Factors for Successful Trading; Commodities Show Promise

It's T-minus four months until my wedding, and if you've been through the process, you know what that means--I'm knee-deep in wedding plans, arranging such vital and earth-shattering tasks as what will be the last of four passed hors d'oeuvres (leaning toward stuffed mushroom caps), what kind of chips we want to include for our out-of-town gift bags (likely Cape Cod potato chips, to give out-of-towners a New England feel), and forcing my brother to get fitted so I can give his suit size to the salesman. Good times!

Of course, I've been aware that these seemingly menial tasks are part of the process; many of my friends have tied the knot in the last couple of years, so I know what to expect ... and even picked up some helpful pointers along the way. Heck, that's why my fiancée and I are getting some of these things done now--if we can knock off these tasks early on, maybe the two or three weeks before the wedding will be a little less stressful than normal. Maybe.

Actually, though I'm poking fun at the effort (and money!) spent on what will be a seven-hour event, I've grown to appreciate all the small, mid-sized and large tasks involved in wedding planning. In a weird way, I think somebody upstairs thought that, if two people can get through the rigors of planning a wedding without going totally insane, then they're almost surely a match after all. It's really a rite of passage in the truest sense of the phrase.

But, more than that, I respect that the process reinforces one of the basic premises in life - hard work pays off. Sure, eloping didn't sound like a bad idea when I first got engaged (still doesn't sound too bad, actually ... ), but the initial fear that we and most couples face--that putting together such a huge event will take time, and there's no guarantee all our plans won't go awry--has faded. Today, we're both confident that hard work put in today will pay off June 6, with many laughs, pretty pictures, good drinks and a fun time had by all.

And, ironically, that doesn't mean everything will actually go as planned ... and that's fine by us. We've accepted that there are things outside our control - not just stuff such as the weather (it's an outdoor ceremony), but also details such as how well the beef is cooked that day, or how bad the traffic will be on the way to the wedding (for non-wedding party guests). We've each been to a bunch of weddings, and the one certainty is that something, somewhere will not go as planned. But everyone still has a great time--and that's what we're counting on.


Factors for Successful Trading

As a student of the market, I'm always looking for parallels between things in everyday life and sound investment principles. (Actually, I think one of the reasons so many people have trouble in the market is that they're surrounded by situations that reinforce habits that cost you money in the markets ... but that's a topic for another time.)

So you shouldn't be shocked to know that I think the two key factors I wrote about above--hard work, and staying focused on what can be controlled--are key to making big money in the market. In fact, I'd say these are two of the most important traits of successful traders.

Interestingly, I recently read an article online that relayed a few thoughts about the distinctions between successful traders and those who are failure prone. One of the biggest differences: The market can change its tune in a heartbeat (which Timothy Lutts touched upon in Thursday's CWA), but ineffective traders cannot ... or at least refuse to try. These traders think everything has to make sense, and rapid changes in direction rarely make sense, so they fight the new trend.

To me, this fits under the "hard work" category--the best investors take a few minutes each week to not only review the market's recent action, but to also consider a few scenarios of what COULD happen going forward. That way, just like practicing your wedding vows ahead of time (yep ... on my to-do list) will ease some of the nerves on the big day, going through this mental exercise means you'll rarely be caught off guard no matter what the market decides to throw at you.

Another difference: Unsuccessful traders think every trade is a referendum on them, their success, their worth, and their trading system. Thus, even though nobody is going to pick all winners (the best investors usually win half to two-thirds of the time), these traders believe a two- or three-stock losing streak means they're awful ... while a two- or three-stock winning streak means they're geniuses.

In other words, odd as it might sound, these investors are focused on things they can't directly control--i.e., exactly how each and every one of their stock picks is going to fare. That's not to say profits and losses are unimportant, of course, but the best investors usually focus on the process, not the exact results. Said another way, the top traders usually focus on following their own proven system (realizing it will dish out good results over time), rather than what's pushing their stocks around day to day.

