Possible Red-Letter Day on AUDUSD and DXY and USDJPY

Just yesterday I highlighted the possibility of AUDUSD making a Bullish Flag breakout. - Today it did break out the top of this pattern, it also made a new high for this move, but it also may have had a spectacular failure in doing so, as highlighted by poor volume on the breakout and heavy volume on the failure. - Today's price action has also produced a bearish 'Shooting Star' candle. - On its own, not that significant, but given the breakout failure and the high volume, this may turn out to be a significant day for the AUDUSD in relation to the next few weeks. The first and second chart below highlight these points.

Below the AUD charts I have some other charts of interest. The first is today's USD Index, which has not yet closed, but it looks nailed on for a significant 'Bullish Engulfing Day', this is often a strong reversal candle signal. I would also like to point out this 'may' also be forming a 'Bullish Falling Wedge' pattern on the USD Index; if this were to complete, then the odds would be strong for a move back to the highs of the USD Index in coming weeks, and quite possibly higher. With the major constituent for the USD Index being the relationship to the EURO and European currencies, this could be significant for the EURUSD.

The fourth chart shows how today's strong up-move in USDJPY has produced a strong monthly candle. This suggests that today's move is based on USD strength at this stage rather than a risk-off flight. I touched on the possibility of a significant move for USDJPY a couple of weeks ago, that post can be seen here . Today's close near the high of the month is supportive of further upside in coming months and in the big picture seems very bullish.  Finally below this chart is some analysis courtesy of Barclays FX research, which also shows some interesting analysis on the USDJPY.

AUDUSD CME FX FUTURES CHARTS

USD INDEX CHARTS

USDJPY FX SPOT CHARTS 

 

Some further thoughts on forecasting?

I recently posted a couple of articles about forecasting and whether there is any utility achieved from forecasting. - The first of these was posted a few weeks a ago and can be seen at this link 'Is it folly to forecast?' this was followed up by a question on my 'LinkedIn group' - 'Is forecasting a waste of time?' - which was intended to stimulate debate rather than express my opinion, and which certainly produced some interesting responses.

Before, I proceed any further I also want to refer to an article by Michel Pireu in 'Business Day' from last year where he talks about James Montier's view on forecasting - the article can be seen here. I have discussed some of Montier's views previously, I am a huge fan of Montier's work, not only does he make some excellent points and observations, his writing style is both interesting and uncomplicated, which means unlike so many books on aspects of trading and finance, you won't need matchsticks wedged into your eyelids to stop them from shutting. - One of the points about forecasting Montier makes is that "The bottom line from this whistle-stop tour of the failure of forecasting is that it would be sheer madness to base an investment process around our seriously flawed ability to divine the future."- However, there appears more utility to forecasting, then would be merely the actual prediction element, The following highlights and summarises some of the responses from people to this discussion on my 'Linkedin' group.

Firstly some very inciteful responses which I am paraphrasing from Can Esenbel:
- Forecasting can make you prone to start caring more about being right than about making money.
- Forecasts can become 'Hopecasts' or 'Wishcasts': 'The other problem with a forecast is that we will tend to integrate our inside view as an outside view'.
- Forecasts can cause us to lose sight of the context: 'We will tend to overweight recent, eloquent confirming information while ignoring or downplaying info that we don't like. We are also like to compress or expand time frames to manage our views'.

Durga G added to this that a danger with forecasts is that:
- It is how we respond to forecasts that often be the problem : Forecasts are fine but it is the certainty one attaches to a forecast that leads to trouble.

Biju Dominic made an interesting point:
- It is inherently difficult for a human beings to believe that the future is uncertain. So despite enough and more studies that show that it is impossible to predict the movements of a financial market, or the way the consumer will behave in the market place (I am sure many of us have read the book Why Most Things Fail by Paul Ormerod and Wrong, Why Experts Keep Failing us by David H. Freedman) it is imperative that 'experts' are expected to have a point of view about the future.

