Today our classroom permanently moved to CHAFEE 219. Please note this.
As you read your technical analysis material, go to StockCharts.com and practice by working with the graph for oil (symbol $WTIC). Where is the trend? As people ask where oil price is likely to go, you can use the chart and see the past levels of support. When a price graph is falling, LOOK TO THE LEFT and find a previous level of support. What price is it? Annotate the graph. My handout says how to print this if you want to keep a record of this.
Note that on StockCharts.com, you can use either daily or weekly time frames. Perform the above analysis on the daily chart, note past support, then switch the frequency to weekly. Do the same thing. Where is weekly support?
Monday, September 11, 2006
Thursday, September 7, 2006
Technical Analysis Practice
You should be reading Stikki Stock Charts (finish it for class Wednesday). Let me refer you to a free article from Barron's Online by Michael Kahn -- someone I will be referring to throughout the semester.
His most recent article, Will September Be the Cruelest Month , contains several technical formations and tools that we will be discussing all semester. These are introduced in Stikki. Feel free to read though the archives of Mr. Kahn's column as well.
You should visit StockCharts.com. I have a set of downloadable notes on the online syllabus that detail how to use this site. Try it. It's actually quite easy, and you have the entire semester to gain proficiency with it.
His most recent article, Will September Be the Cruelest Month , contains several technical formations and tools that we will be discussing all semester. These are introduced in Stikki. Feel free to read though the archives of Mr. Kahn's column as well.
You should visit StockCharts.com. I have a set of downloadable notes on the online syllabus that detail how to use this site. Try it. It's actually quite easy, and you have the entire semester to gain proficiency with it.
Monday, May 8, 2006
Assigmnent #3
A number of persons had incorrect answers for the first two questions in Assignment #3.
1. As Md = f(r) but not a function of Y => Md is downward sloping but it does not shift for changes in Y. Thus, there is only one equilibrium r, no matter what the level of Y is. Therefore, the LM curve is horizontal.
2. You need to read the chapter on AD - AS for this. Yf is obtained when labor market equilibrium occurs (where labor demand = labor supply). This gives L*, which when plugged into the production function gives Y* (or Yf).
3. The data you obtained was for the nominal interest rate (the 10-year constant maturity rate) and the real interest rate (the Treasury-Inflation Indexed note). The basic formula to relate these is:
Real r = Nominal r - expected inflation
Solve this for expected inflation:
Expected inflation = Nominal r - Real r
The result is what is referred to as the "TIPS spread." It provides a real-time measure of the value of inflation expectations for the next 10 years (in this case). REFER TO THIS IN THE FUTURE AFTER YOU COMPLETE THIS COURSE -- IT IS VERY IMPORTANT AND OFTEN REFERRED TO.
1. As Md = f(r) but not a function of Y => Md is downward sloping but it does not shift for changes in Y. Thus, there is only one equilibrium r, no matter what the level of Y is. Therefore, the LM curve is horizontal.
2. You need to read the chapter on AD - AS for this. Yf is obtained when labor market equilibrium occurs (where labor demand = labor supply). This gives L*, which when plugged into the production function gives Y* (or Yf).
3. The data you obtained was for the nominal interest rate (the 10-year constant maturity rate) and the real interest rate (the Treasury-Inflation Indexed note). The basic formula to relate these is:
Real r = Nominal r - expected inflation
Solve this for expected inflation:
Expected inflation = Nominal r - Real r
The result is what is referred to as the "TIPS spread." It provides a real-time measure of the value of inflation expectations for the next 10 years (in this case). REFER TO THIS IN THE FUTURE AFTER YOU COMPLETE THIS COURSE -- IT IS VERY IMPORTANT AND OFTEN REFERRED TO.
Monday, April 17, 2006
THIS WEEK - WHAT TO WATCH
The big story, which we discussed in class this past week, is the rise of long-term interest rates. The 10-year ($TNX) has risen past two resistance lines over the past several weeks, and is now above the psychological 5% barrier. Next resistance is around 5.3% (I was kind in class when I used this, the preferable point is more like 5.45%). Note the recent trends surrounding this: mortgage rates rising; the dollar gaining strength; expectations for a slower pace of economic activity in the second half of this year are being reinforced.
