Capitalogix

Capitalogix Commentary 05/31/09

A Different Form of Rescue for G.M., Through Bankruptcy.

President Obama will push General Motors into bankruptcy protection on Monday, making a risky economic and political bet that by nationalizing the onetime icon of American capitalism, he can save the company as a much smaller automaker that is competitive.

Still, The Market's Rally Persists.

The Markets continue to hold-up well three months into the rally.  From my standpoint, I'd like to see a pull-back.  However, the action has seemed relatively healthy considering the circumstances. 

The chart below shows a daily view of the S&P 500 since its March lows.  I marked the obvious Bull and Bear cases for your review.  A sustained break-out to the upside would be significant here.

I don't normally post intra-day charts; however, Friday was interesting.  We spent the day bouncing within a tight range ... then somebody started buying.  I hear people reference the "Boys" or the "Plunge Protection Team", or explain the push as "End-of-Month Window Dressing" or "Short-Covering."  Here is an hourly chart showing Wednesday, Thursday, and Friday.

From my perspective, all it means was there was a lack of sellers.  Let's see if they come back in June.

What Goes Up, Must Come Down:  Or Does It?

The rally did not just happen here in America.  This chart, from Bespoke, shows how far the fast growing developing countries have come this year. 

When I see charts like this, one part of me thinks, "look how far they've come"; and another part of me thinks, "look how far they are likely to fall."

Business Posts Moving the Markets that I Found Interesting This Week:

• Sell In May? Not This Time ... as the Rally Continued. (Seeking Alpha)
• Many Hedge Funds Caught Short by the Rally, Still Have Not Fully Bought-In. (WSJ)
• Will Money Flow Back Into The Markets, Or Will The Sidelines Stay Crowded? (WSJ)
• Economists Disagree Whether A Sustainable Recovery Has Begun. (Market Oracle)
• Hulbert's Contrarian Take On Consumer Confidence. (MarketWatch)
• Tivo Posts Loss As Its Growth Slows. (NYTimes)
• Dell Warns PC Market Hasn't Hit Bottom; Suffers 63% Drop In Quarterly Profit. (WSJ)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Susan Boyle's Final Performance on the "Britain's Got Talent" Final. (YouTube)
• The Science of Voodoo - How Mind Attacks Body. (New Scientist)
• Shark Tank: New Reality Show Where Entrepreneurs Pitch To VCs. (WSJ Blogs)
• Is Cloud-Computing a Myth or a Worthy Goal? (Forbes)
• New Form of Warfare? Mysterious Computer Virus Strikes FBI. (ZDNet)
• Thought Provoking Article about Author-Strategist, Jim Collins. (NYTimes)
• How IBM Plans To Win Jeopardy! With Natural-Language Processing. (Tech Review)
• More Posts with Lighter Ideas and Fun Links.

Seth Godin: Why Tribes, Not Money Or Factories, Will Change The World

Terrific video from the TED series.

Seth Godin argues the Internet has ended mass marketing and revived a human social unit from the distant past: tribes. Founded on shared ideas and values, tribes give ordinary people the power to lead and make big change. He urges us to do so.

Direct link to the Seth Godin's Tribe Talk at TED.

I'm seeing more examples of Tribes. For example, Facebook and Twitter have become an important part of my day and business process.  I am pleasantly surprised by how many people have offered ideas, opinions and insights that make a difference and move things forward.

Everything old is new again.  Welcome to the tribe.

Capitalogix Commentary 05/24/09

A good magician misdirects your focus with clever patter, distracting gestures and a pretty assistant.  Why does that remind me about the current state of market perception and the economy? 

Perhaps in part because of the rosy picture the recent rally paints, while few notice the plunge in S&P 500 earnings.  That means the great bargain you think you are buying isn't such a bargain.

Stocks Are Expensive Again.

The chart below, from Chart of the Day, illustrates how this plunge in earnings has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio).

Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1936 into the late 1980s, the PE ratio tended to peak in the low 20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s) and the dot-com bust (early 2000s).

As a result of the current plunge in earnings and the recent 2.5 month stock market rally, the PE ratio has spiked to the low 120s – a record high.

Click here for a different perspective on this chart. 

Precious Metals Are Performing Well.

At the same time, there is another trend worth watching.  Money is moving to gold.

The chart displays the relative performance of several market sectors over the past few weeks.  The chart below shows the same data, but compared to Gold as the baseline.  It highlights how dramatically the other markets have under-performed recently.

The recent financial crisis has clearly re-ignited investor interest in precious metals.  Many believe that gold and silver are good bets during tough times - and a hedge against inflation.  So it doesn't surprise me that I'm hearing more investors using Warehouse Depositary Receipts to actually take delivery of the asset rather than just speculating.

What To Expect.

