The forecast paper for ECN 327 that is due this Thursday MUST include correctly formatted footnotes and bibliographies. You should get into the habit of doing this for every paper you write. In order to make this process a bit less daunting for you, I have located an easy-to-use link that illustrates the appropriate footnote and corresponding bibliographic entries for various types of sources you might reference. I have chosen the Chicago style for this.
Finally, all of you need to avoid using incorrect words that unfortunately have the effect of making your writing and/or you appear to be "dumb" to persons who don't know you. I am referring to the confusion between "effect" and "affect," and "to" versus "too." I have a handout for you detailing this. If you confuse these words in your papers, you will be penalized a +/- on your paper grade.
Monday, December 7, 2009
Sunday, December 6, 2009
November Employment Report
The November employment brought with it several surprises. First, and foremost, payroll employment fell by far less than just about anyone (including me) had predicted. While the consensus number was a decline of around 120,000, the actual number was a decline of just 11,000. In addition to this, decreases from the prior two months were revised to show less job loss. So, with the addition of Census workers early next year, it is very likely that we will see the employment change go positive -- either next month when the November data are revised or when we get January or February data. Second, there was a nostalgic element to Friday's action in that the stock market actually rose along with the US dollar. When was the last time that happened? You should read about the employment report from MarketWatch.com and the Wall Street Journal.
The stock market liked the employment report very much. The Dow-Jones Average started out showing a gain of around 150, but as is so typical of employment release days, gave most of that back (this apparently works in both directions). At the end of the day, the Dow was up 23 points (for 0.2%). Interestingly, the NASDAQ was up by a greater percentage than the Dow, as its 21 point gain was almost 1 percent. Typically, when observing markets it is a good sign when the NASDAQ outperforms the Dow-Jones average. As this stock market "rally" was occurring, the bond market obviously hated what it saw, so a selloff resulted. As bond prices fell, the 10-year bond rate rose by a full 10 bp, a rather significant change. The US Dollar index rose by just over one point (1.07) to close at 75.8. So, enjoy this combination while you can -- a bullish report triggered stock market gains, a bond market sell off, a stronger US Dollar, and a drop in Gold price. That is the way things normally go, but haven't gone this semester as the result of the dollar carry trade.
Along with this favorable economic report, of course, comes all the myopic garbage that has come to characterize coverage by the financial media. Will the Fed now begin to raise rates very soon based on the new-found economic strength? Give me a break! Is the carry trade dead, based on Friday? Gee, we have one full day of that result, so it must be inevitable! I'll probably reserve judgment, though, until I hear from Jon and Kate, and check in with Tiger Woods. Here is the URL for an article with an intelligent discussion of the likelihood of Fed actions based on Friday's report.
The interesting question is how long the pattern of the inverse relationship between the dollar and US stock market has existed. It must seem to all of you that this has been around for a very long time, that this is the "norm." For extra credit due at the beginning of class on Tuesday, produce a chart using weekly data going back three years with the Dow-Jones average and the US Dollar index in the same chart, both as solid lines. Adding annotations, eliminating other elements of the graph like MA's, pinpoint when the current pattern began based on this chart.
So the question now becomes whether the dollar carry trade is dead or possibly dormant for a while. If this is conjecture turns out to be true, the US Dollar should begin to rally without threatening the positive momentum of the US stock market. We can use technical analysis along with economic theory to ascertain whether any short-term bottoming of the dollar is in the cards. Based on the RSI(9) from weekly data, there was a bullish divergence for $USD -- the RSI had been rising while the weekly $USD was recently falling. So, in the very short-term at least, some dollar strength is likely, especially since the RSI is nowhere near an overbought level. In fact, the weekly RSI(9) is at 40.5, which if you look back several months to April, is a resistance level for the RSI. If that resistance is broken, the dollar index could go to either 77 (its next resistance point determined the usual way) or all the way to 80 based on a Fibbonnacci Retracement from March of 2009 until the most recent low. Stay tuned!
The stock market liked the employment report very much. The Dow-Jones Average started out showing a gain of around 150, but as is so typical of employment release days, gave most of that back (this apparently works in both directions). At the end of the day, the Dow was up 23 points (for 0.2%). Interestingly, the NASDAQ was up by a greater percentage than the Dow, as its 21 point gain was almost 1 percent. Typically, when observing markets it is a good sign when the NASDAQ outperforms the Dow-Jones average. As this stock market "rally" was occurring, the bond market obviously hated what it saw, so a selloff resulted. As bond prices fell, the 10-year bond rate rose by a full 10 bp, a rather significant change. The US Dollar index rose by just over one point (1.07) to close at 75.8. So, enjoy this combination while you can -- a bullish report triggered stock market gains, a bond market sell off, a stronger US Dollar, and a drop in Gold price. That is the way things normally go, but haven't gone this semester as the result of the dollar carry trade.
Along with this favorable economic report, of course, comes all the myopic garbage that has come to characterize coverage by the financial media. Will the Fed now begin to raise rates very soon based on the new-found economic strength? Give me a break! Is the carry trade dead, based on Friday? Gee, we have one full day of that result, so it must be inevitable! I'll probably reserve judgment, though, until I hear from Jon and Kate, and check in with Tiger Woods. Here is the URL for an article with an intelligent discussion of the likelihood of Fed actions based on Friday's report.
The interesting question is how long the pattern of the inverse relationship between the dollar and US stock market has existed. It must seem to all of you that this has been around for a very long time, that this is the "norm." For extra credit due at the beginning of class on Tuesday, produce a chart using weekly data going back three years with the Dow-Jones average and the US Dollar index in the same chart, both as solid lines. Adding annotations, eliminating other elements of the graph like MA's, pinpoint when the current pattern began based on this chart.
So the question now becomes whether the dollar carry trade is dead or possibly dormant for a while. If this is conjecture turns out to be true, the US Dollar should begin to rally without threatening the positive momentum of the US stock market. We can use technical analysis along with economic theory to ascertain whether any short-term bottoming of the dollar is in the cards. Based on the RSI(9) from weekly data, there was a bullish divergence for $USD -- the RSI had been rising while the weekly $USD was recently falling. So, in the very short-term at least, some dollar strength is likely, especially since the RSI is nowhere near an overbought level. In fact, the weekly RSI(9) is at 40.5, which if you look back several months to April, is a resistance level for the RSI. If that resistance is broken, the dollar index could go to either 77 (its next resistance point determined the usual way) or all the way to 80 based on a Fibbonnacci Retracement from March of 2009 until the most recent low. Stay tuned!
Friday, November 20, 2009
Short Term Rates Turn Negative -- Again
I have been discussing the decline in very short-term rates, especially those for the 1-month and 3-month t-bills. As of class today, those rates had fallen to 4 bp for the 1-month t-bill and 2pb for the 3-month, indicating an inversion for the 3-month relative to the 1-month rate. I noted that this may well signal the possibly that something will be occurring shortly, perhaps an upcoming equity market correction (although not necessarily a large correction).
Something did occur later today -- short-term t-bill rates went negative! Here is an article from FT discussing this fact. The article attributes the negative interest rates to a very strong demand by banks to have "pristine" assets on their balance sheets at the end of the year. While I have no doubt this is correct, does this explain the whole story? Consider the explanation above to be a hypothesis, not necessarily "the" fact about negative short-term rates.
My question is whether this appetite for short-term treasury debt is the cause or effect of other things occurring in the financial sector? In other words, the effect of shaky financial fundamentals or upcoming risk could be the year-end appetite for short-term treasuries. This is certainly something to think about. While the appetite for quality assets on bank balance sheets at year end certainly could be expected to put downward pressure on these short-term rates, would it be sufficient to move them all the way to negative values? I'm not so sure.
We'll have to wait to see how this plays out. Let me say, though, that I never expected to see negative short-term rates this soon after the economic free-fall of last fall!
POST SCRIPT: As of the next morning (Friday, 11/20), short-term t-bill rates have returned to positive, with the 1-month at 5.5 bp and the 3-month at 1.5 bp. Note the short-term rate inversion has been sustained. I continue to believe that this rate behavior signals underlying problems with the strength of our financial system that has in part, at least, been picked up by the stock market (recent pull backs). Here is another article written about this in Barrons, the more informative of the two to read.
Something did occur later today -- short-term t-bill rates went negative! Here is an article from FT discussing this fact. The article attributes the negative interest rates to a very strong demand by banks to have "pristine" assets on their balance sheets at the end of the year. While I have no doubt this is correct, does this explain the whole story? Consider the explanation above to be a hypothesis, not necessarily "the" fact about negative short-term rates.
My question is whether this appetite for short-term treasury debt is the cause or effect of other things occurring in the financial sector? In other words, the effect of shaky financial fundamentals or upcoming risk could be the year-end appetite for short-term treasuries. This is certainly something to think about. While the appetite for quality assets on bank balance sheets at year end certainly could be expected to put downward pressure on these short-term rates, would it be sufficient to move them all the way to negative values? I'm not so sure.
We'll have to wait to see how this plays out. Let me say, though, that I never expected to see negative short-term rates this soon after the economic free-fall of last fall!
POST SCRIPT: As of the next morning (Friday, 11/20), short-term t-bill rates have returned to positive, with the 1-month at 5.5 bp and the 3-month at 1.5 bp. Note the short-term rate inversion has been sustained. I continue to believe that this rate behavior signals underlying problems with the strength of our financial system that has in part, at least, been picked up by the stock market (recent pull backs). Here is another article written about this in Barrons, the more informative of the two to read.
Tuesday, November 17, 2009
10-Year Bond Rates
If you look at the 10-year bond rate since the end of 2008, the economic free fall, until the present time, you see several interesting and informative behaviors. First, when the economy was in potentially serious condition in November and December of 2008, rates gapped down on several occasions. This means that bond price gapped up on those occasions. Second, if we apply Fibonacci analysis to the bottom in rates at the end of 2008 up to the present time, you see that Fibonacci has been very predictive for likely declines from the recent 10-year peak of around 4% in June of this year. The chart below shows this (click to enlarge). Remember that the values on the right axis are 10x the interest rate, so 36 is really 3.6.
The 61.8% retracement level (around 3.27%) has been touched on several occasions. Note that the rate has yet to fall to the 50% retracement point (at 3.04%). While we remain slightly above the 61.8 percent mark, note that the RSI is still above the oversold reading of 30, so it is quite possible that we will see another retest of the 61.8 percent level at 3.27%. The likelihood of this rests on, among other things, markets continuing to believe the message delivered by Fed Chair Bernanke the other day.
