“Saturday Seminars” – Trading on Expectations: Pinpointing Trading Ranges, Trends & Reversals
Filed under: MarketClub Techniques, Tips & Talk
One of the most important factors affecting the market’s supply-and-demand equation (i.e., selling and buying transactions in the market) is the expectations of the participants — expectations about where prices are headed, fundamental reports and the market’s response to news releases.
The Federal Reserve Board recently adopted an expectations model of the markets for economic forecasting, and now you can apply the same approach to your trading. In testimony before the Senate Banking Committee in 1997, Federal Reserve Chairman Alan Greenspan described the expectations model this way: “Participants in the financial markets are susceptible to waves of optimism. Excessive optimism sows the seed of its own reversal. When unwarranted expectations are ultimately not realized, the unwinding of these excesses can act to amplify a downturn, much the way they can amplify the upswing.” This session teaches you how to identify and take advantage of these waves (trends) of optimism and pessimism and their reversals. You will also learn how Brendan combines elements of the economic science used in the Chicago Board of Trade’s Market Profile and the Nobel Prize-winning theories of expectations (as expressed in sentiment surveys) to develop a method for analyzing and trading the futures markets.
Brendan Moynihan, a foreign exchange trader at First American National Bank (now AmSouth) in Nashville, Tennessee. During his ten-year career in the investment business, he has been a bond market and currency market analyst, a commodity trader and a cash government bond trader. He has also been a hedging and trading consultant for banks and brokerage firms.
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Saturday Seminars are just a taste of the power of INO TV. The web’s only online video and audio library for trading education. So watch four videos in our free version of INO TV click here.
Traders Toolbox: Money Management Part 3 of 4
Crucial but often overlooked, money management practices can mean the difference between winning and losing in the market.
-Placing Stop Order- It’s helpful to think of these by their more formal name, stop-loss orders, because that is what they are designed to do – stop the loss of money. Stop orders are offsetting orders placed away from the market to liquidate losing positions before they become unsustainable.
Placing stop orders is more of an art than a science, but adhering to money management rules can optimize their effectiveness. Stops can be placed using a number of different approaches; by determining the exact dollar amount a trader wishes to risk on a single trade; as a percentage of total equity; or by applying technical indicators.
Realistically, methods may overlap, and you’ll have a certain amount of leeway in deciding where to put a
stop, but always be wary of straying too far from the basic asset allocation parameters established earlier. For example, if a trader is long one S&P 500 future at 450.00, a based on his total equity he has a $2,500 to risk on the position, he might place a sell stop at 445.00, which would take him out of the market with a $2,500 loss ($500 per full index point, per contract). Buss after consulting his charts, he discovers strong support at the 444.55, a level he believes if broken will trigger a major break. If this level is not broken, the trader believes, that rally will continue. So he might consider putting a stop at 444.55 to avoid being stopped out prematurely. Although he’s risking an extra $225, he’s staying close to his money allocation percentages and modifying his system to take advantage of additional market information.
Of course, the size of a position will affect the placement of stops. The larger the position, the loser the stop has to be to keep the loss within the established risk level. Also consider market volatility. You run a greater risk of getting stopped out in choppy, “noisy” markets, depending on how far away stops are placed. This can cause unwanted liquidation when the market is actually moving your direction.
Now suppose our hypothetical trader, who started with $50,000, is now looking at a $10,000 gain (which happened to be his goal for this trade) on a long position. What should he do? That depends entirely on his trading goals. He can take the $10,000 profit and, assuming he leaves the money in his trading account, turn to other trading opportunities. If he desires, he can increase the size of his trades proportionally to his increase in trading equity. This would give him the potential to earn greater profits, with the accompanying risk of greater losses.
He also could choose to keep the size of his trades identical to what they were before he made his initial profit, thus minimizing his risk (as he would be committing a smaller percentage of his total equity to his trades) but at the same time bypassing the chance for larger profits. If his winning positions had consisted of more than one contract and he believed the market was still in an uptrend, he could opt to take his profits immediately on some of the trades, while leaving the other positions open to gain even more. He then could limit his risk on these remaining trades by entering a stop order at a level that would keep him within his determined level of risk, as well as protect his profits. He does run the risk of giving back some of his money if he is stopped out, but counters that with the potential for even larger gains if the market continues in his direction.
