Alex Trias

Odd Signals from Financial Markets: Who's Wrong Here?

The problem here is that you're looking at too narrow a snapshot. Yes, things look a bit extreme if you look at the move from March, 2009 to now. What about that impressive move from January 2009 to March 2009? If you're going to say that the move in the latter half of the year is unwarranted and extreme, what about the move in the FIRST half of the year? You cannot look at one leg of market volatility without looking at what came before it, unless you want to get an incomplete (and probably inaccurate) picture of the market's dynamics.
I doubt that the volatility we have seen this year says much of anything, except that investors seem to tend to over-react in the short run. I suggest taking a much longer-term view, measuring where the market has gone in the last decade. Ben Graham's lessons still ring true to me. Earnings are volatile, so I measure value based on an average of the past ten years worth of earnings. I use average growth rates in the past decade to figure out a reasonable rate to apply for measuring future projected growth. It takes a bit more digging, but based on those metrics, the US stock market as a whole is really pretty cheap right now - compared to the price of a ten year US Treasury.

Report from Europe: Theme Du Jour -- Sovereign Credit Risk

A funny thing happened on the way to the credit crisis. It appears from these distant shores that the European credit market is starting to go to the dogs. Spain, Greece, banks going under left right and center. By rights, you'd expect the dollar to soar on risk aversion and investor revulsion with the Euro. This morning, not so much. You'd think investors would, for instance, want to pig out on Treasuries. Still this morning, not so much. It remains early in the day to be sure - but if these sorts of issues in the European credit market are not sufficient to send the dollar, US Treasuries and gold significantly higher, what will? As Todd Harrison often likes to put it, it is not the news that matters, it is the market's reaction to the news that matters. What we might be starting to see with Treasuries, gold, dollars, is indifference to good news. If so, that's a little bearish for these assets. On the flip side, we see equities continuing to show some strength - perhaps flagging strength, but strength nonetheless - in the face of what would have otherwise struck me as fairly nerve-jangling news vis-a-vis the credit markets over the last three weeks. It seems a wall of worry is being climbed in risky assets. Taken together, I think we are seeing a fairly consistent picture forming up of investors rotating into risk in the face of high levels of economic and financial uncertainties. Today is only a single data point, but it's part of a pattern that starting to shape up fairly nicely for equities investors.

My, How the Markets Have Changed

Beg to differ on those odds for Helicopter Ben. Here in DC, where I live and work, the sense from folks I know (including some of the lobbyists who work at my firm) is that Ben has it locked up. Barney Frank loves him, and nobody in the Senate really wants to get on the Chairman of the Finance Committee's bad side. There is some posturing and noise by legislators, but only because they cannot impact the outcome of this confirmation. A disident legislator can score nice brownie points with the public by opposing Ben, which remains outraged over last year's bail outs, and all without jeopardizing Ben's tenure. Hollow posturing, in other words, as opposed to genuine risk.

You make a good point on the negative MACD divergence and the stout technical resistance on the SP500 at 1120, particularly with volume drying up like a jellyfish in the desert. You wonder if you're starting to smell a rat nestled into the market's technicals.

Still, it's tough to argue when you see a market observing a 65 day or 30 day exponential moving average as support on any given pullback, making higher highs all the while. And the other thing, too, is that some of the risky stuff, the sometimes leading indicators like EEM, ILF, EPP, have surmounted their respective break down points. An indication the SP500 will follow? Maybe, or maybe not.

What I will watch with great interest is whether the 30 day EMA can stay above the 65 day EMA if the SP500 goes into a dive at 1120 (or earlier, for that matter). Divergence between these two moving averages has been a very useful description of the market's momentum, better, I think, than MACD or the RSI. Overall, I would say shorter term momentum oscillators are not always reliable - unless and until they stray into extreme overbought or oversold conditions. For the SP500, RSI and MACD are neutral to slightly positive, so we have no clear indication of waning momentum. Yet. But when short term moving averages drop below longer term moving averages, you do get a clearer picture that folks are quicker to sell than to buy. That's just another way of saying that sellers are far more eager than buyers, and the only thing a stock price measures is the relative eagerness of buyers and sellers. At the moment, because the 30 day EMA is higher than the 65 day EMA, there is an argument that buyers are more eager than sellers, which is all it takes to lift stock prices.

