Alex Trias

Boom or Bust Cycle: Where Are We Now?

Not so wild about your photo, either.


On Aug 13 01:11 PM Dave Wrixon wrote:

> This guy really is as daft as his photo suggests!
>
> Where we are is at the middle peak of the W. The second leg down
> will be less steep but will actually take us down to about S&P
> 400 or their abouts. The low volumes show this is a complete rigged
> market and when the selling pressure comes back it will quickly capitulate.
>
>
> And does believe those Morons that talk about paper losses. If you
> cannot get your cash back then you have lost your money. And even
> if you could it now worth a fair bit less than when you put it there.
> The value of that cash is going to quickly crash but having it tied
> up in Wall Street isn't going to get you back in the black.

Boom or Bust Cycle: Where Are We Now?

What does "really bad" mean? "Bad" as in the Japanese economy in the past twenty years? No, we aren't close to that bad. Compared to 1929-1932? No, not as bad.

I'd be comfortable describing the 1970s as "bad" for investors, and using the metrics I suggest, we're not quite as badly off now, but we're very close. It just doesn't feel as bad because if the dollar is your functional currency, you don't notice how far your wealth has dropped each time you go to the grocery store. If you were sitting in Paris holding US equities only, you'd certainly feel like an investor would have felt by the time 1980 rolled around.


On Aug 13 01:04 PM Roger Knights wrote:

> "And we can also know that after a really bad stretch in the market,
> usually a really good stretch follows."
>
> We haven't had a REALLY bad stretch yet.

Thursday Outlook: Commodities, Global Markets

Very good points. Thanks, David.

Some Graham and Dodd Type Thoughts on Stocks vs. Bonds

Interesting article, although I'd be nervous about relying on the TIP vs. stock analogy. As at least one commentator pointed out, stocks are riskier than Treasuries, so there is a potential apples to oranges comparison problem you have. Second, you haven't accounted for corporate growth rates. Investing in a company because it has a low price to book ratio is all fine and good - provided the shareholder equity is growing, rather than shrinking, over time.
Third, dividends can change based on corporate policy - companies might opt to scrap dividends for buybacks, for instance - sometimes for reasons having nothing to do whatever with corporate earnings. If you want to value a company, you might want to at least take corporate earnings into account somewhere in your equation.

Thursday Outlook: Commodities, Global Markets

Thanks Dave. Two questions to add.

One: IWM is a leading indicator for the US market, and as you point out, we're in a gap. So, what's the leading indicator for IWM? International? The charts show how many of the more volatile international ETFs have already pretty well filled up their own respective gaps. Does that suggest a similar fate awaits IWM, and if so, the rest of the US market? Time will certainly tell.

Two: Does IFN tell us the whole story in India, or is the message garbled by factors intrinsic to the fund itself? For instance, this fund is trading at a 13% premium to NAV. Granted, India equities are tough to access, so I could see an argument for at least some premium, but 13% looks expensive to say the least. I wonder whether the drop in IFN has something to do with valuation? Another factor at play is that the fund rights issued to shareholders expire soon - IFN might be dropping due to ex-dividend considerations?

I don't know what's the real driver behind the sudden deterioration of IFN - but to track India, why not use an India ETN like INP? Is credit quality of the issuer a reason not to use INP as the baseline for your technical analysis?

Thanks!

Why Today's Stock Markets Are All About Confidence and Gullibility

Nobody can predict the stock market. You might make a call that turns out to be correct by chance. You might do that a few times and think you can see the future that others cannot. In the end, the law of averages will catch up with you and prove that the future is unknown. That's exactly what makes the future.... well.... the future.

Best we can do is describe the market. This article describes the market as one driven, in effect, by fraud and stupidity. The author concludes that in time, truth prevails, and overcomes the forces of fraud and stupidity, generally with trend-reversing consequences.

This raises several issues:
(1) It's tough to keep a conspiracy going for more than a nanosecond on Wall Street. Try it. You'll see.
(2) If investors can be stupid for a month or two, they can be stupid for a decade or two.
(3) In business and investing, truth is worse than irrelevant. If everyone thinks the Earth is flat, you can't make much money trying to sell globes. By the time you convince everyone the Earth is actually round, that guy who's been selling "flat Earth" products the whole while you've been preaching has long since eaten your lunch. If the market is saying the Earth is flat, invest accordingly until the market starts to say the Earth is round.

The Fallacy of 'Money on the Sidelines'

Two points. First, what drives stock prices is the relative eagerness of buyers and sellers. "Cash on the sidelines" doesn't mean much more than maybe, those who have sold might want to buy again maybe. And it really doesn't indicate the relative eagerness of buyers verses sellers.
Second, what does volume tell us? To move a company's stock price, it matters not whether one share a day trades, or one million shares a day trade. Assuming for the sake of argument that individual investors do pile into stocks, once the moment after they have bought shares, they are irrelevant to the stock price until they sell. All that matters to stock prices is that there is one person willing to sell low, or buy high. Whether American households participate en masse is sort of beside the point.

