Thursday, January 31, 2008
Intraday, several major indices hit the official 20% correction mark, with many emerging markets doing substantively worse still.
Once again, the Federal Reserve came to put Humpty Dumpty back together again with a "surprise" 75 basis point reduction after a steep global sell-off during the Martin Luther King Holiday. In retrospect, that particular sell-off may have been precipitated by Societe Generale closing its leveraged “rogue trader” positions.
Nonetheless, on balance the month's economic news strongly reinforced the slowdown premise, even as commodities breached record levels (oil hit $100 per barrel and gold exceeded $900 per oz.). The Federal Reserve thus cut an additional 50 bps at their formal meeting, leaving the funds rate at 3%, its lowest level in several years.
In addition, the beltway joined in the attempt to revive the markets, with the Whitehouse and Congress agreeing to a $146B stimulus package.
Interestingly, Small-Cap and Value stocks strongly outperformed their Large-Cap and Growth brethren, indicating a rotation out of last year’s winners and into the laggards. Similar sector rotations were notable into Financials and out of Technology, as one example.
Downward volatility certainly reigned the day last month, and the bulls are no doubt happy to wish January a good riddance.
The Style Box below was calculated using the following PowerShares™ ETFs: Small-Growth (PWT), Small-Value (PWY), Mid-Growth (PWJ), Mid-Value (PWP), Large-Growth (PWB), and Large-Value (PWV).
The Standard & Poors 500, Dow Jones Industrial Average and NASDAQ 100 may be traded through ETF proxies, including the SPY or IVV, DIA and QQQQ, respectively.
Volatility: Elevated (VIX 22-37)
Speaking of which, here is a good article on trading gaps down in bull versus bear markets (highly recommended daily blog by Rob Hanna). I did manage to cover most of our short hedges this a.m. in spite of caring for a sick child at the office today.
Wednesday, January 30, 2008
Be prepared for some fireworks and only play the noise if you can manage the trade very closely. It usually takes an hour to start playing out directionally and lately the pattern has been for any pops to be faded. The NDX is slightly outperforming for once inspite of Yahoo.
FED UPDATE: 50/50; 1 Dissent -- The market will now fire on all cylinders. Trail a stop (SPY $136.50 looks adequate as a stop loss -- just above it right now down over $1.00 (correction) high).
3:15PM CST UPDATE: Lot's of noise and plenty of signal changes for my fund going into the close. Hectic! Now all we need is the Federal Government to back the mortgage insurers... right. It's not necessarily terrible that we moved back off the highs, will give us room above for a run. Watch the first hour closely tomorrow for momentum clues.
Tuesday, January 29, 2008
I do think it's bullish we have held the opening gap up thus far, but you will notice on the chart below that I started hedging a little less than an hour ago. Transports are pulling nicely today while Technology continues to struggle. On the daily time frame, we are in a bit of a no man's land here.
Monday, January 28, 2008
As of now, VWAP, Cumulative Tick and A-D line slopes all look very constructive at the mid-day. We are challenging the pivot point for the third time today as this is posted. Small caps and Financials are again pulling hard with Semi's even towing the line.
2:30PM CST UPDATE: Rising VWAPs held as support for everything but the NASDAQ100, which has been held back badly by the Internet issues such as Yahoo and Bidu. I did put a bit more on towards the Friday close and will minimally hold for a retest of the Friday open.
Daily NASDAQ-100 Component Performance
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Friday, January 25, 2008
If it does sell off much harder, I'll probably take a look at putting some back on towards the close as we head into the end of month with all of its potential for window dressing, bottom fishing and fed speculation ahead.
2:50PM CST UPDATE: I think I'll sit tight until Monday unless we really move down hard from here, say below the daily lows. Enjoy your weekend.
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Thursday, January 24, 2008
1:30PM CST UPDATE: Too wide a range for the above, but I'm not going to stare at the gift horse. Looks like there are some business measures in the stimulus package and the ultimate consumer rebates came back up. Consider in advance how/when/whether you wish to hedge as we move along here.
Blog to Read: Bear Market Magnitudes since 1960s
Wednesday, January 23, 2008
Wed 1:00pm ET- Briefing.com
The stock market falls to fresh session lows, without a specific catalyst for the wave of selling pressure. The major indices are currently trading...
Clear rotation occurring with last year's winners being sold hard and reinvested into last year's losers, specifically those that will benefit from lower interest rates. By way of example, compare and contrast QQQQ & XLE versus XLF & IYR.
The bull's hope is that these components will constitute the new leaders. This is why I advised my clients to think carefully before selling their (diversified) losers at last year's end. When we bounce, I expect all ships will rise for a period of time. At the close I will post a sector recap.
After the Close:
This has been a gut wrenching period reportedly on the scale of World War II level downward volatility. I wish I could say with confidence that today's turnaround was the definitive short-term end to it. It probably is, but this is a very erratic market.
