The volume of stocks being traded is the lowest in years. Things are so bad that big brokerage firms are laying off hundreds of employees and smaller firms are simply closing their doors. For those who are still interested, what is the best way to approach trading stocks in a low volume market? A few clues may be found in the reasons that trading volume has fallen so dramatically. Investors are uncertain. Mutual fund investors have been pulling out their money for the last five years, starting with the first hints of the stock market crash that evolved into the second worst recession in three quarters of a century. Many were disappointed when the rally of the first half of 2011 turned into the rout of the second half. Now, when we are seeing the best January in over a decade many are sitting on the sidelines. Traders typically follow both fundamental and technical analysis of stocks. But the fundamentals have been poor and economic recovery is slow even where it exists. Low volume and poor liquidity make technical trading more difficult and chancy trading stocks in a low volume market.

There are a number of basics that have been and will be affecting markets. The debt situation in Europe has dragged on for a couple of years and there is no clear resolution in sight. The possibility of one more nations in the EU being unable to pay their national debts scares bankers and big investors alike. The US appears to be coming out of the recession but the risk of a double dip recession in Europe makes investors skeptical. China, the growth engine of the last decade or more, is looking at a decrease in exports, a possible real estate market crash, and a more expensive Yuan as both the European Union and United States steadily devalue their currencies. When trading stocks in a low volume market, keep an eye on the printing presses. The so called Bernanke Doctrine designed to avert a depression, calls for, among other things, printing money in large quantities to maintain credit and keep businesses running. The new president of the European National Bank appears to be following the path of Mr. Bernanke so that we may see a steady devaluation both the Euro and US dollar. This is meant to forestall a depression and make exports from both economies more competitive. However, it will also make things valued in dollars and Euros cheaper and that could include US stocks. Someone trading the Russell 2000, for example, might find that his stock portfolio is going up as valued in dollars but going down when compared to oil, gold, and other commodities. Those still in the game trading stocks in low volume market have typically picked a scenario to follow and are doing so.

As we have often pointed out, not all stocks do badly in bad markets. If war breaks out in the Persian Gulf traders may want to brush up on how to trade oil stocks. Oil companies with operations outside of the Persian Gulf could do very well if Iran tries to close the Straits of Hormuz. Oil stocks could, in fact, go either way as the US is using new technology to extract oil that was previously difficult to bring to the surface. In fact, in the last few years, the US has reduced its dependence on foreign oil to forty percent. In fact, combined US and Canadian production is expect to surpass record levels by 2016 according to a report in the Houston Chronicle. The United States could possibly become the number one producer in the world by the end of the decade. When trading stocks in a low volume market, traders may wish to keep their eye on oil.

More Resources

Popularity: 3% [?]

The most recent Detroit auto show was a smashing success. Car makers whose very existence was in doubt a couple of years ago are selling more and are presenting the public with line after line of impressive vehicles. Now, what does this mean for those interested in trading options on US automakers? Cars like the plugin hybrid version of the Ford Fusion deliver the equivalent of a hundred miles per gallon. Detroit has re-learned how to make vehicles that appear to the American public and that does not mean gas guzzling monstrosities doomed to fade into oblivion as fuel prices rise. What this could well mean for the US auto industry is a rebirth. What it could mean for the trader who uses fundamental as well as technical analysis to evaluate auto stocks is profits. Who are the players for those interested in trading options on US automakers?

The so called “Big Three” used to be General Motors, Ford, and Chrysler. However, both General Motors and Chrysler had to be bailed out during the early stages of recession. Fiat ended up buying Chrysler. Even prior to the recession Toyota passed General Motors in total cars sold to become the world’s leading auto maker. All of this may have import for the long term investor who lost out as two of the Big Three faded. But, for the short term trader, especially those interested in the options route, the questions have to do with the future and the degree to which American automakers can recover, increase, and maintain sales. A couple of years ago we wrote about trading the GM IPO as the carmaker came out of bankruptcy. The IPO came in at $34 a share. As recently as July of 2011 the stock was trading just above $31 a share but for the last four months it has been in the $21 to $26 a share range. Ford bottomed out at around $1.50 a share in 2009 and then rose over $5 only to come back into the $1.50 to $2 a share range by the end of 2011. Chrysler emerged from bankruptcy as a private company with 53% ownership by Fiat. Fiat was trading in the $6 range until mid-2011 and now trades around $3 a share.

