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3 Lies Traders Should Avoid Today

One of the things that makes retail trading unique as a pastime, or even a career, is the degree of honesty and self-reflection it requires. There are many jobs that offer some consistent semblance of leeway when it comes to making mistakes and honing a skill set, but trading is not one of them. No trader can negotiate a raise with the markets or hope for the markets to recognize their hard work; if anyone is not careful with their expectations and risk management, even just one losing trade can be catastrophic. Hence, why truthfulness matters in the world of retail trading: it often spells the difference between passive income and financial ruin. With that in mind, let’s explore 3 lies traders should avoid today.

“My strategy doesn’t need stop losses”

Regardless of a trader’s win rate, every trustworthy strategy incorporates stop losses to some meaningful degree. This is because it is as near certain as statistically possible that unmitigated risk in trading will eventually have terrible consequences. Even if a strategy somehow achieved a win rate over 95% with consistent incremental gains, unchecked risk would still be present in every trade, resulting in a handful of losses that could easily erase all prior profits in a fraction of the time (I know this from personal experience). Stop losses, especially trailing ones, are thus an indispensable tool for traders when it comes to safeguarding against inevitable losses and making their wins count in the long run.

“I will compound my account so fast”

Building a large trading account is a long, gradual process that requires plenty of discipline and patience. Because of this, if a retail trader approaches entering and exiting positions through the lens of a get-rich-quick scheme, they are bound to become disappointed and discouraged, and likely lose money along the way due to over-leveraging and impulsive trading. Thus, it is important for traders to generate realistic expectations for themselves, and not take success for granted. Some ways to practice this include a) thoroughly backtesting any strategies of choice, b) avoiding trading out of financial desperation, and c) recognizing that your value as a person has nothing to do with your account’s performance.

“Fundamentals don’t really matter”

Technical analysis is a wonderful tool for every trader to have equipped, and there are myriad technical indicators worth exploring and adding to any strategy. Likewise, sentiment analysis is valuable as well, since anticipating buying and selling pressure is at the heart of trading as a discipline. However, even with these two crucial forms of analysis at our disposal, it must never be taken for granted that traders are buying and selling real securities.

In a new age of gamification and excessive speculation fueling price action volatility in the markets, it can become easy to believe, even subconsciously, that trading is reducible to a worldwide chart-reading game. Therefore, it’s possible for many traders to miss out on significant fundamental catalysts and opportune points of entry and exit, because it is easy to forget that we are trading in real markets that are shaped by concrete circumstances and events in our world. Thus, whether a trader is buying or selling stocks, currency pairs, or bonds, it is always wise to conduct fundamental analysis, whether that be monitoring macroeconomic data, business fundamentals, or other variables.

Key Takeaways

Today I'll share some economic analysis on the CPI report and what to look for in order to tell if inflation will get worse. Lastly, I'll cover some ways that you can make an investment play on inflation.

September CPI Report

The Consumer Price Index report for September 2021 was published on October 12, 2021. Prices increased for urban consumers by 0.4 percent in September on a seasonally adjusted basis. This is slightly higher than August which came in at 0.3 percent. On a 12 month basis, the CPI is up 5.4% from September 2020.

CPI's impact on Inflation

Largest Price Increases

Energy

You have likely seen your gas prices so I don't need to tell you that prices are up, but it's worth noting how much. All major energy indexes are up this month. The entire energy index increased by 24.8% on a12 month seasonally adjusted basis. Gasoline is up 42.1% and Natural Gas is up 20.6% over the same period. Electricity also increased by 5.2%.

CPI's impact on Inflation

Food

The index for food was up 4.5% over the past 12 months. The largest movers in the food index were meat products. Meat, fish, poultry, and eggs increased 10.5% and the index for beef is up 12.6% in the last year.

CPI's impact on Inflation

Will Inflation Get Worse?