This week, there are several critical reports to watch. There will be both a CPI report and a PPI report. Also, the minutes of the last Fed meeting will be released. All of these contain important and market-moving information. If you want a real-time indicator of inflationary expectations relevant to the 10-year bond, view the behavior of Treasury Inflation Protected Security prices (TIP) relative to bond prices for longer duration (TLT). To evaluate this, try viewing the ratio TIP:TLT on StockCharts.com. Switch from candlesticks or OHLC bars to lines, and add RSI(9) as usual. IN REAL-TIME, what are markets saying about expected inflation? How is this different from what the reports are saying? Also, check to see how this changes after each report is released.
Also view the yield curve. You can see this either from Bloomberg.com (under Market Data and rates) or Bondheads.com. If you use Bloomberg.com, click on the tabs to see the yield curves for other countries. Want to see a really strong positive yield curve? Try Japan. Interestingly, the British Pound has been appreciating relative to the US Dollar lately. Check out their yield curve. What does that say about their economy in the coming months? What about Pound strength relative to the US dollar going forward? Hmmmm.
We'll talk more about all this during class. But you should begin to follow trends like these and different variables to understand how the economy is performing now, or how things will likely change in the future. THIS IS ESPECIALLY USEFUL FOR YOUR FORECAST PAPERS!!
This week, there are several critical reports to watch. There will be both a CPI report and a PPI report. Also, the minutes of the last Fed meeting will be released. All of these contain important and market-moving information. If you want a real-time indicator of inflationary expectations relevant to the 10-year bond, view the behavior of Treasury Inflation Protected Security prices (TIP) relative to bond prices for longer duration (TLT). To evaluate this, try viewing the ratio TIP:TLT on StockCharts.com. Switch from candlesticks or OHLC bars to lines, and add RSI(9) as usual. IN REAL-TIME, what are markets saying about expected inflation? How is this different from what the reports are saying? Also, check to see how this changes after each report is released.
Also view the yield curve. You can see this either from Bloomberg.com (under Market Data and rates) or Bondheads.com. If you use Bloomberg.com, click on the tabs to see the yield curves for other countries. Want to see a really strong positive yield curve? Try Japan. Interestingly, the British Pound has been appreciating relative to the US Dollar lately. Check out their yield curve. What does that say about their economy in the coming months? What about Pound strength relative to the US dollar going forward? Hmmmm.
We'll talk more about all this during class. But you should begin to follow trends like these and different variables to understand how the economy is performing now, or how things will likely change in the future. THIS IS ESPECIALLY USEFUL FOR YOUR FORECAST PAPERS!!
Sunday, April 2, 2006
Dollar Strength
The strength of the US dollar is something that has been hotly debated of late. If you follow this measure each day, you see "ups" some days and "downs" on other days, but no dominant pattern (at least if you follow the financial press).
How should you follow the dollar? The dollar index ($USD) measures the strength of the US dollar against its major trading partners. It is not a bilateral exchange rate. Think of the dollar index as an equilibrium price -- in this case for the dollar. How is this price determined? Simply by supply and demand. So, you can use the supply and demand for dollars by the US and its major trading partners to model this variable. I will also refer you to my handout on Flexible Exchange Rates.
At the present time, it appears that relative US interest rates are the most important driving force for the Dollar Index. The Fed's indecision about whether it is done raising interest rates (at least in its post-meeting statements) has lead to recent market uncertainties and dollar "bounces." This is critical in light of recent slowing by the housing sector which has done much of the "heavy lifting" for our economy the past few years (an article about this).
In the last few days, the 10-year government bond ($TNX) has gained significant ground, breaking through resistance, finishing the day at 4.85%. This is NOT a good time to have money in bond mutual funds (see article).