Happy investing, and thanks for your article.

Why Does the Fed Feel Powerless to Identify Bubbles in Real Time?

Very good point. The Fed shouldn't care if people want to lose their own money by overpaying for assets. Actually, it's probably important that the Fed make a point of staying out of the way to let the law of the market jungle separate fools from their capital and reward those with better investment thinking.

A leveraged bubble is another animal because it creates the potential for cascading failures, which punishes idiots and geniuses alike. Cascading failures such as what we saw in 2008 are not really the law of the jungle at play - more like a forest fire burning the jungle down to the ground and taking the fittest and the least fit down with it. There's nothing efficient about that.


On Nov 18 07:48 AM chap08 wrote:

> I partly agree with you, but I don't think that identifying (let
> alone bursting) bubbles is such an easy thing. If you think that
> the Fed should burst bubbles, then you have to be able to answer
> the following questions:
>
> 1. What is a bubble and what is the difference to over-valuation?
>
> 2. At what stage should the bubble be prevented or burst?
> 3. What is the relative priority of bursting bubbles and other economic
> objectives e.g. employment?
> 4. What assets should this be applied to e.g. healthcare stocks,
> sugar futures, Kansas housing, treasuries, gold?
> 5. Why should the Fed be better at spotting bubbles than the market?
> How would they determine if, say, stocks are in a bubble now, when
> for every hedgie that says they are, I can find one that says they're
> not?
>
> For my part, I see a big difference between a bubble and a highly
> leveraged bubble. It's the highly leveraged ones that really do the
> damage and the level of leverage makes them easier to spot. Consequently,
> I would worry less about asset values and focus on measures of leverage
> instead.

Is the Dollar Toast?

Old Trader - the more I consider your question, the more I feel that I need to think about my analysis. Are consumers de-leveraging? At the moment, yes. Is borrowing less the same thing as saving more? That I don't know. I have always thought of saving as building capital that may be deployed into productive investment (whether in a savings account, or otherwise). By that measure, I'll go ahead and stick with my flat-screen TV analysis. But maybe your question highlights a more sophisticated way of looking at the link between credit and capital creation. I'll need to keep mulling it over because frankly, the more I think about it, the more I realize you've left me somewhat stumped.


On Nov 18 12:14 AM Old Trader wrote:

> Alex,
>
> Your analysis of the dollar jibes with what I'm hearing/reading;
> that is a good possibility of a correction upward, in the short term,
> while holding a downward trend.
>
> Regarding a 10% savings rate, have/are you factoring debt reduction
> on credit cards, etc., by consumers, rather than just looking what
> might be sitting in savings/MM accounts?

Is the Dollar Toast?

The answer may depend on your time frame. A two year daily chart of the USD index is interesting. From 74 to 76 on the index is a dead zone - virtually no trading support or resistance. More, the 50 day simple moving average is bearing down on the USD at the moment, and the MACD is firmly in negative momentum land. And this week the buck touched a new "lower low" within the primary downward trend that started last March. Put that all together, and technically minded folks might be tempted to short ole Bucky down a few points from here in the near term.
Change the view to a weekly chart, and what you see is that the dollar is hitting oversold extremes. That is not to say that it might now hit even more oversold extremes in the near term, but nothing drops straight down forever. I might look for some support at about 72 - the point where the dollar rallied back in July of 2008 - particularly if the weekly RSI should reflect a highly oversold condition below 30. But those numbers are pretty hypothetical. On a longer term view, the dollar COULD catch some technical support, but it is pretty tough to make that call just yet. And then you have those bedeviling budget and trade decifits and negative interest rates to deal with over the long term, which says nothing good about the long term prospects for dollars to rally against other currencies.

A 10% savings rate? I live in the USA, and I must tell you, I see no evidence of a 10% savings rate. My home is near a high end shopping area, and on weekends, as I walk past the jam-packed restaurants, and past swarms of shoppers toting large bags of newly purchased shoes, handbags, what-have-you, I have to wonder, does anyone here realize we're in an economic crisis? It's like, what if you decided to throw a great depression, but nobody came? Anecdotal evidence, to be sure, but sitting at a trading desk in London, you might not have access to the feel of consumer sentiment you get by walking the streets of some US cities. Another anecdote. Got a friend who lost his job two months ago. He just bought a new car the other day. Getting an American to stop consuming is like trying to get an ocean-liner to turn on a dime. And getting an American to save 10% of his income rather than buy that second flat screen TV with zero percent financing and no money down? Long odds, my friend, very long odds.