- Ian Copsey, a market forecaster himself, backed-up this point of Biju's with some examples of his work. Ian is the sort of person Biju was highlighting, experts in their field, who may be able to add some value to the traders/ investors own perspective.

- Some excellent counter-points were however made by Richard Brown and Mao Song-Gong. Which brought in some other aspects of forecasting: The essence of these being that despite most (not all) forecasts being nothing more than educated guesses with little chance of being accurate, they do provide a context or focal point for a trader or investor, without a forecast or belief many people are really just looking at numbers moving. Further to this, they also provide an opportunity to learn and increase our knowledge of the current market, by having a reference point to assess what we see against what we think. Thus they help us in proving clues which can help us to try and complete parts of the jigsaw: Taking this analogy a little further, when one tries to complete a jigsaw, it is often a trial and error process, which involves looking for pieces that may fit. - In the markets of course it is virtually impossible to ever complete the jigsaw, but at least one may try and put parts of it together to have a sense of the bigger picture.

I would like to add something to this, which partly builds upon the point made by Biju above. Markets are inherently uncertain places, and entering them means venturing into an uncertain world. - We need a strategy to cope with this, or we risk being paralysed by fear, and thus never taking part in seeking risk. - These strategies will depend very much on ones personality and behavioural characteristics and preferences. -Thus an inherent part of your strategic approach to trading will be an attempt to reduce your uncertainty (or ambiguity aversion). The tactics you adopt to achieve this will probably depend on your preferred behavioural approach or personality: For some it will be following rules, or taking a systematic approach; others will like to expend energy keeping very close control on themselves, their trading and their risk-management, others will limit their exposure to the market to mere seconds or minutes, - I could go on, but I am sure you get my point. - One approach to reducing uncertainty is to make (or to have) a prediction of what may happen next, whether or not it turns out that way, is not really as important in this sense, as to how it reduces uncertainty within the trader's mind.

Further to this last point, and to echo some of the above points, forecasts also provide a reference and focal point to events in the market. Some traders are able to make successful trades out of incorrect forecasts, this is because the subsequent market actions following the forecasts enables the trader to eliminate certain courses of action, and can help highlight favourable risk/reward set-ups.

In summing up, I would say that it is not folly to forecast, there is real utility to forecasting and to reading peoples forecasts, though this will largely depend on a trader/investor's working approach and style. I would however add a note of caution; traders and investors must make sure they keep forecasts in perspective, they are not and never will be a road-map of the market, in most cases they are 'best-guesses' based off limited and ever-changing variables. However they are useful noise, knowledge and information, they can help provide a focal point to the market and a context to price action and news/events. Further more they will always be needed and demanded because people need ways to reduce uncertainty, and will seek leadership and expert advice. .

AUDUSD - CHART OBSERVATION - Bull Flag ?

Has the SP500 been producing a repeat rally?

I can't help noticing that this recent rally on the SP500 does look remarkably similar in nature to some other rallies over recent years.

The chart below highlight the 3 prior rallies I am referring to, along with the current rally. - The Rallies follows a sharp dip, we then see a remarkably steady and consistent rally, these are then followed by some topping action, and then a correction, these being of varying sizes, but include 2010s flash crash as one of them.

Below I have added a set of charts of each of these rallies. - As you can see they are remarkably similar in nature, furthermore there is a very close similarity between the amount of % gains and their duration. [Those of you who are in to the Fibonacci thing may notice how close the durations are in days to the Fib number 55].  - Below these charts I have added a chart showing the current rally. - If (and it is a big 'if')  this was to continue to display similarity to these rallies, we may still have a couple more weeks of upside, with the rally approaching or making one final lunge close to 1400. - If it were to unfold something like that - well what happens next is anyone's guess?

Interesting Pivotal Juncture for the 'Risk-off' poster boy.

During the entire period from 2007 to the present, the JPY has been the poster boy of the 'Risk-off' fraternity. Falling sharply from late 2007, trying to rally several times, but these ultimately fading away into a long continual downtrend which has ultimately seen it move from near 125.00 versus the USD to around 75.00, a drop of around 40% (or a gain if you were a JPY investor).  