How high will the 10-year go? To answer this, first examine a chart of $TNX and find support and resistance. Where is the next resistance? Are we close to that now? For extra credit (part 1), graph the 10-year bond using weekly data for three years in StockCharts.com. Change the moving averages to 10 and 40 periods (this makes them comparable to daily values of 50 and 200). Annotate this graph going back as close to the beginning of the three-year period as is necessary and draw relevant support and resistance lines. Print this out in a Word document. (do not hand draw the lines).
The other relevant question is how tied to interest rates the US Dollar is. According to economic theory, it is very tied, for reasons outlined in class and on the handout for Flexible Exchange Rates. For extra credit part 2, make a graph of the US Dollar Index ($USD) as a dotted line, remove the moving averages, and select Price as one of the indicators -- use $TNX -- and place this behind the dollar graph (this is done by changing the box from "below" to "behind price." Past this into the Word document and in one paragraph discuss how these two variables are related. Is it what theory leads us to believe? Bring this to our next class. It is due at the beginning of class on Tuesday.
In order to determine whether the 10-year bond might break beyond current resistance, you can use the model of interest rates we developed in class at the beginning of the semester. A forecast by you would allow you to make an "educated" guess as to whether we will break through the next resistance.
How should you follow the dollar? The dollar index ($USD) measures the strength of the US dollar against its major trading partners. It is not a bilateral exchange rate. Think of the dollar index as an equilibrium price -- in this case for the dollar. How is this price determined? Simply by supply and demand. So, you can use the supply and demand for dollars by the US and its major trading partners to model this variable. I will also refer you to my handout on Flexible Exchange Rates.
At the present time, it appears that relative US interest rates are the most important driving force for the Dollar Index. The Fed's indecision about whether it is done raising interest rates (at least in its post-meeting statements) has lead to recent market uncertainties and dollar "bounces." This is critical in light of recent slowing by the housing sector which has done much of the "heavy lifting" for our economy the past few years (an article about this).
In the last few days, the 10-year government bond ($TNX) has gained significant ground, breaking through resistance, finishing the day at 4.85%. This is NOT a good time to have money in bond mutual funds (see article).
How high will the 10-year go? To answer this, first examine a chart of $TNX and find support and resistance. Where is the next resistance? Are we close to that now? For extra credit (part 1), graph the 10-year bond using weekly data for three years in StockCharts.com. Change the moving averages to 10 and 40 periods (this makes them comparable to daily values of 50 and 200). Annotate this graph going back as close to the beginning of the three-year period as is necessary and draw relevant support and resistance lines. Print this out in a Word document. (do not hand draw the lines).
The other relevant question is how tied to interest rates the US Dollar is. According to economic theory, it is very tied, for reasons outlined in class and on the handout for Flexible Exchange Rates. For extra credit part 2, make a graph of the US Dollar Index ($USD) as a dotted line, remove the moving averages, and select Price as one of the indicators -- use $TNX -- and place this behind the dollar graph (this is done by changing the box from "below" to "behind price." Past this into the Word document and in one paragraph discuss how these two variables are related. Is it what theory leads us to believe? Bring this to our next class. It is due at the beginning of class on Tuesday.
In order to determine whether the 10-year bond might break beyond current resistance, you can use the model of interest rates we developed in class at the beginning of the semester. A forecast by you would allow you to make an "educated" guess as to whether we will break through the next resistance.
Saturday, March 4, 2006
Rates Breakout
The big story this week is the rise of the ten year bond rate ($TNX) above resistance (both R1, as discussed in class, and now R2). This rate closed Friday at 4.684%, its highest level in more than a year. The main "fuel" for the breakout beyond R2 is a rate hike by the European Central Bank, a higher-than-expected inflation reading in Japan, implying they will begin raising rates, and several strong indicators in the US (read story about this).
There is great potential significance to this breakout, assuming it remains in tact. IF this turns out to be the bottom for bond prices, rising 10-year rates will translate into rising mortgage rates, bad news to a sector already weakening that has provided so much of the basis for economic advance. Second, bond prices tend to peak ahead of stock prices (historically), so the days of a bullish stock market might be numbered (REMEMBER my lecture on the signal given by declining year-over-year growth rates in real GDP and Real Personal Consumption Expenditures). Fortunately, though the yield curve had inverted in the most relevant way (3-month rate higher than the 10-year rate), this has reversed for now. Stay tuned!