What low volumes do is simply to exacerbate volatility since there are fewer dollars and minds at work. Which could make it more likely a market has gotten ahead of where it ought to be. Or maybe not - perhaps those investing today are really a microcosm of a broader population of investors who may, or may not, invest in the future.
Either way, tough to draw any hard conclusions from what, if anything, "cash on the sidelines" and low volume indicates, and more importantly what, if anything, it suggests about future market performance.

Don't Let Moving Averages Distract You

Side notes: (1) I think a good title for this article might have been "Don't let the moving averages DISTRACT you." (2) I generally use an exchange traded fund when I track technical developments, rather than the fund's underlying index. My reasoning is that nobody trades an index, they trade securities (like ETFs). However, I note that an ETF may not correspond directly to its' underlying index - things get complicated by dividends, performance lag, and so forth. I'd welcome any comments on my methodology from interested readers.

When Will the Music Stop for Government Bonds?

The author suggests, correctly, that the excess government leverage cannot continue in any rational system, and concludes that rationality must eventually prevail. Perhaps so, but rationality can be and is always adjusted to suit expediency.

Picture a room with ten guys in it, the first of whom has one dollar. First guy lends the dollar to a second guy for a one dollar promisory note. First guy then lends the promisory note to a third guy for ANOTHER one dollar promisory note. Everyone in the room suddenly gets an idea. They put the dollar in the middle of the table, and then they all start lending more and more promisory notes to each other until suddenly, there are trillions of dollars worth of promisory notes in the room. Each guy is worth billions on paper, and feels brilliant and rich. How long can this game go on, you ask? Answer? How much fun is everyone having?

Maybe one guy decides enough is enough, cashes in a promisory note for that one dollar sitting on the table, and walks out. The lending game might continue a while longer, until those poor nine guys in the room realize they are all completely insolvent. Anarchy follows. This is the gist of this article.

Meanwhile, the clever fellow who took that dollar and flew the coop is walking down the street realizing he's gone from being a multi-billionaire to being a guy with one lousy buck in his pocket. How long before he reconsiders, walks BACK into the room (to open arms and friendly pats on the back), slaps that dollar right back on the table and gets the music playing again? I give it three months, tops. We got a taste of that during the credit crunch.

Now assume that there are big burly government dudes waiting at the door, whose task is to prevent any of the ten guys from taking the dollar off the table and leaving the room.I think we got a taste of that, too, last year. Now I'm guessing the music won't stop until someone is clever enough to come up with a better tune, and clever enough to convince everyone (including the burly government dudes standing at the door) that he has done so. That happens once every three to five hundred years, more or less.

The Downside of Profits

I enjoyed professor Carter's contracts class as well - one of the highlights of first year. Like you, I agree that high profits are not an ipso facto indication of industry health - particularly in the context of a near oligopoly as we see in the health care industry. I take your point from a social benefit standpoint, where fairness, innovation and such is paramount. But my question from an investment standpoint (this is, after all, SeekingAlpha.com) is this: should you be very, very worried? Or should you take the "if you can't beat 'em, buy their stock" view, and let the capital markets sort out what's most economically efficient?

Technical Rally Could Indicate Computerized Panic Buying

Thanks for your comment. Technical analysis is a descriptive tool, and by no means a predictive tool. You can look at technical data and conclude only this much: "this is a bull (or bear market) until it stops being one." On it's own, that is not very useful information, is it?
We can probably agree that if fundamentals drive the market, technical data simply describes the market. For instance, if the Fed model suggests the ten-year earnings yield on the S&P 500 is twice the yield on a ten year US Treasury, that relative undervaluation of risk can and will drive the market higher at some point - nobody can say when. You cannot predict when that point will be, but technical analysis can indicate a probability of when the point has, in fact, already arrived. Put cheap valuation and technical strength together, you can take your finger off the sell button and relax for a little while.

My main use for technical analysis is really more as an exit strategy. Markets overshoot and undershoot fundamentals constantly, due to momentum and human emotion. How can you know when that has happened? You look for a huge disconnect between technical trends and valuation. For example, if you see a high ten-year average P/E ratio on the S&P500, and a robust technical upwards trend, you're probably at one of those points where a massive selloff is likely because markets have overshot fundamentals due to momentum and emotion. So too with the converse.

