 Filtering Out The Noise
Kevin Kerr
The Daily
Reckoning
Mar 26, 2007
The Daily Reckoning PRESENTS: When looking at the commodities market,
it's hard to decipher what is critical information, and what
is just media fluff. Below, Kevin Kerr explains how to tune out
the noisy chatter - and zero-in on the significant data from
news and media outlets...
Sometimes when I turn the TV
on and listen to the commentators talk about commodities I cringe.
For years the media treated commodities as a secondary asset
class, or worse, a form of legalized gambling - to some extent
they still do. Their understanding of how the markets actually
function is rudimentary at best. Now I'm not saying these journalists
are not intelligent - some of them are brilliant. They just don't
understand how the commodities markets work. But yet they have
such power that when the camera light goes on millions of people
hear and believe what they say. Having done a lot of television
and print media myself, I know that they can be very powerful
tools but, as they say in the Spiderman movies "with great
power comes great responsibility."
Anyway, let me be clear - I
make use of the media and information superhighway every day.
While I have colleagues who are deep philosophical thinkers who
don't even own a TV, I have five computer screens in my office
and two televisions. Does this make me non-philosophical and
obtuse? No, because most of the time I keep the volume on the
TV down, which improves my IQ immensely.
Distractions of any sort when
trading can be of little or no value. The TV blaring opinions
that change moment-to-moment can be one of a trader's most useless
tools. A friend and colleague of mine, we'll call him Jack, used
to work in the office across from mine. Jack is one of the best
currency traders I know and he and I come from the same mold.
Jack never had a TV in his office; he thought it was worthless
and that what was said was mostly drivel. For the most part he
was right. More importantly, Jack's point was that TV offered
him nothing beneficial for his trading -- it only interfered
with his system and was a distraction; in other words, just noise.
I agree with Jack. I also feel that staring at a trading screen
all day long is useless.
Markets move up and down and
when they move against you, when the screen is totally red, emotion
can creep in, and we all know how detrimental that can be. I
suggest sometimes that you simply switch off the screen and do
something else. Pet the dog, make a sandwich, go to the gym,
make another sandwich (there have been some years where I've
gained 20 pounds!) - my point is to leave the scene and clear
your head, then come back and decide what to do. You may be amazed
at what you find when you return!
Jack was a funny guy; he had very little in his office: a little
box over in the corner, a few books on the desk, a light and
that was about it - maybe one picture of his family. Truly a
minimalist. My office, on the other hand, had tons of stuff in
it -- pictures books, plaques, TV blaring, etc. So one day I
went into Jack's office and I asked him "Not for nothing
Jack, but what's the box for, and why don't you keep more stuff
in your office?" He looked at me and said, "I can fit
everything I have in this office in that little box in about
two minutes." Jack's point was that he wanted to be ready
to go at a moment's notice. After being a professional trader
for a number of years you come to learn that no matter where
you're working as a trader it all comes down to results, you're
only as good as your last trade.
Now is that true? No, but it's
the perception. Truthfully, the media can be an invaluable source
of new information and also a good contra-indicator. In other
words, if everyone on TV or in the press is talking about how
strong copper is, or crude oil, it may be time to look for a
downside move, not always, but sometimes.
My advice is to use the news
and information as a resource; pull out what you need and leave
the rest behind. It's quite possible to be bombarded 24/7 by
talking heads and then have no idea what to do. The best plan
is to pick one or two trusted information sources, then lay out
your own disciplined game plan and stick to it. Alter it occasionally
but never stray too far or too fast. You can always hit the mute
button on the TV -- sometimes that's your best move.
You'll preserve more of your
sanity if you tune out all of the opinion and stick with the
facts on which you should have based your trades in the first
place. Moving your positions with every sound byte on TV only
makes one person rich - your broker. Don't do it!
In the world of commodities, figuring out which data NOT to look
at can be just as important as knowing what you absolutely must
follow on a regular basis. Each commodity is different and learning
what's important for corn is a lot different than learning what
you need to watch for crude oil. Government numbers such as employment
data, GDP, and Federal Reserve announcements impact almost all
markets, even the global ones. It's important to have an understanding
of the key reports and, even more essential, how much emphasis
the markets place on them. Certain reports carry more weight
with traders than others.