The potential reduction of counter-party mortgage default insurer risk is a huge development. Did you get the sense that news may have been leaked earlier in the day? Whatever, for today we'll take it.
Tuesday, January 22, 2008
XLF is up over +1.6% and the Smallcaps are just under breakeven. I see the VIX tagged 37 at the open.
Hard to add much to the long list of excellent posts today:
Monday, January 21, 2008
Edit: Scratch that, the German DAX is now down about 7%. Not many periods in recent history with as fast a sell off as we have recently seen. Hard to imagine a 1987 scenario in these "modern" times, but I suppose anything is possible in this fast moving environment.
Blog to Read:
Calculated Risk - Past Bear Markets & Recessions
Friday, January 18, 2008
1:25PM CST UPDATE: Tick is still very negative, watch out for the possibility of some risk reduction ahead of the long weekend at the close. So far we seem to be holding at S1 and have been fairly trendless since late morning.
Interestingly, the Transports and Semis's are still doing great. Financials (edit: struck Energy) are holding us back. I'd like to poke around analyst valuation models for the Financials... how much lower can they go? The VIX hit a high of 29.3 earlier today. A little higher would have been nice, not that I'm hoping for more pain here.
2:50PM CST UPDATE: Tick has been trying to turn the corner. See if we can break the VWAP... Sellers looking exhausted. (!!What, is Pisani reading this blog!! -- Don't worry, I'm not that much of a narcissist.)
HAVE A RESTFUL LONG WEEKEND!
Blogs to Read:
Thursday, January 17, 2008
We will see more of a decline, but before you panic and sell it all, at least take a moment to recall that one person's pain threshold is another's buying point. Whoops, we broke $135 before I could even get this posted... a very ugly day indeed.
11:30AM CST UPDATE: A little bit of a tick divergence became evident about twenty minutes ago and it seems we are finding some support at S2. I'm not too excited about it just yet though.
1:35PM CST UPDATE: The VIX at about 27 is up over 10% from yesterday's close.
2:10PM CST UPDATE: Monthly view and long-term bull market support...
2:45PM CST UPDATE: Have to get ready for the close, but while I would have liked to have seen more volume, we are seeing VIX readings at or near the recent typical "capitulation" level here with a 16% stretch from yesterday's close. Prospectively a very good day to consider writing out-of-the-money puts...
3:10PM CST UPDATE: Ouch. A note to you bears, remember August 17th last year, also a pre-expiration Thursday? "Short" of that, I believe we can next look to stronger technical support in the $130-$133 range, which we are right on top of. The SPY is down more than 15% from its Fall peak.
Blogs to Read:
Wednesday, January 16, 2008
This week's news once again features prominent and sizable liquidity facilities provided to our US banking institutions by foreign sovereign funds. As shown below, from the foreigner's currency adjusted perspective, these securities are an even better "bargain", with the XLF down more than 30% when stated in Euro and Yuan, respectively.
If you believe foreign central banks will soon start lowering their lending rates along with ours, and that the US is closer to a price floor than our relatively high flying foreign market counterparts, it is easy to see the attraction. This is especially true with choice preferred stock dividend rates approaching 10% on the bargaining table.
Who would have guessed just a few short years ago that our securities would so soon become the global "value-play"? Billions of US investment dollars are reported to have moved into overseas equities during the last several years. I wonder if the ultimate "put" for the US markets will end up being the reversal of that flow?
I do believe there is a risk of holding shorts ahead of expiration Friday and potential Fed actions. I just wouldn't want to bet on that from the long side. What this means price action-wise through the weekend, I'm not yet sure. For now I'm standing pat with my current exposure -- I did buy a little Intel last night.
11:30AM CST UPDATE: Mid-day inverted head and shoulders reversal? Once again, Cumulative Tick is mighty strong and A-D line is actually fairly flat and slowly moving into the plus side. Financials are flying high AND small caps are strongly outperforming.
1:55PM CST UPDATE: The NASDAQ100 and Dow have stalled at their respective 5-day moving averages... program trades...
2:45PM CST UPDATE: Selling the strength on Treasury Department political wrangling over loan limit proposals for Fannie and Freddie... stupid press release... somebody had better get spanked for that.
Rob Hanna on 90% Days and Gaps Down
Steenbarger updates his Indicators
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Tuesday, January 15, 2008
That's not to say there aren't frequent overreactions. If one sees the last ten-months as a correction "through time," you could argue that we are setting up for a nice-short term rally with a "W" retest-bottom ala March of last year, earnings and the Fed permitting. (Note that this was a common argument at the end of the tech-bubble in the early months of decline.)
On the other hand, if you feel we haven't seen enough cross-market capitulation and that the bad news is going to keep coming our way unabated, it's likewise easy to argue for a run to SPY $125-132.