A short-term bounce wouldn't surprise me here.  The markets have held-up fairly well after the big rally.  So another test higher makes sense.  However, based on the weakening internals, the intermediate-term outlook is looking more bearish to me.

Business Posts Moving the Markets that I Found Interesting This Week:

• Will the Fed's Medicine have Inflationary Side-Effects? (WSJ)
• Treasury's Next Phase Of Bank Rescue: Buying Toxic Assets. (Dealbook NYTimes)
• Two Tech IPOs This Week: Is The Dry Spell Over? (NYTimes)
• Financiers In China Are Getting Leery Of Dollars & Are Accumulating Gold. (Forbes)
• Russians Offers to Invest $200 Million in Facebook at $10 Billion valuation. (WSJ)
• Despite Russia's Struggling Economy, Its Market Surges. (NYTimes)
• Is A Low VIX Good? Not In My Experience. Who's Afraid Of the Bear? (Money)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• How Well Can You Live In India On $2 Per Day? (Slate)
• Verne Harnish Insights & Best Practices for Growing Leaders and Companies. (Blog)
• In Praise of Dullness: the CEO Traits That Most Help Them Thrive. (NYTimes)
• When Will Computer Intelligence Surpass Our Own? (NYTimes)
• IBM Unveils Software to Find Trends in Vast Data Sets. (NYTimes)
• Kindle Books Now Account for 35% of Sales When Available. (Business Insider)
• Why Predictions Based On Search Were Wrong About 'Idol' Winner. (MediaPost)
• More Posts with Lighter Ideas and Fun Links.

Happy Dance Postcards From Around The World

I found this strangely compelling and fun to watch. 

Been there, want to go there, hadn't even heard of there ... I've flown over 4 million miles, and enjoyed realizing I haven't even scratched the surface, yet.

Why watch a video of a guy doing his happy dance in various places around the world?  See for yourself. 

Here is a link to several of his videos and a link to his website.

Capitalogix Commentary 05/17/09

As expected, the Markets have hit some resistance and are losing momentum.

It will be interesting to see whether people view this as an investment opportunity ... or the beginning of the next leg down.

The "new rally" offensive sectors are now under-performing. In particular, Consumer Discretionary and Technology sectors are showing weakness. In contrast, the defensive sectors are outperforming ... with Healthcare, Utilities, and Consumer Staples showing relative strength. Energy is also outperforming the broader market.

Even though this change is relatively new, it does show a change in risk appetite. Investors and traders are turning more cautious on the market overall.

Here is a chart showing where the NYSE finds itself.

Are Small Investors Paying Attention?

Marty Chenard's StockTiming site often highlights interesting trading ideas and statistics.  The chart below is from his site, and shows how large investors and small investors reacted differently to market conditions earlier this week.

The chart shows the volume of Advancing and/or Declining shares for the New York Stock Exchange, the NASDAQ, the American Stock Exchange, and the Over The Counter Bulletin Board.  (OTC stocks are generally unlisted stocks which trade on the Over the Counter Bulletin Board (OTCBB) or on the pink sheets.)

It is easy to see that larger investors were taking profits ... while smaller investors were still buying.

That would be significant if it continues.

Business Posts Moving the Markets that I Found Interesting This Week:

• Why Economists Failed To Predict The Financial Crisis. (Wharton)
• Insider Selling: Disney Finance Chief's $1.9 Million Sale. (Barrons)
• Green Shoots Or False Hope About Economic Recovery? (FT)
• Stock-Market Sages Say Worst Is To Come. (TheStreet.com)
• How The Govt Made Economic Problems To Justify Its Solutions. (Forbes)
• Banks Pass Stress Test - Regulators Fail Ethics Test. (Hussman)
• Why Did Cash-Rich Microsoft Sell Its First Bonds? (WSJ)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Is Google Insurmountable? (WSJ Blogs)
• The Rebirth Of News: Papers Are Folding as News Flourishes On The Internet. (Economist)
• Asking A Machine To Spot Threats Human Eyes Miss. (Technology Review)
• A New Type Of War Game At West Point; Training For Cyber Foes. (NYT)
• The CIO's Dilemma: How Long Can You Do More With Less? (Forbes)
• Creative Minds - The Links Between Mental Illness And Creativity (Independent Uk)
• Vitamins Found To Curb Exercise Benefits: Are Antioxidants the Problem? (NYT)
• More Posts with Lighter Ideas and Fun Links.

Wolfram's Alpha Knowledge Engine

I use Google without thinking.  It is a habit or a reflex.  That is about to change; at least for some types of information.

They call it a "Computational Knowledge Engine" - but my tests tell me it does a lot more than what that means to me.  For example, here is a comparison of Accenture and IBM.

Here is a link to a brief demo.  Take a look ... I bet you shake your head and smile.  Progress is a beautiful thing.