In addition, as a market changes
and matures, certain reports may lose their relevance and new
ones may come into play. For example, back when I started in
the crude oil markets, everyone followed the American Petroleum
Institute report (API), the benchmark report for oil inventories.
Not anymore. These days, traders monitor the Energy Information
Agency (EIA) report.
Key government reports have
been around for as long as the markets and they rarely change.
Unemployment numbers, trade deficit, GDP, consumer sentiment.
These all are major indicators of the state of the economy, and
traders should know when these numbers are going to be announced
or published.
I've found that the hardest
part about any information or number is not only understanding
what it means but, more importantly, anticipating how the markets
will react to the data. The second part of this equation is a
thousand times more difficult than the first.
For example, if the EIA data
for crude oil comes out on a Wednesday morning and it shows a
build in crude oil supplies, will the market perceive that as
bullish or bearish? In other words, if the report shows more
crude oil on hand than expected, you would think that would tell
traders the market is heading lower. Not always. Sometimes traders
may figure that OPEC will see that supply is higher and immediately
cut production, which will have an impact on supplies down the
road. So while the front couple of months may drop in price,
if you own futures further out they actually could go higher.
Commodities trading is like one big chess game; I advise being
the knight, not a pawn. You always need to be flexible and agile
when trading "off of the numbers." Remember not to
get tunnel vision and don't fight the trend after a number, chances
are very good that the trend will win.
"Buy the rumor, sell the
news" is a common traders' saying, and for good reason.
But once again this is not always the best advice. Sometimes
what happens is that the markets will already "price in"
the anticipated data; then when the numbers are released it's
a bit of a letdown from the hype before the number, thus "buy
the rumor, sell the news." Another favorite old-time saying
I used to hear was, "Those who trade headlines end up selling
newspapers."
Here are some of the key reports
professional traders follow:
Commitments of Traders (COT) - A report published every Friday
by the Commodity Futures Trading Commission (CFTC) that provides
investors with up-to-date information on futures market operations
and increases the transparency of the exchanges. This is one
report that traders rely on heavily, and so should you.
Volume and Open Interest - We talked about this. Open Interest
shows us how many people are actually trading any particular
market at a given time. The higher the open interest the safer,
or at least more liquid a market is to trade.
Commercials' Positions - This shows what commercial and end
users are doing. Commercials buy more than individuals, or sell
more, depending on market conditions. Traders put a lot of stock
into what the commercials are doing because they carry a lot
of weight in the market and often control the majority of the
open interest.
Unemployment Claims - Jobs are the lifeblood of the economy
so traders pay very close attention to these numbers.
Interest Rates - Interest rates affect almost every
aspect of people's lives, especially borrowing, and that can
impact the ability of traders to invest, so it's important to
keep an eye on the Federal Reserve at all times.
More specific to certain commodities
are reports such as:
Cattle on Feed - Shows the number of cattle that
are in the process of getting ready for slaughter
Crop Progress Report - Shows the condition of the current
corps and how and in what condition they may harvest.
Crop Reports for OJ - Shows the orange crop estimates
and potential damage from weather, pests, or disease.
EIA Report for Oil - A weekly inventory report, appearing
every Wednesday, for crude oil and products derived from it
Natural Gas Inventories- Same as the EIA report for Crude
Oil, except it comes out on Thursdays and only measures the amount
of natural gas in storage in cubic feet.
... and many, many others.
Like any tool in our trading
toolbox, these reports can help us make an educated trading decision,
but remember they are only one tool. Putting all of your eggs
in one basket is never a good idea. Take the numbers with a grain
of salt and try to anticipate how the market will react to any
given number release. It's a good rule of thumb to be on the
sidelines for any major announcement because trading ahead of
a number is highly risky and often very unpredictable, but then
again that's what many investors want. As you gain experience,
you'll be able to see where you want to be.
Regards,
Kevin Kerr
for The Daily Reckoning
email: dr@dailyreckoning.com
P.S In Outstanding Investments,
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Kevin Kerr is the editor of
two highly successful and acclaimed financial advisory newsletters,
Resource Trader Alert and Outstanding Investments. A veteran
commodities trader, Kevin uses his irreplaceable experience to
advise his readers on a variety of commodities investments on
a daily basis. Widely considered one of the nation's top commodities
gurus, Kevin's expert opinions are routinely featured in the
country's premier media outlets.
The above was taken from Kevin's
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