Intellectually, I'm in the bear camp, but being an optimist at heart, I tend to look for the upside when we are this "oversold". As of right now, equities are off +/-2% of the day, but the VWAPs are being challenged to the upside. What are your thoughts dear reader?
1:30PM CST UPDATE: The Cumulative Tick is once again making a concerted effort to go positive on the day. Athough it has been relatively less predictive over the past three days or so, that's saying something given the magnitude of the repricing. See prior days' posts. Technology and Financials just look painful. Tech in particular continues to revert to the mean relative to last year's outperformance (semi's aside).
4:10PM CST UPDATE: Intel, ouch...
Blog to Review: Vix & More - "Checking for Atheists"
Monday, January 14, 2008
12:45PM CST UPDATE: Looks like some bond selling -- this is good, as is cumulative Tick taking a more northernly tack.
Friday, January 11, 2008
1:10PM CST UPDATE: As promised, the "How Shall We Bounce" article has been updated to include the percentage of postive outcomes in subsequent five-day periods. Ugly out there. Tick continues to look healthy, unlike price action. Interestingly, A-D line is also fairly flat. Large caps pulling us down? Gotta be.
1:45PM CST UPDATE: I'm not the first one to say it, but it does indeed look like last year's winners are being sold with proceeds reinvested into bonds. With rates as low as they are and inflation stats coming out next week, that just doesn't strike me as very smart, at least in terms of a "safety play." Cumulative Tick still roaring ahead of price. Again, this means that buyers are taking the ask, on balance.
Blog(s) to Read:
Kirk Report ~ Arms Index Bullish
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Thursday, January 10, 2008
11:55AM CST UPDATE: Bernanke's written comments, the Fed "will take substantive action as necessary." Note that the first reaction to sell the break above the five-day simple moving average was contained at the daily VWAP. Tick and A-D are picking up strongly. If I get a chance later today, I will update the tables in the post below to include the percentage of wins per cell.
12:20PM CST UPDATE: Man, you can hear his voice wavering... Think there is a bit of pressure on this guy? I fixed the date on the title of the post, thanks. CNBC has got to lose that swoosh sound every fifteen seconds. What's up with that?
12:35PM CST UPDATE: Not sure that was enough. The post euphoria depression needs to be bought here to hold trend. By the same token, I think you'd have to be nuts to go short here -- if nothing else, that was "put" language.
1:20PM CST UPDATE: We keep trying to move through that 5-day MA. Eventualy we will with so many attempts, but meanwhile moving down the slope. Will it become downside support on one of these breaks? Daily Fibonacci view:
Wednesday, January 9, 2008
Last November, I did a series of articles titled along these lines "NASDAQ 100 Down X Days > Y%: What Happens Next?" Rather than posting an endless series this go around, I thought I would post a more comprehensive study for future reference.
The tables below present average five-day returns after the markets have consecutively declined a given number of days (columns) by increasing levels of cumulative percentage loss (rows) for both the NASDAQ 100 (NDX/QQQQ) and S&P 500 (GSPC/SPY). Over the ten-year study period (n=2,519 days), the baseline average five-day return was 0.24% and 0.11% for the NDX and GSPC, respectively. Importantly, a down-day is defined here as one where average price is lower than the prior, with average price calculated as [(Open + High + Low + Close)/4].
The intersected yellow colored cells represent the state of the respective indices as of yesterday's close (1/8/08). In the last ten years, the combination of duration and level of such pullbacks has been quite rare indeed! While the NASDAQ100 is flat on average five-days later (n=3 first instances only), the S&P 500 typically shows strong gains exceeding 3% (n=6).
This is apparently somewhat typical. Note generally the differences in subsequent five-day performance behavior between the two indices. As perhaps best seen in the topographic charts, while both indices perform best after short, sharp declines, although the S&P 500 tended to outperform the baseline across all combinations, on average the NASDAQ 100 tended to exhibit subsequent downward momentum after a tipping point of seven or eight days of consecutive declines.
My initial thought is that this behavioural difference relates to the NASDAQ 100's greater historic industry concentration, which may make it more susceptible to durable trending patterns when strong fundamental/structural rotations occur. Second, a deeper look at the timing of these few extended pullbacks may likely show that many occurred during the 2000-2002 post-bubble technology correction on valuation. These are obviously related thoughts.
Assuming these hypotheses are correct, I don't have reason to believe that either situation applies currently and would therefore argue that the index should more equitably participate in any general market bounce we may see in the days ahead.
Tuesday, January 8, 2008
2:25PM CST UPDATE: Arguably at those stop levels... you can see those sell programs hit every time the indices tried to pop above their respective 5-day ma's. This puts us back at those "panic" August lows.