Good money management practices dictate stop orders be placed at levels that minimize loss; they should never be moved farther away form the original position. You should accept small losses, understanding that preservation of capital will in the long run keep you in the market long enough to profit from the wining trades that make up for the losers.
Trading in the real world almost never seems to go as smoothly as it does on paper, mainly because paper trading typically never figures in such real world factors as commission, fees and slippage. “Slippage” refers to unanticipated loss of equity does to poor fills (especially on stops) that can result from extreme market conditions or human error. Factoring these elements into your overall money management program can help create a more realistic trading scenario, and reduce stress and disappointment when gains do not seem to be as large as they should be.
-One Final Note- Do your money management homework before you start trading. This helps you decide what to trade and how to trade it. On paper, money management sounds so obvious and based on common sense that its significantly overlooked. The challenge is to apply its principles in practice. Without money management, even the most astute market prognosticator may find himself caught in a downward trading spiral, right on the trend, but wrong on the money.
Using Option Spread to Reduce Risk
Happy Thanksgiving! I hope you spend this time with family and friends enjoying their company and eating delicious food! Today I’ve asked Behrouz Fallahi from http://markettime.blogspot.com to come and keep us on the educational track and teach us a bit about how to use option spreads to reduce risk.
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Many market participants are conditioned to think of options as instruments of gambling and undue risk. In my opinion options should be regarded as what they really are: instruments of market participation. Like any other tool, it is the way we use them that can make them help, or harm us.
I sometimes use options instead of buying or shorting the underlying securities. As we know, options come with an expiry date, and a time premium that shrinks ever so faster as we get closer to expiration. So, timing is important. Also, it is important that one chooses an expiry date that would give enough time for the trade to play out.
Following is a trade I did a while back using put spreads to short the Biotech Holders ETF (BBH). I will use a hypothetical position size of 10 contract for simplicity of calculations but that is not the size of the actual position that I had.
On August 14, 2008, a TV commentator’s remark on the biotech sector being hot and attracting funds caught my attention. I am a strong believer that when I hear something on TV, the story has already run its course. Not that financial pundits mean to deceive us, just that they, or at least most of them, pay attention to things like most of the rest of us – well past the half way mark if they are half good at what they do, right at the end if they are not.
A look at the BBH chart got me interested on the short side.

I noticed a few things
1. Price had a huge gap up in mid July
2. It followed through by another, smaller gap up, which was quickly reversed by a gap down, forming an Island Reversal.
3. The island reversal was ignored by bulls and price rose, but in a very tight slanted channel
4. The latest rise on the chart was accompanied by diminishing momentum, and volume
I liked what I saw for a short and decided to keep an eye on it.
My first thought was to see if I could find a leveraged short ETF on the Biotech sector. I could not find any. I am a member of a very active community of traders. I posted a question to see if anyone would aware of a Biotech short ETF. Instead of a simple Yes/No answer, I received detailed dissertations why it would be a bad idea to short Biotechs. This was my second contrary confirmation that I had a good shot on the short side. Not having been able to find an ETF to do the short, I decided to use put options.
A few days later, I got what I wanted

1. The rising channel broke
2. Stochastics gave a sell signal
3. Negative momentum divergences in place
4. Longer term momentum, at the top of the chart, showed signs of rolling over
Things are seldom perfect
1. Volume was lacking
2. price was on a first run out of a long term base indicating possibility of a mere pullback and not a total breakdown
3. Longer term MAs were pointing up
I decided to go on with the trade and buy some puts on BBH. But what puts? To decide on a strike, I first tried to come up with some target areas if the short would actually work.
1. There was the huge gap in 183-190 area
2. There was the top of rectangular base at 180 (that base had been 2+ years in the making)
3. 50% retracement of the up move sat right on the resistance line at 180
4. 32% retracement of the up move was somewhere in the 183-190 gap
I thought if I could get lucky, 180-185 area might define a drop target.
What option duration? Trying to give the trade a bit of time, I decided to buy Oct 185 puts. Before placing an order I defined on my exit rules:
1. Buy, sell, stop decisions were to be primarily taken based on price action of the underlying security and not the option price
2. If options were more than 1/3 in loss, the position would be closed.
For 10 Oct 185 puts at 1.25, I would have to pay 125 dollars a contract or 1250 dollars total. That would be all I could ever lose; if I could get to exercise my rules, I would actually lose 1/3 of that.