What we have been witnessing in the short-term, however, is a rising stock market with a strong bond market. So, stock prices have been rising while interest rates have been falling. This is not the typical pattern. Usually stock prices and interest rates move in the same direction. You should think about this to strengthen your understanding of the stock and bond markets. The "other thing" that is not equal is the words of the Fed Chair.
I have recently heard some "talking heads" discuss whether the bond market is a bubble at present, while others are hinting that rates have gotten very high, potentially a cause for worry. I have plotted the 10-year rate weekly over a very long time period. The chart shows this from the early 1990s (click to enlarge). The current 10-year rate is hardly excessive based on its history, which showed it to be around 8 percent in the early 1990s. Note the long-term downward sloping resistance line. Were we to move up to that line, the 10-year rate would have to rise to 4.75 percent, which is approximately the level it attained during the double top in 2006-2007 (note: that double top is what converted me to using technical analysis -- the technical analysis prediction of a declining rate from that double top ran counter to the "traditional economic wisdom" of the day which saw higher rates coming). How likely is it for the 10-year rate to rest resistance at around 4.75 percent? Use the model of interest rates we have developed and enhanced from class:
Remember: in place of economic growth in this model, you should now employ the Basic Keynesian Model which identifies factors that generate growth: changes in autonomous spending (from C, Ip, G, and NX). The resulting forecast will allow you to move well beyond the limits of technical analysis.
The 61.8% retracement level (around 3.27%) has been touched on several occasions. Note that the rate has yet to fall to the 50% retracement point (at 3.04%). While we remain slightly above the 61.8 percent mark, note that the RSI is still above the oversold reading of 30, so it is quite possible that we will see another retest of the 61.8 percent level at 3.27%. The likelihood of this rests on, among other things, markets continuing to believe the message delivered by Fed Chair Bernanke the other day.
I have recently heard some "talking heads" discuss whether the bond market is a bubble at present, while others are hinting that rates have gotten very high, potentially a cause for worry. I have plotted the 10-year rate weekly over a very long time period. The chart shows this from the early 1990s (click to enlarge). The current 10-year rate is hardly excessive based on its history, which showed it to be around 8 percent in the early 1990s. Note the long-term downward sloping resistance line. Were we to move up to that line, the 10-year rate would have to rise to 4.75 percent, which is approximately the level it attained during the double top in 2006-2007 (note: that double top is what converted me to using technical analysis -- the technical analysis prediction of a declining rate from that double top ran counter to the "traditional economic wisdom" of the day which saw higher rates coming). How likely is it for the 10-year rate to rest resistance at around 4.75 percent? Use the model of interest rates we have developed and enhanced from class:r = f(expected inflation, autonomous spending components, monetary policy)
Remember: in place of economic growth in this model, you should now employ the Basic Keynesian Model which identifies factors that generate growth: changes in autonomous spending (from C, Ip, G, and NX). The resulting forecast will allow you to move well beyond the limits of technical analysis.
Tuesday, October 13, 2009
How Overextended is Gold?
I have been going over the market for gold ($GOLD) in class since last week. We have looked at daily and weekly data, viewed the RSI, and we have gone back to consider where the US Dollar ($USD) is, as the dollar and commodities are inversely related (other things being equal). What I want to do in this post is to show you another way to show whether something is overbought or oversold.
First, chart $GOLD using daily data. Find a moving average that fits the time period under consideration very well. After a number of different values (starting from 20-day to higher periods), I found that the 150-day simple moving average fits gold very well, as the chart shows (click to enlarge).
To find a way to view how far the closing price is from this moving average, under "Indicators" below the graph, use the following information with StockCharts.com: MACD with values 1,150,1 (select MACD then enter the values I indicated).
That produces the graph below the Gold chart. You can annotate any (or all) of this set of charts. Here, apply a horizontal line to the peaks of the gap measure (the MACD values) to find where resistance has been before. It should be clear from the chart that recently, Gold price moved above its 150-day moving average by the greatest amount since either June of 2008 or September of this year. Note, also, this has occurred as Gold is very overbought based on the RSI (which is also showing a bearish divergence).So, you can see from this chart that there is yet another basis to conclude that some short-term pullback in Gold price is likely. Note, though, that markets can remain overbought for some time, so any pullback might not occur for a while yet.
First, chart $GOLD using daily data. Find a moving average that fits the time period under consideration very well. After a number of different values (starting from 20-day to higher periods), I found that the 150-day simple moving average fits gold very well, as the chart shows (click to enlarge).
To find a way to view how far the closing price is from this moving average, under "Indicators" below the graph, use the following information with StockCharts.com: MACD with values 1,150,1 (select MACD then enter the values I indicated).
That produces the graph below the Gold chart. You can annotate any (or all) of this set of charts. Here, apply a horizontal line to the peaks of the gap measure (the MACD values) to find where resistance has been before. It should be clear from the chart that recently, Gold price moved above its 150-day moving average by the greatest amount since either June of 2008 or September of this year. Note, also, this has occurred as Gold is very overbought based on the RSI (which is also showing a bearish divergence).So, you can see from this chart that there is yet another basis to conclude that some short-term pullback in Gold price is likely. Note, though, that markets can remain overbought for some time, so any pullback might not occur for a while yet.
Saturday, October 3, 2009
Friday's Employment Report
I had stated in class that the bond market anticipated a bad employment report. THE BOND MARKET WAS CORRECT. In anticipation of a larger-than-expected fall in employment (an actual fall of 263,000 -- much worse than the "consensus" estimate), and thus slower growth ahead, interest rates had been falling during this week. And, the actual number didn't do anything to reverse that trend. Here is a very short summary of the day's 10-year bond performance.
The chart (click to enlarge) shows the ten-year bond rate ($TNX). NOTE: the rate of interest is the listed value on the right axis divided by 10. So, 35 corresponds to a 3.5% rate, etc. Resistance for the 10-year bond rate has recently been 3.5% -- you can see the rate bouncing off this level several times since August. Focusing only on this past week, we see a noticeable decline in the 10-year rate, in anticipation of a weak employment report.
As interest rates and bond prices are inversely related, note from the RSI indicator above the chart that rates are oversold, so a bond rally (on potentially bad news) has caused bond prices to be overbought.
There is one interesting thing about Friday after the employment release: the 10-year rate rose (and prices fell). And, while the rate hit 3.1% at one point during the day, the close was higher than the open. There was also a lower tail (remember: a possible signal of change of momentum). It is quite possible that the low on Friday may be a 10-year low for the short-term based on Friday's price bar. Keep in mind, though, that mortgage rates tend to be highly correlated with the 10-year bond rate, so it appears that we are going to see lower mortgage rates ahead (below 5% on 30-year mortgages). The real question is whether mortgage applications rise or fall ("other things" are not necessarily equal).
The stock market had a rough couple of days. After class on Thursday, the market dropped sharply. Friday, after the report, another sharp drop occurred until around mid-day when we came off the lows of the day. Here is a story about the stock and bond markets. For extra credit, due at the beginning of class on Tuesday, create a chart of the S&P 500 (daily) using "fill the chart" as the data range. Put the RSI in the same chart (not above or below it), paste this into a Word document. In that document, provide a brief summary indicating how the RSI signaled the recent stock market decline.
You should continue following the bond market throughout the remainder of this semester and beyond, noting what it is forecasting and contrast this with what the stock market is assuming. We will cover the stock market this week.
The chart (click to enlarge) shows the ten-year bond rate ($TNX). NOTE: the rate of interest is the listed value on the right axis divided by 10. So, 35 corresponds to a 3.5% rate, etc. Resistance for the 10-year bond rate has recently been 3.5% -- you can see the rate bouncing off this level several times since August. Focusing only on this past week, we see a noticeable decline in the 10-year rate, in anticipation of a weak employment report.
There is one interesting thing about Friday after the employment release: the 10-year rate rose (and prices fell). And, while the rate hit 3.1% at one point during the day, the close was higher than the open. There was also a lower tail (remember: a possible signal of change of momentum). It is quite possible that the low on Friday may be a 10-year low for the short-term based on Friday's price bar. Keep in mind, though, that mortgage rates tend to be highly correlated with the 10-year bond rate, so it appears that we are going to see lower mortgage rates ahead (below 5% on 30-year mortgages). The real question is whether mortgage applications rise or fall ("other things" are not necessarily equal).
The stock market had a rough couple of days. After class on Thursday, the market dropped sharply. Friday, after the report, another sharp drop occurred until around mid-day when we came off the lows of the day. Here is a story about the stock and bond markets. For extra credit, due at the beginning of class on Tuesday, create a chart of the S&P 500 (daily) using "fill the chart" as the data range. Put the RSI in the same chart (not above or below it), paste this into a Word document. In that document, provide a brief summary indicating how the RSI signaled the recent stock market decline.
You should continue following the bond market throughout the remainder of this semester and beyond, noting what it is forecasting and contrast this with what the stock market is assuming. We will cover the stock market this week.
Wednesday, September 30, 2009
New Notes Online
I have two more sets of online notes to complete the Bond Market information now being covered in class. These are listed near the Bond notes on the online syllabus. If you want to download these from this post, here are the links: The Yield Curve, Stock Market, and Interest Rates and The Money Market.
Wednesday, September 23, 2009
Fed Decision?
As expected, at 2:15 today the Federal Reserve made its decision not to raise rates (thank God!), and released its short statement summarizing its assessment of the economy now and in the future. Here is a copy of the actual Fed statement. And, as I indicated to you in class, the media provided an anal and microscopic evaluation of this statement compared to the previous one (click here).
How did the stock market react? Below is an image of the S&P 500 using 15-minute intervals (click to enlarge). Look this over, as a number of the key elements for reading market momentum show up. First, note when the announcement occurred at 2:15. The initial reaction was very positive (large up bar). But, that wasn't sustainable, as the RSI(9) showed an overbought reading (above 70). The next 15 minutes, we see a classic illustration of what happens when momentum diminishes -- a bar with a significant upper tail. This indicates that the bulls were able to push price fairly high, but the bears ultimately beat them back. For that bar, note the close (of the 15 minutes) was almost identical to the open. In the next bar, the open was above the prior bar's close, but things got bad for the bulls as the bears were clearly in control at this point. Take a look at the last bar of the trading day - a large range, the bears were clearly in control by then, and the close was almost at the low for that 15-minute period.
The day ended with an ugly price bar, but a glimmer of hope for tomorrow -- the RSI was giving an oversold reading (was below 30). If price should continue to fall, how low can we expect it to fall? Let me restate this: where is the next level of support? To find this, use the rule from class: look to the left. In other words, extend the time period of the chart. In the second graph (click to enlarge), I have extended to 5 days. From this, we are able to see the next level of support at around 1058.
Let's see what happens tomorrow.
