May 1, 2008
The model is signalling an early morning correction. In addition, it’s Friday. Certainly, this makes sense as far as the POT analysis, commodity related stocks and the broad market have been out of sorts recently.
market
Archived Posts from this Category
April 22, 2008
Somewhere in the recent comments section, I posited that homebuilders would no longer be contributing to weakness in the S&P500 index, thus, along with stabilising financials, that the primary drivers of the bear market, as far as the index was concerned, had already possibly seen the worst.
From Bespoke;
As can be seen, speculators within the homebuilders have done rather well. Whether any value investors have participated, I have no idea, however certain stocks, specifically TOL, actually represent value, if, you have a longer time horizon.
April 21, 2008
There have been numerous blogs that have questioned whether the market is a predictive or leading indicator, or whether it mirrors the business cycle.
Currently this question has become very important, as, certainly the economic data suggests a serious recession is already underway in America, and quite possibly will spread to the rest of the global economies.
The global stockmarkets, particularly American, Chinese and Australian are all off their highs, yet the American markets seem to be shrugging off their malaise with a rally, and talk that the bottom is already in.
Possible?
If we look at the bottom of the UK market in May 1940, the BEF had just escaped Dunkirk and the crushing defeat and fall of France after a 20 day blitzkrieg offensive had trapped them, splitting the British and French forces.
That 338,000 escaped back to England was somewhat of a miracle, and poor judgement on Hitler’s part, Gudarien, had recommended that they be destroyed on the beaches, and not allowed to escape back to England, as an invasion was a distinct possibility.
This point marked the absolute bottom within the stockmarket. I have no valuations, as in P/E’s or otherwise, so unfortunately, I cannot state that the valuation was compelling [or otherwise] however, coming shortly after the Great Depression, this particular low, I strongly suspect would have commanded a fairly low valuation on a replacement basis, earnings in all likelihood would have been impacted by the Depression and then the war.
Thus, we have the country facing defeat in France, the distinct possibility of an invasion, the economy bad, but quite possibly to deteriorate even further…and the stockmarket rallies hugely, up 17% in a matter of weeks.
Here we have an example of the market leading the economy. It can therefore be stated categorically that in the past, markets can disengage from the economy, discounting into the future. If it has happened once in the markets [or even if it hadn't] it can happen again.
Returning to todays markets; yes the economy is poor, and quite possibly getting worse. Yes, the global economy is in not much better shape. Markets have sold off, possibly ahead of the worst, and certainly prior to the economic data. Are they now looking forward once more? It is certainly POSSIBLE.
April 21, 2008
Well, of course. The Google. I hope you bought the (deep out of the money) April $520’s at the close yesterday. While the common stock is struggling, up only 21% today as I type, the April $520’s are up 14,976.47%.
After reporting a 30% increase in revenue and proving (for now) that the hand-wringing over slowing in paid clicks was overblown, the options market has gone bananas, and the momentum players have returned to the stock as well, if only for a day.
Who exactly was purchasing those far out of the money CALLS?
With Google having a market capitalization of $134.7 Billion prior to the Earnings release, a 21% jump [and it was higher at the peak] represents an overnight re-valuation of $28.9 Billion.
Were the initial $520 CALLS actually SHORT positions? The earnings call came prior to Friday expiry. Were the purchased CALLS primarily Market makers squeezing the SHORT positions?
As GOOG is not a stock I particularly follow nor trade, I never looked at the positions within the Options market, however, $100+ Billion companies tend not to be that mis-priced on a day-to-day basis.
April 20, 2008
From the Wall St Journal, the hotties of the week.
Is it worth focusing on this timeframe? [outside of daytraders] Or, is it simply noise? How would you actually differentiate? Once differentiated, how would you trade it?
April 20, 2008
If you read the last point within Brett Steenbarger’s article, you will read that he believes that markets lead, rather than follow.
Is there a case to be made.
Probably, but I’ll look more closely at some historical turning points.
April 19, 2008
For future reference, a robust[ish] indicator for Market tops.
One of the indicators to call the top of the market is the Titanic Syndrome – a term coined by Bill Ohama in 1965. It became more widely known after it appeared in an article in the Stocks & Commodities magazine in November 1988.
