O. Young Kwon's  Instablog

ABOUT The DMI (Daily Market Information)

Investing is a zero-sum game, meaning when one guy gains, the other guy must lose. In order to win, what must we do? The DMI might help you to have an edge over the other guys. There is too much market information on SA, TV, Newspapers, magazines, etc. The problem is there is too much info to absorb. That's why DMI is brief and well-selected.

My focus is primarily on news about two areas: The Fed policy and Business Cycles. These are macro topics. DMI is a summary of what I listen to BBR, and read WSJ, Reuters, Bloomberg, AP, and Barons (weekend) from 5:a.m. to 7:00 a.m. everyday.

With this information and the RED Spread (introduced in in my article. Link: www.seekingalpha.com/article/817551) you can grasp the current market situation.

The Daily Market Information (DMI) (May 25, 2013 Saturday)

Bloomberg

Durable Goods Point to Second-Half Rebound: Economy.

German Consumer Sentiment to reach 5-Year High in June, GfK Says.

Fisher Says BOE Policy Makers Must Keep Up Economic Stimulus.

Draghi Says Bond Buying Pledge Helps Transit Rates.

Orders for U.S. Durable Goods Rose More Than Forecast in April.

Target, Macy's Sue MasterCard, Visa Over Swipe Fees.

Reuters

Visa, MasterCard ask court to declare card fees are lawful.

The Daily Market Information (DMI) (May 24, 2013 Friday)

Reuters

German Q2 GDP growth to outpace first quarter considerably - Ifo economist.

Private consumption helps German economy to meager growth.

Wall Street sags, but ends off session lows, HP hits 52 week high.

Volatile Nikkei keeps Asian stocks edge.

Bloomberg

Durable Goods Orders in U.S. Probably Rose in April, After Slump.

Kuroda Struggles With Communication as Japan Rates Rise: Economy.

WSJ

Jobless Claims Fall to 340000.

Tokyo Recovers, Sidney Extends Fall.

The Exchange

The Housing Market Gets Bubbly Again.

The Daily Market Information (DMI) (May 23, 2013 Thursday)

AP

Stocks Turn Mixed After Early Selloff.

Bloomberg

Euro-Asia Services, Factory Gauge Rises More Than Expected.

U.K Economy Grows 0.3% on Inventories, Consumer Spending.

Japan Economy Chief Warns Panic Over Stock Sell-Off.

China Manufacturing Unexpectedly Contracts in Test for Premier.

Reuters

Bernanke and growth fears send shares lowers, yen up.

WSJ

Japanese Stocks Fall Sharply.

BusinessWeek

Ahead of the Bell, US Home Sales.

The Daily Market Information (DMI) (May 22, 2013 Wednesday)

Reuters

Dollar dips, shares mixed ahead of Bernanke testimony.

Asian stocks supported by Fed reassurance.

BOJ holds steady despite bond turmoil, upgrade economic outlook.

WSJ

BOJ Gov Kuroda Will Conduct Mkt Flexibility to Make Policy Take Effect.

Bloomberg

Obama's Fannie Mae Pick Watt Faces Fight Impending Housing Deal.

The Daily Market Information (DMI) (May 21, 2013 Tuesday)

Bloomberg

U.K. Inflation Slows More Than Economists Forecast to 2.4%.

Reuters

Dollar firms as Fed suspense builds, off highs.

Apple, Congress spar over taxes ahead Tuesday hearing.

Financial Times

Dublin rejects Apple tax avoidance claims.

WSJ

Outsourcer Fires Indian CEO Over Relationship.

The Daily Market Information (DMI) (May 20, 2013 Monday)

Reuters

Wall St. dips after records, but deals support.

Insight: The fight for North Dakota's fracking-water market.

Global shares grind higher, yen edged up on Amari comments.

Analysis: Shrinking deficit reduces pressure for budget deal.

Bloomberg

Gains in China New-Home Prices Signal Growth Challenge for Li.

WSJ

Obama Counsel Was Told of IRS Audit Findings Weeks Ago.

Yahoo's board approves $1.1 billion Tumber acquisition.

The Daily Market Information (DMI) (May 19, 2013 Sunday)

Barron's

Are Cyclicals Ready to Rally? By Kopin Tan. Neglected shares sport low multiples and some have already pulled back by 5% to 10%.

