Global traders and investors were quick to act upon the ‘sell in May and go away’ idiom last night, sending the major indices sharply lower on the first day of the new month.

European stocks declined, paring an 11th straight month of gains, as a report showed business activity in the U.S. unexpectedly shrank this month.

U.S. stocks fell, dragging the Standard & Poor’s 500 Index from a record high, on slower growth in American payrolls and manufacturing as the Federal Reserve said it will maintain its bond buying to support the economy.

The S&P500 fell 0.9% to 1,583, whilst the Dow Jones slipped 139 (-0.9%) to 14,701. More than 6.6 billion shares changed hands on U.S. exchanges, or 4.4% above the three-month average.

Gold fell the most in two weeks as the Federal Reserve signaled it is ready to curb a bond-buying program as needed and inflation remained in check, eroding demand for the precious metal as a hedge.

Gold futures for June delivery retreated 1.8% to settle at $1,446.20 an ounce on the Comex in New York, the biggest drop since April 15, when prices slumped the most in 33 years.

Oil fell for a second day on signs of economic slowdown in the U.S. and China and after an industry group said U.S. stockpiles climbed for the first time in three weeks.

Crude for June delivery retreated $2.60 (-2.8%) to $90.86 a barrel New York Mercantile Exchange.

In currency markets, the US Dollar Index fell for a fifth session as the Federal Reserve said it will maintain its bond buying at a pace of $85 billion a month and is prepared to raise or lower the level of purchases as economic conditions evolve.

Today’s session will bring us data in the form of building approvals and import prices, both slated for release at 11:30am, AEST.

 

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Global markets rallied overnight amid solid US economic data and optimism central banks will maintain stimulus plans boosted sentiment.

European stocks rose, pushing the Stoxx Europe 600 Index toward its longest streak of monthly gains since 1997, as Italy formed a new government and as U.S. consumer spending unexpectedly increased in March.

In London the UK’s FTSE 100 added 32 points (+0.5%) to settle at 6458, whilst the German DAX added 59 points (+0.8%) at 7874.

Stateside, the S&P 500 rose 0.7% to 1594, topping a record close of 1,593.37 reached on April 11. The Dow Jones increased 106 points (+0.7%), to 14,819.

The S&P 500 has climbed 1.6% in April and is poised for its sixth straight month of gains, the longest streak of advances since September 2009.

The bull market in U.S. equities has entered its fifth year as the S&P 500 surged 136% from a 12-year low in 2009, driven by better-than-estimated corporate earnings and three rounds of monetary stimulus from the Federal Reserve.

Gold futures rose on speculation that the Federal Reserve will maintain bond purchases to bolster the U.S. economy, while demand for coins and jewellery climbed.

Gold futures for June delivery gained 0.9% to settle at $1,467.40 an ounce on the Comex in New York. The price headed for the biggest monthly drop since December 2011 after entering a bear market on April 12.

Crude rose to the highest level in more than two weeks as the Standard & Poor’s 500 Index approached a record on optimism that central banks will maintain economic stimulus to bolster growth. Oil for June delivery climbed $1.50 to $94.50 a barrel on the New York Mercantile Exchange, the highest settlement since April 10.

The US dollar fell against 14 of its 16 most-traded peers before the Federal Reserve opens a two-day meeting tomorrow amid bets it will maintain bond purchases under quantitative easing for the foreseeable future.

Today’s session will bring us data in the form of Private Sector Credit, at 11:30am, AEST.

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Global markets are mainly weaker on Friday amid weaker than expected U.S. GDP numbers.

European stocks fell, paring their biggest weekly rally in five months, as companies posted financial results that disappointed investors, while the U.S. economy grew at a slower-than-expected pace.

U.S. gross domestic product rose at a 2.5% annual rate, Commerce Department figures showed today. The median estimate of 86 economists surveyed by Bloomberg called for a 3% gain.

In London the UK’s FTSE 100 shed 16 points (-0.3%) to settle at 6426, whilst the German DAX lost 18 points (-0.2%) to close at 7815.

Stateside, the Dow Jones added 12 points (+0.1%), to 14713, whilst the S&P 500 lost three points (-0.2%) to 1582.

Gold futures fell, trimming the biggest weekly gain in 15 months, as the U.S. economy expanded less than forecast, driving commodities lower and crimping demand for the precious metal as a hedge against inflation.

