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).

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!

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!

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 ----.

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!

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."

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 is 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.

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

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???

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 level. 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.

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.

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.