There are signs however that USDJPY 'may' be basing. One has to be aware however; the world is full of traders with severely damaged trading accounts who have tried to call a base in the USDJPY over the past couple of years.

I am not going to go into detail in this at this stage, however I would like to present the longer-term USDJPY charts and highlight the pivotal nature of the current zone, in terms of major trend-line resistance at 78.70/85, which sits just above today's high at 78.66. - It is worth noting, the trend-line connecting the start of this decline had been broken in the past month, however the resistance line which is currently under threat may be more significant as it connects a number of key highs.  Also worth noting is that at the same level there is a minor line connecting a couple of significant highs from the past 6 months, giving this level a greater significance in terms of being pivotal. First attempts a key levels such as this may be repelled, but this is definitely a key level to keep an eye on with possibly deeper repercussions longer-term. . 

 

The deeper repercussions would be that a breaking of the trend-line may be a significant step on the way to a major change of trend in the USDJPY. This would not of course confirm a change of trend in itself, however, it could be an important event which could trigger some USDJPY buying activity, and longer-term could be a significant marker on the way to a major trend change. If that major trend change is occurring, does that mean that the risk-off mindset which has been the dominant feature since 2007 may be on the wane? The chart below highlights significant differences in the characteristic of the market in terms of USDJPY and SP500 in risk-on v risk-off phases, I know this is highly simplified, but it is nonetheless worthy of consideration going forward.

Does perception mislead reality in trading?

I have been asked to respond to a question in relation to an upcoming webinar I am providing to FX traders at a proprietary trading house. The question is as follows:

Should EURUSD traders consider switching to alternative currencies such as the AUDUSD, or even different products, in light of the casino that has been the EURUSD market over the past 6 - 8 months?

When I was asked to respond to this question I thought yes this seems reasonable, EURUSD has been a very difficult trading currency for many in the past year, with the rumour-fest that was the 2nd half of 2011 messing with many people's trading accounts.Whereas there is a common perception that the AUDUSD had been a good trending currency in recent months with manageable levels of volatility.

I decided to put this question out to a number of trusted friends and contacts at various investment banks and hedge funds to illicit some of their responses. The general tone of the response has been that switching markets away from what one is use to is fraught with danger, taking one away from their core capabilities, strengths and areas of familiarity. However, it was also generally pointed out that the AUDUSD has been a steadier trending and trading currency that the EURUSD over the past year. 

However, one respondent disagreed totally, his assertion was that the AUDUSD has not been less volatile than the EURUSD nor a better trending currency, it is just that AUDUSD traders are more familiar than EURUSD traders with the excessive volatility, and that the relative conditions were less unusual for AUDUSD traders compared to EURUSD traders. - This was an interesting point which particularly resonated with me as last year my EURUSD trading left something to be desired, whereas my AUDUSD trading last year was extremely successful. Had this been the case, that I did not need to adjust my trading on the AUDUSD as its behaviour was not so different to what I had been use to over the years? Whereas my EURUSD trading was a different story, cutting me out more often than would normally be the case, and providing me with misleading signals relative to its usual behaviour.

I decided to look at this phenomenon a little further, I have produced some charts, based off the size of daily price ranges relative to price (this allows for a comparison of two different currencies performance, and compensates for the changing price level over time). - I was adamant, that the EURUSD had been far more volatile than the AUDUSD in H2 last year, and I sensed that many people shared that opinion. The data however tell a different story. 

The first charts below show data from the year 2000 to the present:

• EURUSD to the left and AUDUSD to the right.
• The top charts show the 20 day average range as a percentage of price. 
• The lower charts show the 10 day average of the 10 day standard deviation of range as a percentage of price.
• The area marked in the Red border is the data for the second half of 2011.

Is this a case of lies, damned lies, and statistics? - The next charts shows the AUDUSD daily and the EURUSD daily over the past 9 months. 