There are "talking heads" saying that everything is well and stronger times are ahead. A good example is recent statements by Fed Vice Chairman Ferguson (read article). While I do believe we are not about to fall into the abyss of recession in the near term, I don't expect some surge in the level of economic activity that will be sustained for a number of years. That's what the persons who follow rates of change assume. As I stated in class, I am one of the rate of change in the rate of change crowd!
Finally, how does one find the new level of resistance for $TNX? I suggest switching the time frame in StockCharts.com from daily to weekly and extending the time period from the default of "Fill the Chart" to 3 Years. In other words, LOOK LEFT. WHEN USING WEEKLY DATA, CHANGE THE MOVING AVERAGE SETTINGS (divide the usual values by 5 due to 5 trading days per week). So, instead of 50-day and 200-day Moving Averages, change these to 10-week and 40-week values, respectively.
There is great potential significance to this breakout, assuming it remains in tact. IF this turns out to be the bottom for bond prices, rising 10-year rates will translate into rising mortgage rates, bad news to a sector already weakening that has provided so much of the basis for economic advance. Second, bond prices tend to peak ahead of stock prices (historically), so the days of a bullish stock market might be numbered (REMEMBER my lecture on the signal given by declining year-over-year growth rates in real GDP and Real Personal Consumption Expenditures). Fortunately, though the yield curve had inverted in the most relevant way (3-month rate higher than the 10-year rate), this has reversed for now. Stay tuned!
There are "talking heads" saying that everything is well and stronger times are ahead. A good example is recent statements by Fed Vice Chairman Ferguson (read article). While I do believe we are not about to fall into the abyss of recession in the near term, I don't expect some surge in the level of economic activity that will be sustained for a number of years. That's what the persons who follow rates of change assume. As I stated in class, I am one of the rate of change in the rate of change crowd!
Finally, how does one find the new level of resistance for $TNX? I suggest switching the time frame in StockCharts.com from daily to weekly and extending the time period from the default of "Fill the Chart" to 3 Years. In other words, LOOK LEFT. WHEN USING WEEKLY DATA, CHANGE THE MOVING AVERAGE SETTINGS (divide the usual values by 5 due to 5 trading days per week). So, instead of 50-day and 200-day Moving Averages, change these to 10-week and 40-week values, respectively.
Friday, February 17, 2006
January PPI
This morning the government reported that for January, the Producer Price Index (PPI) rose by more than was expected. The overall PPI grew by 0.3% (compared to December), while the less volatile core rate, which excludes both food and energy, rose by 0.4%. This signals that for January, at least, "wholesale inflation" was worse than thought (read an article about this and compare it to another article).
What do you suppose the reaction was in the bond market? Normally, a "hot" inflation number will cause a bond sell off, pushing bond prices down and interest rates higher. Today, however, the opposite was the case -- rates actually fell. How could this happen?
Remember, when we analyze this market, we must, of necessity, consider "other things being equal." Today, that was not the case. First, the number itself might have been bad, but this is only the first bad number in a while for the PPI. And, never pay too much attention to the value of an indicator for a single time period. Second, the shocking rise was on a sequential rate of change, comparing December to January. When an alternative comparison is used, comparing this January to last January, called the year-over-year growth rate, that number was actually fairly good (1.5%), and below the year-over-year growth rate for December (of 1.7%).
As this was happening, oil prices continued their recent rise, moving from around $58 per barrel just a few days ago to $61.29 today. Again, this would normally be bad for bonds, which makes the PPI story even more interesting. For extra credit, due at the beginning of Tuesday's class, go to StockCharts.com and plot the price of oil ($WTIC) with the 9-day RSI and the Relative Strength compared to the S&P and annotate it with comments and lines that summarize the main aspects of its performance over the last week or two.
Finally, the University of Michigan's Consumer Sentiment Index fell more than expected today, further reinforcing the upward price movement in bonds.
What do you suppose the reaction was in the bond market? Normally, a "hot" inflation number will cause a bond sell off, pushing bond prices down and interest rates higher. Today, however, the opposite was the case -- rates actually fell. How could this happen?
