Capitalogix

Capitalogix Commentary 11/29/09

Black Friday came in several ways this year.  Yes, there was shopping.  However, the markets had a dark few days, too, as the world markets quaked at the news of Dubai's sovereign debt default.

I've always believed that you can tell a lot about the current character of the market based on how it responds to news. Sometimes markets go up on good news, and go down on bad news. That seems normal. On the other hand, I take it as a bearish sign when markets sell-off after good news. Likewise, I take it is a bullish sign when markets go up, despite bad news.

So, it wasn't surprising that markets reacted negatively to the largest sovereign debt default since Argentina. It was, however, somewhat bullish that the US equity indices went down as little as they did. Yes, I know that our markets were closed on Thursday (when most of the damage was done globally) because of our Thanksgiving holiday. And I also realized that Friday was a half day and had relatively light volume. Nonetheless, it could have been worse; much worse.

Here is a link to a post I wrote that I think is worth reading at this point in the markets. I called it "What My Dogs Can Teach Us about Markets".  It's really about how perceived danger puts us on alert; and why the second perceived danger often receives an even greater response. The point is that the world is now on alert, and I'm watching how calmly (or not) the market reacts to news.

Market Commentary.

The markets continue to hold up well on the surface.  Underneath, I'm seeing signs of weakness (poor breadth, weak up-volume, fewer new highs, more negative divergences, etc.).  Nevertheless, price has stayed above important levels.

With that said, here are some patterns worth watching.  This chart uses 15-minute bars to get an intra-day look at the S&P Mid-Cap Index throughout November. The most notable thing I see is a character change in mid-month.  The Bullish Break-Away Gaps seen at the beginning of the month are followed by two Bearish Island Reversal patterns (marked by the yellow boxes) in the second half of the month.  This type of pattern can be seen at market tops.  It starts with a gap-up (shown by the green circle) and ends with an exhaustion gap (shown by the red circle). You can click this chart to see a full-size version.

To understand what this pattern shows, you can think of it as the last buyers rushing to get in (pushing-up price so fast that it creates a break-away gap), only to find that there are no new buyers (causing a price drop and the resulting exhaustion gap).  This gap down can signal the beginning of a change in trend. Two of them in a row makes me more watchful.

David Corna reminded me that this pattern shows-up differently on a higher time-frame. For example, on a daily candlestick chart, the intra-day Island Reversal manifests as two classic reversal patterns, a Hanging Man followed by an Evening Star. Their very names are onomatopoetic to their meaning. These candlestick formations will almost always be found at the end of a trend and the beginning of a reversal.

Chart.ly from StockTwits is a Good Source of Ideas.

Many traders use charts and technical analysis to gain insight and perspective on what's happening in the markets.  I'm always looking for resources that help me do that.  Recently, I've found a lot of good content on the Chart.ly website.  It is part of StockTwits, and has a strong user community.  Here is an example of a chart I found there this week.

I like the analysis, and concur that the bottom trend-line (and the area on the far right of the chart marked by the blue circle) points to a key price area.  Staying above that is important for the rally to continue.

How bullish has the rally been in real economic terms?

What the Dow Priced in Gold Tells You?

This chart shows the Dow Jones Industrial Average priced in Gold.  In other words, how many ounces of gold does it take to buy the Dow's price?  So, for example, when the Dow is at 10,000 and Gold is $1,000 per ounce, it would take 10 ounces.

Here is a similar chart, limited to the past ten years.

As you can see, it took over 40 ounces of Gold to pay for Dow in early 2000.  It now takes around 8.75 ounces. From this perspective, it looks like the Dow lost 80% of its value. That seems significant, even though the Dow's price is back close to the levels traded in the year 2000.

I don't normally put too much stock in charts that show one asset priced in another.  If it was supposed to be priced that way, it would be ... However, this comparison seems more relevant to me because gold is a form or currency.  Also, as people decide what to invest in lost opportunity cost is a factor.

How is the Economy Doing?

Here is a chart from Russell Investments that identifies a few key economic and market indicators to help assess the current economic health and trend.  Click the chart for an interactive version.

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

• Reasons Gold Is Rallying  ... (Jesse's Café)
• A Good Old-Fashioned Panic & Not Just in Our Equity Markets. (Macro-Man)
• Stating the Obvious: Why the Stock Market Should Crash. (Of Two Minds)
• Kass: Is it Time to Anticipate a Reversal of Fortune? (TheStreet)
• NBC-Comcast Move Closer to Deal. (TDB)
• Betting on Bytes: is IT Rebound a Sign that the Economy's Improving? (Economist)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Alpha Males Must Trade on More than Machismo. (FT)
• America's Healthiest and Unhealthiest States. (MSN Health)
• In Tough Economy, Tighter Belts Mean Thicker Waists. (WSJ)
• Man in ‘Coma’ Heard Everything for 23 years. (MSNBC)
• Clicker's Online TV & Movie Guide Impresses. (Newser)
• Answers to 15 More Google Interview Questions that Will Make You Feel Stupid. (Insider)
• More Posts with Lighter Ideas and Fun Links.

