G’day Traders,

Well I always said that September brings big moves, but I didn’t really expect it to happen on the 1st of the month. Last night we got some significant moves, but before we get the really big moves, let’s review the last few days as they can provide an invaluable lesson for many traders.

Over the past couple of days some traders have emailed in saying that they read my update and have made big losses recently on the JPY pairs. A few even admitted to taking all four JPY pairs, had too much risk and lost substantial amounts of their accounts.

Besides saying that this horrifies me every time (and it really upsets me when I hear a client has lost money) it is really bad to hear because I have deliberately put an emphasis on risk over the past week. On the 30th I even made the point of saying to beginners to just trade four pairs and focus on risk.

Let me make this very, very clear:

These markets are getting volatile and when they break they should really go.
Volatility means there is extra risk around. Therefore everyone should focus primarily on risk. Risk per trade differs but >5% on a trade is suicide and it should be much lower.
Tight stops won’t work as you get stopped out of good trades and in volatile markets like this you need extra room.
Beginners should reduce what they trade down to a diversified range of products. That means 1 JPY pair and, as I said, maybe just four forex pairs plus whatever commodities and you should be trading the minimum amount.
I see too many traders start off risking too much and trying to make it big in their first six months. Even in good markets you should be asking what is the worse case scenario here. By the way, according to my rules these are good markets and I will explain that further on.

Bad risk management kills accounts, not bad markets or bad signals.

The US S&P500 +2.95, Brazil +2.96, European top 500 +2.88 and UK +2.70%, Nikkei +1.17 and ASX +2.08%… China was actually down – should jump today.

On Twitter I spoke about the market looking very strong – a good thing for Forex and T-Bond traders. Treasuries fell, but bounced off critical support. This is the market I am watching.

On Treasuries I tweeted an article about bond yields being lower than stock dividends. Fascinating to hear that this was the norm prior to 1958 when the US markets were dominated by deflationary periods. For 50 years this never happened again until 2008 and now it is looking more like the norm.

What does this mean? A primary shift in the way investing is done and the markets seem to get it. I cannot emphasise this enough and the sad thing is that even the investment community doesn’t understand what is happening. I would not be surprised if we see a 50 year period of deflationary episodes and I will touch on this tomorrow at the Summit. I can see this occurring in the Australian real estate market too and there is an article there on the US real estate market.

Just on the Summit I won’t write a weekly tomorrow. I am simply too busy… but of course will try for a daily.

I also tweeted that a Chinese central bank analyst predicts a sharp Gold decline. Firstly, when I see an analyst predicting something I look the other way. Secondly, when a central banker says something I know they are scared about the opposite. Thirdly, when a Chinese official says something they are usually saying it to take advantage of it. So this article should read – China wants to buy more Gold and sees significant risk of other assets they own lots of (such as USD assets) devaluing. I know… I am VERY skeptical

Employment: The market didn’t care, but we got seriously bad employment data last night. It was the first drop in the private sector this year. Forget the magnitude and what the markets say – this is scary because if there was even a small recovery we should see job gains.

The big number is out tomorrow – US employment data!

Now with the rally my call of 1100 on the ES not being broken this year looks shaky. However, I believe this employment data could be horrific for the market. Therefore, another swing is possible. Bernanke speaks today in the US, although I would say there is a possibility the markets won’t do much. Truth is though, I would have expected that support in the ES to have been broken already so I believe I am wrong on that call.

Oh – why do I say these are good markets?

I am looking forward:

• There is a lot of economic news, debates and uncertainty. We usually get good moves out of this.
• The ‘energy’ in the market is increasing – it just hasn’t focused in one direction.
• September is traditionally a month of really nice moves (although the lead up can be difficult).
• October is usually better than September.

It is just important to focus on RISK first – so you can take advantage of good markets.

ETFs – The rally last night was very big, but it is in the range and so means very little.

Options – Awesome rally – time for some BECS trades. Options Trading Pits is scheduled to start tonight I believe for those on Fast Track.

Information for Beginners – If you are a beginner you should be focused on keeping things simple and risk low.

Information for Intermediate – A nice move, but don’t get excited yet – it is in the middle of a range. Be diversified and focus on risk.

Information for Advanced – The critical level I am watching is 132 on Dec T-Bonds. If the market breaks this my 1100 ceiling is probably finished. The T-Bonds are really moving a lot and I wonder if this means it is the top of this market.

Scott Goold

Head of Lifestyle R&D

An observation on diversification by Endre Dobozy

I regularly receive questions about how best to diversify my investments. The logic is that you shouldn’t have too many eggs in one basket, a theory that works when everything is going up. This is further reinforced when everything is trending up on a lag, as they don’t all rise at the same time, giving the illusion that diversification is working because when one asset class is down a little another is rising. However, this isn’t likely to be the case over the next decade, where all assets are likely to fall partly because of deflation and deleveraging, but also due to reduced demand from the peaking of the 39-40 year generational cycle. So, by diversifying your eggs into lots of little baskets all you end up with is lots of baskets losing value.

Once net worth peaks at around age 64, investors shift their focus from stocks to bonds as these are used to provide income during retirement. From this point on they spend less and make do with less. They effectively reduce consumption and begin the process of spending down the money that has been accumulated over a lifetime of work.

If you want proof that people spend less on consumption as they age just take a trip to a retirement home (also referred to as God’s waiting room) and look at how many new cars there are that belong to the residents. Look at the furniture and the money spent on flat screen TVs and other electronics. I guarantee you won’t find many. The only area of consumption that increases in this age demographic is spending on drugs, which doesn’t peak until age 81.

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Trader Term of the Day – Tangible Asset

An asset whose value depends on particular physical properties. These include reproducible assets such as buildings or machinery and non-reproducible assets such as land, a mine or a work of art.