Remember, when we analyze this market, we must, of necessity, consider "other things being equal." Today, that was not the case. First, the number itself might have been bad, but this is only the first bad number in a while for the PPI. And, never pay too much attention to the value of an indicator for a single time period. Second, the shocking rise was on a sequential rate of change, comparing December to January. When an alternative comparison is used, comparing this January to last January, called the year-over-year growth rate, that number was actually fairly good (1.5%), and below the year-over-year growth rate for December (of 1.7%).
As this was happening, oil prices continued their recent rise, moving from around $58 per barrel just a few days ago to $61.29 today. Again, this would normally be bad for bonds, which makes the PPI story even more interesting. For extra credit, due at the beginning of Tuesday's class, go to StockCharts.com and plot the price of oil ($WTIC) with the 9-day RSI and the Relative Strength compared to the S&P and annotate it with comments and lines that summarize the main aspects of its performance over the last week or two.
Finally, the University of Michigan's Consumer Sentiment Index fell more than expected today, further reinforcing the upward price movement in bonds.
Saturday, February 4, 2006
January Employment Report
The jobs report yesterday had some surprises. The "headline" employment number rose by around 190,000, below expectations. But prior month totals were revised upwards. You should always view revisions to prior data when judging newly released data -- on anything.
To read a story about this click here. Look briefly at the overall report as well.
There is more to the employment report than just employment. It also contains data on the unemployment rate, hours worked, and the average hourly wage. It was these that triggered the ultimate reaction by the stock and bond markets. Average hourly earnings rose a greater-than-expected 0.4% for the month and 3.3 percent for the year. Along with the disappointing productivity number on Thursday, this further reinforced inflation fears. As a result, there was an initial rise in bond interest rates (remember this from class -- the inflation premium in interest rates increased, pushing up nominal rates). The stock market also reacted badly. Why? Two things. First, higher interest rates are bad for stocks. We will see in class this coming week that this entails a substitution of interest-earning assets for stocks, and it lowers the present discounted value of expected profits. Second, the acceleration of inflationary expectations means that the Fed will not be finished raising interest rates very soon as had been thought. In fact, the belief that the Fed was almost done raising rates is what led the Dow-Jones Industrial Average over the 11,000 mark earlier this year.
From a technical analysis point of view (read Stikki Stock Charts if it ever gets here), this means that the resistance encountered by the Dow-Jones average at 11,000 held, and that it will likely hold for a while. A similar argument pertains to both the NASDAQ and the S&P 500 (those doing this as your forecast paper topic should start to follow this). The pressing question from a technical point of view is therefore, where is support for each of these markets. For the S&P 500, prior resistance at 1,275 had been exceeded (i.e., a breakout
occurred). And, as typically occurs, priror resistance became support during the breakout. Now, unfortunately, things have reversed once again -- 1,275 is once again resistance. Support (for now) is at 1,250.
In the blog entry above this one, I have provided a graph of the S&P 500 and the recent breakdown from a triangle formation. Not a very flattering picture. Why? Besides the obvious declines, I have added information about the RSI (I will distribute the handout for this soon). The bad news is that the RSI is not yet in oversold territory (RSI <30), so this decline might have a ways to go yet.
To read a story about this click here. Look briefly at the overall report as well.
There is more to the employment report than just employment. It also contains data on the unemployment rate, hours worked, and the average hourly wage. It was these that triggered the ultimate reaction by the stock and bond markets. Average hourly earnings rose a greater-than-expected 0.4% for the month and 3.3 percent for the year. Along with the disappointing productivity number on Thursday, this further reinforced inflation fears. As a result, there was an initial rise in bond interest rates (remember this from class -- the inflation premium in interest rates increased, pushing up nominal rates). The stock market also reacted badly. Why? Two things. First, higher interest rates are bad for stocks. We will see in class this coming week that this entails a substitution of interest-earning assets for stocks, and it lowers the present discounted value of expected profits. Second, the acceleration of inflationary expectations means that the Fed will not be finished raising interest rates very soon as had been thought. In fact, the belief that the Fed was almost done raising rates is what led the Dow-Jones Industrial Average over the 11,000 mark earlier this year.