Hard to say whether we get a pop from here on a bounce or a panic drop into the nether regions of yesterday's daily chart. Statistics call for a bounce, but it's those "fat tails" one needs to worry about. With the repeated tests of this pricing level, I can see the shorts pushing the envelope further than they have been willing to up until now. Question is how far, to state the obvious.
3:30PM CST UPDATE: Well, that answers that. Volume ended up relatively higher, but not necessarily at "capitulation" levels. Next SPY technical support is very wide ranging at this point between $132 and $137. I'm afraid that isn't very helpful and you can bet shorts are thinking the very same thing. I still think a bounce up to SPY $143 to $145 is more likely in the short term. We'll see.
Blogs to review:
Vix & More -- First Five Days Fallacy
CXO Advisory -- Value & Momentum
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Monday, January 7, 2008
I'm very short-term bullish, but still tend to think that these continued retests of the SPY $140 level give credence to a potential breakdown scenario ahead given the right news flow. Strict and more liberally drawn daily support levels are shown below. Certainly lots of "space" between the two. Note we are sitting right above the more "liberally" drawn level.
- Obama v. Clinton
- Jobs/ Consumer Strength
- Iran/ Hormuz
- Possible Fed (In)Actions
- Downgrades/ Earnings Outlook
- Upcoming Earnings Season
- Size of Pending Writedowns
By the end of January, nearly all of these factors will have shown their hand for better or worse.
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Friday, January 4, 2008
Bear in mind that the poll was very small, totaling only 23 responses. Nonetheless, I am told by said reader that it is a fairly "typical result." Whether this is true or not, it is my hope that this information will help frame and bound your personal expectations for 2008 and the years ahead:
Regarding the market's compound average total return of 9.7% over the period, it bears repeating that this particular statistic swings dramatically depending which year is selected as the starting point for the calculation.
Comparing the poll to historic results, I noticed that the modal poll response of +0.0% to +7.5% was below the index's compound average result with the expected returns distribution for 2008 also dramatically skewed below the historic distribution, indicating an overall negative view on the year. Granted, it's hard to see that view as unfounded on a day like today!
1:55PM CST UPDATE: The NDX is down over 4% and falling. There is ugly and then there is today. I'll post a sector screen after the close. Note volume isn't huge by any means.
3:05PM CST UPDATE: The first two columns are % change since open and close, respectively.
Here we are again - not good - following is a link to the prior bounce series, we are actually in worse shape than we were then though: Nasdaq Down X Days: What Happens Next?
Thursday, January 3, 2008
The way the intuition behind cointegration was first related to me, was to imagine a man walking his dog. The man and dog may seemingly move independently and in different directions for a while, but the leash ensures that they will eventually cross paths.
Among a pool of about sixty tracked ETFs, here are the top ten pairings for the last 250 trading days against the Standard & Poors 500 Spiders (SPY) and iShares MSCI EAFE (Foreign) Index (EFA), respectively, as ranked by the Augmented Dickey-Fuller unit root test.
The pairings presented above each demonstrated a high level of significance (critical values <-3). Don't ask me to speculate on the fundamental underpinnings of each pair result; I'll leave that to you. However, I personally find them occasionally surprising and even amusing! Foreign basket stocks and US Utilities -- who knew?
The Cumulative Tick looks constructive at the mid-day. This is usually a good sign of dependable strength through the day. It may help to break through the pivot point about here. We are technically oversold and still in a typically bullish period in-spite of all the hemming.
UPDATE I: One more thought, consider hedging towards the close today in the event of a sell off ahead of tomorrow's jobs data. Also, hard to know how the political caucuses will play in the days ahead. Anti-business rhetoric is a growing theme, and that can't help stocks.
2:30PM CST UPDATE II: Hope you read the first update earlier this morning... What was the tip? Just intuition based on the recent environment. However, you may have subsequently noted that:
- There was no relative strength among the leaders;
- The Russel struggled all day long;
- The VWAP (Correction: Tick) became erratic;
- The A-D line started to trail off; and,
- VWAP started to trend negative.
If the market sells off much harder, I'll think about going-long the overnight. Otherwise I'll sit tight.
3:50PM CST UPDATE III: Interesting comment on Bloomberg just now; did anyone notice how the VIX declined today? I admit I missed it until I heard it in the background... Hmm...
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Wednesday, January 2, 2008
PM UPDATE: Worst first day of the year since 1932 (Correction: 1983)? Come on CNBC, percentages are the only thing that matters -- that's really sensationalizing the matter. Doesn't change the fact that it was ugly. But, hard to know what to make of the first day of the year. Still a lot of tax moves out there on top of that fairly dower news.
An awful lot of technical buy signals -- I'm only taking them incrementally on the way down this go. Mood is as negative as the news and I don't want to be losing fingers on this one. As I've said for a while, if we do retest recent lows, this time I can see them breaking, and possibly hard at that. Exits on bounces are going to make it hard to hold for the longs. How is that for sensationalism?
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