Looking at this , not only does the AUDUSD look more volatile on a daily basis, its also looked that contrary to a few opinions the EURUSD had been more trending than the AUDUSD. 

Finally the last charts show the period from the beginning of June last year through to the end of December, highlighting the daily range relative to price for each currency. 

I think it is crystal clear from these last charts, that despite the rumour fest which coincided with the European Sovereign Debt crisis of last year (still on-going), the EURUSD was not more volatile than the apparently safer (in terms of volatility) AUDUSD, despite what seems to be a quite common perception out there amongst many FX traders, that teh opposite is true. (Unless of course I am canvassing opinion from a very small group of unrepresentative traders.)

Thus answer to the original question. - If one was to move to the AUDUSD to escape the volatility of the EURUSD they would actually be increasing their exposure to volatility, and not escaping it.

In fact to further quote one of my good trading friends, who had an excellent year on the EURUSD last year bucking the opinions of many others, 'The key is to see it for what it is and to look at the opportunities it provides, rather than see danger at every turn'.

With regard to the question - Does perception mislead reality in trading? - I think this is a bias which affects many traders, and indeed can affect whole groups.

Beware the ‘Siren’s Song’ of quick and easy profits.

You start your trading day with the best of intentions: – You intend to buy low, sell high, then sell high, buy low. – At the end of the trading day you hope to have booked a tidy profit, and so added further to your P&L, before repeating the same the next day. You aim to be disciplined, steady, focused, you do not want to get sucked into buying near the top, selling near the bottom, cutting your position just before it turns, snatching at quick profits, only to run large losses, and then walk out the office questioning ‘why the hell you did what you did?’.

 

How did you fell reading that passage? Were you upbeat at the beginning? - Thinking ‘yes, this is what I like’? Towards the middle bit did you find yourself agreeing with the principles? However by the end were you a little bit deflated? Did this sound all too familiar? And did this echo all to often your trading day?

I can look back over my many years as a trader and recall this sort of pattern during some of my less successful phases. – I thought it applied almost exclusively to me. – Over the past couple of years however, working with and coaching other traders, I have come to realise that this sort of pattern is incredibly common. The best of intentions can get jettisoned the moment we sit down and look at the screens. – The ‘siren’s song’ of quick and easy profits is there to always entice us off course and smash our trading performance to pieces on the rocks of despair. The following is a fictional account of how this ‘siren’s song’ may play out over the course of a trading day. This account is accumulated from many years personal experience and from hearing the travails of many a trader. It is worth noting how the trader is led astray and deviates from his original course of planning to go long on a pullback. Also see how the trader’s personal trading rules are scuppered, and attempts to navigate his way to safety, lead to the trader undermining effective risk management. Finally notice how the trader’s judgement and decision-making abilities are compromised leaving the trader stranded and relying on nothing but hope.

The script may go something like this: -

Bund (or DAX / S&P / Treasury / EURUSD -whatever your poison is) is up for third day in row, its rallying, trader thinks ‘I want to get long of this, it is heading higher, but its looking a little tired, I think I’ll wait for a pullback, when that happens I’ll get long’.

-          Have a coffee –

‘Ah another leg-up, did not see that coming, but now its overbought and approaching some overhead resistance, maybe a good sell here for a few ticks’ -  Trader sells 50 lots. - It comes down a little, - ‘I knew it, perhaps I could make a tidy sum on this’ – ‘Doh - its back up, but still looking tired though, maybe I’ll sell a little more, there is good size on the offer, not much on the bid, this could puke any second now.’ -  ‘Damn, where did that bid come from, all offers taken out - this is soaring’ – ‘F*ck, its getting close to my stop, bloody algos, they knew I was short’. – ‘Shit my stop is approaching, I know its going to get taken out, right I’m cutting here, if I’m going to be stopped anyway I may as well cut here and save some P&L’ – ‘Right I’m out, flat now, and saved a few ‘bob’ compared to where stop would have been, that feels a lot better’.  – ‘Going go over road to Starbucks, back in 15 minutes, could do with some air anyway’

