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Is Europe Playing Kick the Can?
A hot summer evening, an old can and a bunch of kids—that’s everything you needed for a good ol’ fashioned game of Kick the Can.
Kick the Can evolved out of the game Hide and Seek. A group of kids would gather and pick someone to be “It.” Whoever was “It” had to sit down and cover their eyes with their hands. The rest of the kids then chose somebody else to kick a can away from the person who was “It.” This honor usually fell to the most talented kicker of the group who could send the can farthest down the road.
Once the can was kicked, the rest of the kids would scatter to find hiding places while the person who was “It” would count to 100. Reaching 100, he or she would try to remember in which direction the can was kicked and go retrieve it.
Only after the can was retrieved and returned to home base (usually in the center of the cul-de-sac, parking lot or other wide open space) could the person who was “It” seek out the hiders. Kids would play this game until dark or until Mom called for dinner, whichever came first.
From this children’s game, pundits created a memorable phrase for a common occurrence in politics. “Kicking the can down the road” has become a metaphor for anyone employing a delay tactic in order to deal with a problem at a later date (and often by someone else).
Did Europe Kick Their Can Down the Road?
Across the globe, most equities markets are down for the year. Many analysts have pointed to the strong potential of several European countries’ sovereign debt default as a primary factor for the downward pressure on the markets.
With the recent compelling lift off of the early July lows, however, it’s fair to ask if the markets have simply discounted this issue for the moment or if Europe truly did what was required to mitigate the markets’ fears. While it would be extremely short-sighted to think that the sovereign debt crisis is over, there is a strong possibility that the European Central Bank (ECB) has appeased the nay-sayers in the near term and successfully delayed a true reckoning of the problems.
Some compelling factors support the view that Europe successfully kicked the sovereign debt default can down the road:
- The Euro has had a decent rally from its lows in early June.
- Both Spain and Portugal have had very successful bond sales.
- Greece has managed to keep from going into a debt death spiral. (This is in large part thanks to the ECB buying massive amounts of Greek debt on the secondary market to provide liquidity.)
In addition to these factors, my friend and hedge fund manager Marshall Auerback made the call almost two weeks back that Euro denominated assets would outperform U.S. dollar based assets. The charts certainly support his point of view at the moment.
The red line shows the iShares S&P Europe 350 Index Fund had a return of 9.89% in the last month while the S&P 500 (blue line) has lagged significantly behind with a 2.35% return.
Though not definitive, the chart certainly indicates that a significant recovery could be starting in European equities.
In my article last week, I pointed out some extreme oversold measures in the markets that suggested a near term snapback rally, which we got with a vengeance. Early indications are that the equity and fixed income markets may be shrugging off European debt default fears. If so, this could further solidify the notion that we hit an intermediate bottom early this month.
Where can we go from here? The following chart of the S&P 500 provides some targets to consider.
The light blue highlighted area shows a convergence zone of three important indicators: the 50 day simple moving average, a trendline drawn off of the April highs and a Fibonacci retracement of 0.382 drawn from that same high to the July 1st low.
If the bears are going to maintain control for the rest of the summer, this area has to hold and repel the current move up. If the bulls can breach this zone, however, more upside should follow.
If you have some thoughts or feedback on these matters, I’d love to hear them. You can email me at drbarton “at” iitm.com. Until next week…
Peak Performance Home Study
The benefit of taking this course is not dependent on your experience level. It is not system, time-frame or market specific. It is just as helpful to the person who has traded for 10 years managing millions as it is for the new investor with a small personal account, or to the person who wants to trade but has never traded. This is because the focus of this program is YOU.
It focuses on all key areas of the individual, such as self-sabotage, fear of pulling the trigger, and overtrading. It helps you analyze and reduce your level of stress. It also, very importantly, opens your eyes to a better understanding of your own belief system. It helps you understand your decision-making processes and makes you a better decision maker. It shows how all of these factors tie into your trading and investing performance. It will be the best $795 you've ever spent on your trading education...guaranteed!
