]...
• If you love the big money, you've got to love the big economy. It's the only thing that will show you the path to maxing out on your investment return on the stocks.
• If you love the quick money, then you’ve got to learn to read the market episodes.
One day at the aquatic shop where Rex is working...
“Rex, we’ve got some questions about our fishes. They seem to be quite...”
“Sick? Not a problem StockRats. You’ve asked the right person. I’ve got all you need to know about your fishy at the tips of my claws.” Rex said proudly before we could finish our question.
“How you know that?” We were intrigued by his spontaneity.
“Come’on. It’s common sense. It’s all in the plastic bag you’re carrying. You know my dear friends, the trick in keeping your fishes merry isn’t in the food pellets, fish medicines, and water pump that you’ve just bought from our shop. The secret is in the water that your fishes live in. Just focus on keeping the water quality right and everything else will fall into place. Have you forgotten what I told you? Well, it took me a while to figure that out, but you know, as I always did, I managed to find the Holy Grail.”
We raised our whiskers at the brilliant point he made. It makes a lot of sense that we should place our emphasis on the knowledge of maintaining water conditions and stop looking everywhere else for answers on why our fishes often fall ill and die. The water is the place where the fishes live. Wow!
“So, StockRats how’s that for a quick fix? Cool?”
“Yeah well, sure. Thanks. It makes a lot of sense. Really, how could we thank you Rex?”
“Wanna thank me? Tell me your secret.” Rex looked at us in a shrewd way, twitching his eyebrows.
“What secret? We’ve got lots of them. Which one are you referring to?”
“How do you read the market direction? But make sure it’s worth my trade-in.”
“Oh, I see. Well, Rex, move a little closer here so that I can speak into your ears...only your ears.”
“It’s by taking the pulse of economic health.” we could hear it echoing as the ear was so huge.
“What? Come again!” Rex roared. Obviously he needed some reassurance on this one.
“It's of the same principle, Rex. Since you are a fish fanatic, we’ll use the fish and water to explain. Imagine the listed companies were fishes. Whether the fishes are healthy, happy, sick or dull will depend on the water condition, right? That’s what you’ve just told us.”
“Well you sure learn fast guys. Go on, I’m listening.”
“Now, the water condition is equivalent to the economic condition which companies operate their business in; just like fishes live in water, businesses ‘live’ in the economy. A weak or recessionary phase of economy will put stress on the businesses throughout the various sectors and industries within its framework, causing some to fail or collapse while majority of them struggling; it’s like the oxygen level becoming too low in the water, and for the economy, it’s the money supply. On the other hand, when someone [Obama] comes along and clean up the tank [banking sector], change the water [CEOs], fishy [other businesses] starts to get well, but some [Lehman, Freddie Mae] might have already died. It's the same with an economy on the recovery. And when the economy becomes robust again, most businesses will be busy with activities as well; and that's when stable water condition promotes breeding among the fishy. Coincidently, water contracts and expands and goes in cycle just like the economy; it either contracts or expands, in cycles. To remember, just think that businesses (fishes) live in the economy (water)”.
“I can see your point, but I only become more confused with the economic indicators pointing all over the place. I’d be better off throwing the dice. Just yesterday, the market was happily celebrating FED’s decision on keeping the interest rates as it was and so was I. I thought everything was gonna be fine and I happily counted my profits. But look what happened today, all my profits are wiped out because of the lousy home sales figure and the creepy unemployment rate. I am sure I heard them said the economy was well on the recovery track just the day before. And these contradictions are making the market moves like a headless zombie. My friends had told me that since they started trading the market, they have learnt to put up with their girlfriends’ tantrums and unpredictability better. I didn’t understand at first, but now I know what they meant. You’ll appreciate women more when you become a trader.” He paused before continuing with his complaints.
“And you know what’s the most annoying of all? It’s when you watch before your eyes your profits vanish; all because of some stupid comments from who-knows-who and the market falls. Why does the market bother to listen to a bunch of suckers who are never right about their forecasts? If you don't believe me, let's make a bet on the next forecast. I bet it must be either ‘worse-than-expected’, ‘not-as-expected’, ‘never-expected’ or ‘better-than-expected’, but will never be ‘as-they-have-expected. The odd will be 1 pay 100. I mean what are these guys paid for? To confuse the market? If time and again they are missing the mark, not once, not twice, but countless times, what’s the point of having them make these forecasts at all? I just can't see the purpose behind all these. If they are not good at it, might as well don't do it. Not that we can't wait for the actual figures instead. Why create all the extra confusion? Haven't we had enough already? And now you’re asking me to use the economy to read the market direction, how do you expect that to be of any help when it doesn’t even know where it should be heading?”
“Now Rex, we can see that you are really confused. And you are confused not because those analysts are making it confusing but because you are confusing yourself. To get the market direction, you only need to know one thing about the economy amongst the many indicators. All you have to know is whether the economy is expanding or contracting; like plus or minus, positive or negative, period. That’s it. And that is the single vision that the big players hold. And it is this ‘faith’ that creates the nice gradient on the chart amid the randomness and ‘uncertainties’. When the big players get this point clear, expand or contract, they go super long bias, occasionally ‘playing along’ with the market on the bad news, making it looks really scary and uncertain, shaking weak hands and the panicky. All news of uncertainties, opinions and comments or any concerns do not matter as long as they know they wouldn't derail the economic growth momentum. And the key is that these big players know how to differentiate between news, comments, opinions and what fact is.”
“Huh? What’s the difference?”
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