-          15 minutes later and back in the office –

‘WTF, its right back down, never even hit my stop’ – ‘Agggghh I’m such an idiot, its puking, and I’m not short, if I had just stuck to my original stop -  aggghhhh’. – Right as I said in first place this is going lower, I’m going short in twice the size, make up for the missed P&L, I can still make this work for me.’ - ‘Right short now 100 lots, this feels better, I got my short on again - I can see the profit in front of my eyes, - can relax a little now, just let the market do the work for me its moving my way, feels good, hmmm’ –

‘Now where do place my stop on this, can not have it as high as before, as I’m in twice the size, but I would like it up there as I know it is just above a key level, but on the other hand I’m risking too much on this size from where I entered, and got the earlier loss already. - OK I’ll have to bring it down a little lower this time, it should be safe anyway, after all I’m convinced this is heading lower - its not going to be taken out.’

-          A short while later -

‘ Hmmm, not doing much all of a sudden,  seems to have stalled a little, I guess a little retracement is on the cards, I suppose this means it could rally a little before dumping, I’ll try and capture some of that rally, make a little bit, then get short again. - Ok lets buy some here, get a little long, not too long, as it is only a small move.’ – ‘F*ck, its going down, I’m long now ‘bloody algos again – they knew I’d gone long’. - ‘Right I’ll wait for a small pullback, try and break even on this last bit, then I’ll be back short where I want to be.’  – ‘OK its coming back up nicely, just a couple more ticks… damn someone has hit it, this is not coming back, quick get my short on only 50 left on the bid, missed it damn -  aggghhh this system is so bloody slow, next bid gone too aggghhh, right just hit next bid – done it.’ – Aggghhh its bounced a couple of ticks, why didn’t I just wait a minute, well at least I’m short now once again, that feels much better, a small loss on that last bit, but I got the right position on again, and I sense I’m going to make some serious money on this, and get all today’s loss back and some - happy again!’.

-          From the squawk-box – ‘Rumour of Medley Report, should be bullish for Bunds’.

Market spikes up. - ‘Shit, shit, shit - what should I do, - last time this happened it faded away and had no real impact then dropped sharply, this may actually work in my favour, I think that this could happen again, - stay with it.’

-          Slowly comes lower back to almost where it was at time of report comment. –

‘OK, as I thought, this is the right position, nice hold by me ‘am I good? or - am - I -  good’?’ – ‘Ok this is trickling up a little again, should start to fade soon and then dump’. 

– Continues to trickle up. –

‘Right stay with it, this is a little painful, but there is not much going through, should fade soon.’

-  Continues climbing slowly. –

‘Surely this should run out of steam soon, perhaps if I sell some it might knock it back down, there is so little size on the bid, hhhmmm. -  No what am I saying that never seems to work, and I have not got the size for that, and I think it will run out of steam soon anyway as this has nothing behind it. - But my stop, it is approaching it now, and this is not a major level, I know what will happen - it will just go through it by 1 maybe 2 ticks, takes me out, and then back down, and I miss out, how I can let that happen? - But my P&L - I’m closing in on my daily loss limit - but I’ll kick myself if this stop is triggered and then this pukes – bloody decisions.’ – ‘Right, I’m moving stop to original level, - ‘in for a penny in for a pound eh’. 

‘Ok, my original stop has gone by 1 tick and its back a few ticks lower now, - I knew it, brilliant, got it just right, should see this start to head down now, it may even collapse.’

-          Starts to climb again slowly –

Agghhhh, it’s broken through my original stop, damn maybe I should have kept it there and been done with it, this is not going lower. - What to do now, its costing me some serious P&L, I can’t even look at my account balance, I know roughly what it is, I don’t need to see today’s figure in writing. – Should I cut now ahead of my new stop? But - then what was the point of moving it in first place, and if I cut now and it does not go through it, as happened like last time, well then I’ll be even more bloody furious. - But if it goes through the stop then the loss will be well through my daily loss limit - more bloody decisions.’ – ‘Right I’ve decided I’m going to leave it, but I’m not going to watch it, I’m going out for a coffee, then I don’t have the agony of watching it, - it might even be lower by the time I get back’.