It so happened that the channel break signal that I took was a good one, and BBH started on its merry way down, all the way to this chart of Sep 4, 2008

The puts that I had could now be sold for 2.20 for a net profit of 220 – 125 = 95 dollars a contract or 95 / 125 = 76%.
But, conservative and risk averse as I am, I still am a greedy trader. This chart looked like it was rolling over on a weekly basis. So I decided to do something different.
1. I would sell 30% of the position and take some profit
2. I would lay a spread against the remaining 70%
I could sell 3 of my puts for 3 * 2.20 = 660 dollars, bringing my cost down to 1250 – 660 = 590 dollars for remaining 7 contracts = 90.7 dollars per contract.
I could now sell 7 Oct 180 puts for 1.25 or 125 dollars a contract = 7 * 1.25 = 875 dollars.
So I would be out 1250 – 660 = 590 dollars on 7 Oct 185 puts
I would get 7 * 125 = 875 dollars from the sell of the Oct 180 puts.
That would give me a net profit of 875 – 590 = 285 dollars, or 285 / 1250 (original investment) = 22%
Not as good as 70% but still decent, and I was still in the game, free of cost.
So what could happen from then till Oct expiration day if I did nothing?
1. BBH could stay above 185, and all puts would expire useless. Then I would make 22%
2. BBH could drop below 180, then I would be put BBH shares at 180, which I would sell at 185 using my higher puts and would make 500 dollars a contract on top of what I had already made (best possible outcome)
3. BBH could stay between 180 and 185 at price x, then 180 puts would expire, and my 185 puts would be worth (185 – x) * 100 dollars per contract + what I had already made
4. A disaster could happen and all contracts could be declared void, I would still make 22%, that is, if the disaster did not adversely affect my bank.
This is a recent chart of BBH showing what would happen if I had, against all technical signs, followed the pundit on TV, or the traders on the board I mentioned above.

A combination of basic chart reading techniques, decent timing, and risk management using options can produce good returns against well-defined, limited risk.
About the author:
Behrouz Fallahi is an independent market participant who keeps an active blog at http://markettime.blogspot.com.
Clean Tech: Complex Field, Simple Story
I’d like everyone to welcome back John Rubino from DollarCollapse.com. I’ve been a visitor to his site for a while now and it’s become clear that he’s passionate and knowledgeable about the subject of Clean Tech. So read his article below and ask him any questions you may have. Oh, be sure and check out his book, it’s a must read!
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Imagine, for a minute, that you’re Barack Obama. You’ve just spent two years running a non-stop, highly-successful presidential campaign. Now, when a normal person would be expect a well-deserved month on some quiet beach, the world is clamoring for a plan to stop the global economy from imploding. You’re not even moved into the White House and the weight of the world is on your shoulders.
Luckily, in formulating your plan you have a couple of advantages. First, with the federal deficit already projected to top $1 trillion in 2009, no one could care less if your proposals are expensive. Conventional wisdom says they SHOULD be expensive because government spending is the only thing with a positive arc these days. So you’re free to indulge your inner FDR and talk about a “New, New Deal” without fear of right wing ridicule. Second, a new generation of clean technologies is just now coming to market with the potential to solve some festering problems. Solar, wind, smart grid and the rest can replace foreign oil with locally produced (or conserved, same thing) power. They create jobs in the U.S., while depriving rouge oil producers like Russia and Venezuela of the means to make trouble. And they potentially fix global warming.
So your grand economic plan turns out to be something you can sketch out on a napkin: Borrow trillions of dollars and invest it in clean tech. You get jobs, geopolitical advantage, a cleaner environment, and an aura of supreme coolness, all with the stroke of a pen. And that’s exactly what soon-to-be president Obama announced last week, to the apparent joy of the markets: Friday and Monday saw the biggest two-day pop since 1987.