Gold futures for June delivery declined 0.6% to settle at $1,453.60 an ounce on the Comex in New York.

Crude fell, trimming the biggest weekly increase since June, as the U.S. economy grew less than expected in the first quarter.

Oil for June delivery retreated 64 cents to settle at $93 a barrel on the New York Mercantile Exchange.

The US dollar held declines against most of its major peers after U.S. gross domestic product increased less than forecast in the first quarter, adding to concern the world’s biggest economy is struggling to grow.

There is no major local data due out for today’s session.

 

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Modern economics makes an assumption for both social and economic behaviour, and that is that all individuals will choose the best course of action based on the stable preferences and limitations facing them.

This is known as “rational choice theory”. Individuals will choose as rationally as possible based on the information made available to them. Though it is primarily an economic-social theory, rational choice theory is used in a number of fields, including criminology.

For the purpose of this lesson, however, we will look at the economic and psychological perspective of the theory.

It’s your choice

Rational choice theory is based on the idea that group behaviours are the result of individual actions. Typically, people are motivated by money and the idea of making a profit, so the theory fits in well with economics.

The concept is that people tend to be rational in character, and will calculate costs and benefits of any action before deciding what to do. The theory therefore rejects the idea that social action may be anything other than rationally motivated, even when it appears irrational.

One would hope that this is how individuals act when they make their trading decisions: they choose trades based on rational decision-making and the information available to them.

But is this what really happens in the market?

Throwing the market into the mix

The stock market is made up of many individuals making a number of financial decisions. Rational choice comes in when traders try to anticipate outcomes of different courses of action, and calculate which choice is the best for them. Right?

Well, yes and no. As traders, we try to make the choice that seems like it will deliver the best possible outcome to us as individuals. However, even when a decision looks like a good one, there is no guarantee that the likely outcome will eventuate.

The stock market is characterized by a lot of players and a lot of conflicting individual activity, meaning that nothing is certain.

Check your emotion at the door

Rational choice won’t always lead to successful trades, because there can be factors or information outside of our control that will lead to unpredictable outcomes.

However, rationality will always win out over emotionally-driven decisions, because it takes into account as much information as possible. Rational choice involves reinforcement. If a rational trading strategy is successful, the strength of this strategy will be reinforced by the reward of the successful trades.

Therefore, rational choices that lead to successful outcomes will be reinforced in our trading behaviour over time.

Carl Capolingua
Head of Education
Australian Stock Report
Follow Carl on Twitter @CarlCapolingua

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Global markets eked out modest gains overnight, as a rally in commodity prices spurred energy and raw-material producers.

European stocks rose, rebounding from the biggest weekly drop in five months, as Italy elected a president and the Group of 20 refrained from opposing the Bank of Japan’s stimulus policies.

In London the UK’s FTSE 100 bucked the trend to close lower, shedding six points (-0.1%) to settle at 6281. In Germany the DAX added 18 points (+0.2%) to close at 7478.

Stateside, the Dow Jones put on 20 points (+0.1%), to settle at 14567, whilst the S&P 500 gained seven points (+0.5%) to 1563.

Crude rose to a one-week high as the Group of 20 nations approved of Japan’s stimulus program, bolstering speculation that fuel demand will climb in the third-biggest oil-consuming nation. Oil for May delivery climbed 75 cents to $88.76 a barrel on the NYMEX, the highest settlement since April 12.

The yen gained for the first time in five sessions after traders failed to push the currency through 100 per dollar, a level it last weakened to four years ago.

Today’s session will bring us data in the form of the CB leading index, at 10:00am, AEST.

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Global indices finished slightly stronger on Friday night, with positive US earnings reports supporting markets.

In London the UK’s FTSE 100 added 43 points (+0.7%) to settle at 6287, whilst the German DAX bucked the trend to settle 14 points weaker, at 7460.

For the week European stocks posted their biggest loss in five months as economic data from the U.S. to China and Germany missed estimates, prompting a selloff in the shares of commodity producers.

U.S. stocks rose on Friday night as earnings from Google and other companies lifted tech shares, but the gains weren’t enough to stop the S&P 500 from suffering its worst week since November.

The Dow Jones added 10 points (+0.1%) to settle at 14548, whilst the S&P gained 14 points (+0.9%) to close at 1555.