-          30 minutes later and back in the office –

I bet it’s stopped out. – Lets look at my screen, here goes - I knew it, bloody thing, it has gone right through my level and is flying. – I knew this was going up, I said so this morning - bloody knew it. ------ What is the matter with me, I’m going home.

-          Storms out the office, angry, annoyed and with a severe dent in his P&L. –

 Will the trader learn from the experience? or will it happen all over again in a similar way? -That may be the difference between success and failure in the long run. - Meanwhile the trader heads home, with the question ringing around inside their head - ‘Why the hell did I do what I did?!?!’

MarketPsych - Social media, Behavioural Finance, Psychology and Neuroscience.

I came across a very interesting piece on a blog called ‘MarketPsych: Applying Behavior Finance’. I was particularly interested in their posting on the 3rd January this year. – The link is here. The title of the piece is ‘Using Reason+Emotion to Forecast 2012’.  The article grabbed my attention making some thought-provoking points and assertions and is well worth a read.

A couple of things jumped out at me, particularly in light of the fact that this article was posted on the 3rd January and how market events have unfolded since that time.

Firstly, their assertion that, ‘uncertainty is predictive - in a counter-intuitive way’. Looking at the way markets have started this year, this would go along way to answering all those people, and there are many, sitting around scratching their heads at the performance of the markets so far this year.

Secondly, and I find this really interesting, they have analysed and aggregated the past 13 years of social media chatter by year for 8,000 publicly traded U.S. companies. They found that December, perhaps not surprisingly, has been the happiest and most optimistic time of the year for investors. Perhaps this is one theory why markets tend to experience the ‘January effect’: The January effect has been known for many years and was first described some 70 years ago. Since 1991, not including this year, January has on average returned 6.7% on the SP500.

Following on from this analysis, they have conducted, in their own words -‘basic analysis’ - from which they have created forecasts for stock out- and under- performance using both emotion and reason as the inputs. As a result they identified five companies that they think may outperform and five who may underperform the market for 2012.

Given that this was published on their blog on the first Monday of January, I thought it would be interesting to see how these have fared so far this year. The following table shows % performance ‘Year to Date (YTD)’ as at the close of business on Friday (3 Feb 2012) for the suggested outperformers and underperformers. At the bottom of each group I have calculated the average performance for each group; I have also included the median performance, which I think gives a better reflection, due to the distorting effect of one outlier in a small group. It certainly looks very impressive thus far: 

Finally they talk about some interesting insights from neuroscience, which can have far reaching consequences for our own performance when trading and investing. Whilst it should be no surprise that people get excited when they do (and possibly believe they will) make money, it is however what is happening inside our brains that is fascinating. When we make money this triggers activation in the brain's reward system; however at the same time that excitement leads to a de-activation in the "loss avoidance" areas of the brain.  Let me just re-phrase that slightly: ‘When we become excited about making, or the prospect of making money, we become less able to detect risk, thus perhaps when we need it most, we let our guard down’. – Who as a trader or investor can not resonate with that? 

 

They also talk about how we become ‘emotionally primed’ when watching financial news, (and I would suggest when watching market price action, data releases, and other aspects of trading and investing). They assert that it is common for - our unconscious emotional state to shift from news story to news story - across a spectrum from joy to anger to fear - depending on the message of each story.  As these shifts occur, the brain shifts its decision-making from primarily neo-cortex (analytical) to primarily limbic (emotional).  And most importantly, this shift to emotional decision making is unconscious.

After such a shift, our rational brain (neo-cortex) believes that it is responding to financial circumstances and information as before, but in actuality it has been "emotionally primed" and is reacting to events from within an emotional frame.  