From a technical analysis point of view (read Stikki Stock Charts if it ever gets here), this means that the resistance encountered by the Dow-Jones average at 11,000 held, and that it will likely hold for a while. A similar argument pertains to both the NASDAQ and the S&P 500 (those doing this as your forecast paper topic should start to follow this). The pressing question from a technical point of view is therefore, where is support for each of these markets. For the S&P 500, prior resistance at 1,275 had been exceeded (i.e., a breakout
occurred). And, as typically occurs, priror resistance became support during the breakout. Now, unfortunately, things have reversed once again -- 1,275 is once again resistance. Support (for now) is at 1,250.In the blog entry above this one, I have provided a graph of the S&P 500 and the recent breakdown from a triangle formation. Not a very flattering picture. Why? Besides the obvious declines, I have added information about the RSI (I will distribute the handout for this soon). The bad news is that the RSI is not yet in oversold territory (RSI <30), so this decline might have a ways to go yet.
Saturday, January 28, 2006
GDP Report
Friday's report on Q4 GDP growth was both surprising and disappointing. Yet the stock market posted a very strong day in spite of this number. Why?
First for the GDP number. The reported growth rate, 1.1 percent, is much smaller than what was expected (around a 2.6% rate). But examination "below the surface" of this number reveals some trends that are either one-time in nature or just plain incorrect. Government spending fell at a double-digit rate from Q3 to Q4. What's the probability of that repeating? Not much. Also, the amazing car sales prompted earlier in the year by major discounts essentially "stole" sales from the end of the year, making the Consumption growth rate much slower than is realistic to expect for this year. Then there is the fact that Friday's number is preliminary, using ESTIMATED values for Net Exports and Inventories. These may also be revised in the next two relases of Q4 data.
So, why the stock market response? Other things being equal (which we spoke about in class on Thursday), this should have hurt stock prices. But "other things" are seldom equal. Housing data released the same day were encouraging. Several large companies reported strong earnings. But, in a sense, the GDP number itself was a "win-win" for the stock market. IF it is correct, then the clear implication is that the Federal Reserve will have almost no further tightening to do. This is beneficial to stocks, since rising interest rates are bad for stocks (we will go over the reasons in class over the next two weeks). But assuming this growth rate is too low, which is a very safe bet, this implies profits, which are a fundamental driver of stock prices, have remained strong going into 2006. And the stronger are profits, the higher stock prices tend to move (other things being equal, of course).
We will cover this topic in detail on Tuesday. Make sure you bring the Online Notes for GDP to class with you.
First for the GDP number. The reported growth rate, 1.1 percent, is much smaller than what was expected (around a 2.6% rate). But examination "below the surface" of this number reveals some trends that are either one-time in nature or just plain incorrect. Government spending fell at a double-digit rate from Q3 to Q4. What's the probability of that repeating? Not much. Also, the amazing car sales prompted earlier in the year by major discounts essentially "stole" sales from the end of the year, making the Consumption growth rate much slower than is realistic to expect for this year. Then there is the fact that Friday's number is preliminary, using ESTIMATED values for Net Exports and Inventories. These may also be revised in the next two relases of Q4 data.
So, why the stock market response? Other things being equal (which we spoke about in class on Thursday), this should have hurt stock prices. But "other things" are seldom equal. Housing data released the same day were encouraging. Several large companies reported strong earnings. But, in a sense, the GDP number itself was a "win-win" for the stock market. IF it is correct, then the clear implication is that the Federal Reserve will have almost no further tightening to do. This is beneficial to stocks, since rising interest rates are bad for stocks (we will go over the reasons in class over the next two weeks). But assuming this growth rate is too low, which is a very safe bet, this implies profits, which are a fundamental driver of stock prices, have remained strong going into 2006. And the stronger are profits, the higher stock prices tend to move (other things being equal, of course).
We will cover this topic in detail on Tuesday. Make sure you bring the Online Notes for GDP to class with you.
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