Small Cap U.S. Equities: A Blast from the Past

Not sure if I already commented on the underperformance of US small caps or not. Then again, I can barely remember my own birthday. So, at the risk of repetition, I'm going with a theory that the Russell 2000 is underperforming the Dow Jones Industrial Average for at least one of two reasons. First, theory: we're approaching the end of the bull market, where risky assets typically tend to underperform relatively less risky assets. Second theory: as an equities fund manager, I'm paid to beat a benchmark, and 9 out of 10 times, that's the S&P 500. If I've been sitting in high beta stuff since March, my carried interest is looking pretty fat, and this would be a tempting moment to lock in. So, I dump my small caps, plow the capital into an S&P 500 index, and now I've locked in my performance. I think we're seeing a bunch of that. Part B of second theory: traders who enjoy life in the market-neutral zone recognize this temptation fund managers face to dump small caps and roll into large caps. So, said traders short Russell 2000 and go long the S&P 500. I'm pretty confident we're seeing some of that because that's a trade that I put on some weeks ago. I doubt I was alone.

Equities Update: Post-Fed Gains Hefty, But Temporary

Days like today, and indeed, most days over the past two weeks, suggest a pattern of selling off on what should be considered pretty good news. I can't help but wonder whether we have gone from bullishly scaling a wall of worry to bearishly descending a hill of hope. Big picture, I'm concerned we are at the end of the equities rally. Any sort of shock to the system has the potential to throw everything off a cliff, and it seems little will fuel an ascent higher.

Technically, the broad market observed the 50 day exponential moving average as resistance, suggesting the path of least resistance is now lower. That measure could be misleading, though. We are quite oversold on a short term basis, and still holding support at the 65 day exponential moving average. That would normally be a precursor to a significant move higher. Perhaps seasonal factors support a push higher, as well. Finally, shorter term moving averages remain firmly above longer term moving averages, indicating the long term upward trend is still in place.
Overall, it appears too soon to call an end to the bull market that started back in March of this year. By the same token, it's getting harder and harder to anticipate much easy money in the markets at this point. The real challenge, though, is that risky assets are not all that exciting to invest in, but so-called "risk free" assets, like US Treasuries, are flat out non-investable situations - unless you're happy to take a guaranteed after-tax, inflation-adjusted loss. If risky and risk-free assets are equally un-attractive, investors face a mild conundrum. Hence, I think the only reasonable advice at this point is to just go on vacation.

Boom or Bust Cycle: Where Are We Now?

What you're asking for is a prediction. I'd be more than happy to oblige, except any prediction I make about the future will be worth about as much as you pay to read my articles.
Rather than predict the market, my goal is to describe it. What's the practical use of that? By describing the nature of the market, we can get a sense whether it is a better strategy to own or sell risk - trying to guess whether the Dow Jones will hit 10,000 next year or in the next decade isn't helpful or, in fact, necessary.
I say "should" and "may" by design because I don't believe in "will". With the exception of a very select few traders, most people who do believe they know for sure where the market will be in a year end up humbled and poorer.


On Aug 13 06:11 PM whidbey wrote:

> You said, "The future should look brighter than it may at first blush."
>
>
> Why do the screwballs come here to reveal themselves? "should" "may"
> meaning what? Tighten it up partner or just skip it. We read a lot
> of stuff and you just can't make here without something to say. Personally
> I kind of like your ideas, but not in writing.

Boom or Bust Cycle: Where Are We Now?

Thanks for this link. Very interesting perspective.

On Aug 13 06:18 PM E Nuff Sed wrote:

> Rather than arguing hypotheticals look at the data.
> This is a chart of market cycles based on real returns and nominal
> returns going back to 1871. Clearly in "real" terms we have been
> in a bear market since 2000. This has been the longest bear market
> in modern history (assuming Mar 9th bottom & we are now recovering)
>
> www.scribd.com/doc/183....

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.

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.

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.