For investors, this sudden clarity in the financial landscape comes at an extraordinarily good time, since clean tech stocks have been absolutely whacked in the general bear market. They’ve popped a bit lately but for the most part are still down more than half from their oil-crisis euphoria highs. They are, in short, an investment thesis with both short and long term appeal. What they’re not is simple. This sector contains many different industries with radically different prospects. Some work today, some will work in a couple of years, and some will never work. So even with a nice stiff government spending tailwind, some clean technologies are more timely than others. Here are three to get you started:
Solar
Over the past decade solar cell efficiency (i.e. their ability to turn a given amount of light into electricity) has risen steadily while production costs have fallen. Now the best solar panels, when bolted onto an Arizona or California roof, generate power that’s competitive with the cost of electricity delivered from distant coal fired plants. This “grid parity” will make solar an attractive addition to most sunny-clime homes and businesses over the coming decade, giving the industry all-but-guaranteed double-digit growth. The question for investors is how to play the bleeding edge boom/bust cycle: During the recent oil crisis, solar power demand soared, causing a shortage of polysilicon, the industry’s main raw material. So everyone with any connection to the business built a polysilicon plant, and now there’s a glut. This is sending prices down, which is good for the solar cell makers. At the same time, the credit crunch is slowing demand growth for solar, which will cause a lot of marginal players to fail. AND several new versions of “thin film” solar are hitting the market, with potentially decisive advantages over traditional silicon. It’s messy to say the least. So…buy the leaders, which have strong balances sheets and in-demand technology. That would be First Solar (FSLR), Energy Conversion Devices (ENER), and SunPower (SPWRA), all of which trade on U.S. exchanges, and Q-Cells, which trades on the Frankfurt exchange as QCEG.
Wind
Wind turbines have gotten so big and so efficient that they’re competitive with utility scale coal and gas fired plants. Wind farms are going up all over the world, onshore and off, and by-and-large the technology is living up to its billing. The credit crunch is causing some projects to be cancelled, but since the makers of turbines and related gear were facing three-year backlogs at the height of last year’s mania, a slowdown will have little effect, other than to shorten the backlog. The major wind companies will, as a result, continue to generate 25% or so annual growth. Most of the major turbine makers are headquartered in Europe and trade on foreign exchanges. Among them: Vestas Wind Systems (VWE.CO — Copenhagen), Suzlon Energy (SUZL — Bombay) and Hansen Transmissions (HSNT — London).
Smart Grid
One of the Obama plan’s goals is to upgrade today’s aging electrical grid by installing high-capacity lines to ship power from wind farms to cities and adding gear to homes and businesses that let utilities and their customers manage and conserve power. This is known as the smart grid, and the opportunities are absolutely huge, since we’re starting with a really dumb grid. Some leaders in this field: Itron (ITRI), Echelon (ELON), American Superconductor (AMSC).
For Future Reference
Other clean technologies like biofuels, electric cars, and fuel cells are a bit further from the market right now. So don’t allocate much capital to them in the short run, but do follow their progress. Sometime in the next few years amazing news will start to filter out of these niches, both of game-changing technical results and promising stocks.
John Rubino
Turkeys, Trillions and Thanksgiving
Filed under: MarketClub Techniques, Tips & Talk
Have you ever built or remodeled a house? If you have, then you know that it always takes longer and cost twice as much as you first estimated. This is exactly the position that the US government has put itself in, only this time the house is the whole country. Now we have to gut the country and totally redo everything. It’s likely to take twice as much time and cost US taxpayers twice as much money to get out of this recession.
Do you know how many zeros there are in a trillion dollars? I really didn’t know myself, as that is way above my pay scale. So, I looked it up on Google and there are 12 zeros behind the 1. When this mess is all over, we will be lucky if the government doesn’t spend 5 trillion dollars (5,000,000,000,000) to get everything back to some form of normalcy in the US markets.
We are continually seeing new people being trotted out in front of the cameras and microphone saying that
this bailout is going to cost $700 billion and something else is going to cost $350 billion. I have a deep suspicion that they have no clue and no belief in what they are saying or doing. It’s also amazing to me that the people that got us into this mess in the first place on now in charge of getting us out of this mess. This does not seem like a very smart idea to me.
One of the most interesting things about the markets is that they never tell you when a bottom is in place until much later. I think that the many economic problems that are currently sitting on the back burner, will warrant this market to continue its slide to the downside. If you haven’t seen my video, “How Low Can The Dow Go,” I recommend that you check it out.