The criteria for the Titanic Syndrome are as follows
1. The DJIA hits a new high for the year, or
2. rallies 400 points or more, and
3. within 7 days, before or after this high,
4. the number of NYSE new 52-week lows exceeds the number of new 52-week highs.
The Titanic Syndrome had correctly identified the May 1965 market top. Since then it has been a consistency itself. For example, it called the top before the October 87 crash, and the tech crash of early 2000.
April 16, 2008
Dow Jones Theory, while not predicting a bull market currently, is certainly not confirming the continuation of the bear market.
So what exactly is the theory calling for?
April 15, 2008
Generally the first metric to consider would be one of valuation. On a valuation basis, we are not at an epic buying point.
In 1932 the P/E was 4.7………………Q Ratio….0.28
In 1949 the P/E was 11.7…………….Q Ratio….0.30
In 1974 the P/E was 7.2……………..Q Ratio….0.29
In 1982 the P/E was 7.7 ……………..Q Ratio…0.33
Economy;
With the exception of the 1932 Bear market, all the other major Bear markets took place in a background of economic expansion. Certainly, currently, the world has been in economic expansion, which therefore places US equities in an economic expansion environment.
Corporate Earnings;
Inflation adjusted earnings, fluctuated over quite a wide range; [-67%] to +28%
Earnings however continued to deteriorate LONG AFTER the bottom had been reached. The market started to climb far before the bottoming in earnings.
Commodity Prices.
Commodity prices are a critical factor within equity bear markets. A material disturbance to commodity prices will be a [the] catalyst to lower equity prices. 1921, 1949, and 1982 saw initially high inflation, followed by a deflation. 1932 saw only a deflation.
Previous Bear Markets
Have bottomed in a recessionary period. The return to commodity price stability [all from a deflation] have signalled the bottom of the bear market.
Bond Market
Bond bull markets, precede equity bull markets. Which makes sense, lower yields make equity investment more attractive.
Federal Reserve
All the major equity bear markets have been ended by the lowering of interest rates by the Federal Reserve. There is however a significant lag factor of circa 6-11 months.
News
Bear market bottoms are characterised by “good news” being ignored.
Auto’s
Have historically been an early indicator.
Equity trading Volume
The bottom is preceeded by falling prices on low volume, and rallies on high volume.
Short Interest
Will be high.
Dow Theory
Has called the bottoms correctly, in all the major bear markets.
April 15, 2008
From Brett Steenbarger;
The charts above decompose the S&P 500 Index (SPY) and 10-year Treasury rates ($TNX) into two components: changes that occur from close to open (overnight) and those that occur from open to close (day). For purposes of comparison, the charts are set to an arbitrary index value of 100 on 12/31/04. It doesn’t take much analysis to see that the overnight and day markets behave quite differently. In fact, the correlation between overnight price changes and subsequent day changes is -.05 for SPY and .03 for $TNX. These, in essence, are separate markets.
The top chart illustrates how much of the stock market’s bullish trend since 2005 has been a function of overnight price change. Indeed, a pure daytrader experienced none of the benefits of this bull run. To be sure, overnight exposure brings its risks, but closing positions at day’s end also has greatly dampened reward.
Notice how, for the most part, interest rate changes have been much more pronounced during the day session compared with overnight: swings up and down tend to be larger. A good part of the trending behavior in rates has occurred during the day–at least until recently.
Which gets us to one of the most interesting aspects of this exercise. Until January of this year, much of the drop in stock prices since mid-2007 occurred during the day session. Similarly, much of the fall in interest rates (flight to quality) also occurred during the day. Since January, however, the day behavior of stocks has been relatively muted–as has been the day behavior of rates. Instead, we’ve seen pronounced overnight weakness in both stocks and rates since January.
This shift in regimes may be quite meaningful, reflecting a thematic shift in the markets. Much of the drop in shares and rates from mid-2007 through the January lows was a function of credit fears, whose epicenter has been in the U.S. Since January, however, U.S. stocks and rates have been responding increasingly to global recession fears, weakness in global share prices (across Asia most notably), and preopening economic and earnings reports related to recession.
It’s interesting that the number of common stocks on the NYSE making fresh 52-week lows hit their highest level in January at exactly the time this overnight/day regime shifted. I believe that January low represents a pivotal point at which markets shifted their focus, such that overnight events–and the global economic picture–are now weighing more heavily on stocks.