How did the stock market react? Below is an image of the S&P 500 using 15-minute intervals (click to enlarge). Look this over, as a number of the key elements for reading market momentum show up. First, note when the announcement occurred at 2:15. The initial reaction was very positive (large up bar). But, that wasn't sustainable, as the RSI(9) showed an overbought reading (above 70). The next 15 minutes, we see a classic illustration of what happens when momentum diminishes -- a bar with a significant upper tail. This indicates that the bulls were able to push price fairly high, but the bears ultimately beat them back. For that bar, note the close (of the 15 minutes) was almost identical to the open. In the next bar, the open was above the prior bar's close, but things got bad for the bulls as the bears were clearly in control at this point. Take a look at the last bar of the trading day - a large range, the bears were clearly in control by then, and the close was almost at the low for that 15-minute period.
The day ended with an ugly price bar, but a glimmer of hope for tomorrow -- the RSI was giving an oversold reading (was below 30). If price should continue to fall, how low can we expect it to fall? Let me restate this: where is the next level of support? To find this, use the rule from class: look to the left. In other words, extend the time period of the chart. In the second graph (click to enlarge), I have extended to 5 days. From this, we are able to see the next level of support at around 1058.Let's see what happens tomorrow.
Tuesday, September 8, 2009
Welcome back!
Welcome to the Fall 2009 semester.
This blog will have postings throughout the semester -- my way of communicating important information to you when we are not meeting as a class. Check in on the days after class meets, especially on weekends. To make this worth your while, there will be two or three extra credit assignments posted on the Blog throughout the semester.
The past year was dominated by a severe financial crisis and a global recession. The recession was so severe (believed to be the worst since the Depression) that it took on a name: "The Great Recession." This semester, growth remains a major concern, as there is considerable debate about whether or not a national economic recovery has actually begun. Whether or not this is so (I believe we are in the earliest stages of a recovery), credit market weakness (ongoing credit problems and further after-effects of sub-prime mortgages) will also be important, as will the behavior of inflation (will it suddenly spark as some observers fear?). In its next move, the Fed will raise the fed funds rate, as it is currently at (or near) 0. The only question that remains is when such a rate hike will occur.
By semester's end, you will come to understand that all of the factors we will be discussing throughout the semester are interrelated. And, as the semester unfolds, we'll see what the collective actions of the world's central banks will be, and if their assessments of what they need to do prove to be correct.
For now, read all of Stikki Stock Charts for next Thursday and visit the web site: Stockcharts.com. On the online syllabus I have added introductory material that will assist you in using that web site (we will be referring to it all semester).
If you have any questions throughout the semester, don't hesitate to e-mail me (llardaro@uri.edu) and/or stop by my office, Chafee 804. DO NOT LEAVE PHONE MESSAGES!!
This blog will have postings throughout the semester -- my way of communicating important information to you when we are not meeting as a class. Check in on the days after class meets, especially on weekends. To make this worth your while, there will be two or three extra credit assignments posted on the Blog throughout the semester.
The past year was dominated by a severe financial crisis and a global recession. The recession was so severe (believed to be the worst since the Depression) that it took on a name: "The Great Recession." This semester, growth remains a major concern, as there is considerable debate about whether or not a national economic recovery has actually begun. Whether or not this is so (I believe we are in the earliest stages of a recovery), credit market weakness (ongoing credit problems and further after-effects of sub-prime mortgages) will also be important, as will the behavior of inflation (will it suddenly spark as some observers fear?). In its next move, the Fed will raise the fed funds rate, as it is currently at (or near) 0. The only question that remains is when such a rate hike will occur.
By semester's end, you will come to understand that all of the factors we will be discussing throughout the semester are interrelated. And, as the semester unfolds, we'll see what the collective actions of the world's central banks will be, and if their assessments of what they need to do prove to be correct.
For now, read all of Stikki Stock Charts for next Thursday and visit the web site: Stockcharts.com. On the online syllabus I have added introductory material that will assist you in using that web site (we will be referring to it all semester).
If you have any questions throughout the semester, don't hesitate to e-mail me (llardaro@uri.edu) and/or stop by my office, Chafee 804. DO NOT LEAVE PHONE MESSAGES!!
Thursday, April 23, 2009
Oil Price
As I stated in class today, oil prices ($WTIC) have recently made, but not completed, a double top. The chart (click to enlarge) shows this, along with how to calculate the target price. First, it is important to point out that for a double top formation to be completed, market price must break below the neckline, which has not yet happened (also, remember this chart is EOD, or End of Day). The calculation of the lower price target is given on the chart. In the pres
ent example, assuming that this pattern is completed, so that price closes below the neckline, the falling price target is just under $40/barrel.
I have drawn a horizontal line at (approximately) that price target. Something interesting emerges: if the target is reached, we can expect a re-test of support that has existed since the beginning of 2009. Notice that there were a few false breakdowns below this support in February, but support there held.
The important question for ECN 335 is the informational content of this formation. In other words, what is this market telling us about the direction of the overall economy, commodity prices, or other factors in the near term?
Start by modeling oil prices (and commodity prices in general): demand for goods (predicated on production), and the strength of the US Dollar are major factors. In addition to these, factors specific to this particular commodity (ex: geopolitical problems concerning oil production) should also be taken into account. Next, view oil price alongside other indicators such as cyclicals ($CYC) and determine whether it is a lagging, coincident, or leading indicator (read Carnes & Slifer's text to help with this).
ent example, assuming that this pattern is completed, so that price closes below the neckline, the falling price target is just under $40/barrel.I have drawn a horizontal line at (approximately) that price target. Something interesting emerges: if the target is reached, we can expect a re-test of support that has existed since the beginning of 2009. Notice that there were a few false breakdowns below this support in February, but support there held.
The important question for ECN 335 is the informational content of this formation. In other words, what is this market telling us about the direction of the overall economy, commodity prices, or other factors in the near term?
Start by modeling oil prices (and commodity prices in general): demand for goods (predicated on production), and the strength of the US Dollar are major factors. In addition to these, factors specific to this particular commodity (ex: geopolitical problems concerning oil production) should also be taken into account. Next, view oil price alongside other indicators such as cyclicals ($CYC) and determine whether it is a lagging, coincident, or leading indicator (read Carnes & Slifer's text to help with this).
Friday, April 17, 2009
Gaps and the NASDAQ
On occasion, gaps appear in price charts. These arise almost exclusively in daily and intra-day charts. There are a number of things that cause gaps to emerge in individual stocks, such as news or earnings announcements (positive or negative) coming out after a day's trading has ended, which causes a new equilibrium price that is different enough to gap up or down from the prior day's trading range. Actually, there are several different types of gaps. There is a good article about them at Chart School in StockCharts.com, and another about how to trade gaps on Investopdia.
The reason for this blog post is that the NASDAQ has seen several gaps over the past few weeks. The chart below (click to enlarge
) shows this. One thing that many of us who follow the market utilize is the tendency for gaps to be filled. How long it takes for this to occur, however, can vary widely, and it depends on the type of gap (see the articles above). Some, breakaway gaps, for example, can take quite a while to fill, if they even end up being filled. At the other extreme is exhaustion gaps, which are very likely to fill (see articles). The gaps in the NASDAQ chart are merely "plain vanilla" or standard gaps. Note an interesting pattern for the last two gaps: they both filled on the third day (almost sounds biblical!). DO NOT make anything of this, it is merely a coincidence.
I do want to point out a trading strategy related to the typical gap. Since gaps tend to eventually fill (again, depending on the type), some traders will essentially place trades that presuppose this. In other words, they trade in the opposite direction of the gap. This is called fading the gap. While I have used this on a number of occasions in the past, I did so with added criteria. So, according to this trading philosophy, if a down gap emerges, go long in anticipation that price will rise and fill the gap.
How likely is it that a gap will be filled in a reasonable time period? Use technical indicators to make this determination. If there is an up gap, for example, and price moves fairly close to resistance and/or the RSI shows an overbought reading, the odds of gap filling are in your favor. It might take longer than you are comfortable with, however. This has a bearing when traders are using options which have a time decay factor that lowers their prices each day as you wait for the filling to occur. Similarly, if a gap down occurs, moving price close to support and/or the RSI is at oversold readings, the likelihood of filling the gap are fairly good. As always, identify either bullish or bearish divergences improves the odds of your being correct even more.
When I originally planned to write this blog, another pattern existed that has now ended. The most likely support for the NASDAQ at present is its 50-day moving average. If a gap emerges that is not very far from the 50-day, and the RSI is at or near an overbought reading, the odds that the gap will be filled as part of a retest of support (at the 50-day moving average) are very favorable.
Let me end this post by transcending exclusive reliance on technical criteria. If you are attempting to determine where price will eventually go, create a price forecast using economic criteria. Identify the primary explanatory variables that will influence price over your time period of interest, then predict what each of them will do. Once you have done this, determine the dominant changes and along with that, your price forecast. For the market as a whole, price depends on interest rates and profit expectations. You then find several variables for each of those factors. At the firm or industry level, the choice of factors can differ. For example, interest rates might not be very influential (ex: consumer staples), or how cyclical the firm or its industry are must be accounted for. That leads to your identifying additional factors to use in your forecast.
Hopefully, it might have crossed your mind that it is also highly useful to incorporate intermarket relationships into this type of analysis. What is the commodity market signaling? How about currencies? The bond market? Put all of this together (as you must for the course paper) and you have a very educated guess about the overall market's direction.
The reason for this blog post is that the NASDAQ has seen several gaps over the past few weeks. The chart below (click to enlarge
) shows this. One thing that many of us who follow the market utilize is the tendency for gaps to be filled. How long it takes for this to occur, however, can vary widely, and it depends on the type of gap (see the articles above). Some, breakaway gaps, for example, can take quite a while to fill, if they even end up being filled. At the other extreme is exhaustion gaps, which are very likely to fill (see articles). The gaps in the NASDAQ chart are merely "plain vanilla" or standard gaps. Note an interesting pattern for the last two gaps: they both filled on the third day (almost sounds biblical!). DO NOT make anything of this, it is merely a coincidence.I do want to point out a trading strategy related to the typical gap. Since gaps tend to eventually fill (again, depending on the type), some traders will essentially place trades that presuppose this. In other words, they trade in the opposite direction of the gap. This is called fading the gap. While I have used this on a number of occasions in the past, I did so with added criteria. So, according to this trading philosophy, if a down gap emerges, go long in anticipation that price will rise and fill the gap.