The technical outlook for the stock market remains negative in my opinion. There’s a great deal of overhead resistance in this market which leads me to believe we will still see further downside erosion. Unlike a bull market that constantly needs to have positive inputs like earnings and positive outlooks, a bear market simply can fall on its own weight.
One thing we rely on to tell us when the market switches gears from a negative to a positive trend is our “Trade Triangle” technology. Presently all of our “Trade Triangles” are in a negative mode for all the indices, and show little or no signs of turning up.
So what’s an investor to do?
Do you buy and hold because it looks cheap? That is not the way I believe you want to trade this market. The closest parallel we have to this market is the crash of 1929 and the bear market that lasted into the early ’30s. We’ve only been in this crisis mode for a little over a year and I believe we have a way to go before the recovery begins.
We still have a downside projection for the DOW at 6,600 and we see little or no reason to change that
technical target at this time.
Make no mistake about it, these are difficult times for many people, and many people will lose their jobs before business and the markets pick up. There’s still the mess with General Motors (NYSE_GM), Ford (NYSE_F) and Chrysler to take care of. How much is that going to cost? In my opinion, the auto industry has been in decline and denial since the ’70s, and any money that is given to them is like throwing money down a rat hole unless there is a major new business plan and a severe downsizing of those industries.
No matter what rough times lay ahead, keep the faith, keep your head down and the computer on, because there are some great trading opportunities that I know will be coming up soon in the marketplace.
From all of our staff both at INO.com and MarketClub, we wish you success in the future. To all of our American friends and clients, we wish you a very Happy Thanksgiving. We still have a lot to be thankful for in this world.
Adam Hewison
President, INO.com
Co-creator, MarketClub
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Something to remember in times like these.
Filed under: MarketClub Techniques, Tips & Talk
Bad Trades
A bad trade is like a dead fish: The longer you keep it, the worse it stinks.
Good Trades
When a trade is making money, the market is telling them they are right and to let the position ride.
Don’t ever do this …
Winners don’t add to, or “average”, losing positions. They dump the trade and go looking for a new opportunity. Successful investors may add to the winning trades. When ahead, they press their advantage while remembering that at any time the market can turn on them and prove them wrong.
In trading keep your mind clear and do not get emotional about a trade. Remember you are not married to a stock rather you are in the dating game.
Learn more about common sense trading.
Adam Hewison
Co-founder of MarketClub
Is gold the last store of value?
Is gold the last store of value?
It has been a difficult time for gold bugs for the past two months as gold has been trapped in a broad trading range which made it seem insulated and immune to all of the financial chaos around it. Today’s action on Friday the 21st, put all of that in action to rest as gold soared to trade over the $800 in a matter of hours. This may be the move we’ve been looking for and coming from a two-month base, it seems large enough to propel this market higher.
I have just finished a new video on gold that goes into some depth and shows you potential upside targets for
this market. The video can be played on any computer and does not need any special plug-in. It is available free of charge from MarketClub as part of our ongoing educational outreach program. Our goal is to help traders improved the timing and trade selection in a scientific way using tools that are real world tested and have stood the test of time.
Enjoy the video,
Adam Hewison
President, INO.com
Co-creator, MarketClub
Traders Toolbox: Money Management Part 2 of 4
Filed under: MarketClub Techniques, Tips & Talk
Crucial but often overlooked, money management practices can mean the difference between winning and losing in the markets.
-Amount Of Money To Risk- It’s difficult to come up with hard and fast money to risk on different markets and trades. For our purpose, though, it’s best to think conservatively. Although some studies suggest initially allocating equity in broad terms of original margin (40% to 50% of total equity committed to the markets at a given time in the form of original margin, 15% to a particular market, 5% to a single trade, etc.), many traders consider these percentages too high, and do not consider the market to be a accurate measure of risk or a sound basis on which to allocate funds, because a trader can always, technically, lose more than the margin amount. These traders find it more beneficial to think in terms of the actual money amount they are willing to lose on any particular trade or trades, determined by their stop level or through some other calculation. 
Although in specific circumstances professional traders may actually risk comparable or even greater percentages of total equity than those listed previously, on average they risk much less-perhaps 12% to 20% of total capital at a time, and 2% – 4% per trade. Depending on the size of your trading account, these levels might seem overly strict, but again, the idea is to conserve money for the long haul.