Each of the former Big Three has obviously seen better days. If first impressions from the most recent Detroit auto show are any guide they seem to have gotten the point. The world needs smaller, fuel efficient, reliable cars. Will this translate into profits? In buying options on US automakers one will buy calls on Ford or GM if he believes that profits will soon follow. He will buy calls if he believes that things will get worse. And, he may consider selling calls or puts if he thinks that stock prices of these automakers will not change. Anyone interested in Chrysler via Fiat should remember that in trading Euro Zone stocks the economic and fiscal mess in Europe may have a lot more to do with Fiat stock going forward than any profits from Chrysler.

More Resources

Popularity: 5% [?]

The recent increase in consumer credit in the USA is widely credited to growing consumer confidence. What does an increase in consumer credit mean for stock traders? Successful stock trading requires a sense of where the markets are going. Traders gain perspective by means of both technical and fundamental analysis of stocks. They also follow both broad and specific economic indicators. Here is where an increase in consumer credit comes into play. Hopeful consumers are willing to buy consumer goods on credit, purchase new homes, buy new cars and do a myriad of things that require credit. More consumer spending translates into more sales, more manufacturing, more transportation, and more economic growth.

An issue for stock traders is whether to trade individual stocks or index funds such as those that follow the S&P 500 or Russell 3000. If in increase in consumer credit is a prelude to economic recovery in the US then a rising tide may indeed raise all ships, or stocks, in this case. Rather than trying to outguess the market and find individual tradable stocks, traders can trade a broad index fund. In doing so, the trader can often limit his fundamental analysis to economic indicators.

By using technical analysis a stock trader can follow and anticipate changes in market sentiment. He can often profit by trading index funds and not worry about the performance of or fundamentals of individual stocks. The current increase in consumer credit has two broad implications. The one we have already mentioned is that an increase in the use of credit goes with increased consumer confidence. It also goes with more hours on the job, conversion from part time to full time work, and having paid off old bills. The cash and barter economy in the USA is real and often not included in any meaningful statistical reports. To a degree the increase in consumer credit may be seen as the tip of the iceberg of consumer wellbeing. If individuals see themselves as having put their financial houses in order or have stashed enough cash and paid off enough bills they may feel secure in buying consumer goods on credit. It is this second interpretation of consumer borrowing that implies a stronger than expected economy.

Whether our speculations about a stronger than expected economy are right or wrong makes little difference, however, to the technical trader. He may suspect that United States Economic Expansion is gaining a head of steam. However, he will use technical indicators a guide in buying and selling stocks. He may choose to keep his cash outside of the market except when scalping profits on high volume trading days. Many traders use stock options as a tool for trading the stock market. When buying calls and puts on stocks or index funds the trader limits his investment risk and also leverages his cash investment. As always we are not predicting economic expansion or any specific direction for the economy. Rather we are suggesting a thought process for traders to go through in search of trading profits.

More Resources

Popularity: 7% [?]

Will the coming United States economic expansion translate into higher stock prices and trading profits? European and US stocks rose on the first days of trading in the New Year. The US manufacturing sector is gaining strength and both Germany and China reported better than expected manufacturing numbers. Stocks in the US went up in thin trading as many traders are waiting to see stronger and continuing signs of United States economic expansion. The debt problems of the Euro Zone continually trouble long term investors. As always traders are trying to gain perspective and anticipate the market. However, the up and down sentiment brought on by conflicting news about the Euro Zone debt dilemma has confused many stock and Forex traders for the last year or more. The painfully slow United States economic expansion coming out of the recession ought to have driven sentiment and stock prices higher. But, the world today is so interlinked economically that bad news in economies throughout the world can drag down US markets.