How likely is it that a gap will be filled in a reasonable time period? Use technical indicators to make this determination. If there is an up gap, for example, and price moves fairly close to resistance and/or the RSI shows an overbought reading, the odds of gap filling are in your favor. It might take longer than you are comfortable with, however. This has a bearing when traders are using options which have a time decay factor that lowers their prices each day as you wait for the filling to occur. Similarly, if a gap down occurs, moving price close to support and/or the RSI is at oversold readings, the likelihood of filling the gap are fairly good. As always, identify either bullish or bearish divergences improves the odds of your being correct even more.
When I originally planned to write this blog, another pattern existed that has now ended. The most likely support for the NASDAQ at present is its 50-day moving average. If a gap emerges that is not very far from the 50-day, and the RSI is at or near an overbought reading, the odds that the gap will be filled as part of a retest of support (at the 50-day moving average) are very favorable.
Let me end this post by transcending exclusive reliance on technical criteria. If you are attempting to determine where price will eventually go, create a price forecast using economic criteria. Identify the primary explanatory variables that will influence price over your time period of interest, then predict what each of them will do. Once you have done this, determine the dominant changes and along with that, your price forecast. For the market as a whole, price depends on interest rates and profit expectations. You then find several variables for each of those factors. At the firm or industry level, the choice of factors can differ. For example, interest rates might not be very influential (ex: consumer staples), or how cyclical the firm or its industry are must be accounted for. That leads to your identifying additional factors to use in your forecast.
Hopefully, it might have crossed your mind that it is also highly useful to incorporate intermarket relationships into this type of analysis. What is the commodity market signaling? How about currencies? The bond market? Put all of this together (as you must for the course paper) and you have a very educated guess about the overall market's direction.
Tuesday, April 7, 2009
Which Way Will the Market Go?
The recent rally has taken a pause at best, and perhaps the recent rally has run its course. While the market has declined for the past two days, today's decline was much larger than Monday, as the S&P fell by almost 20 points back to 815.6. How can we gauge whether this is the end of a rally or merely a pause in an uptrend?
Technical indicators are helpful for this. The following chart (click to enlarge) is the daily S&P performance over the past s
ix months. There are two conflicting signals in this chart. First, note the performance of the RSI. While the S&P has recently risen sharply, that momentum was not confirmed by the RSI (see the lines in the chart). Recall, this is a bearish divergence. But if we work with moving averages, we get a buy signal. In the chart I have added the 20-day and 50-day moving averages. Notice that in the past few days, the 20-day has crossed above the 50-day moving average. This could potentially be considered a buy signal (recall: this is related to the average-marginal relationship we discussed earlier in the semester).
So, which indicator should we rely on? Since moving averages are lagging indicators and a bearish divergence of the RSI is a leading indicator, I would tend to go with the RSI's "signal." But that is still no guarantee that the rally is over -- it merely indicates a short-term pullback is in store which we are now witnessing.
In a situation such as this, you should look at weekly data for whatever information it contains, since weekly data does not contain as much "noise" as does daily price data. The chart below shows weekly S&P data (click to enlarge).
I have added the 13-week moving average since this corresponds to a quarter. Note how well this fits the price data.
The weekly RSI shows very different momentum information than does the daily chart. Note the weekly RSI is far from overbought, and there is no bearish divergence. Actually, the RSI has failed for some time to move beyond 50, which would have indicated movement to more bull-market-type momentum.
In this situation, I recommend that you view an RSI value of 50 as resistance for the S&P's price movement. So, based on the weekly RSI, this rally failed at (RSI) resistance. I would only place bets on upward continuation when (and if) the RSI is able to sustain a break above 50. Were this to happen, daily data would clearly have to show an end to the recent pullback.
Technical indicators are helpful for this. The following chart (click to enlarge) is the daily S&P performance over the past s
ix months. There are two conflicting signals in this chart. First, note the performance of the RSI. While the S&P has recently risen sharply, that momentum was not confirmed by the RSI (see the lines in the chart). Recall, this is a bearish divergence. But if we work with moving averages, we get a buy signal. In the chart I have added the 20-day and 50-day moving averages. Notice that in the past few days, the 20-day has crossed above the 50-day moving average. This could potentially be considered a buy signal (recall: this is related to the average-marginal relationship we discussed earlier in the semester).So, which indicator should we rely on? Since moving averages are lagging indicators and a bearish divergence of the RSI is a leading indicator, I would tend to go with the RSI's "signal." But that is still no guarantee that the rally is over -- it merely indicates a short-term pullback is in store which we are now witnessing.
In a situation such as this, you should look at weekly data for whatever information it contains, since weekly data does not contain as much "noise" as does daily price data. The chart below shows weekly S&P data (click to enlarge).
I have added the 13-week moving average since this corresponds to a quarter. Note how well this fits the price data.The weekly RSI shows very different momentum information than does the daily chart. Note the weekly RSI is far from overbought, and there is no bearish divergence. Actually, the RSI has failed for some time to move beyond 50, which would have indicated movement to more bull-market-type momentum.
In this situation, I recommend that you view an RSI value of 50 as resistance for the S&P's price movement. So, based on the weekly RSI, this rally failed at (RSI) resistance. I would only place bets on upward continuation when (and if) the RSI is able to sustain a break above 50. Were this to happen, daily data would clearly have to show an end to the recent pullback.
Wednesday, March 25, 2009
Happy Days are Here Again!?
There have been several pieces of good economic news lately. Today, durable goods (remember these are a leading economic indicator) rose unexpectedly, and sales of new homes also increased. You can read about these (homes, durable goods).
In following the economy, it is always advisable to track not only growth rates (rates of change) but levels as well. And, remember from the first few lectures, there are different ways of measuring growth rates (sequential, like month-to-month, or year-over-year). The media doesn't make this easy for you, all of the releases lately have focused on rates of growth and included only graphs of growth rates and not levels.
How can you go beyond this? Let me recommend a terrific web site for this: Economy.com's Freelunch. Its URL is: http://economy.com/freelunch. To access the data (for free) you need to first create an account, then disable pop-up blockers for that site so the graphs with data can appear.
Let's first look at new home sales. On the main page, this is under Real Estate and Sales. You are given a number of choices on the page that emerges. Choose View for New One-Family Housing Sold. A pop-up window with data and a graph emerges. Note that on the graph, you can change the data frequency (ex: go from monthly to quarterly), and/or you can change from the level of this variable to various rates of change (then click on the Refresh Data link).
Below is a table of what the markets are celebrating today: a rise in (sequential) new home sales of almost 5%, as sales went from 322,000 to 337,000 (seasonally adjusted). Look over these data and determine for yourself how well home sales are doing (always feel free to agree or disagree with the market for a longer-term perspective).
Now let's look at the graph (click to enlarge) from Freelunch of the entire set of values (current levels). Isn't the cause for today's celebration by the stock market in response to this number obvious? It isn't for me!
What is the market really reacting to today? Is this one month change a blip or the actual bottom? It is impossible to know this. Will data revision next month remove February's increase? Will we return to more declines in March?
Let me state a few rules of data analysis rules I have always lived by:
RULE #1: NEVER MAKE TOO MUCH OUT OF ONE PERIOD'S VALUE.
RULE #2: ALWAYS ATTEMPT TO FIT A GIVEN PERIOD'S VALUE INTO THE BROADER CONTEXT OF A TREND.
RULE #3: ALWAYS INCORPORATE ECONOMIC ANALYSIS INTO ANY ANALYSIS OF DATA TO TRANSCEND THE SHORT-TERM AND TO BEGIN THE PROCESS OF VISUALIZING WHERE AND HOW THE DATA WILL ACTUALLY BE MOVING IN THE FUTURE.
If the graph above were a price chart, what do you think the RSI would be telling us? Remember: just as positive rates of growth can become unsustainable, the same is true for negative growth rates (thank God!). We are clearly due for the equivalent of "oversold bounces" in much economic data. These should be able to sustain the current bear market bounce for a while. But for how long?
To arrive at an answer to this, the final thing I recommend that you do is to identify the sectors that performed best and make intermarket sense out of the pattern that emerges. Personally, I will have to wait to see what Jim Cramer says before I can reach any meaningful conclusions!
In following the economy, it is always advisable to track not only growth rates (rates of change) but levels as well. And, remember from the first few lectures, there are different ways of measuring growth rates (sequential, like month-to-month, or year-over-year). The media doesn't make this easy for you, all of the releases lately have focused on rates of growth and included only graphs of growth rates and not levels.
How can you go beyond this? Let me recommend a terrific web site for this: Economy.com's Freelunch. Its URL is: http://economy.com/freelunch. To access the data (for free) you need to first create an account, then disable pop-up blockers for that site so the graphs with data can appear.
Let's first look at new home sales. On the main page, this is under Real Estate and Sales. You are given a number of choices on the page that emerges. Choose View for New One-Family Housing Sold. A pop-up window with data and a graph emerges. Note that on the graph, you can change the data frequency (ex: go from monthly to quarterly), and/or you can change from the level of this variable to various rates of change (then click on the Refresh Data link).
Below is a table of what the markets are celebrating today: a rise in (sequential) new home sales of almost 5%, as sales went from 322,000 to 337,000 (seasonally adjusted). Look over these data and determine for yourself how well home sales are doing (always feel free to agree or disagree with the market for a longer-term perspective).
| 2009M2 | 337 |
| 2009M1 | 322 |
| 2008M9 | 434 |
| 2008M8 | 448 |
| 2008M7 | 505 |
| 2008M6 | 499 |
| 2008M5 | 515 |
| 2008M4 | 542 |
| 2008M3 | 513 |
| 2008M2 | 572 |
| 2008M12 | 371 |
| 2008M11 | 387 |
| 2008M10 | 404 |
Now let's look at the graph (click to enlarge) from Freelunch of the entire set of values (current levels). Isn't the cause for today's celebration by the stock market in response to this number obvious? It isn't for me!
Let me state a few rules of data analysis rules I have always lived by:
RULE #1: NEVER MAKE TOO MUCH OUT OF ONE PERIOD'S VALUE.
RULE #2: ALWAYS ATTEMPT TO FIT A GIVEN PERIOD'S VALUE INTO THE BROADER CONTEXT OF A TREND.
RULE #3: ALWAYS INCORPORATE ECONOMIC ANALYSIS INTO ANY ANALYSIS OF DATA TO TRANSCEND THE SHORT-TERM AND TO BEGIN THE PROCESS OF VISUALIZING WHERE AND HOW THE DATA WILL ACTUALLY BE MOVING IN THE FUTURE.
If the graph above were a price chart, what do you think the RSI would be telling us? Remember: just as positive rates of growth can become unsustainable, the same is true for negative growth rates (thank God!). We are clearly due for the equivalent of "oversold bounces" in much economic data. These should be able to sustain the current bear market bounce for a while. But for how long?