We've all heard someone in the last few months say something to the effect of : "40% of all dollars were printed in the last year" with an ominous reference to potential inflation. This is more or less correct as the US government has printed a ton of new dollars, but printing more money doesn't directly lead to inflation. If we look at the velocity theory of money we can understand why. The velocity of money is essentially a way of measuring how fast money changes hands, given the price level, GDP and money supply.

Rearranging this, we can see that the speed at which money changes hands is a function of the price of goods, the GDP and the Money supply. Price levels and GDP haven't shifted much, but the M money supply increased a lot. This means that the Velocity of money should be low. And velocity is very low.

This means that inflation hasn't hit us hard yet.. If inflation really starts to pick up, the velocity of money should see a noticeable increase as more dollars start to change hands to pay for the increased price of goods. This is demand inflation. Prices have increased in specific areas, but we have yet to see large scale inflation.

Case Against Inflation

The Federal reserve has shown that it is hesitant to drastically increase interest rates from their near 0 levels, and are more than willing to increase the amount of assets on it's books. As a result the the amount of dollars in the system increases. Under normal circumstances, low interest rates and an increase in the money supply increases the demand for goods and services. But we haven't seen this. Why?

Individuals and businesses have thus far used PPE loans and government stimulus to pay off debts and cover their bases during the pandemic. Since these individuals and businesses can pay for the goods and services that they need, they don't demand more. There is no pressure for a demand shock at this time. The money generated by Fed is sitting idle in bank accounts, investments and institutions.

We are currently in a supply shock in the U.S., increasing in the price of select goods, but we haven't seen a drastic increase in demand or a change in velocity of money. This doesn't eliminate the possibility of future inflation though. That money is still in the system, and we could still be sitting on a powder keg.

Making an Investment Play on Inflation

Currently, I am looking at stocks and asset classes that I think will rise in the event of inflation. Ill share my methodology for my search and give some stocks that I think fit into this criteria. Ill try and explain why I think some industries will do well and why others will not. This is not advice, I am only sharing my opinion and observations.

Methodology:

  1. Find stocks in an industry that can easily pass on price changes to their consumers. This means that when prices do increase, identify those companies that can change the price of their goods VERY fast and pass them onto consumers
  2. Find an industry that deal in inelastic goods or assets that are still demanded by consumers regardless of the price change, consumers will demand a similar amount of the good.
  3. Assets who's production is not slowed down by supply chain issues or price increases. By necessity, all industries are affected by supply chain problems. The key here is finding those that are affected the least.
  4. Make sure these stocks have solid fundamentals.

Things to Consider:

Oil and Natural Gas Producers: Natural gas is up in price by 20.6% and Fuel Oil is up 41.7% since last year. Winter is coming in the United States and Europe and the prices for these commodities are already increasing. Couple this with inflation and supply problems, producers will benefit immensely from this. These guys find the material, and sell it. they only get more money if the price of the commodity goes up and people still need to full up their gas tanks and heat. their homes. The risk is that shipping problems could cause issues.

$OXY, $APA,

Coffee Producers and Futures : America has an addiction to coffee, this is no secret. An article from yahoo finance, described how Caribou Coffee is buying tons of Coffee beans in anticipation of supply shortages. This commodity shows robust demand despite price increases. One difficulty I see with this is finding the right way to invest in this commodity. I'm trying to avoid companies like Starbucks, Nestle and Keurig that sell coffee directly to consumers as they may not be able to pass on as the price increase. It seems like that is the only option aside from directly purchasing futures. One possibility is $JO, which is an ETF that tracks monthly coffee futures contracts.

Things to Avoid

Refiners and Pipelines: Avoid these like the plague if oil and gas prices go up. These companies take a hit when prices increase because they cannot pass prices onto their consumers quickly, yet they still have to meet the demand of consumers to stay in business.

Beef and Pork: If inflation hits this sector Americans will substitute out the expensive red meats for cheaper alternatives like chicken. This is due to the fact that most Americans have a predetermined budget for grocery shopping and will maximize the amount of food they get.

For questions and comments, you can reach me at smstreb97@protonmail.com or through the A1Trading discord at smstreb97

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