Gold futures topped $1,400 an ounce on signs that jewellers and other users of the metal are taking advantage of the biggest slump in prices in three decades.

Gold futures for June delivery climbed 0.2% to settle at $1,395.60 on the Comex in New York.

Crude advanced for a second session, paring its third weekly drop, on speculation that declines were excessive and as the euro increased against the greenback.

Oil for May delivery rose 28 cents to settle at $88.01 a barrel on the NYMEX.

The yen slid to a four-year low against its U.S. counterpart, extending its longest streak of monthly losses in more than a decade, after the Bank of Japan’s stimulus policies were unopposed at a Group of 20 meeting.

There is no major local data due out for today’s session.

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Global markets slid further into the red overnight, with US slipping lower on weak earnings numbers.

European shares erased earlier gains, with the FTSE 100 finishing essentially flat at 6244, whilst the German DAX slump 29 points (-0.4%) to close at 7474.

U.S. stocks fell for a second day amid disappointing earnings reports and data on leading economic indicators and Philadelphia-area manufacturing that trailed estimates.

The weakness sent the Standard & Poor’s 500 Index to a six-week low, with the index sliding 0.7% to 1,542 – the lowest level since March 6. The blue-chip Dow Jones index shed 81 points (-0.6%) to close at 14537.

Gold futures climbed and the spot price headed for the longest rally in four weeks on signs that demand is rebounding among consumers and investors.

Crude rose from a four-month low on signals that recent losses were exaggerated and as Spain sold more debt than planned. Oil for May delivery rose $1.05 to settle at $87.73 a barrel on the NYMEX. It was the biggest gain since March 26.

The US dollar fell against the euro, reversing an earlier gain, after a report showed manufacturing in the Philadelphia region expanded less than forecast, boosting the chances that U.S. monetary stimulus will be maintained.

There is no major local data due out for today’s session.

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For a very long time, the price of gold did nothing but go up.  After all, gold is considered by many to be the ultimate safe-haven asset in times of economic uncertainty.

However recent history suggests gold may be losing its shine.  From a record high of US$1921 an ounce in early September 2011, the price of gold has slid around 20% to be currently trading just above US$1550.

What has driven this decline and is there further weakness in store for gold?  In today’s editorial we will attempt to answer these questions.

Recent history

As we can see from the chart below, there was an almost uninterrupted run-up in gold prices for much of the 2000s.  The price of gold has surged over 400% in the past 11 years!

What drove this run-up?  A few factors.

The tech wreck of the early 2000s sparked a mini-collapse in equity markets and dented investor confidence in some of the riskier asset classes.

In response, the US Federal Reserve (Fed), under the chairmanship of Alan Greenspan, embarked on a plan to keep interest rates as low as possible for as long as possible.

While this was followed by an equity market boom, investors became increasingly concerned about the potential for easy money conditions to result in higher inflation in the US (which eventually occurred).

Low interest rates and a widening US current deficit led to a structural decline in the US dollar, so more and more investors went looking for the next safest alternative asset – gold.

The panic induced by the GFC briefly lured investors back to the US dollar, but aggressive monetary easing policies by the Ben Bernanke-led Fed led to another major run-up in gold prices (again due to inflationary fears).

What has changed?

The chart shows gold topping out above US$1900 and since September 2011, it hasn’t really threatened to create a new high.

So what has changed?  Although the US dollar is still weak compared to a number of other currencies, on a trade-weighted basis, it has rebounded noticeably over the past two years (shown below).

The hyperinflation many feared would result from the monetary easing measures implemented by the world’s central banks never occurred.  Gold’s inflation ‘premium’ therefore is being slowly eroded.

As these inflationary fears subside the prospect of a collapse in the US dollar diminishes, which in turn is providing renewed support for the greenback at the expense of gold.

ETFs and the immediate outlook for gold

In a sign of just how serious the recent collapse in gold prices is, bullion holdings at exchange traded funds (ETFs) have fallen significantly in 2013, as we can see below:

The drop in ETF holdings highlights the extent to which investment demand is weakening.

The rationale for holding significant amounts of bullion is losing its validity; fears of quantitative easing-induced hyperinflation are abating and other asset classes like equities are offering relatively stronger returns.

The actions of ETFs carry particular significance because they are key players in the gold market. EFTs are dumping supply into the market at a time of weak demand, something that may continue weighing on the price of gold for a while yet.