To arrive at an answer to this, the final thing I recommend that you do is to identify the sectors that performed best and make intermarket sense out of the pattern that emerges. Personally, I will have to wait to see what Jim Cramer says before I can reach any meaningful conclusions!
Friday, March 13, 2009
Cramer vs. Jon Stewart
At last, the eagerly awaited confrontation on the Daily Show between Jon Stewart and Jim Cramer has taken place. I can only sum it up with one word: WOW!
I had wondered (and discussed with several of you in class) how Cramer should handle his appearance. Obviously, any temper tantrum would be a total disaster for both Cramer and CNBC. I had expected him to be very nice and self deprecating. His actual performance even exceeded my expectations: he fell on the proverbial "sword," which was probably his best strategy. But I will let you judge for yourself. Here is the link to that show.
I hope that the mystique surrounding CNBC has finally begun to disappear at long last. Now all CNBC needs to do is get rid of those egotistical "I am CNBC" short segments about the "stars" that appear on their network.
For the record, though, let me reiterate something I have said several times in class: the contention by CNBC, specifically Jim Cramer, that the President should do what the stock market is telling him to do, is totally asinine! Hopefully, such absurd advice, which emerged as a by-product of the metamorphosis of CNBC "reporters" into hacks and ideologues, will never be given again. Should such advice ever be offered in the future, don't hesitate to categorically reject it from the outset.
There are two lessons to be learned from all of this. First, never confuse charisma with competence. But, what about persons (who will go nameless) who possess both of these traits? The second lesson is: some people who are more than capable of dazzling you with their knowledge will, based on an incessant need to sustain their inflated egos, opt to also baffle you with bull ----.
I had wondered (and discussed with several of you in class) how Cramer should handle his appearance. Obviously, any temper tantrum would be a total disaster for both Cramer and CNBC. I had expected him to be very nice and self deprecating. His actual performance even exceeded my expectations: he fell on the proverbial "sword," which was probably his best strategy. But I will let you judge for yourself. Here is the link to that show.
I hope that the mystique surrounding CNBC has finally begun to disappear at long last. Now all CNBC needs to do is get rid of those egotistical "I am CNBC" short segments about the "stars" that appear on their network.
For the record, though, let me reiterate something I have said several times in class: the contention by CNBC, specifically Jim Cramer, that the President should do what the stock market is telling him to do, is totally asinine! Hopefully, such absurd advice, which emerged as a by-product of the metamorphosis of CNBC "reporters" into hacks and ideologues, will never be given again. Should such advice ever be offered in the future, don't hesitate to categorically reject it from the outset.
There are two lessons to be learned from all of this. First, never confuse charisma with competence. But, what about persons (who will go nameless) who possess both of these traits? The second lesson is: some people who are more than capable of dazzling you with their knowledge will, based on an incessant need to sustain their inflated egos, opt to also baffle you with bull ----.
Wednesday, March 11, 2009
Determining Size/Emphasis for Price Momentum
As you probably know, there are different sized firms (small, medium, and large capitalization), and there are different emphases among them in ETF's. In this post I focus on growth and value orientations.
To get the symbols for these, I went to the ishares.com web site, which has an easy navigation method. On the left, select the US Market Cap/Style tab. Sub-tabs appear giving the different market cap possibilities, and when you click on one of these, you get the symbols for the market cap and emphasis of that ETF.
You can use these symbols to determine the size/orientations that are outperforming (hopefully) the market using PerfCharts in StockCharts.com. I have done this for you. Click on the following link to get the PerfChart for this.
You will neeed to convert this to a bar chart, so click on the bar designation below the graph on the bottom left.
- To compare performance to the S&P click on the S&P tab above the bar chart.
- On the bottom right below the graph, drag the bar to select the time period you will investigate. NOTE that the dates you end up with are given in the top left of the graph.
Once this is done, you will be able to see which sizes are performing best, or which orientation is doing better than others. At present, growth is outperforming value.
As an investor, how can you use this information for selecting stocks or ETF's? Obviously, the ETF's outperforming the S&P are obvious choices for investment. BUT, make sure you check the technicals of this ETF before deciding whether to purchase shares (using the regular SharpCharts in StockCharts.com).
If you want to purchase individual stocks, what can you do? The answer to this is simpler than it would appear: Get the symbol of the ETF that is outperforming, return to ishares.com, and investigate it there. Enter the symbol on the ishares home page or go to the tab to get to that ETF's page. There you will find the primary holdings in that ETF (you can click to find all holdings if desired), and its sector breakdown. Then, you can exam the technicals for each graph.
But, as a first step, I recommend getting the symbols for the major holdings, returning to PerfCharts, entering those symbols, then determining which individual stocks have outperformed the other ETF holdings. Once you identify those, THEN move to a graph of its technicals and make a decision (you should also have a sense of where the overall market is going). If you click on View All Holdings in ishares.com, symbols for each holding are given.
Finally, you must appeal to the great oracle of stock market wisdom to finalize your choices. Make sure Jim Cramer approves of the stocks or ETF's that you have selected. Absent Cramer the Omnisient One's blessings, you are probably venturing out into needlessly dangerous territory!
To get the symbols for these, I went to the ishares.com web site, which has an easy navigation method. On the left, select the US Market Cap/Style tab. Sub-tabs appear giving the different market cap possibilities, and when you click on one of these, you get the symbols for the market cap and emphasis of that ETF.
You can use these symbols to determine the size/orientations that are outperforming (hopefully) the market using PerfCharts in StockCharts.com. I have done this for you. Click on the following link to get the PerfChart for this.
You will neeed to convert this to a bar chart, so click on the bar designation below the graph on the bottom left.
- To compare performance to the S&P click on the S&P tab above the bar chart.
- On the bottom right below the graph, drag the bar to select the time period you will investigate. NOTE that the dates you end up with are given in the top left of the graph.
Once this is done, you will be able to see which sizes are performing best, or which orientation is doing better than others. At present, growth is outperforming value.
As an investor, how can you use this information for selecting stocks or ETF's? Obviously, the ETF's outperforming the S&P are obvious choices for investment. BUT, make sure you check the technicals of this ETF before deciding whether to purchase shares (using the regular SharpCharts in StockCharts.com).
If you want to purchase individual stocks, what can you do? The answer to this is simpler than it would appear: Get the symbol of the ETF that is outperforming, return to ishares.com, and investigate it there. Enter the symbol on the ishares home page or go to the tab to get to that ETF's page. There you will find the primary holdings in that ETF (you can click to find all holdings if desired), and its sector breakdown. Then, you can exam the technicals for each graph.
But, as a first step, I recommend getting the symbols for the major holdings, returning to PerfCharts, entering those symbols, then determining which individual stocks have outperformed the other ETF holdings. Once you identify those, THEN move to a graph of its technicals and make a decision (you should also have a sense of where the overall market is going). If you click on View All Holdings in ishares.com, symbols for each holding are given.
Finally, you must appeal to the great oracle of stock market wisdom to finalize your choices. Make sure Jim Cramer approves of the stocks or ETF's that you have selected. Absent Cramer the Omnisient One's blessings, you are probably venturing out into needlessly dangerous territory!
Update on CNBC Critique -- Reply to Cramer
After the Daily Show absolutely blasted CNBC and its "reporters" for their shortcomings (see the video clip on the March 5 post), Jim Cramer apparently whined on his Street.com blog about how unfairly he had been treated on the Daily Show. Big mistake! The Daily Show did some research and showed that Cramer had actually blundered more substantially than they had said.
Here is a link to the video clip for this Daily Show "update."
Here is a link to the video clip for this Daily Show "update."
Friday, March 6, 2009
Follow Up on GE
A few days ago I wrote a post about a classic bottoming pattern displayed by GE. Now that trading for the week has ended, I want to quickly revisit GE. The chart shows price action for Thursday and Friday (click to enlarge):
Notice that GE outperformed the market on the two bad days that ended the week. Its relative strength (below chart) turned up signifying this fact. Also, while GE is still oversold, it is less oversold than it was on Wednesday. Finally, look at the price bars (I omitted volume to unclutter the chart). There are higher lows, which is good, but we have yet to exceed Wednesday's high.
The fact that GE's price withstood a big down day on Thursday is something to pay attention to. Keep checking to see how this plays out.
I will finish this post with a look at GE from a weekly perspective. How does this week's price action show up? The weekly chart is given below (click to enlarge).
Note that the price bar for this week has a large lower tail, indicating that the potential bottoming we observed with the daily charts i
s beginning to show up on the weekly level. Weekly volume also shows a surge, consistent with the daily result from Wednesday. Also, the RSI indicates that GE is the most oversold it has been since December (the period of this chart).
As a rule, you should always look at daily and weekly charts before deciding whether to purchase or sell stocks. Daily charts contain a lot of "noise," based on day-to-day fluctuations that might not reflect the overall trend. Weekly charts smooth the daily fluctuations out.
So, the weekly chart has not yet given a buy signal. We require confirmation of the pattern with price next week going above last week's high. How likely is this? I recommend checking the upcoming economic data for next week to see if any potential "land mines" exist. Then, follow the daily and weekly price data in that context.
Notice that GE outperformed the market on the two bad days that ended the week. Its relative strength (below chart) turned up signifying this fact. Also, while GE is still oversold, it is less oversold than it was on Wednesday. Finally, look at the price bars (I omitted volume to unclutter the chart). There are higher lows, which is good, but we have yet to exceed Wednesday's high.The fact that GE's price withstood a big down day on Thursday is something to pay attention to. Keep checking to see how this plays out.
I will finish this post with a look at GE from a weekly perspective. How does this week's price action show up? The weekly chart is given below (click to enlarge).
Note that the price bar for this week has a large lower tail, indicating that the potential bottoming we observed with the daily charts i
s beginning to show up on the weekly level. Weekly volume also shows a surge, consistent with the daily result from Wednesday. Also, the RSI indicates that GE is the most oversold it has been since December (the period of this chart).As a rule, you should always look at daily and weekly charts before deciding whether to purchase or sell stocks. Daily charts contain a lot of "noise," based on day-to-day fluctuations that might not reflect the overall trend. Weekly charts smooth the daily fluctuations out.
So, the weekly chart has not yet given a buy signal. We require confirmation of the pattern with price next week going above last week's high. How likely is this? I recommend checking the upcoming economic data for next week to see if any potential "land mines" exist. Then, follow the daily and weekly price data in that context.
Thursday, March 5, 2009
A Glowing Tribute to CNBC
You have heard all of my frustrations about how CNBC has been covering things this semester and what appears to be a disappointing lack of objectivity (a trade for the rule of ideology). PLEASE click on this URL and play the clip about Rick Santelli's rant that wasn't accompanied by a similar rant about AIG (there is a short ad first, please bear with this).