It does a lot more than calculate how many days you've been alive, amortize a mortgage, or tell you the flying time from Dallas to Paris.  Apparently the folks at Wolfram have a sense of humor too.  Here are some example searches that demonstrate that:

• Where Are You?
• How much wood could a woodchuck chuck if a woodchuck could chuck wood?
• What’s the speed of an unladen swallow?
• How many roads must a man walk down before you can call him a man?

Here is a summary of some more of the hidden tidbits from Mashable.

Strangely, it doesn't know what a "computational knowledge engine" is ... I guess that makes it more human.  It is easier to know lots of stuff than to be self-aware.

Capitalogix Commentary 05/10/09

The market has been tenaciously bullish recently. Apparently it's working, because I hear an increasing amount of people optimistic about the markets.

I'm glad that our trading is based on mechanical models, because recently mechanical models have worked quite well. 

Personally, though, I'm feeling a lot more cautious.  The markets seem pathologically bullish; and I am looking for a pull-back.

What concerns me is that we haven't seen the back and forth ... two steps forward, then one step back, rhythm that I've come to trust. Instead I sense something artificial and likely to break down. For example, since this rally began in early March, there have only been four days with negative reversals greater than 1%.

Can The Economies Of This Many Countries All Get Fixed At The Same Time?

Moreover, a quick glance around the globe shows remarkably similar bullish performance in many markets.

To get a closer look for yourself, here is a link to the charts.

Other Signs That We're Approaching Over-Extended.

I'm starting to see the Smart Money lighten up their bets at the same time I'm seeing retail investors starting to get back into the game; and the VIX is at a low not seen since last September. It feels like we are getting close to the type of confidence spread that often immediately precedes a major turning point.  It is the point where the market is making higher highs, while smart traders are becoming more risk-averse. This negative divergence often perceives market pullbacks.

Again, in my opinion, a pullback from this level is expected and perhaps even healthy. What I'm looking for is to see a healthy correction and then, hopefully, organic buying from the Smart Money.

Elliott Wave Pattern.

I was talking to a friend of mine who successfully trades using Elliott Wave as a framework for understanding the market.  And I thought this might be an interesting time to re-visit this technique.

The premise is that the market doesn't affect sentiment.  Rather, it is the other way around;  collective sentiment affects the market.  And that while markets change, human nature doesn't ... consequently, predictable patterns play out over and over again.

While I now look at Elliott Wave more as a way of understanding what the market has done (rather than a great predictor of what it will do next), I do believe it is helpful in getting a sense of the next likely swing. 

Here is a chart that shows the basic sequence and an example of the sentiment causing the move.

The next chart shows that a similar sequence often happens in both directions.

All this reminded me that I have a piece of software called the Advanced GET, which uses a pretty clever algorithm for identifying some of the simpler Gann and Elliott Wave trading patterns. So I dusted-it-off, fired-it-up, and started playing around.

Looking at a weekly chart of the NASDAQ, it's very easy to envision a five wave sequence as follows.

Note that the wave five target is beneath the recent lows. And that the wave four pullback takes us back to the top of the channel ... and seems to have textbook Elliott Wave size, slope, and timing.

Again, I don't trade the Elliott Wave. Yet it fascinates me, and is something that I do pay attention to as a framework.  Add to all this that the daily chart of the NASDAQ shows that price is stalled at its 200 day moving average, and I'm certainly going to be wary of a pull-back here.

Business Posts Moving the Markets that I Found Interesting This Week:

• Is The Recession Over? (Forbes)
• Wall St Continues to Rally; S&P positive for '09. (Reuters)
• Bernanke's Outlook A Bit Brighter, But Forecasts Slow Recovery. (WP)
• The End Of The IPO Drought Is Coming. (A VC)
• Venture Capital's Dilemma: the prescription for curing IPO ills. (Forbes)
• Economic View - Depression Scares Are Hardly New. (NYT)
• Feds Bailing Out States. (TDB)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• The Science Of Concentration: Multi-Tasking Is A Myth. (NYT)
• Amazon's Secret Weapon: Recommendations Based On Your Interests. (Forbes)
• Coldplay Plagiarism Claims Filed By Three Artists (PopEater)
• Funny Video - Real Life Twitter (E-Guiders)
• Microsoft's Ozzie On Web Strategy & the Next Big Thing In Tech. (Forbes)
• Shorter URLs Provide Real Value and Make Tracking Easier (NYTimes)
• Publishers Nurture Rivals To Kindle (WSJ)
• More Posts with Lighter Ideas and Fun Links.

Some Mother's Day Thoughts

 To those of you with young children, here is a peek into your future.

After years of hard work and your best efforts (OK, mostly your best efforts) ... I predict that your adorable bundles of joy will someday wish they could send you this card.