When looking to profit from trading a United States economic expansion smart traders remain aware that not all companies will prosper to the same degree as the economy rights itself. Many with cash are already looking for partners or buying competitors in order to strengthen their positions in the months and years ahead. For example, Devon Energy will get $2.2 Billion from the Chinese oil company Sinopec International Petroleum Exploration & Production Corp. in return for a 1/3 interest in several oil shale developments. MMM is going to pay Avery Dennison half a billion dollars for their office and consumer products business in order to further grow this arm of their business. It takes continual fundamental analysis to help decide which business strategy will succeed and which will fail. In the meantime traders use technical analysis in order to anticipate changes in market sentiment and consequent changes in stock prices.

The report than has lightened spirits is the Institute for Supply Management’s manufacturing index. It rose to 53.9 in December, up 1.2 points on the month. Anything above 50 is considered a sign of expansion in manufacturing. Many analysts, however, want to harder data. They point to last year when many believed that the recession was lifting and invested heavily only to lose in the second half. Astute traders, however, were able to sell short at the top of the market last year and successfully trade options as the markets waffled up and down. Whether we see volatile stock trading like in the second half of last year or the long awaited rally that raises all stocks smart traders will use a combination of shorts, options, and straight stock purchases to selectively profit as a United States economic expansion clicks into gear. Traders will do well to watch for upcoming figures on retail sales as well as jobs data. The other large issue to watch is still the debt crisis in Europe as necessary austerity measures take hold on the continent. These will help in the long term but may well act as a drag on global recovery in the short term.

More Resources

Popularity: 10% [?]

The most recent European Central Bank loans to faltering European banks met mixed reviews. The first reaction seems to have been one of relief. It seemed that the EU had finally gotten its act together. At a recent Paris summit European leaders agreed to amend their treaty to bring about closer fiscal integration among the members using the Euro as their currency. They also agreed to give the European Central Bank a stronger hand in bailing out ailing banks and faltering governments. The first European Central Bank loans amounted to $639 Billion (in Euros). It was to prop up ailing European banks. The mixed market reaction was typical of the up and down sentiment that has plagued the Euro and European stocks for the last couple of years. The market seems to overreact to both good and bad news, creating a very chaotic market. This has been a difficult market for stock investors but often a profitable market for stock traders. A common stock trading strategy in recent months has been options trading because of the ability of traders to limit risk and leverage their investment capital.

The ability to generate European Central Bank loans without excessive need to consult the cumbersome EU bureaucracy is seen as a positive by many. Markets are not looking for all of the EU debt issues to be resolved but traders and investors are waiting to see a clear direction. Lacking a clear direction, traders have been limited to using very short term technical analysis in order to eek profits from market reaction to various pronouncements by EU officials. A perceived resolution to the EU sovereign debt dilemma would likely touch off a market rally, both in the EU and in markets throughout the world. Chinese factory production is off while new housing starts are up in the USA. These are mixed signals and the market is waiting for a clear direction. Although traders can make profits from short term market reactions they could find much more profit from successfully anticipating a substantial stock surge.

Trading Euro Zone stocks might be especially profitable if the EU is seen as getting its act together. Trading the Euro could be profitable as well if a resolution to the debt crisis drives the European Union currency upwards. In trading the EURO traders need to follow economic data and economic policy of the EU and of the nation against whose currency they trade the Euro. In trading Euro Zone stocks traders need to look at whether the company primarily does business in Europe or does business worldwide. A thoroughly European business would likely prosper in an EU recovery. A multinational located in Europe could suffer from a higher Euro as their exports would be priced higher abroad. As always traders are strongly advised to use both fundamental and technical analysis in trading stocks or currencies. Often times successful traders scout out stocks with trading potential but only trade them when market conditions are conducive to a sufficient likelihood of profits.

More Resources

Popularity: 14% [?]