This clip also shows a number of the blunders from prior CNBC broadcasts, some of which were posted on You Tube, etc.
POSTSCRIPT: I thought about it for a while and finally figured out what CNBC actually stands for:
Correlation
Neatly
Becomes
Causation
This clip also shows a number of the blunders from prior CNBC broadcasts, some of which were posted on You Tube, etc.
POSTSCRIPT: I thought about it for a while and finally figured out what CNBC actually stands for:
Correlation
Neatly
Becomes
Causation
Wednesday, March 4, 2009
Spotting a Bottom
While many things happened today, most notably this was an up day (yes those actually occur from time to time), I thought I would write a post showing a classic bottoming pattern in technical analysis. This can be seen by referring to GE (General Electric), which has been totally beaten up over the past year, mainly because it has a large financial segment. The chart below shows daily action for GE (click to enlarge):
First, let's forget about support. There is enough information to overlook that at present. Note that the chart shows GE to be VERY oversold at present. Now, focus on today's bar. It illustrates something that often occurs at bottoms: there is a large and significant lower tail (below the closing value). Even though today's close was lower than the open, the bears, who at one point were able to get price much lower than the closing price, were largely rebuffed by the bulls who were able to reverse much of the bears' negative momentum. In candlestick charting, today's bar is called a hammer, which "hammers a downtrend shut."
There is further reason to consider today's bar as significant: it occurred with extremely high volume. This is indicative of capitulation -- the "soft" money gives up and sells off, leaving only the "firmer hands" that will likely move price higher. This is an example of what I often refer to as "shaking the tree."
While today's action has all the makings of a short-term bottom for GE, there is no guarantee that it will actually be the bottom. Confirmation is required from tomorrow's price action: will tomorrow's trading move price above today's high? If so, there is reason to expect follow through. Of course, if more financial "shoes" drop, if tomorrow's initial claims data is a disaster, or if Friday's employment data are worse than the whisper number of around -850,000, all bets are off.
I suggest you follow GE for the next week or so and see how this plays out. To help you further, I have also added the
chart for GE as most people look at it: closing prices only with no technical indicators. What would you conclude from this chart???
First, let's forget about support. There is enough information to overlook that at present. Note that the chart shows GE to be VERY oversold at present. Now, focus on today's bar. It illustrates something that often occurs at bottoms: there is a large and significant lower tail (below the closing value). Even though today's close was lower than the open, the bears, who at one point were able to get price much lower than the closing price, were largely rebuffed by the bulls who were able to reverse much of the bears' negative momentum. In candlestick charting, today's bar is called a hammer, which "hammers a downtrend shut."
There is further reason to consider today's bar as significant: it occurred with extremely high volume. This is indicative of capitulation -- the "soft" money gives up and sells off, leaving only the "firmer hands" that will likely move price higher. This is an example of what I often refer to as "shaking the tree."
While today's action has all the makings of a short-term bottom for GE, there is no guarantee that it will actually be the bottom. Confirmation is required from tomorrow's price action: will tomorrow's trading move price above today's high? If so, there is reason to expect follow through. Of course, if more financial "shoes" drop, if tomorrow's initial claims data is a disaster, or if Friday's employment data are worse than the whisper number of around -850,000, all bets are off.
I suggest you follow GE for the next week or so and see how this plays out. To help you further, I have also added the
chart for GE as most people look at it: closing prices only with no technical indicators. What would you conclude from this chart???
Monday, March 2, 2009
What's Next for the S&P 500?
The S&P 500 fell all the way to 700 today, which is support going all the way back to 1997. Clearly, financial sector problems, most notably the ongoing problems with AIG (where was Rick Sentelli's rage about the government's action today??), and HSBC, the largest European bank curtailing lending in the US, hurt markets in general.
In order to find the next support levels, go to StockCharts.com, switch to Weekly data, and to make things visible, enter a specific time period. I chose 1996 - 1997 to see things without too many small OHLC bars. In order to find the exact LOW for support, in Annotations, change the Info Mode of the Cursor (far button on top right of Annotation screen). Click two times until it gives the date and specific values for Open, Close, High, and Low when you move to a bar.
I did this and found the next two support levels for the S&P 500 (note: this is depressing, viewer discretion is advised), which is given on the following chart (click to enlarge). Next stop is 644, which is a pretty significant drop from today's lev
el. After that, the next support takes us almost to 600 (at 606).
To determine whether we will likely hit either of these support levels, once again use economic analysis. The primary determinants of stock price at present are proft expectations and the perceived safety of the financial system.
Considering just these factors, we go 0 for 2, so the likelihood of reaching 644 suddenly becomes very significant. But at times like this, don't forget the psychology of markets.
A few weeks ago, many of the "talking heads" were saying it was time to get back into the market. Recall, my advice at that time was to get out quickly if you had money invested. Now, there is almost total resignation that a sharp drop is inevitable. Being a contrarian, I see the potential basis for a short-term bear market rally. So, barring any more horrible news (remember we have the employment report Friday), we might move up shortly.
The initial claims news on Thursday will probably bring more downward price pressure so it is not inconceivable that after a very bad employment report on Friday, we have an initial downdraft followed by a short-term rally. Think about it for a while: if a rally were to occur, when would most people be fooled? Answer: Friday after the employment report. This is only one possibility. Let's see how things actually play out for the rest of this week.
In order to find the next support levels, go to StockCharts.com, switch to Weekly data, and to make things visible, enter a specific time period. I chose 1996 - 1997 to see things without too many small OHLC bars. In order to find the exact LOW for support, in Annotations, change the Info Mode of the Cursor (far button on top right of Annotation screen). Click two times until it gives the date and specific values for Open, Close, High, and Low when you move to a bar.
I did this and found the next two support levels for the S&P 500 (note: this is depressing, viewer discretion is advised), which is given on the following chart (click to enlarge). Next stop is 644, which is a pretty significant drop from today's lev
el. After that, the next support takes us almost to 600 (at 606).To determine whether we will likely hit either of these support levels, once again use economic analysis. The primary determinants of stock price at present are proft expectations and the perceived safety of the financial system.
Considering just these factors, we go 0 for 2, so the likelihood of reaching 644 suddenly becomes very significant. But at times like this, don't forget the psychology of markets.
A few weeks ago, many of the "talking heads" were saying it was time to get back into the market. Recall, my advice at that time was to get out quickly if you had money invested. Now, there is almost total resignation that a sharp drop is inevitable. Being a contrarian, I see the potential basis for a short-term bear market rally. So, barring any more horrible news (remember we have the employment report Friday), we might move up shortly.
The initial claims news on Thursday will probably bring more downward price pressure so it is not inconceivable that after a very bad employment report on Friday, we have an initial downdraft followed by a short-term rally. Think about it for a while: if a rally were to occur, when would most people be fooled? Answer: Friday after the employment report. This is only one possibility. Let's see how things actually play out for the rest of this week.
Saturday, February 28, 2009
Q4 GDP Surprise?
On Friday, the second round estimate of Q4 2008 GDP was released. Originally, the real growth rate for Q4 was -3.8%. But, as I noted in class, that release only approximated inventories, exports, and imports.
The value for Friday's release was fairly close to my expectation. My prediction was for a downward revision to -5.5%, but I didn't rule out a drop of around 6%. That's what we got: -6.2%. The media tried to play this as a huge surprise, but many economists saw this coming. Markets gyrated throughout the day. The Dow-Jones average started the day down over 100 points, eventually moved into positive territory, then closed down 119. ALWAYS PAY ATTENTION TO THE WEEKLY CLOSE. The ten-year bond rate closed above 3 percent, which will likely remain in force as budget deficit projections continue to rise.
The major revisions contained in the revised GDP data were a worse-than-expected fall in exports and a sharp downward reduction in inventories. Read this article about the report. Actually, the fact that inventories are much smaller than first estimated is a very positive sign. Inventories are a leading economic indicator - their behavior today signals likely changes in economic activity 3 to 6 months in the future. So, with the new inventory estimate, businesses have far less inventory to work off in future months, meaning they have already begun to work through this problem (review the Quantity Adjustment Mechanism from Supply and Demand notes). Unfortunately, working down inventories will continue for much of this year, as national and global weakness persists.
On Friday, the Dow-Jones average closed near the low of the day, which moved us very close to the 7,000 level. Next Friday the February employment data will be released. That could move us below 7,000, but only if there were very big surprises (a nightmare decline in employment, and a sharp rise in the unemployment rate). I'm not sure we'll see that as the markets have already priced in very bad employment data, especially in light of Thursday's initial claims level.
The value for Friday's release was fairly close to my expectation. My prediction was for a downward revision to -5.5%, but I didn't rule out a drop of around 6%. That's what we got: -6.2%. The media tried to play this as a huge surprise, but many economists saw this coming. Markets gyrated throughout the day. The Dow-Jones average started the day down over 100 points, eventually moved into positive territory, then closed down 119. ALWAYS PAY ATTENTION TO THE WEEKLY CLOSE. The ten-year bond rate closed above 3 percent, which will likely remain in force as budget deficit projections continue to rise.
The major revisions contained in the revised GDP data were a worse-than-expected fall in exports and a sharp downward reduction in inventories. Read this article about the report. Actually, the fact that inventories are much smaller than first estimated is a very positive sign. Inventories are a leading economic indicator - their behavior today signals likely changes in economic activity 3 to 6 months in the future. So, with the new inventory estimate, businesses have far less inventory to work off in future months, meaning they have already begun to work through this problem (review the Quantity Adjustment Mechanism from Supply and Demand notes). Unfortunately, working down inventories will continue for much of this year, as national and global weakness persists.
On Friday, the Dow-Jones average closed near the low of the day, which moved us very close to the 7,000 level. Next Friday the February employment data will be released. That could move us below 7,000, but only if there were very big surprises (a nightmare decline in employment, and a sharp rise in the unemployment rate). I'm not sure we'll see that as the markets have already priced in very bad employment data, especially in light of Thursday's initial claims level.
Sunday, February 22, 2009
Gold Breaks $1,000
Friday was a roller coaster day for the stock market. The Dow-Jones, down by over 200 points in the early afternoon, finished "only" down 100 points, as the Obama administration assured a nervous market that nationalization of banks was not imminent (apparently, many thought this weekend could have ended with a surprise not unlike we saw at the end of last year -- this time nationalization of both Citigroup and Bank of America). You can read about this.