I am concerned we are at such a point now. The P/E ratio and book value of most index ETFs appear reasonable (if you smooth earnings out for the last ten years, and extrapolate average growth rates of about 7% - pretty much what we've seen over the past century). Unfortunately, thanks to the credit crunch last year, current earnings are still all wacky. Also, I'm still unclear on how the impact of deleveraging will hit earnings going forward. I cannot form any clear judgment of whether stocks are priced to perfection right now (which is what my gut tells me), whether they are cheap (if the credit bubble starts to inflate again, stocks look really cheap), or whether stocks are wildly expensive (if we are in a new era of Spartan consumption, low leverage, and pandemic global depression, stocks are insanely priced). Time will tell, but given those risks, if you see a massive technical downturn forming, it sure would be a good idea to cut and run. And if a massive technical upsurge unfolds, you need to really consider whether momentum has, as it always does, brought us far, far ahead of fundamentals.

This is a long winded way, I suppose, of explaining what keeps me up at night, and keeps my finger poised on the sell button during the day.




On Jul 29 08:13 PM Old Trader wrote:

> I'll be the first to admit that I've only recently started employing
> T/A, coming from a fundamental background. The reason I've started
> studying and using some simple T/A, mostly to pick entry and exit
> points, is because so many other people do (or their computers do),
> and to not acknowledge the fact (and hopefully profit by it), strikes
> me as being short-sighted.
>
> Bottom line, the fundie part of me is saying "run and hide", but
> I can appreciate the points the author's made, acknowledge the party
> might not yet be over, and am looking at various trades accordingly.

Technical Rally Could Indicate Computerized Panic Buying

Thanks for your comment, and you are making an important point. More or less right on cue, markets are staging a little bit of a rally today, which roughly corresponds to the fact that the 30 day exponential moving average for the SP500 has intersected the 200 day exponential moving averages. This timing is highly suspect, don't you think?

Your point is that what this seems like is the technical trading version of a "pump and dump". You are right. Your next question is a practical one: will we see more pumping, and when can we expect the dumping? You then opine that generating volume is tricky if you're trying to shove the market higher, so there is better volatility (and upside) pushing the market down.

Here's where I start to get a bit fuzzy on your argument. First, with low volume, I can swamp the market with orders and thereby generate PLENTY of volatility. I don't see how it matters to me whether it's up or down. If I want to generate a stampede, I LOVE low volume. And generating emotional stampedes is PRECISELY the game that is unfolding right now in the equities markets.

Point two: as a computer program designed to make money by manipulating markets higher, remember my primary trading bias. I hate shorting stocks. When I do, I get 100% upside, and unlimited downside. When I go long, however, I have unlimited upside, and no more than 100% downside. If you want to pig out on technical trades, you want a bull market. If I wanted to manipulate the market, I'd program my computer with a bullish bias.

It's in the collective best interests of those manipulating the market higher to let their winners ride, and to keep pressing the buy button. But what this amounts to is a huge prisoner's dilemma. It works as long as everyone cooperates, and nobody cheats by cashing out too much. Interesting thing is that prisoner's dilemma's can be remarkably stable for long periods of time. What will break this one will be an unforeseen random event. There is no way to predict when it will come, but it is guaranteed to come at some point nonetheless.

My practical advice for investors is probably not too far off from yours. I'm invested at the moment, but I have set targets and my finger is poised on the sell button, ready to hit it at any moment regardless of my targets.







On Jul 29 09:41 PM Moon Kil Woong wrote:

> Actually, my guess is the program trade run up is over. Those generating
> the run up will try to hold down volatility as much as they can to
> close out their positions. That means trading as little actual volume
> as they can at the prices it wants (seekingalpha.com/symbo...)
> at the end of the day.
>
> Don't be the sucker who buys out their position. After they clear
> who knows which way they will want to try to yank the price. If they
> want more volatitlity it probably won't be up (too hard to generate
> meaningful volume).

Technical Rally Could Indicate Computerized Panic Buying

So you've traded the risk of sun burn for the risk of market burn. Welcome back.

After reading your comment, I think the point of my article may be somewhat obscured by my writing style. I'm not suggesting everyone should be going 100% long equities. Generally, most of us can probably agree that arguing with the markets is about at smart as arguing with a hungry lion. The point of my article is that right now, what might APPEAR to be a hungry lion could very well be nothing more than a computer-enhanced mirage. If so, we could really start to see a massive disconnect between fundamentals and equity prices. And that's not good news for anyone, bull or bear. Why? Because if you cannot believe what you see in the markets, what that really creates is an uninvestable situation.

Your point about markets being oversold (I use NYMO to measure that condition for equities markets, and by golly, we're really oversold) is excellent. When short term bearish indicators are flashing at the same time as long term bullish indicators are flashing, you're looking at a pretty dismal risk/ reward situation for any position you take - long or short. Frankly, were it me, I'd go back to the mostquitoes and leave the buying and selling to the high frequency trading programs.