A Call for Cyclicala. By Stephen M. Sears. Buying options now on cyclical stocks could turn out to be a bargain later.

Bloomberg

Payroll Increased in 30 U.S. States in April, Led by Texas.

Reuters

Bernanke upbeat on innovation outlook in commercement address.

Obama budget cut deficit $1.1 trillion over decade: CBO.

Fed has not lowered interest rates enough: Kochertakota.

The REDS S&P 500 Prediction (RSP) (May 19, 2013)

My article ("The RED Spread: A Market-Breadth Barometer - Can It Predict Black Swan?") introduced the RED Spread (REDS) (with the RED) as a Market Condition Monitor. The RED Spread is performing one-month-ahead forecasts of the S&P 500 index. The predictions follow.

The evaluation of the predictions made on 2/24/2013, 3/3/2013, 3/10/2013, 3/17/2013, 3/24/2013, 3/31/13, 4/7/2013 and 4/14/2014 is available: The Forecast Error Percentages were 9.1, 9.0, 8.3,10.4, 9.0, 10.8, 12.0, and 19.0 respectively; and the Mean Absolute Errors were 8.7 8.8, 8.6, 9.0, 8.8, 8.6, 9.6, and 10.8; respectively. They were under-forecasts. The error were significant because the data range (5/2/2012 to 4/12/2013) don't cover a full year. From the 5/5/2013 prediction the data have a full year, as shown in the above Table..

It was also because the budget negotiations have been worked out this time, surrounding the sequester (March 1) and the smooth passage of the spending bill or a continuing resolution (CR): The market not only didn't respond negatively on across-the-board spending cuts even though White House exaggerated the impact of the sequester, but the new CR keeps government open through September, averting shutting down government on March 27 when all stopgaps spending measurements will be expired.

All these timely good movements of Congress boosted the market more much than expected one month earlier.

The Model

Y (t) = X (t-1) + e,

Where Y (t) = one-month average of daily changes in the S&P 500 at t, X (t-1) = one-month average of daily changes in REDGs at t-1, and e = errors.

(1) The Data

The RED Spread or REDS from 4/3/2012 to date.

Introduction

Market forecasts refer to market perspectives of unknown events, whether in the past, present, or future. It is the future that attracts most attention of investors because the practical purpose of the forecasts is to help make and improve investment decisions, which are forward looking.

Large econometric models which have many variables and various data are available for market forecasts, but a naïve single-variable model is introduced here. For stock-market forecasts, a simple model with a well-defined set of data can compete large model because stock prices and bond yields (and bond prices in the opposite direction), all of which are highly volatile, responsive to a continuous flow of rumors and headlines that affects expectations of investors. As a result, it is almost impossible predict the future movements of the stock market in a relatively short term, say, a time horizon of one to three months which are my primary target.

The purpose of this column is not to expect to provide any acceptable results of near-term market forecasts, but rather to attempt to test a naïve autoregressive equation with seven-day moving averages of changes in both the S&P 500 index and the RED Spread or the REDS. The REDS reflects all market activities - large and small - at the closing every day. They are unbiased and directly observed. Hence I have a strong confidence on this data set.

The REDS series just starts from April 3, 2012. After making changes and moving averages, the final input series begin May 2, 2012. Changes and moving averages made the original series less noisy, but still a year-on-year forecasting is better to eliminate further any remaining cyclical or seasonal components.

Hence, weekly one-month-ahead predictions will continue to be performed using the same starting data, May 2, 2012, until May 3, 2013. After that, the starting data will change to cover just one year. As the series lengthen, two-month and three-month predictions will be performed in the future.

The evaluation of predictions will be made by two criteria: (a) The Forecast Error Percentage (FEP) and (b) The Absolute Mean Error (AME). The FEP is for at one point at the target day while the AME is for 7-day forecasts.

At this time, I am not certain about the likely outcomes of this experiment. The only hope is this model with this innovative data set would shed some light in a very changeable area of predictions of the equity market with an explicit link with the bond market.