We see this in our own behaviours, when we hear frightening news; we react with more caution, whereas after favourable news, we are inclined to take on more risk. This ties in an aspect of my own ‘Trader Performance’ coaching, where  I suggest to clients that their major market analysis and indeed their thinking should where possible be done, in what I consider a ‘cold-state’, preferably not in front of screens, or away from market activity, or during quiet times. This way decisions and analysis are far more likely to be based in reason, whereas decisions taken in the heat of trading, ‘hot-state’ are far more likely to be poor decisions, based on emotional responses. (Please note; I like emotion as an input into decision making, so I do not suggest ignoring it, but the decisions themselves should be made in a rationale state of mind - where possible).

How a bull market starts? Wise words from another era.

The following excerpts are from a book I acquired last year.

Before applying rules for operating in a bull market it is necessary, of course, first to determine when stocks are actually in a bull swing. Most traders seem to become convinced of the genuineness of a movement in either direction only when it approaches a culmination.

The start of practically every bull market is indicated on one of two ways:

1) The orthodox indication is afforded when the market, after a protracted period of dullness and narrow fluctuations, breaks through the trading area, with increased activity on the advances..........To avoid mistaking a false move in a few easily manipulated stocks for a genuine bull market, this indication should not be accepted until the recognised leaders have entered new territory.

2) The other reliable indication of the start of an upward swing is afforded when after a period of declining prices or, less frequently, dullness, the market advances or refuses to go down following the receipt of bad news. It is not enough that these should be temporary strength..........the market finally advances above where it was before the news was received.

The above circumstances on the latter case read rather like the US market since early October 2011, which has rallied nearly 25% despite climbing what could be termed a huge ‘wall of worry’.

However, the interesting thing about these comments in this book is that they were not written on response to current events, or even any recent event, rather they were written in 1917.  Another extract from the book highlights the author’s second assertion:  

A striking case in point was afforded by the action of stocks on May 9 1917. The market had been going down steadily for nearly two months. On that date the front pages of the daily newspapers carried bad news from every quarter: The Russian Provisional Government has apparently collapsed, troops were deserting, anarchy reigned; submarine sinkings were on the increase and British statesmen were in the last throes of pessimism; the Anglo-French offensive on the western battle front had petered out; Congress was going to enact tax measures of a more drastic nature than had been expected; profits were to be restricted, prices fixed, huge bond issues were pending and it seemed certain that thereafter the United States would have to carry the financial and much of the military burden of the war. The worst that Wall Street had feared since our entrance into the conflict had apparently had come to pass.

The market greeted this array of unfavourable developments with a fairly steady opening; stocks then broke to lower levels, but late in the day rallied vigourously under the leadership of Steel, which had opened at 114. Its extreme low for the day was 112½ but it finally got above the opening figure, and followed by the munition, equipment and other steel stocks, kept right on going up for three weeks, until it made a new record high at 136½.

I can’t help thinking of the parallels with some of the headlines and general feeling around the market at the lows around the 3^rd/4^th October last year, when the SP500 put in a low, which had followed nearly 3 months of declines of around 20%.

• Moody's cuts Italy credit rating by three notches, Moody's downgrades Italy for first time in two decades.
• Investor Fear Over Morgan Stanley Sharpens – NYTimes.com.
• Goldman Sachs predicts “great stagnation” in the global economy.
• Eurozone crisis prompts global sell-off as Greek deal is delayed - US now in bear market territory amid fears banks face bigger losses in Greece.
• Wall Street protest movement spreads to cities across US, Canada and Europe.
• Occupy Wall Street protests reach Boston, LA, St Louis and Kansas City, and are planned in cities across US and abroad.
• Senior IMF official backs hike in Japan’s consumption tax rate

The book (a small publication of just 64 small pages) called ‘One-way pockets: The book of books on Wall Street Speculation’, was written under the pseudonym Don Guyon. It is an analytical study undertaken between 1915 and 1917 by the author, who worked for a large brokerage firm in New York, of the trading activities of a number of major accounts at the firm.

I think the ultimate lesson from reading this publication is the old adage, ‘The more things change, the more they stay the same’.