My current portfolio (Update 8 weeks in): 21.2% in the green!

This is an update to my macro-portfolio which was started on February the 29th. If you didn't read about the trades I put on, then here is the link:
http://jtatrading.blogspot.co.uk/2015/02/my-current-portfolio-oil-dollar-gilts.html

A lot has happened since then, at the time, Brent crude was way down at $48. I was very bullish on oil at that cheap price, this was because I believe the market had over-reacted and hadn't taken into account the cut in production from the big players in the oil market. 

My view was profitable seeing the market realise it's over reaction and it moved back to around $60. At the time I was still bullish, however after some very strong US data and some big moves in the strength of the dollar, I believed in the short term it was best to profit take and not be exposed to large dollar fluctuations in my oil trade. 

I closed out at $57.6, realising a 19.2% gain. The current has retraced a lot back to $52.6.

I will keep a close eye on oil, and hopefully the strong dollar will again push it down to prices where I believe it is over sold and cheap. 

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I was also a seller of gilts at 124.2. 

I believe this was the best trade in my portfolio, and I feel maybe I should have put a larger amount on the trade. 

Gilts I believed were well over-bought due to inflation fears, mainly that had come about from the cheap oil. I knew this was only temporary and unless we were going to going to go into heavy deflation, then there was no way yields would remain so low. 

This trade paid off, mainly because of traders taking the same view and also the rise in the oil price which is inflationary. 

Due to the speed of the trade which was unexpected, I closed out of the position at 118.7 - mainly to a large correction at around 117.8. This correction has since moved to 120.4, therefore I will begin looking for another level to begin shorting again. 

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I spoke about being bullish on the dollar in my last post. Where I was a seller of EUR/USD at 1.13, and also a buyer of USD/JPY at 118.4.

I stated very clearly in my last post that this was a long term-trade and based on different monetary policies. I had a 6-12 month horizon on both of these trades. 

I didn't stick to my original plan and with impatient, I closed both of these positions two weeks in after very small volatility. In hindsight, I should have kept these positions on along with ignoring the fact there was little volatility as this just came after the largest volatility in the currency since the crisis. This was a silly and impatient move as I saw gilts and oil moving very quickly. 

The prices are now 1.062 EURUSD and 121.3 for USD/JPY. These moves mainly came from great dollar data on employment, and also from QE programs from both Japan and Europe. 

A big lesson is to be learned from this particular trade. 

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In the last 8 weeks since I put these trades on, I remain exactly the same macro-economic view and I hope that I can trade this view effectively without letting charts or small news get in the way. I will begin looking at how to get into my long term view again after these large moves. 

I have added two more positions to my portfolio and this is long sterling against euros and also long dollar against the yen. This is due to my view that both the Fed and the BoE have much more hawkish monetary policies and we will become to see these become real in the next year. 

Along with this I am also very bullish on the FTSE. It has really struggled to get past all time highs and had actually retraced a lot back to 6700. I am long at 6819, with the view it will rise back up to around all time highs, and past it at some point during this year. 

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Overall my performance is 21.2% increase in portfolio value. This is higher than expected due to the speed at which things have moved. I still remain the same view about these positions and will again look to get in at better prices. 

Look forward to writing another update soon. 

Introduction to Financial Markets: Equity Indices

Equity Indices

The main indices around the world are all compiled of the biggest firms in the globe. Therefore what moves these assets are the changes in the business environment, domestically and globally (These firms do business in all countries across the globe). One of the biggest determinants of equity indexes is GDP. If spending is increasing businesses are creating more revenue, this means they are making more profit and growing larger. Other indicators that suggest a higher spending capacity such as decreasing unemployment, inflation and consumer sentiment all move this market.

Another important determinant in equities is the interest rate. If rates are low there is a double effect for businesses; first there is likely to be more demand in the economy for goods due to cheaper mortgages and less incentive to spend, the other is that businesses will have a cheaper form of finance to grow and become more efficient. The opposite will have the contrary effect on the market.

Investor and public sentiment is also a huge determinant in this asset class. Some of the greatest bull rallies have been based on sentiment as opposed to fundamental factors (2000s), therefore understanding when the market is overoptimistic and pessimistic is a key to making money in equities. This can be achieved by looking at the P/E ratios of particular stock markets. 

