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Inflection Point Investing LLC
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Inflection Point Investing LLC is a Registered Investment Advisory firm in New York City.
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Inflection Point Investing LLC
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  • 6 1/2 Year Low for the Equity Put Call Ratio
    This morning on CNBC’s Squawk Box Joe Kernen was interviewing an Elliott Wave newsletter writer who in his list of reasons why the market could turn lower. One of the more interesting reasons given was that the Put Call Ratio was at 10 Year lows. At times I have followed the Put Call ratio because it can tip off extreme readings and potentially a market turn. It acts as a reverse sentiment indicator. If the ratio goes to an extreme high (more bulls) then a correction could occur. If the ratio goes to an extreme low (more bears), it means that potentially the market could be due for a rally. Sentiment indicators can be helpful but are far from full proof. The problem is that extreme readings do occur near the tops and bottoms but that extreme readings can go on for long periods of time. In other words markets can stay overbought or oversold for long periods of time. This is especially true for commodities which tend to be streaky but less so for equities which seem to have more corrections along a trend line.
     
    The CBOE publishes 3 put call ratios: One is the total put call ratio, the second is an index put call ratio and the third is an equity put call ratio. As of yesterday April 14, 2010, the Total Put Call ratio was at 0.56, the Index Put Call ratio was at 1.11 and the Equity Put Call ratio was at 0.32. The data goes back to October 2003. Of the three ratios, the Equity Put Call ratio was at the lowest reading recorded over that time (with a range of 0.32 – 1.35), the Total Put Call Ratio had only 4 lower readings over that time (range 0.32 – 1.70), and the Index Put Call ratio was near the lower end of its range (0.24 – 3.89).


    The Equity Put Call Ratio


     
     
     
    The Total Volume Put Call Ratio:





    The Index Put Call Ratio:







    So what if any conclusions can be drawn from this? The put call ratio is a useful indicator and can signal overbought or oversold readings. However, it may not necessarily mean that a change in trend is imminent (although that is possible). It may best be used as a way to gauge sentiment and to more closely observe for other signs that a change in trend or a pull back from the trend is occurring. An easy sign one to watch out for is market reaction to news. If market reaction to news changes from its current all news is good, then that in addition to the Put Call ratio near 6.5 year lows could be a harbinger for a correction.
     
    The accounts have long exposure to the equity markets.
     
     
    Authored by Tom Henderson, Strategist JBH Capital.
     


     


    Disclosure: The accounts have long exposure to the markets
    Apr 15 3:49 PM | Link | Comment!
  • Is There Any Significance to the Russell 2000 Streak of 20 Up Days in 22 Trading Days
    Is There Any Significance to the Russell 2000 Streak of 20 Up Days in 22 Trading Days

    I knew the US equity markets were up a lot over the past month. I have watched many stocks shoot up some with strong fundamentals, others with less strong fundamentals. It seems as though everything was going up. However, I really did not know how long the streak was unbtil this morning. I heard the stat thrown out there by CNBC broadcaster Carl Quintanilla this morning when he said (about the rally) that “the Russell 2000 has been up 20 of the past 22 days.” I was like wow! Can it really be so many days?
     
    Like any good market strategist, I decided to look into this claim. Knowing that Mr. Quintanilla has an eye for stats like this I believed the stat to be true. But I also began to wonder how often has this happened in the past? And what happened to that index one month later, 3 months later and 1 year later after a streak like this.

    The Russell 2000 is an index that has not been around for that long. It has been around since September 1987. What is interesting about that is that is one month before the October 1987 meltdown in the stock market which saw a 20% drop in the US equity indices. What a time to start a new index I said to myself as I ran the numbers. (Note that I used Yahoo Finance for this exercise.)

    It turns out that there have been 10 instances which saw the Russell 2000 go up in 21 times in 22 days, and 11 instances which saw the Russell 2000 go up 20 times in 22 days. However, 19 of these 21 instances occurred on consecutive days during the January 27th 1988 through February 23rd 1988 time frame.  I used this consecutive day period as two periods. One date on January 27th and the second on February 23rd. Thinking about this extraordinary period in 1988. Perhaps since this was 2 months following the October 1987 stock market meltdown that the equity markets were so out of whack to the down side they were re-correcting back to the upside making up in a hurry for lost ground.

    So what happened 1 month, 3 months 6 months and 1 year after these three periods? All of the periods showed percentage gains. The January 1988 period stands out for its outperformance having the strongest retrurns perhaps because this was closer to the 1987 October market collapse. Whereas the February 23rd period lagged all three periods. Perhaps because it followed the strong gains from the January 1988 consecutive day period.