While the stock market was gyrating, gold rose to over $1,000/ounce (click here for story). While that is not far from the record in nominal terms, it was very far from the all-time record in real terms (around $2,200 in 2008 dollars). The move to gold was a flight to safety, not unlike what we often see for bonds (review Supply and Demand notes). Globally, markets are unsure about how long and severe this recession will be. So, rotate from stocks to bonds (interest rates fell Friday) and gold. Part of what underlies this uncertainty can be seen all too vividly with the following graph:
Gains that accumulated over five years have been wiped out over the last year and a half! We have now broken below support from 2002. Look closely at the most recent two price bars and the information they contain.
Where do we go from here? The only good news in the chart is that the RSI is giving an extremely oversold reading (of around 10). So, based on the way markets usually work, we are due for an oversold bounce. But other things are not equal. So, when might the bounce occur?
This is where you need to add economics to model the Dow-Jones average. Recall, the two primary factors moving it are interest rates and profit expectations. Interest rates for now are not a concern, so focus primarily on profit expectations. Predicting them necessarily requires a forecast of credit availability and financial system workings (read this intriguing article). Because this is so uncertain at present, opinions change every day. As market participants continue to change their minds often, they move in and out of different assets and stock sectors, causing volatile stock prices (referred to as the repricing of risk).
Expect this to continue until markets see a predictable (not necessarily effective) direction for financial markets, housing prices, and overall economic activity. ALL THREE ARE ENDOGENOUS AND SIMULTANEOUSLY DETERMINED.
While the stock market was gyrating, gold rose to over $1,000/ounce (click here for story). While that is not far from the record in nominal terms, it was very far from the all-time record in real terms (around $2,200 in 2008 dollars). The move to gold was a flight to safety, not unlike what we often see for bonds (review Supply and Demand notes). Globally, markets are unsure about how long and severe this recession will be. So, rotate from stocks to bonds (interest rates fell Friday) and gold. Part of what underlies this uncertainty can be seen all too vividly with the following graph:
Gains that accumulated over five years have been wiped out over the last year and a half! We have now broken below support from 2002. Look closely at the most recent two price bars and the information they contain.Where do we go from here? The only good news in the chart is that the RSI is giving an extremely oversold reading (of around 10). So, based on the way markets usually work, we are due for an oversold bounce. But other things are not equal. So, when might the bounce occur?
This is where you need to add economics to model the Dow-Jones average. Recall, the two primary factors moving it are interest rates and profit expectations. Interest rates for now are not a concern, so focus primarily on profit expectations. Predicting them necessarily requires a forecast of credit availability and financial system workings (read this intriguing article). Because this is so uncertain at present, opinions change every day. As market participants continue to change their minds often, they move in and out of different assets and stock sectors, causing volatile stock prices (referred to as the repricing of risk).
Expect this to continue until markets see a predictable (not necessarily effective) direction for financial markets, housing prices, and overall economic activity. ALL THREE ARE ENDOGENOUS AND SIMULTANEOUSLY DETERMINED.
Tuesday, February 17, 2009
Sector Rotations and the 200-day Moving Average
Bloomberg's had an excellent interview with John Murphy, the author of this course's Intermarket Analysis text. Here is a link to the You Tube interview. You will probably need to play it a few times, but take notes and try to understand the role of gold (here's an article to help), how the 200-day moving average has significance in reading the market, especially for selecting stocks, and how to use sector performance data as a leading indicator for when the overall stock market will bottom.
Today's market behavior moved us closer to testing the Dow-Jones and S&P 500 average bottoms from November. Note that the media refers to closes as bottoms, while technically lows should be used. If reaction tomorrow to the President's plan to control foreclosures is tepid or just plain hostile, we should test the November lows. Study today's OHLC bar and where the RSI(9) is relative to giving an oversold reading. Then strap your seatbelts for tomorrow's market action.
Today's market behavior moved us closer to testing the Dow-Jones and S&P 500 average bottoms from November. Note that the media refers to closes as bottoms, while technically lows should be used. If reaction tomorrow to the President's plan to control foreclosures is tepid or just plain hostile, we should test the November lows. Study today's OHLC bar and where the RSI(9) is relative to giving an oversold reading. Then strap your seatbelts for tomorrow's market action.
Monday, February 16, 2009
Gold Rally?
I have heard an increasing number of "talking heads" in the media recommend investing in gold. You can track gold using $GOLD (it is end of day values, though) or invest in it through an Exchange Traded Fund, GLD. How can such recommendations in general be evaluated?
Many persons watching or listening to the "talking heads" of course just rush into recommended investments. After all, these people have been analyzing markets for years! But, as we have discussed in class, experience is a sufficient but not necessary condition for competency in a given field. Then there is consideration of the short term versus longer term. Technical analysis and economics can help with both of these. Although there are never any guarantees, just a higher probability of success based on systematic analysis, the benefit of this combination is that you can check to see where mistakes occurred after the fact and improve your economic analysis.
A further edge into this is provided by intermarket analysis. As we have already discussed in class, gold and the US Dollar tend to move in opposite directions, as gold and other commodities have prices stated in US Dollars. For extra credit, due at the beginning of class tomorrow (2/17), prepare a Word document were you paste a graph of $GOLD and the US Dollar Index in the same graph, converting each to line charts (from OHLC). Is the relationship between this pair that expected from intermatket analysis at present? Explain why or why not (write a few sentences to explain this), after reading about the recent behavior of each from sources on the Internet, etc. Then, in a separate graph (you can go back to OHLC), have both gold and the RSI(9) in the same chart and paste this into your document. What does the relationship betwen gold price and the RSI indiacate about any "legs" the short-term gold rally can be expected to have? Write a bried explanaton of your answer.
Finally, today Japan reported a quarterly (sequential) change in real GDP of over 3%! This translates into an annualized decline of around 13%. OUCH!! You can read about this. What did the Japanese Yen do in reaction to this? It actually rose, believe it or not! Clearly, this is yet another instance where "other things" are not equal.
As the semester progresses, think about how weakness in Japan will likely affect the global recovery (they are the #2 economy in the world), and how this might play into your forecast.
Many persons watching or listening to the "talking heads" of course just rush into recommended investments. After all, these people have been analyzing markets for years! But, as we have discussed in class, experience is a sufficient but not necessary condition for competency in a given field. Then there is consideration of the short term versus longer term. Technical analysis and economics can help with both of these. Although there are never any guarantees, just a higher probability of success based on systematic analysis, the benefit of this combination is that you can check to see where mistakes occurred after the fact and improve your economic analysis.
A further edge into this is provided by intermarket analysis. As we have already discussed in class, gold and the US Dollar tend to move in opposite directions, as gold and other commodities have prices stated in US Dollars. For extra credit, due at the beginning of class tomorrow (2/17), prepare a Word document were you paste a graph of $GOLD and the US Dollar Index in the same graph, converting each to line charts (from OHLC). Is the relationship between this pair that expected from intermatket analysis at present? Explain why or why not (write a few sentences to explain this), after reading about the recent behavior of each from sources on the Internet, etc. Then, in a separate graph (you can go back to OHLC), have both gold and the RSI(9) in the same chart and paste this into your document. What does the relationship betwen gold price and the RSI indiacate about any "legs" the short-term gold rally can be expected to have? Write a bried explanaton of your answer.
Finally, today Japan reported a quarterly (sequential) change in real GDP of over 3%! This translates into an annualized decline of around 13%. OUCH!! You can read about this. What did the Japanese Yen do in reaction to this? It actually rose, believe it or not! Clearly, this is yet another instance where "other things" are not equal.
As the semester progresses, think about how weakness in Japan will likely affect the global recovery (they are the #2 economy in the world), and how this might play into your forecast.
Thursday, February 12, 2009
Very Long Term Support
As I am at office hours, doing my ongoing impression of the Maytag Repair Man, I thought I would finally do something I had avoided: find the very long term support points for the Dow-Jones Average. To do this, I had to convert to monthly bars (I can do this since I have a paid subscription), and went as far back as 1994. Here are the results for support should the current support of 7,475 fail:
Support #1: October 2002 = 7,198
Support #2: October 1997 = 6,933
Support #3: April 1997 = 6,316
Support #4: July 1996 = 5,170
The only good news here is that with the monthly chart and current levels of the Dow-Jones Average, the RSI is giving an extremely oversold reading of 13.3, which is its lowest reading by far over the entire period from 1994 through 2009. While this suggests a short-term bounce up, it is important to keep in mind that markets can remain in oversold territory for a while before such a bounce occurs. This is particularly true when analyzing monthly data.
NOTE: I have used lows, which are most appropriate to determining levels of support. The media generally uses closing values for this, which is technically incorrect.
Support #1: October 2002 = 7,198
Support #2: October 1997 = 6,933
Support #3: April 1997 = 6,316
Support #4: July 1996 = 5,170
The only good news here is that with the monthly chart and current levels of the Dow-Jones Average, the RSI is giving an extremely oversold reading of 13.3, which is its lowest reading by far over the entire period from 1994 through 2009. While this suggests a short-term bounce up, it is important to keep in mind that markets can remain in oversold territory for a while before such a bounce occurs. This is particularly true when analyzing monthly data.
NOTE: I have used lows, which are most appropriate to determining levels of support. The media generally uses closing values for this, which is technically incorrect.
Wednesday, February 11, 2009
Follow Up to January Employment Report
I hate to say I told you so (in the previous post), but the market sold off sharply yesterday (Tuesday, 2/10) when Treasury Secretary Geithner presented his plan (actually, more of a broad outline). Who was particularly hard hit? Banking and financial stocks. What the stock market did yesterday is what it would normally have done on Friday after the employment report. Note that this large market decline occurred along with a very large volume -- indicating "conviction" in this move.
Sadly, this was fairly predictable, not only based on a "buy on the rumor, sell on the news" basis, but since so many of the "talking heads" on television had been trying to convince people that this was an excellent time to get back into the market. I have even heard speculation that had (and when) sufficient details been provided for the financial package the market would rebound. Only if the package ends disease, brings peace to the world, extends global life expectancy to 100+ years! In other words, any package will be imperfect, and market participants will find reasons to be less than enthusiastic.
There are two things I want you to focus on from yesterday. First, we witnessed a textbook example of a flight to safety (review this in the Supply and Demand notes), where persons fled stocks, lowering stock prices, and moved their money to a more safe place, the fixed income (bond) market, raising bond prices and causing interest rates to fall. In fact, the US 10-year bond fell significantly, by about 16 bp yesterday. Second, the Dow-Jones average broke well below 8,000, closing at 7,888. This moves us back to levels we haven't witnessed since mid-November. Don't expect any significant positive market momentum until we get some meaningful clarity on the financial program. In other words, I believe the market will move lower before rising -- we will test further support.