So, take a moment to think about your Mom ... and remember that she was very young when she did those things to you ...

... and what you make them mean is up to you.

Capitalogix Commentary 05/01/09

"Sell in May and Go Away" is a popular market aphorism.  Still, the markets continue to hold up well despite less than favorable news.  Usually I consider that a bullish sign.

This chart shows that the S&P 500 Index has dropped dramatically the past two times it rose above its upper Bollinger Band line (indicating a market high), while the Bollinger Band Width was narrow (indicating low volatility).  Well that is where we are again, and with low volume as well. 

I am watching the 20 day moving average (which also serves as the recent up-move's trend line).  A break below that might trigger another big move down).

This Week's Featured Market Chart.

Many investors have looked at the early 1930s for some insight into the current economic/stock market environment. While there are significant differences in the global economy and political landscape between the current environment and that what occurred in the early 1930s, there are also many similarities (bank failures, bankruptcies, severe market declines, etc.).

For some perspective on the current stock market rally that began on March 9th, the chart below illustrates the duration (calendar days) and magnitude (percent gain) of all significant Dow rallies that occurred during the 1929-1932 bear market (solid blue dots). For example, the bear market rally that began in October 1931 lasted 35 calendar days and resulted in a gain of 35%. As this chart illustrates, the current Dow rally (hollow blue dot with the pale yellow "You are here" label) is slightly below average in both duration and magnitude relative to the average 1929-1932 bear market rally (hollow red dot, with the pale blue label).

So, as big as this rally seems ... It still might be a bear market rally.

What's Happening In the Legal Industry Says A Lot About the Market.

I used to be a lawyer, and still have a number of friends who practice law. I don't normally use law firm data as a trading indicator; but these are not normal times.  I suspect that there are a number of early indicators we can glean from watching this industry sector.

First, this weekend a bankruptcy partner in a large Dallas firm told me that he is seeing a big upswing in business. This implies a big increase in the number of bankruptcies to be filed in the coming months. I'm hearing similar things from friends around the country; that right now, the hottest section in many law firms is its bankruptcy practice.

I think that means that the economy hasn't fully digested the damage done by the economic slow-down.  Frankly, I'd be surprised if it had.

The other side of that coin is that law firms are downsizing and laying-off people because there simply isn't as much transactional work as there used to be.  The big example here is that Skadden Arps offered its associates one-third of their pay to take the year off.

At Skadden, I'm sure many of them thought, nice work if you can get it.  However, I also suspect that a lot of talent will jump ship to corporate jobs.

This might be the economic season that lawyers start to pursue other business interests.  Historically that has often been a positive mutation for businesses.  Research shows that a disproportionate number of corporate executives have legal degrees.  So, I'm looking for more lawyers to join start-ups roll-ups during the next downturn.  And I'll take that as an early indicator of recovery.

When legal transactional work starts picking-up again because of mergers and acquisitions ... I'll take that as an even better indicator that the recovery underway.

Business Posts Moving the Markets that I Found Interesting This Week:

• Stocks End Higher As Fed Sees Recession Easing. (AP)
• Only 37% of WSJ Readers Said They Think The Economy Is Improving. (Forums)
• Semiconductor Sales Fall 30%, Continuing Sharpest Downturn In Years. (WSJ)
• In Major Shift, Apple Builds Its Own Team to Design Chips. (WSJ)
• Starbucks Reports Steep Earnings Decline. (NYTimes)
• Microsoft and Verizon in Talks to Launch iPhone Rival. (WSJ)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• You Can Catch Swine Flu From Money. (SmartMoney)
• Do You Have Swine Flu? Self Diagnosis Test. (DoIHaveSwineFlu.org)
• Michael Douglas to Reprise Gordon Gecko 'Wall Street' Role in Sequel. (FoxNews)
• Research Shows People Like To Exploit The Luck Of Others. (BPS Research)
• The Reverse Black Swan. (BW)
• Money Messes With Your Mind - Is Handling Cash An Anesthetic? (NewScientist)
• More Posts with Lighter Ideas and Fun Links.

Everything You Need To Know About Swine Flu

Good news, this picture does not illustrate an effective vaccine technique.

Swine Flu is getting a lot of press. Some responses make fun of the panic.  For example, I saw a link to a test to determine if you have the disease.  Clicking the link takes you to a page that says "Panic!  You Are Infected."

Twitter is a great place to watch public emotion unfold.  Here is a comic that pokes fun at the reaction to Swine Flu.

 

Humor aside, here are some links on the subject if you are interested.

• Here is a link to the CDC's updated tally of human cases.
• Here is a graphic guide to germs and where they most likely are near you.
• Here is Organized Wisdom's Swine Flu page.
• Here is the Swine Flu global news summary page from Reuters.
  
• And, here is a FluTracker Map.