    Who knows what will happen in the next month, 3 months 6 months or 12 months to the current Russell 2000? If the past is any guide (and who knows if it is, with old saying like ‘US housing prices on a national basis do not fall’ getting tossed aside), then the Russell 2000 up 20 times in 22 trading days could signal further upside for the Russell 2000.

    Authored by Tom Henderson, Strategist JBH Capital.

    The accounts likely have long exposure to the Russell 2000.
     

    Date1/27/19882/27/19884/27/19887/27/19881/27/1989
    Index Price123.37134.17143.65148.77159.92
    % change 
    from 1/27/19888.7516.4420.5929.63
          
    Date2/23/19883/23/19885/23/19888/23/19882/23/1989
    Index Price132.52143.07139.2144155.41
    % change 
    from 2/23/19887.965.048.6617.27
          
    Date6/29/19957/29/19959/29/199512/29/19956/29/1996
    Index Price281.08299.23310.38315.97346.61
    % change 
    from 2/23/19886.4610.4212.4123.31


    Disclosure: The managed accounts likely have long exposure to the Russell 2000.
    Tags: IWM
    Mar 12 1:14 PM | Link | 2 Comments
  • 5 Lessons from Legendary Investor Grace Groner
    In case you have not heard the story of Grace Groner here it is. She is the 100 year old woman who died in January 2010 at the age of 100, leaving her $7 million estate to her alma mater, Lake Forest College. What makes Ms. Groner’s story interesting is how she made the $7 million. She made it from an initial investment of $180 into Abbott Labs stock in 1935 buying 3 shares of stock at $60 per share and reinvesting the dividends generating 15% returns per year. Since it is tax time here in the US, I thought it was a good idea to take some of the lessons from Ms. Groner and apply them to the modern US investor.
     
    1 – Investors should optimize their savings. It might be hard to come up with that extra bit on a monthly basis to set aside for retirement. But the amount does not have to be much. Ms. Groner started with $180. An investor can even start with $50. There are mutual funds that allow investors to have money withdrawn from their checking account (and many stocks with dividend reinvestment plans) to make the process painless. The lesson from Ms. Groner here is that any initial investment can compound over time if it is allowed to work. One may look at that investment and think it is not a lot of money. Well, if it is left alone, it does not have to be a lot of money.
     
    2 – Investors should utilize tax deferred vehicles like IRAs and 401ks. There are multiple reasons for this. First investors are going to need to rely on their own savings to fund retirement. Second, the government gives a tax break for these vehicles allowing investors to save with pretax money. Lastly when a tax deferred vehicle like an IRA is used the money cannot be touched without taking a penalty. This would encourage the investor to leave the investment alone.

    3 – Investors should allow time to work in your favor. Assets can expand rapidly if allowed to compound over a long period of time. Ms Groner left $180 alone and did not touch it even as it spiraled into the millions. She held the shares and accumulated more through a depression, multiple wars, multiple recessions, inflation scares and many booms as well. I looked at Abbott’s stock and there were a few 40% draw downs. 75 years is a long time and we should all be so lucky to live so long but even if we placed $10,000 into an IRA and generated long term returns of 10% (which is historically what the equity indices have generated) then that would spiral into $175,000 over 30 years and to $1,000,000 by the 48th year.

    4 – Investors should look at investments that generate dividends. It is true that stocks that dividend paying stocks tend to be more mature firms. Still if reinvested, dividends can really spiral an investment’s returns. Dividends may also force a company to be true with its accounting revenues and earnings. A company (like Enron) that did not generate cold hard cash would not be able to pay a dividend. This is just another layer of safety for the investor. This may have helped Ms. Groner and her investment as she had 100% of her life savings in one stock. Risky? Yes, but as long as it paid a solid dividend, it was at least generating enough of cash to stay in business.

    5 – Know where your money is going. Ms Groner had all of her assets in one stock. This is no doubt a risky scenario. But it does point out an important part of Ms. Groner’s investment style. She invested in what she knew. In this case she worked over 40 years at Abbott Labs and had at least some idea of how the company was doing. As a secretary I would bet that she would be able to see how well financially the company was doing. Maybe she read the reports as well. Regardless investors should really get to know the story when investing in an individual stock. Read the annual report, the 10K and 10Qs are especially useful as they contain all sorts of scenarios both positive and negative that the company can take.

    To recap, investors can learn a lot from Ms. Groner. If possible, save some money and utilize the IRAs. April 15th and Uncle Sam wait in the background but he gives individuals a way to save. Investors should take full advantage of it and maybe generate returns like legendary investor Grace Groner.

    Authored by Tom Henderson, Strategist JBH Capital.
     
    There are no disclosures to make.


    Disclosure: There are no disclosures to make.
    Tags: ABT, SPY
    Mar 12 11:40 AM | Link | Comment!
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