Having traded through 2007 in very volatile conditions most market participants have taken on board the need to ensure that risk management is at the forefront of their plan. Even with risk management it has been a very frustrating experience for many attempting to trade over the longer term. As large up and down swings in index and share movements have taken place, many who cut losses or attempted to hold profits have seen positions regained within days or watched profits disappear as reversals took hold.
Whats worse is that it didn’t matter if the positions were taken based on a technical or fundamental analytic approach. Volatility was such that bulls and bears of both persuasions saw stops hit. It wasn’t just stock markets that saw this trend, commodities, bonds and forex markets repeated the picture of large swings in prices and increased volatility.
Many in the technical analysis camp saw usually reliable set ups taken apart as rapid and large moves in price left chart indicators lagging far behind. Followers of Elliott Wave Theory saw set up after set up on the charts appear to be ready to point the way, only for the set up to fail at the crucial moment. Whilst the price volatility for short term traders provided many opportunities even they could not claim to be immune from sudden and violent changes in trend.
After all the talk of credit crashes, slowing economic growth, coupling or decoupling of economic reliance and weak vs strong currencies the stock markets, in the main, stayed within a large sideways trend through the latter half of ’07. As most traders know, relying on the past to point the way into the future is not the most reliable way of planning a trade. With stock markets ignoring the larger economic outlook at present and indicators lagging far behind price movements is there a way for traders to get an early warning of a change in the larger trends?
I believe there is. I do have to base this belief on one or two suppositions. Whilst this may seem like a rider to what is to follow, it should be taken more as a warning that just because it happened before, it will happen again. All associations break in the end. However as the connection between the warning and price action cannot be broken without huge changes in price levels and thus warning traders that something is different, the suppositions stand up reasonably well.
Firstly I firmly believe that stock markets are being infused with money via the Yen carry trade, either as direct overseas investment from Japanese investors or from Financial Institutions implementing carry trades. Both are looking for higher yielding returns, not just in stocks but also in bonds and commodities. Its stock markets that seem to have had the best flows over the past 2 – 3 years. The second supposition is that the carry trade continues to be important to the level of stock markets ahead.
There is not enough room in this article to show all the relationships so I will restrict it to the Yen vs the Dow. Below are 2 charts. One is the daily chart of the Dow over the past year, the other is the same specification for the Yen Index. The Dow chart has some trend lines and patterns drawn to help identify important moves, the Yen is showing a longer term trend line as support.

The longer term relationship between the Dow and Yen is an inverse one. Rises in the Yen show it is being bought as Japanese investors sell the Dow and repatriate their money or as Financial Institutions unwind carry trades by buying back loans in Yen. As the Yen rises the Dow falls as the assets are liquidated. The converse is true too, as Yen is sold to buy dollar based shares, the Dow rises.
Currently the Yen is rising from a support line. Previous moves higher from this support have been accompanied by large falls in the Dow. It should also be noted that the support is now in a clear rising trend. If that support line is broken, the Yen could retrace a large part of the up move from the June low sending the Dow higher.
As I mentioned earlier, previous trends may not hold true forever but I believe we may have just received an early warning of further volatility and its direction into 2008.

Market Snippets
Is Mr Buffett riding to the rescue or has he seen an opportunity to take a strong position in a weakening sector? Either way, he is moving quickly to take up business that others cannot. On Friday last week Berkshire Hathaway Group bought ING Group reinsurance unit NRG N.V for approximately $435.7 Million. Mr Buffet has already started business this week.
Also in the US, worries about manufacturing rose as the December Manufacturing ISM figures were released revealing a fall to 47.7 from 50.8, showing contraction. Prices paid rose to 68.0, employment at 48.0, new orders at 45.7 and production at 47.3. All the sub sectors showed weakness.

Commentary by Mick Phoenix

on behalf of An occasional letter from The Collection Agency

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. The views in the article are for informational purpose only.