On Jul 29 12:38 PM Mad Hedge Fund Trader wrote:

> Nothing to do here. OK, so they didn’t mention the mosquitoes, the
> poison oak, or the guy snoring in the next tent on the website. But
> I’d rather put up with all of that than the absolute dearth of trading
> opportunities I faced on my return. The S&P 500, the Dow, NASDAQ,
> the euro, the Australian, New Zealand, and Canadian dollars, gold,
> copper, lumber, and anything else I like are overbought, bumping
> up against Fibonacci’s, moving averages, RSI’s, oscillators, and
> any other technical warning light you want to mention. Only wheat
> looks cheap, the greatest growing conditions in history knocking
> a bushel down to the low five dollar handle (click here for the argument
> at www.madhedgefundtrader...). Natural
> gas prices are low, not to be confused with cheap, with every uptick
> getting smashed with a new field discovery. Only a hurricane can
> save NG. It’s amazing how many people have turned bullish now that
> everything has gone up for two plus weeks. The only thing that makes
> sense here is to go short, but not on my first day back. Give me
> some time to gird my loins and build a risk appetite. And pass the
> calamine lotion, please.

Technical Rally Could Indicate Computerized Panic Buying

That's a great comment. Like almost everybody, I was tought to believe in the efficiency of the markets. And therein lies the problem. One market paradigm that is always true is that the market likes to disprove as many people as possible. So, once the efficient markets model universally accepted and followed, the markets will adapt in such a way as to render the model incorrect.

Another problem with the model is that it assumes that all players in the markets are investors who are concerned entirely with future earnings prospects. Unfortunately, market participants are simply not a homogenous group. Some participants care about earnings, others care about momentum, statistics, and so forth. This latter group can and sometimes does set prices. In fact, when the momentum players really get a hold on things, many of the purported "earnings-oriented" crowd start to join in and become momentum obsessed themselves. Efficiency by that time gets tossed by the wayside, because as an investment model, it's not making as much money for you as other models (like momentum) are. There are different types of participants in the market, but they all do share one characteristic: they like to make money, and the ones who are good at that will adopt any approach that makes money, and discard any approach that does not.

You make an interesting second point, which is that in the long term, perhaps efficiency does matter. My question then is, how would we know that?

Okay, one consequence of market efficiency is that nobody can beat the market's average performance over the long term. Why? Because any information they have is already priced in, so there's no way to get an edge. In fact, what we see is that most investors out there end up performing at or below the market's average. There are the Buffetts and Soroses of the world, but those are the exceptions that prove the rule. The law of averages catches up to most folks in the end, so it looks like efficiency is at work. At least that's the obvious answer. But look behind the curtain a little bit, and you'll find that there are many, many, many traders who quietly beat the market for years and years. I've drafted quite a few estate plans for guys like this who you've never heard of and probably never will. Why? They're smart enough to quit while they're ahead (or, in some cases, way way way ahead). And guess what. Most of them aren't crunching income statements and reading analyst reports, either. These guys tend to be crackerjack mathematicians, who know how to spot a trend, leverage up, and profit from it.

My conclusion: markets may or may not be efficient, but regardless, the efficient markets hypothesis isn't a tool that you can use to get rich or to stay rich. That being the case, and since running money is about making money, I'm going to say the question of market efficiency is ultimately irrelevant.



On Jul 29 08:29 AM Wesley Mouch wrote:

> Good article and insight. I think you have really hit on some good
> items here.
>
> If Alex is right, and I think he is, we need to revise some economic
> textbooks on the efficiency of markets. I would suggest the following
> edit:
>
> Change "Markets provide an efficient pricing mechanism" to "In the
> long term, markets may be efficient, but in the short term, it is
> far more important to have a double head and shoulders pattern with
> broken candlesticks under the full moon eating a muffin with an Italian
> Coffee, but watch your taylor series conversion."

How Strong Is the Current Cyclical Bull Market?

Very interesting charts. Thanks for the information. It appears reasonable to conclude that spikes in "new lows" can indicate panic selling - something that generally accompanies a bear market. However, I am not clear the converse holds true. A bull market sometimes can be characterized by a buying panic at the front end - although typically that sort of panic behavior can start to manifest close to a market top. 2003 may be somewhat of an oddity in that respect, and the next bull market (whenever that may come) could very easily be characterized by extreme skepticism on the part of buyers, caution, and disbelief. We may not see the breadth of previous bull markets, and irrational levels of conviction and greed may be slower to crop up. You need more data to conclude we are in a new bull market - which is not to say that we aren't.

Thanks again for your article.