Recap of May Financial Markets 6/2/11

May was volatile for many asset classes – and the futures & commodities markets were no exception. Some notes on May’s market action:

· Crude Oil: after hitting recent highs to end April ($115/barrel on the July contract), crude oil declined the first 5 days of May (including -9% in a single day) – as it lost -20% (to $95), before consolidating at $100/barrel.

· Gold: similar to crude, Gold hit highs at the end of April near 1580, then collapsed all the way to 1480 – before settling the month at 1540.

· Equity Markets: global stock markets were down in May, with the S&P ending down -1.1% (rallying from a low of -3.5% at mid-month). European markets underperformed due to debt worries.

· Currencies: the US dollar has shown strength as the markets try to sort out economic growth, debt problems, and other key forex drivers.

· Bonds: the fixed income market was one of the better markets for trading programs during May, as the “flight to safety” caused bonds to rise.

Indy 500 and Risk Management

Yesterday's Indianapolis 500 race was a reminder about the importance of risk management -- and weighing the risks versus the returns of every action and trade. The leader of the race with one turn to go crashed -- and lost the race -- due to one lapse in judgment.

INDIANAPOLIS – One turn. One stinkin’ turn.

JR Hildebrand made it through 799 of ’em without any trouble. As the young Californian approached that final left, all he had to do was keep his car off the wall, speed down the main straightaway and collect a win in the Indianapolis 500 on his very first try.

Instead, Hildebrand made the sort of colossal blunder that will forever link him to the Jean Van de Veldes of the sporting world.
...
Hildebrand was faced with a choice when he came up on another rookie, Charlie Kimball, going much slower as they approached the fourth turn.

The prudent thing would’ve been to back off and tuck in behind Kimball until they were on the main straightaway. Then Hildebrand could’ve gone on by to take the checkered flag.

Instead, showing his inexperience, Hildebrand decided to stay on the gas and go around on the outside. That put him into “the marbles,” the tiny particles of rubber that gather near the wall, making that part of the track especially slick.

He never had a chance.

“Is it a move that I would do again?” Hildebrand said. “No.”

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Similar analogies of experience, and weighing risk vs. returns can be made to investing and trading. We use computerized trading systems that take the emotions out of trading the financial markets. This keeps us disciplined and focused on idea generation and research.

Related info:
http://whowillwinthebiggame.blogspot.com/2011/05/indy-500-sport-psychology.html