By MoneyMorning.com.au
–Due to special circumstances, I’ve moved my normal Wednesday S&P analysis to Thursday. Look for it tomorrow.
–In the meantime, I’ve recorded a short video answering some basic questions about my trading, my background, and what I’ve done to make Slipstream Trader more useful for you. You can see the full explanation here.
–In today’s Money Morning you’ll find the transcript of an interview I did last week with Kris Sayce before he went on holiday. I’ll show you why you need more than just charts to be a good trader and when I expect stocks to be cheap again. Enjoy!
Kris Sayce (KS): You’ve been bearish on this market for the past two years. And I know from talking to you, you knew the recent market action was coming. At any point over that time have you ever thought, “Hang on, maybe I’m wrong and the economy will be just fine”?
Murray Dawes (MD): The whole basis of my trading methodology is structured around the fact that I may be wrong. No one knows the future. Once you accept this fact you can build a strategy that manages the truth that markets can do anything and everything.
Having said that, my macro-economic view has been based on observing the market for nearly 20 years. My views are based on Austrian economic theory so I have felt very confident that the Keynesian solutions had a used-by date. The correlation between Fed manipulation of interest rates and money printing in recent years and the movements in equity markets is undeniable when you have been watching markets for so long.
It has been fairly obvious that the fiscal pump priming and money printing has been the major cause of the rally from the lows in 2009. It was only a matter of time until the music stopped. The difficulty, as always in trading, is figuring out when to start attacking the market from the short side.
In Slipstream Trader we had a few false starts but have ended up catching a great bulk of the sell-off.
KS: How important has the actions of the U.S. Federal Reserve and Dr. Ben S. Bernanke been to your analysis these past two years?
MD: It is imperative that any trader – other than scalpers – have a good understanding of the workings of the US Fed. They have the power to change the rules of the game. The US dollar is the world’s reserve currency and they have the power to create as many of them as they like. They also have power over the price of money via interest rates.
If you don’t understand their ultimate motivations you are flying in the dark. I have devoted a lot of time to understating the history of the US Fed and… beyond that… the history of central banking.
Once you understand there is a partnership between governments and central banks that goes back hundreds of years you are no longer surprised by their actions and can even start to predict what they will do.
There is no doubt that the US Fed is motivated purely by their desire to protect the banking system. Everything else is secondary. Their actions of the past few years, when analysed from this point of view, make perfect sense.
By printing money they have done nothing other than help to recapitalise the banking system. Cheap money has been used by the banks to cover up huge losses and to speculate on commodities and equities worldwide via the carry trade.
Surging commodities have lowered the average person’s disposable income via surging food and energy prices. Businesses have had their margins crunched by rising input costs and low end demand. Printing money just steals from savers and gives to the banks.
The whole thing is rotten to the core and would have you scratching your head if you didn’t understand what their true motivations are.
KS: I’ve met and spoken to hundreds of technical analysts over the past 10 years, but none of them have a trading style that comes anywhere near replicating yours. How long did it take you to develop your trading approach? And is it something you’re still fine-tuning?
MD: The markets are constantly changing so you always have to be open to learning new things and adjusting your approach. The cornerstone of my trading approach was created from my years on the Sydney Futures Exchange trading floor. It was an invaluable experience spending years in the trading pits watching every tick.
You get an intimate sense of the emotion running through the crowd as prices move. Moments of calm twist into mayhem at the drop of a hat and then return to calm.
My theories on the structure of price action grew from this period and as the years passed by I have strengthened my views about the universal patterns that occur across all markets. I am still constantly amazed by the market’s ability to wrong foot you, but I feel confident that I have the ability to survive in any market conditions even if I end up treading water for months at a time.
My main motto is survival, because the market will always end up giving you great opportunities if you are patient.
KS: Are you a perma-bear or do you think one day you’ll look at the market and say, “Wow, this is a bargain!”
MD: I have to admit that I have suffered from the condition of perma-bearness in the past. Having a strong point of view can be damaging in the markets because you end up filtering all market information through your world view. In the end, you can miss important signals or leave money on the table because you are so stubborn about your view.
These days I have a set of rules based on short, intermediate and long-term trend indicators that keep me in the flow of the markets. When my indicators align with my macro view then I will attack the market aggressively. If they don’t, then I either tread carefully or trade with the prevailing market trend regardless of my bearish view.
The market has just trended up in a straight line for two years from 2009 to 2011. If you were stubborn with your bearish view you would have missed out on great gains and possibly have blown yourself up.
I am sure there will come a day when I will say that the market is a bargain. It will probably be when the Dow/gold ratio is close to one as it was near the lows of past bear markets. Does that mean Dow 5000/gold $5000? Probably but who knows.
All I know is that this market is being held up by government intervention alone. Eventually the market will always go where it needs to go regardless of what the politicians want.
KS: Most of the technical analysts I’ve met only look at charts. In fact, some of them don’t even care what the company is or does. But you use fundamental analysis with your technical trading. Why is that important to you?
MD: The market is an intricate game of chess. I think the more you understand about the way it functions the better able you are to react and take advantage of opportunities.
I want to buy cheap companies like anyone else but I have seen cheap companies become cheaper and cheaper over a long period of time. I would prefer to use technical analysis to give me great risk/reward entry points where I know very quickly if I am wrong. Then I am not tying up capital in dud trades that cause me stress.
I am either in the money quickly, in which case I can take part profits and turn the trade into a free option. Or I am out with a small loss.
If I focus on buying or selling short companies that I believe are very under or overvalued then my profit potential is increased dramatically. That’s because I can use my money management system to give me low-risk entry points into stocks that may eventually rise by multiples while also managing my downside risk.
I think it just makes perfect sense to combine fundamental and technical analysis when you are trading stocks for larger moves than can be achieved in a day or two.
Also, as I said above, it is necessary to understand the workings of the US Fed, for example, so that you can react and predict what they will do. If you ignore their power you will eventually be blindsided by their actions.
KS: Thanks Murray!
MD: My pleasure. Enjoy the beach!
Murray Dawes
Money Morning Australia
Publisher’s note: Murray began his career on the Sydney Futures Exchange trading floor in 1993 with Swiss Banking Corporation (SBC). After leaving SBC Murray continued his career in broking at Bankers Trust Australia. Then in 2001 Murray moved to Melbourne to work as a hedge fund trader for one of Australia’s wealthiest families. In 2003 he was ready to set up his own firm providing the same proprietary technical trading system to some of Australia’s boutique hedge funds. Now Murray heads up the Slipstream Trader service which provides members with specific buy and sell alerts on Australian stocks. To trial Murray’s service for 90 days, with no obligation, go here.