Recap for Week Ending 8/24

Net Asset Value: +21.81%
Change in Contributed Capital: 0
Change in Purchasing Power: +18.95%

This week saw a return of risk appetite as traders rebuilt their JPY-funded carry positions and unloaded their U.S. dollars for oil, gold, foreign currencies and U.S. common stocks.

Everything that was supposed to happen happened. Global equity markets rebounded from last week's record lows. Emerging markets currencies strengthened against the USD. The JPY weakened across the board. Oil and gold were up slightly. The Bank of Japan left key interest rate unchanged on Thursday as anticipated. No surprises. Not really. The only event that may qualify as a surprise is Bank of America's $2 billion bid for Countrywide's preferred stock. This has the effect of removing the second company from the "endangered species" list and boosting investor's confidence.

The majority of my profit this week came from shorting EUR/TRY. But I could have easily generated the same amount from buying Crosses/JPY. In fact, I could have done both and generated twice the amount shown above. But trading volume was thin and there wasn't much on the calendar in terms of market-moving economic events. In addition, since the pain of large losses I had endured last week still lingered in my mind, I was psychologically unable to allocate a significant amount of my trading capital on any trade. Consequently, I only extracted the least I could have extracted from the market.

Here's how hot money moved:

	17-Aug	24-Aug	long USD	short USD
CHF	1.2077	1.2002	-0.62%	-2.24%
CNY	7.5896	7.5576	-0.42%	-2.44%
EUR	0.7424	0.7315	-1.46%	-1.40%
GBP	0.5049	0.4966	-1.65%	-1.21%
JPY	114.3	116.39	1.83%	-4.69%
XAU	0.00152	0.00150	-1.57%	-1.29%
ORORCL	classified	classified	-21.81%	18.95%
DJIA	13,079.08	13,378.87	-2.29%	-0.57%
Nasdaq	2,505.03	2,576.69	-2.86%	0.00%
S&P 500	1,445.94	1,479.37	-2.31%	-0.55%

The Dow doesn't look too hot. Sure, the index of 30 blue chips companies closed up 2.29% for the week. However, weekly MACD is bearish; weekly RSI, bullish. The fact that volume is about average indicates some reluctance to take sides among traders. Some bulls (or bears) have become birds, due to risk aversion; or maybe they're still re-assessing their own risk exposure.
Same story on the daily chart, with the exception of a bullish MACD crossover. As a matter of fact, daily volume is slowly drying up, indicating floundering buying interest. On a side note, the morning star pattern suggested last week did, in fact, materialize.

But it looks like a lot of traders are happy being on the sidelines. Like them, I will join the bulls if and only if the Fed lowers the Fed Funds rate as widely anticipated. For now, that decision is only a fantasy that has been widely priced into market prices. If I enter the U.S. equity market now and the Fed decides to leave rate steady in September, I will lose my shirt.

Actually, I'm more afraid of the Bank of Japan than the Fed. Lately the BoJ has been involved in too many open market operations that it's difficult to predict what its next course of action would be. Inject liquidity, or reject it? Which is next? Personally, I would like to take the BoJ's side. I would like to help the BoJ accomplish its long-term objectives, but it seems like the BoJ is stuck between a rock and a hard place that it acts to appear active. It's acting like a day trader, pumping money into the money market one day and pumping money out of it the next. Is that good? I don't know. But it's making me nervous, extremely.