My Current Portfolio: Oil, Dollar, Gilts, FTSE

Here is a little update on my current portfolio. The macro environment has been pretty volatile in recent months. We have seen a few major events:

- Oil fall from $115 all the way to a low of around $45

- EUR/USD fall from 1.4 to around 1.13

- Gilts up to record highs of 125 with the lowest yield ever recorded.

I have based my trades around the changing macro environment since these significant events and my outlook for 2015.

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1) Long oil @ 48.3.

This trade is based on a view that the market has completely over-reacted to OPEC not cutting production which is something that has never been seen in the oil markets along with poor global demand. The market I believe has not priced in the fact the oil producers are heavily cutting investment for new rigs in 2015 which will eventually materialise to a fall in production.

It has seen oil plummet to near crisis lows of around 45.5. The violent move stalled for around two weeks and didn't fall on very bearish data such as China missing GDP and the eurozone going into further deflation. When I saw oil not reacting to this news, I saw this as a buying opportunity for a medium-term hold.

I was a buyer at 48.3 and have seen the bulls push it up to 55, after a small retracement to 53 I have increased my position buying again at 53.1.

I believe this could be one of the portfolio drivers in the next 6 months.

I will be looking for intra-day bullish moves to then decrease my position and then increase it back to my original stake after a small retracement. This will take an advantage of retracements. I will be assessing these retracements after large intra-day moves using fibonacci retracement technical analysis.

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2) Seller of UK gilts at 124.2

I believe ultra low inflation has been the driver to record high priced bonds, however this hit in inflation has only been temporary with low oil prices. Ultimately with the UK still a strong grower and wage inflation starting to pick up with lowering unemployment (based on the phillips curve theory), I expect gilts to fall over the next few months on the back of increasing inflation.

From now on I believe inflation will pick up and the interest hike expectations will be brought forward in the next 6 months by the Bank of England. This should see a sharp increase in yields and a decrease in the price of UK gilts.

Since the $5 move on oil this has seen a small move so far in the right direction and I am holding this for the medium term.

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3) Bullish on the dollar.

I am still very bullish on the dollar, despite it having a great year in 2014 with it making great gains against the yen and the euro. I still believe there is more to come due to the fact there has not yet been a rate hike in the US yet. I believe most of the dollar strength against the yen and the euro has been based more on central bank action taken in Japan and Europe.

With the ECB and BoJ starting new QE projects, there has been a great fall against the dollar, however we are still to see the interest rate hike in the US and I believe as the price of oil pushes inflation back up in 2015, the Fed will look seriously at raising the rate this year. This could potentially see the dollar make great gains.

However due to their large moves already, I only have a moderate sized position. Investors may be reluctant to push the dollar as voilently as before and also there may be some significant profit taking which will affect this trades volatility.

My entry prices were sell EUR/USD @ 1.13 and buying USD/JPY @ 118.4.

These have moved in the opposite direction slightly however when the rate hike becomes topical I believe these will see some good moves in the 6-12 month spectrum.

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4) Long FTSE 100 @ 6822

The FTSE has been trading in range for a few years now struggling to break the 6900 mark, however I believe this has been undervalued. The UK economy is in a good position and still with much cheaper oil there will be some good short term GDP data out. Also with aggressive falls in unemployment, the FTSE will not be able to ignore the good UK data coming out.

Also I believe it is stalling the 6900 level because of the uncertainty from the UK election in May. When this is out of the way, I believe it will be a good year for the FTSE and am looking for it to finally break through the 6900 barrier. From a technical point of view, a break out of 6900 would be significant as this has been a very strong level of resistance, so the herd mentality will be ripe should there be a break out from this level.

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These trades were executed  as of Thursday 29th Feburary. Since then the portfolio is up 10% mainly because of the $5 move on crude oil and the small move on UK gilts.

The dollar trades and the FTSE has made small losses however this portfolio is very much based on a 6-12 month macro view therefore I will review the trades to ensure my macro view has not changed but I will only review performance after 6-12 months.