Background

The origin of The REDS went back to early 1980s when a paper was submitted to the American Economic Association [AEA] meeting in Montego Bay, Jamaica. The paper was to predict stock markets (the level of the S&P 500) by employing the NBER composite indexes which were compiled at the Center for International Business Cycles Research [CIBCR]. Since the S&P 500 is one of the components of the Composite Leading Index, the paper used the Composite Lagging Index inverted: The inverted Lagging index normally leads the Leading Index.

Last summer a science-oriented reader and I exchanged our views on whether the REDS can predict the market or not, as follows:

Reader - "Here are my predictions for today at closing based on your chart above RED REDS S&P 500 10Y T Yield 9/28/2012 52.8 5.0% 1445.99 1.665."

Author - "It is pretty difficult to grasp the relevance of your comment which perhaps is based upon a presumption that the RED and the RED Spread can forecast the closing prices of the S&P 500 and 10-year Treasuries. I wish your comment works, but unfortunately it cannot because economics (finance) is not an exact science."

Reader - "Still, I look forward to your post on Monday to see how far off I am and in what direction."

Author -- Yesterday (September 28) numbers were: RED = 52.*% RED Spread = 4.6% S&P 500 = 1,440.69 10-Y Treasury Yield = 1.64%...[A]ny economic forecast should be done with an explicit model…[W]e should build two equations as:

Y1 = a1X1 + b1X2 (1)

Y2 = a2X1 + b2X2 (2)

Where Y1 = the S&P 500, Y2 = the 10-Y Treasury yield, X1 = the RED, and X2 = the RED Spread. A further discussion along this line of thought is beyond of the scope of this article."

(From our comments on "The RED Spread: A Market-Breadth Barometer - Can It Predict Black Swan?".)

The experimental work is to show my analysis to the reader (quoted above) and all other readers who might be interested in a short-term market forecast which is not seen on Seeking Alpha.

The Market Stress Index (MSI) (May 28, 2013, Tuesday)

This post is based on my article, titled "The Relationship Between A New "Market Stress Index (MSI)" And The Market" (seekingalpha.com/article/1187701

Three distinguishable political events - the 11/6/2012 election, the 12/31/2012 tax deal, and the 1/23/2013 House Debt-Limit-Extension bill --, as explained in my "A Lackluster Market Ahead As Budget Fight Is Looming" seekingalpha.com/article/1135161, are used to make the benchmark of the MSI.

Daily updates of the MSI indicate the level of market strains, caused by various outside data such as monetary and fiscal policies, political events, and other natural and geopolitical disruptions.

The market stress level has risen since Wednesday (February 6, 2013), affected by looming budget battles. The MSI has became in a low level, ranging 21.4 to 28.6 from 3/7 (Wednesday) to 3/14 (Thursday). From 3/15 (Friday) to 3/25 (Monday) the MSI jumped to a range between 42.9 and 50.0. These high MSIs reflect the Cyprus worries.

Between on 3/26 (Tuesday)and 4/9 (Tuesday) it was in a range between 35.7 and42.9. Between 4/10 (Wednesday) and 4/18 (Thursday) it was in a range of 28.6 and 21.4. On 4/19 (Friday) it was 35.7. On 4/22 (Monday) and 4/23 (Tuesday)it was 50.0. Between 4/24 (Wednesday) and 4/29 (Monday) it was 42.9. Between 4/30 (Tuesday) and 5/2 (Thursday) it was 50.0. On 5/3 (Friday) it was 57.1.

On 5/6 (Monday) and 5/7 (Tuesday) it was 50.0. On 5/8 (Wednesday) it was 57.1. On 5/9 (Thursday) it was 50.0. The market recovered from the Boston Incident, but the market stress is mounted with the market a double-bottom signal as shown in the Daily Market Condition (DMC) until 5/9 (Thursday..

On 5/10 (Friday) it was 35.7. On 5/13 (Monday) it was 28.6. On 5/14 it was 21.4. On 5/15 (Wednesday) it was 35.7. On 5/16 (Thursday) it was 42.9. On 5/17 (Friday) it was 35.9. On 5/20 (Monday) and on 5/21 (Tuesday) it was 28.6. On 5/22 (Wednesday) and on 5/23 (Thursday) it was 35.7. On 5/24 (Friday) it was 28.5. On 5/28 (Tuesday) it is also expected to fall to 28.6.

Will the MPI calm ?