This article was issued to our members of the investors report  on April 8th 2013, if you would like further information you can sign up for FREE recommendations and access all our research files on not only trading gold but all our current trading ideas. Simply click here and starting trading today, free for 7 days.

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The rollercoaster ride continued overnight, with investors struggling through a third straight session of volatility, as weak economic data from Europe and disappointing earnings reports in the U.S. prompted a pullback in stocks, the euro and oil prices.

European stocks declined for a fourth session, with the benchmark Stoxx Europe 600 Index falling to its lowest level this year, as commodity producers and automakers slid.

In London the FTSE 100 shed 60 points (-1%) to settle at 6244, whilst the German DAX slumped a whopping 180 points (-2.3%) to close at 7503. Stateside, the Dow Jones Industrial Average finished with a decline of 138 (-0.9%) to close at 14619, for a third straight session of triple-digit moves for the blue-chip index.

On Monday, the Dow suffered its biggest one-day decline this year, falling 266 points, before recovering most of those losses on Tuesday.

The three-day run of triple-digit moves is the first since late February, when an inconclusive Italian election cast uncertainty over Europe’s debt crisis.

The S&P500 gave up 23 points (-1.4%), to 1552.01, while the NASDAQ 60 (-1.8%), to 3205.

Spot gold prices advanced for a second day as global equities declined and on signs that physical demand is rebounding. Gold for immediate delivery gained 0.7% to $1,377.43 an ounce.

Oil fell to a four-month low as equities declined and U.S. output rose to a 20-year high. Crude for May delivery fell $2.04 (-2.3%) to $86.68 a barrel on the NYMEX, the lowest settlement since 14 December.

The British pound fell the most in six weeks against the US dollar after government data showed the U.K. unemployment rate climbed and wage increases slowed, adding to signs the economy is weakening.

Today’s session will bring us data in the form of the latest NAB Quarterly Business Confidence reading, at 11:30am, AEST.

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Though it’s important to use logic when setting up a trade, it may surprise some that creativity also has its place in trading. Creativity is generally considered to be the ability to combine novelty and usefulness, hopefully to obtain an innovative result.

It is also considered to be the ability for a person to restructure their understanding of a situation in a manner that may not be obvious to all.

Am I creative?

Apart from simple (possibly subjective) observation, it is difficult to determine whether a person is creative or not.

There isn’t a generally accepted method for testing creativity. Different studies have employed various tests, such as the “divergent thinking” test where a subject is asked to come up with new and useful purposes for an everyday object (such as a pencil).

Others have maintained that possessing a good sense of humour is an important aspect of creativity. You might watch a funny film or TV show and wonder, “how did the writers even come up with that idea?” because it’s not a concept that crops up in everyday thinking.

Testing conducted by Dr. Rex Jung, a research scientist at the Mind Research Network in the US, has shown that whilst the brain works like a straight road to get you from point A to point B when it comes to intelligence, the regions of the brain associated with creativity looks like a collection of side roads with interesting detours.

Another interesting fact about creativity is that, contrary to popular opinion, creativity doesn’t just spontaneously show up as inspiration just because someone happens to be “creative”.

A recent study suggests that creativity takes a slower path than that of intelligence, so the concept of a quick-thinking “creative genius” is more of a myth.

Using creativity

Anyone can employ creativity by letting go of their habitual response to a situation. Try to shut down what would be your automatic logical reaction to a situation, and “think outside the box”.

It doesn’t matter how long it takes you to think of a creative idea – once you’ve searched for a unique idea once, you will find it easier to come up with creative solutions the second, third, fourth (and so on) time.

Creativity can be important when you’re trading because it forces you to think about the market in new ways – and you might find a whole new trading style that could bring you greater success.

It should be good news to most traders out there that most of you probably are naturally creative. Risk-taking is associated with creativity, and most traders by nature are able to embrace risk.

Creative connections crop up when most people are relaxed. And what’s a great way to relax? To laugh. And the driver for laughter? Humour. Go rent out your favourite funny film, or take a look at that new show your friend swears is hilarious. (First make sure you friend has good taste.)

Then go have a glance over your recent trades. Are any new ideas for future trades cropping up?

Carl Capolingua
Head of Education
Australian Stock Report
Follow Carl on Twitter @CarlCapolingua

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