In developing your trading goal, determine how much you could accept losing on a trade, both financially and psychologically. Based on total capital and the number of markets in which you are active, allocate your equity proportionally between individual trade, market group and total trading activity levels.
These guidelines protect you from dangers of extreme leverage in the futures markets. Though it may seen attractive to have the change to make big money on a small initial investment, the risk of loss is just as great.
-Determining Reward/Risk Ratios- Another common rule in trading is never to put on a position unless your possible profits outweigh your possible losses by a ratio of 3 to 1, or at the very least 2 to 1. So, if a particular trade has the potential of losing $100, the profit potential should be at least $200 to $300. This is not a bad rule, but like so many aspects of trading, it is somewhat intangible. Once you have formed an opinion of a market, determined your entry point and calculated the maximum amounts you could win or lose on a trade, you still are left with the uncertainty of the probability of your trade winning or losing, and unfortunately there is not secret formula for removing this uncertainty.
Some traders don’t consider probabilities valid at all. The most any trader can do is perform his or her best analysis of the market, and, along with experience and intuition, come up with some rough idea of the probability of success for a given trade. This probability can then be weighed against the reward / risk ratio in selecting trades. For example, would it be better to put on a trade where the reward / risk ratio is four to one and the probability of success is 30%, or would it be advisable to put on a trade where the reward / risk ratio is only two to one but the probability of success is 75%? Using this rule, you’ll be ahead of the game by directing resources to the trades with the greatest chance of success.
“Saturday Seminars” – Trading Techniques to Buy Bottoms & Sell Tops
Big reversal tops and bottoms occur at the peaks and valleys of long term moves. Smaller and tradable tops and bottoms also occur in trending moves. With appropriate timing and a coninuing trend, buying in an uptrend or selling in a downtrend is low risk. Walt will show you how to identify trends and trade bottoms and tops with three mechanical trading techniques.
You will acquire specific techniques for identifying trends and you will learn how to trade with the trend. You will also learn how to anticipate and trade trend reversals. Walt will show you mechanical buy/sell signals applicable to any market, in any time frame.
Finally, he will provide you with some simple, profitable money management techniques to reduce risk and take advantage of the big moves when they occur.
Walter Bressert has been using market cycles to trade stocks and commodities since the 1970s when his HAL Commodity Cycles was one of the most widely known advisory services focusing on cycles.
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Saturday Seminars are just a taste of the power of INO TV. The web’s only online video and audio library for trading education. So watch four videos in our free version of INO TV click here.
How low can the DOW go?
Filed under: MarketClub Techniques, Tips & Talk
Make no mistake about it, the market action on Wednesday (November 19th) was extremely negative for all of the indices that we track. The close below 8,000 on the DOW can only be described as negative, indicating further weakness to the downside. I am looking for this index to trade down to around the 6600-6700 level.
Watch my new video right here.
Looking at the charts using our “Trade Triangle” technology, it is clear that the Dow has been under pressure since our first major sell signal at 11,290. I see no reason to alter this stand, as I believe the trend will continue to be on the downside. I expect to see further weakness in the weeks and months to come.
What’s an investor to do? As a trader or investor there are three choices you have as an investor:
1. You can go long a market.
2. You can go short a market.
3. You can move into cash.
I’m often amused when I see people buying “defensive stocks.” Why not get out of the market entirely when it’s going down. Doesn’t that make common sense to everyone?
However, most brokers want you to stay in the market at all times fearing that they will miss a bottom. Truth is, most investors (including brokers) missed the top, so what makes anyone so sure that they’ll catch the bottom?
The key in trading is not to get out at the top, or in at the bottom. Anyone who tells you to do that isn’t playing smart in the markets, and most likely claims that they are holding the “holy grail” of trading.
An investor’s goal should be to capture 70% of a move. The middle is the sweet spot, and if you make enough in the middle then who cares about the tops and bottoms. Forget picking up the 15% on the top and 15% on the bottom, it doesn’t work consistently to use it as a trading strategy.
Check out my new video and see exactly where we got out of the indexes and were we see them headed right now…
Enjoy the video,



