Why Now is the Best Time to be a Trader – Introduction
We are living in interesting times. From a monetary policy side of view, central bankers are talking about normalization. In the United States, the Fed has already started the process. Last year, the FOMC raised interest rates three times and this year, they have pointed to three more hikes.
In the United Kingdom, as inflation picks up, the MPC is likely to raise rates. As you recall, last year, the committee raised rates by 50 basis points and pointed to no hike this year. Then, in December, the Office of National Statistics released its QoQ CPI data that showed a surge in inflation to 3.1%. As a result, Mark Carney, the governor will be required to write a letter to Phillip Hammond, explaining the situation.
In the EU, the ECB has pointed that they might start normalization this year. In the October meeting, they announced that they will continue the stimulus package, albeit by half, to September.
In other words, Central Bankers are in a normalization mood but the question remains of why they are doing this. Other than Carney, I don’t see why Yellen and Draghi should be in this mood. Perhaps, the reason why they might be interested is to prevent animal spirits in the financial markets. As you know, the low for longer mentality tends to introduce complacency among the market participants.
On the other hand, household debt and delinquencies are rising. In the United States, household debt has risen to the highest levels ever and at the same time, the level of delinquencies is also rising.
A combination of factors have made the global financial markets expensive. Low interest rates, also known as easy money, low crude prices, and increased employment have made the global economic environment interesting.
However, now that crude oil prices and interest rates are rising. This difficult combination has led to significant market shocks.
Today, being an investor is difficult because what is there to buy? It has become increasingly difficult to find valuable assets that are not expensive. For example, what is the justification of buying a company like Caterpillar that has a PE ratio of more than 30? What about Tesla? This is a loss-making company that has a PE of more than 100.
Being a trader is probably the best thing to do. As a trader, your role is not to find overvalued and undervalued companies. Your role is to study charts and find short-term overbought and oversold positions. It is also to study the charts and take note of the positions where investors have overreacted.
By being a trader, your aim will not be buying stocks with the aim of holding them for months. Your goal is to buy oversold stocks and short overbought stocks. By doing this, you remove the uncertainty of the future.
As I have mentioned before, if a crash or correction was to happen today, the implications to financial markets would be significant. This is because with tax and interest rates being so low, it would be difficult for the policy makers to control the sell-off. In the past, when a major sell-off happens, policy makers react by reducing rates and offering stimulus packages. Now, with all these at historically low levels, it will be difficult to see what happens if the bubble pops.
Why Now is the Best Time to be a Trader – Useful Tips: