Trader Vic on Commodities

In Trader Vic on Commodities, Wall Street legend Victor Sperandeo explains in simple terms how these markets operate, removes some of the mystique and uncertainty involved, and offers a proven method for capitalizing on commodity market trends—without taking giant risks. Sperandeo shows that, as commodities are cyclical in nature, your goal should be to capture as much of the major market trends as possible, while balancing that goal with a minimum of risk.

Preface ix

Acknowledgments xiii

Chapter 1 The Basics 1

Chapter 2 You Can’t Win Them All 9

Chapter 3 Indicators and Tools 15

Chapter 4 2B or Not 2B: A Classic Rule Revisited 23

Chapter 5 An Introduction to the S&P DTI 35

Chapter 6 A Challenge to the Random Walk Theory 45

Chapter 7 The Rationale and Value of a Long/Short Futures Strategy 67

Chapter 8 Why the S&P DTI Is an Indicator 81

Chapter 9 The Fundamental Reason the S&P DTI Generates Core Returns 105

Chapter 10 The Nature of the S&P DTI Returns 115

Chapter 11 A Fundamental Hedge 133

Chapter 12 S&P DTI Subindexes: The S&P Commodity Trends Indicator and the S&P Financial Trends Indicator 139

Afterword 143

Appendix A S&P DTI Methodology and Implementation 147

Appendix B How to Interpret Simulated Historical Results 177

Appendix C Correlation Statistics 191

About the Author 195

Index 197

Victor Sperandeo is a principal of Enhanced Alpha Management. He has more than forty years' experience on Wall Street, trading independently with, among others, George Soros, Leon Cooperman, and BT Alex Brown. He has written two very successful books with Wiley: Trader Vic: Methods of a Wall Street Master and Trader Vic II: Principles of Professional Speculation. Sperandeo has appeared on CNN and CNBC, as well as in leading financial publications.

Commodities are experiencing a new up cycle—and an examination of the major factors contributing to these price increases suggests they are not short-lived. World populations continue to expand, increasing global demand. Industrialization in China and India, as well as in other emerging markets, has greatly increased the need for energy and industrial products, while the supply remains limited. With the increased volatility in the commodities markets, the surge in interest, and the generally higher prices in everything from crude oil to copper to cocoa, it seems clear that every investor should have at least some exposure to commodities.

In Trader Vic on Commodities, Wall Street legend Victor Sperandeo explains in simple terms how these markets operate, removes some of the mystique and uncertainty involved, and offers a proven method for capitalizing on commodity market trends—without taking giant risks. He introduces a valuable tool—the Standard & Poor's Diversified Trends Indicator (S&P DTI)—to capture price movement, premiums, and discounts in the commodity futures markets. Sperandeo shows that, as commodities are cyclical in nature, the best goal is to capture as much of the major trends of each market as possible, while balancing that goal with a minimum of risk. The S&P DTI—designed to be complementary to other investments, but with a negative historical correlation and completely uncorrelated to other investment classes—has produced alpha consistency with low volatility rather than outsized returns with higher volatility.

Perhaps most importantly, Sperandeo acknowledges that losses are part of the trading business. But if you are trading properly, he explains, you will find yourself able to lose more often than win and still remain profitable overall. Learning to accept, deal with, and minimize losses is the most important factor in determining your success as a trader.

Finding ways to remove the emotion and personal judgment from an investment strategy is also a crucial factor in long-term market profitability. The S&P Diversified Trends Indicator accomplishes these goals more successfully than most other strategies you will find. It will provide a well-researched, low-volatility strategy for taking advantage of commodity trends in a systematic way so as to earn consistently superior index returns over the long run.

Praise For Trader Vic On Commodities

"Victor Sperandeo is an extraordinary mentor, a 'wise and faithful advisor, friend, or teacher' as my dictionary says. His readers quote his advice long after reading his books. His new book, Trader Vic on Commodities, in some ways builds on his famous 2B rule, which is that you lose properly. This book, however, is really about winning and breaking new ground in commodities trading strategies. Sperandeo describes how an index that includes both traditional commodities and financial futures can provide a better inflation hedge—and more profitable trading strategy—than an investment in traditional commodities alone. The book is a treasure of statistical tables to show both the 'how to' and the validity of Sperandeo's trading strategies. Readers will find him still, as Barron's titled him years ago, Trader Vic: The Ultimate Wall Street Pro."
—Elizabeth B. Currier, President, The Committee for Monetary Research & Education

"Trader Vic on Commodities will surely become one of the must-read books for anyone interested in trading commodities."
—Thomas Finley, Managing Director, Global Markets & Investment Banking, Merrill Lynch

"Only the legendary Trader Vic Sperandeo could bring such clarity to what to most is a complex and indecipherable subject. This book is a splendid achievement from one of the investing world's true originals. The only thing I'd recommend more highly than the book is taking Vic's trading advice."
—Keith Styrcula, Chairman, Structured Products Association, CEO, WealthNotes Capital Management, LLC