How far might the market fall? Let's rephrase that: where is the next level of support for the Dow-Jones? First, check where price is relative to the 50-day moving average. We failed yet again to break the 50-day, which has to be viewed as short-term resistance at this point. Also, the RSI does not indicate an overbought condition (<30).
Look at the ten-year bond ($TNX) and see how it reacted yesterday. After peaking at 3.05% a few days ago, which had an overbought reading from the RSI, that rate has fallen sharply, yesterday and today (thus far). Also, there was a gap down yesterday. Try identifying relevant economic factors that determine the behavior of the ten-year, determine how those factors will likely be changing, then make a prediction of how the ten-year rate will be moving over the next few days.
Sadly, this was fairly predictable, not only based on a "buy on the rumor, sell on the news" basis, but since so many of the "talking heads" on television had been trying to convince people that this was an excellent time to get back into the market. I have even heard speculation that had (and when) sufficient details been provided for the financial package the market would rebound. Only if the package ends disease, brings peace to the world, extends global life expectancy to 100+ years! In other words, any package will be imperfect, and market participants will find reasons to be less than enthusiastic.
There are two things I want you to focus on from yesterday. First, we witnessed a textbook example of a flight to safety (review this in the Supply and Demand notes), where persons fled stocks, lowering stock prices, and moved their money to a more safe place, the fixed income (bond) market, raising bond prices and causing interest rates to fall. In fact, the US 10-year bond fell significantly, by about 16 bp yesterday. Second, the Dow-Jones average broke well below 8,000, closing at 7,888. This moves us back to levels we haven't witnessed since mid-November. Don't expect any significant positive market momentum until we get some meaningful clarity on the financial program. In other words, I believe the market will move lower before rising -- we will test further support.
How far might the market fall? Let's rephrase that: where is the next level of support for the Dow-Jones? First, check where price is relative to the 50-day moving average. We failed yet again to break the 50-day, which has to be viewed as short-term resistance at this point. Also, the RSI does not indicate an overbought condition (<30).
Look at the ten-year bond ($TNX) and see how it reacted yesterday. After peaking at 3.05% a few days ago, which had an overbought reading from the RSI, that rate has fallen sharply, yesterday and today (thus far). Also, there was a gap down yesterday. Try identifying relevant economic factors that determine the behavior of the ten-year, determine how those factors will likely be changing, then make a prediction of how the ten-year rate will be moving over the next few days.
Sunday, February 8, 2009
January Employment Report
Friday's employment report was very close to my expectations -- very bad. As I stated in class on Thursday, my expectations were for payroll employment to fall by 550,000 and the unemployment rate to rise to 7.7%. The actual employment change was -598,000 and the jobless rate rose to (only) 7.6 percent. Read a story about this report. Also, view a video, the Short View by John Authers of Financial Times.
Reaction by markets was very likely the opposite of what you had come to expect. I will focus on only the stock and bond markets in this post.
The stock market actually rose by 217 points. There are a couple of reasons for this. There is a formal expectation for major numbers and what is called a "whisper number" -- what markets really expect and have braced for. The whisper number for employment was a decline of over 600,000, so the actual number was not much of a surprise (or scare). The whisper number for the unemployment rate was around 7.8%. So, in a sense Friday's stock market rally was a sigh of relief -- we apparently have dodged a bullet. But there is another level of causation involved.
The January numbers were so bad that markets have now discounted for the fact that some stimulus package will definitely pass -- and soon. Furthermore, Treasury Secretary Geithner is expected to announce a new round for TARP funding, and as of Friday, markets reacted to the "rumor" (their visions of what will likely occur) as they so often do. But there is a very old saying in the stock market: Buy on the rumor, sell on the news. So, when the actual details of the Treasury program are eventually released, apparently on Tuesday, expect there to be somewhat of a letdown, as reality seldom matches expectations, potentially resulting in some stock market giveback.
Technical analysis tools help in evaluating the likelihood of this. First, the RSI(9) for the Dow-Jones Industrial Average ($INDU in StockCharts.com) just moved over 50 on Friday, a bullish sign, and nowhere near an overbought reading (at 70). But, a look at recent highs in late January indicates that there is resistance point not far from where the market closed for the week. So, we have a toss up based on technicals.
What about the bond market? Review the online notes from Thursday. Interest rates rose on the "good" news, which means the bond market sold off (lower bond prices). Persons sold bonds, which lowered bond prices and raised interest rates, and moved into stocks, raising stock prices. This is a very typical "rotation, the reverse of a flight to safety. The ten-year US government bond rate rose to almost 3%, which is stunning since about a month ago it was threatening to break below 2%.
If we assume, as is quite possibly the case, that interest rates have bottomed, then bond prices will be falling from this point forward. If you were an investor, how could you "play" this expectation? There are inverse Exchange Traded Funds (ETF's). For bond prices, the symbol is TBT, the double inverse (i.e., ultra short) for 20+ year bonds. Check this out and graph it on StockCharts.com. Is there a trend? If so, which direction? Where is support? Resistance? What do the RSI and relative strength indicate? Please note: I AM NOT RECOMMENDING THE PURCHASE OF THIS ETF.
As I finish this post (11:30pm Sunday night), the Dow-Jones futures are signalling an opening that is down about 92 points from Friday's close. This might well change. But keep an eye on markets after the Treasury announcement on Tuesday.
Reaction by markets was very likely the opposite of what you had come to expect. I will focus on only the stock and bond markets in this post.
The stock market actually rose by 217 points. There are a couple of reasons for this. There is a formal expectation for major numbers and what is called a "whisper number" -- what markets really expect and have braced for. The whisper number for employment was a decline of over 600,000, so the actual number was not much of a surprise (or scare). The whisper number for the unemployment rate was around 7.8%. So, in a sense Friday's stock market rally was a sigh of relief -- we apparently have dodged a bullet. But there is another level of causation involved.
The January numbers were so bad that markets have now discounted for the fact that some stimulus package will definitely pass -- and soon. Furthermore, Treasury Secretary Geithner is expected to announce a new round for TARP funding, and as of Friday, markets reacted to the "rumor" (their visions of what will likely occur) as they so often do. But there is a very old saying in the stock market: Buy on the rumor, sell on the news. So, when the actual details of the Treasury program are eventually released, apparently on Tuesday, expect there to be somewhat of a letdown, as reality seldom matches expectations, potentially resulting in some stock market giveback.
Technical analysis tools help in evaluating the likelihood of this. First, the RSI(9) for the Dow-Jones Industrial Average ($INDU in StockCharts.com) just moved over 50 on Friday, a bullish sign, and nowhere near an overbought reading (at 70). But, a look at recent highs in late January indicates that there is resistance point not far from where the market closed for the week. So, we have a toss up based on technicals.
What about the bond market? Review the online notes from Thursday. Interest rates rose on the "good" news, which means the bond market sold off (lower bond prices). Persons sold bonds, which lowered bond prices and raised interest rates, and moved into stocks, raising stock prices. This is a very typical "rotation, the reverse of a flight to safety. The ten-year US government bond rate rose to almost 3%, which is stunning since about a month ago it was threatening to break below 2%.
If we assume, as is quite possibly the case, that interest rates have bottomed, then bond prices will be falling from this point forward. If you were an investor, how could you "play" this expectation? There are inverse Exchange Traded Funds (ETF's). For bond prices, the symbol is TBT, the double inverse (i.e., ultra short) for 20+ year bonds. Check this out and graph it on StockCharts.com. Is there a trend? If so, which direction? Where is support? Resistance? What do the RSI and relative strength indicate? Please note: I AM NOT RECOMMENDING THE PURCHASE OF THIS ETF.
As I finish this post (11:30pm Sunday night), the Dow-Jones futures are signalling an opening that is down about 92 points from Friday's close. This might well change. But keep an eye on markets after the Treasury announcement on Tuesday.
Sunday, February 1, 2009
GDP Report
On Friday, the preliminary GDP estimate for Q4 of 2008 was released. The number indicated a decline of 3.8% (versus Q3 -- an annualized change). This is well below my expectation of -4.5%, and the consensus figure of -5.5%. However, the preliminary (first-pass) number is based on estimates of inventories and net exports (exports and imports).
Interestingly, both inventories and net exports made positive contributions to the Q4 number. Personally, I believe these will be very different when the second pass number is released in a month, so I am sticking with my expectation of -4.5% to -5%.
What did the stock market do in reaction to the GDP number? After a brief and weak rally early, the stock market closed down. The Dow-Jones Industrial Average closed right at 8,000 (a fall of 148), which is a support from a few months ago (think of this as Support #1). Will that hold? Next Friday the employment number for January will be released, and it promises to be UGLY!! So, it is likely that we will test Support #2 of 7,962 from mid-November, especially since the RSI is not yet in oversold territory.
The bond market likes weakness (remember from class: bad news is good news in the bond market), so rates dropped slightly (this was not much of a surprise to bond traders). Commodities (in terms of the CRB Commodities Index) rose slightly, as did Oil and GOLD.
In my mind, the most significant trend from intermarket analysis is that in spite of Friday's result, the bond market might have already turned up (rising interest rate trend, falling bond prices). As Murphy discusses in his text, historically, BONDS LEAD STOCKS (and Commodities). So, if the bond rates have bottomed, we might see a stock market bottom by the fourth quarter of this year.
If you have not done so yet, purchase and read all of Stikki Stock Charts, download my handout for getting started with StockCharts.com, and try out the things in the handout. I will hand out material to you on Tuesday.
Interestingly, both inventories and net exports made positive contributions to the Q4 number. Personally, I believe these will be very different when the second pass number is released in a month, so I am sticking with my expectation of -4.5% to -5%.
What did the stock market do in reaction to the GDP number? After a brief and weak rally early, the stock market closed down. The Dow-Jones Industrial Average closed right at 8,000 (a fall of 148), which is a support from a few months ago (think of this as Support #1). Will that hold? Next Friday the employment number for January will be released, and it promises to be UGLY!! So, it is likely that we will test Support #2 of 7,962 from mid-November, especially since the RSI is not yet in oversold territory.
The bond market likes weakness (remember from class: bad news is good news in the bond market), so rates dropped slightly (this was not much of a surprise to bond traders). Commodities (in terms of the CRB Commodities Index) rose slightly, as did Oil and GOLD.
In my mind, the most significant trend from intermarket analysis is that in spite of Friday's result, the bond market might have already turned up (rising interest rate trend, falling bond prices). As Murphy discusses in his text, historically, BONDS LEAD STOCKS (and Commodities). So, if the bond rates have bottomed, we might see a stock market bottom by the fourth quarter of this year.
If you have not done so yet, purchase and read all of Stikki Stock Charts, download my handout for getting started with StockCharts.com, and try out the things in the handout. I will hand out material to you on Tuesday.
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