A Proven Strategy for Improving Your Trading Practice
Trading is a craft that requires the integration of patience, dedication, discipline and a plan for action.
Understanding this perspective leads to a process of inquiry: How can we improve the practice of our trading through focused study? How could that then help our action plan?
I suggest a focused study of subject matter experts and three column reflective journaling, a journaling technique that I have used in countless ways (hat tip to the psychologist and humanitarian Kurt Lewin and his two column journaling technique).
First, understand what it is you want to learn. Specifically practice describing the knowledge you believe you need to acquire. This act alone will serve to help the universe give you what you need. Your intentions and public commitment to study will aid you. Be careful what you ask for.
Then, pick an author and start reading. For each book or work, make three columns with the following headings on a sheet of paper:
- Summarize What He Said
- My Thoughts about What He Said
- What I Will Do
Columns 1 and 2 are fairly self-explanatory and thought oriented. Column 3 is action oriented: you commit to your Self to either apply your new found knowledge in some way or investigate further claims and hypotheses. Put a priority on each item and describe how you propose to apply it and/or check it.
For those items you want to check, create a separate Master Research Task List and sort your ideas by priority and the possible payoffs. Your Master Research Task List will serve to prioritize the various research items from all of the different works you read.
Your first three column journal page on a book will be the first page of the Research Section of your trading journal. As you continue to read, add one page with three columns for each book. For each author you study, build a chapter with multiple pages.
Prioritize your authors and study each one deeply rather than skim several at once. To study is more important than to skim. Over time, scan a wide set of authors to get a sense of "resonance." You will figure out who to study. Ask others you trust for ideas if you get stuck.
If you have the discipline and focus to study in this way, you will create a major edge for yourself over the legions of impulsive, discretionary traders.
- Your focus and attention will improve.
- You will refine your beliefs and develop an inquiring mind.
- You will exercise both your creative and critical thinking skills.
- You will improve your discipline.
- You will learn to act on evidence that has been weighed and measured.
- You will be growing your body of knowledge.
- You will learn to make more and more distinctions.
In other words, you will walk along the path of mastery.
Notice that I said the path of mastery, and not the path to mastery.
You already have the mastery within you, waiting to be called forth. The journey removes the obstacles and distractions if you have the will.
Mastery is walking the path, not the destination. Should you choose to walk it each and every day, what will you find?
What is SQN?
Q: Last week you used the acronym SQN in your market update. Can you explain what that means?
A: After researching position sizing™ strategies for a number of years, Dr. Van Tharp developed a proprietary measure of the quality of a trading system that he calls the System Quality Number® or SQN®.
SQN measures the relationship between the mean (expectancy) and the standard deviation of the R-multiple distribution generated by a trading system. It also makes an adjustment for the number of trades involved. Dr. Tharp has determined that the better the SQN, the easier it is to use various position sizing strategies to meet one’s objectives.
The calculation, use, and interpretation of the SQN are discussed extensively in Dr. Tharp’s book, The Definitive Guide to Position Sizing.
In addition, Dr. Tharp discovered that when he applied the SQN formula to the daily percent price change of a stock or an index, it proved to be an excellent measure of trendiness. Dr. Tharp now calculates a market SQN for the S&P 500 based on the daily changes in the S&P 500 for periods of 25 days to 200 days and publishes the results each month in his free newsletter Tharp’s Thoughts. Dr. Tharp’s monthly Market Update includes a graphical representation of the market SQN for 100 days that makes it easy to see how the market is performing. Dr. Tharp also uses a quantitative world model of the markets that shows the strongest and weakest regions, countries, sectors, and currencies using the universe of ETFs. Dr. Tharp’s multiple analytical perspectives provide readers a holistic view of market conditions and help them understand how the market is likely to perform in the short term.
Everything that we do here at the Van Tharp Institute is focused around helping you improve as a trader and investor. Therefore, we love to get your feedback, both positive and negative!
Feel free to click below to leave us any comments so that we can serve you better. Or, send Van a question that you would like for him to answer.
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