Incidentally, the article also stated that both winning and losing traders are obsessed (in a good way) with the market--both are passionate about producing results. But the winners tend to be much more modest and have a game plan for playing defense (cutting losses short, not putting too much money into an initial position, etc.), while the losers are more gung-ho, which eventually creates some very big losses.

Maybe that's why couples who take things in stride when planning a wedding often have less stress, and a more delightful outcome, than those who don't.


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As for the current market, we all got a big ray of hope Wednesday, as the market rallied strongly following some positive performance among individual leading stocks. But (you knew that was coming, didn't you?), the market crapped out the next day on higher volume than Wednesday. Translation: Institutions are still not in a buying mood.

However, I have finally found one theme that's working in the market today--inflation. Lots of it! Really, unless you're talking about a house or a stock, just about everything in the world is inflating in price. (I loved one of the headlines I saw in Investor's Business Daily this week: " If You Can Eat It, Likely It's An '08 Leader.") Gold, silver, wheat (inventories of which are at 60-year lows), coal, sugar, eggs, platinum, steel, corn, oil and natural gas are all trending higher.

Why? Well, honestly, I don't really care why; I believe what I see. But if you're looking for a plausible reason, look no further than the rapid rate cuts by the Fed and some other central banks around the world. That much liquidity, combined with a slowing economy, means more money chasing fewer goods ... and that results in higher prices ten times out of ten.

So, while my favorite market environment is one led by strong growth stocks with potentially revolutionary products and ideas, thus far, it looks like commodities are where the action is. How long any rally will last is anyone's guess, but history does tell us that bull markets led by cyclical-type stocks are less durable than those led by true-blue growth names. Just something to keep in mind should the market push higher from here.

Exchange Traded Funds

My investment idea comes right out of the inflation playbook--but, given the market's choppiness, I'm going to steer away from an individual stock and instead present a couple of exchange traded funds (ETFs) that allow you exposure to a sector's moves, but won't be subject to 8% or 10% drop because of a poor earnings report or something similar.

My first idea follows up on Tim's write-up from Thursday - coal prices are skyrocketing because of suddenly tight supply around the globe, combined with continued strong demand from emerging markets, and especially China. In fact, I'm betting that coal is going to be the next commodity to benefit from the "China Effect" - when that country begins to gobble up a given commodity, that commodity soars in price in the years to come. Energy has been the obvious example, but iron ore, copper and numerous others have followed along.

Now it's coal's turn, and given the superb upside volume seen in these stocks of late, I think institutions are just starting to build positions. The coal market vector ETF (symbol: KOL), which only recently began trading, is a nice way to play the group. Again, you can probably make more money in individual names ... but you'll also have more volatility as well.

My other ETF recommendation is steel. Specifically, I've noticed a couple of foreign steel stocks break out to new highs during the last week or two (thanks mainly to Cabot Top Ten Report), and there are a couple more setting up for breakouts. I can't say the group is as strong as the coals, but given the utter lack of breakouts in the market, seeing a couple from the steel sector tells me something is afoot. The steel market vector ETF (symbol: SLX) is indeed improving; buying a little (just a little!) here and looking for a breakout above 90 is a decent strategy.

Thanks for reading!


Editor's Note: Michael Cintolo is the Vice President of Investments for Cabot Heritage Corporation, as well as editor of both Cabot Market Letter and Cabot Top Ten Report. While the ETF recommendations above have good potential, Mike's specialty is in individual, leading stocks - such as those he uncovers in his Cabot Top Ten Report. Top Ten, a weekly publication, screens for the market's strongest stocks and sectors in any market environment, so subscribers are always on top of what's working ... and what isn't. Mike considers it the #1 source of new stock ideas for individual investors. If you're looking for insight into the market's strongest stocks, click here to give Cabot Top Ten Report a try. 


Michael Cintolo can be found on Google Plus.

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