A Bohemian Rhapsody in Three Parts

Compare the original to the Muppets' version and a parody. Some things are classic. Some things are good enough to stand-up no matter who performs it.  You be the judge. 

A Little Background.

"Bohemian Rhapsody" is a song written by Freddie Mercury, originally recorded by the band Queen for their 1975 album A Night at the Opera.

The song is a parody of a rock opera and has a very unusual musical structure for a piece of popular music. Its three different sections have no chorus but both a cappella and heavy metal arrangements. Despite this, it was released as a single and became a huge commercial success, marking a decisive point in Queen's career.

The single was accompanied by a groundbreaking "promotional video", which helped establish the visual language of the modern music (and helped make the music video a must have accessory for any performer).

Muppets - Video of Bohemian Rhapsody:

The Muppets have created their own version of Queen's classic song and video.  This version has very quickly gone viral, as people around the world flock to see it.

The Muppets released their version of Bohemian Rhapsody as a funny and endearing tribute marking the 18th anniversary of Freddie Mercury's untimely death. 

While there will never be another Freddy Mercury, neither will there be another Gonzo, Fozzie Bear nor Miss Piggy.  Here is their attempt at rock opera:

Bohemian Bankruptcy - A Tragedy by Drag Queen.

This, completely different, take on the classic is a witty parody of our economic times.

The Original: I Saved the Best for Last.

Here is the original.  After all this time, it still speaks for itself.

Here is a link to that video with the lyrics superimposed.

Capitalogix Commentary 11/22/09

Obama's China Visit.

President Obama asked for patience about the economy.  Nonetheless, a Gallup poll showed his job approval rating had dropped to 49 percent, the first time he has fallen below 50 percent in this survey, as Americans express dissatisfaction with his handling of the economy and other issues.

Unfortunately for him (and us) that wasn't the only voice of dissatisfaction he's heard lately.

Also, here is a skit from Saturday Night Live.  Like most good humor, it is funny because of how much is true.  I'm not posting it for partisan reasons ... rather, it made me laugh.  Hope you enjoy it too.

Market Commentary: Spotting an Island Reveal Pattern.

In general, the markets held-up again this week.  As I scan the charts, there is little new or opinion-changing information.  However, I spotted an Island Reversal pattern on an intra-day chart of the S&P 500.  This is often seen at market tops.  It starts with a break-away gap (shown by the green circle) and ends with an exhaustion gap (shown by the red circle and the big red arrow). 

To understand this pattern, you can think of it as the last buyers rushing to get in (pushing-up price so fast that it creates a break-away gap), only to find that there are no new buyers (causing a price drop and the resulting exhaustion gap).  This gap down can signal the beginning of a change in trend. 

In this particular case, we are coming into a holiday-shortened week (often characterized by light trading).  So I'm not expecting anything dramatic.  Still, it seems worth watching to see if the market trades back up above the exhaustion gap.

Something Changed: Small Caps and Techs are Not Leading The Way.

Here is something else that caught my eye.  The chart below shows that the Russell 2000 Index (shown in green below) has led the way throughout the recent rally.  The S&P 500 Index (shown in red below), represents the broader market.  While the Dow Jones Industrial Average (shown in blue below) lagged.  You can click the chart image below to launch an interactive version on Stockcharts.com.  This chart shows the relative performance of these indices during the past year.  You can adjust the date range by dragging the date bar at the bottom.

The next chart shows the same information, except limited to the past month.  Notice that the relative performance of these indices has reversed. 

I'm watching this rotation to see if small caps recover or continue to show weakness.  They could be the canary in the coal-mine for a bigger correction.

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

• Fed Eyes Dollar Drop, But Clings to Low-Rate Pledge. (FluentNews)
• Goldman Outlines Fed’s New Dashboard Indicators. (WSJ)
• Buffett Says His Businesses Have Bottomed (Reuters)
• Memo to Buffett: Put Down the Pom-Poms & Tell Us the Truth. (HuffingtonPost)
• New Market Bubble is Brewing: It's Déja Vu All Over Again. (Newsweek)
• While U.S. Economy Struggles, China's Rises. (NPR)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Is Too Much Science Thwarting American Innovation? (FastCompany)
• 15 Google Interview Questions. Answers at the End. (BusinessInsider)
• How Ritz-Carlton Stays At The Top.  Interesting. (Forbes)
• Twitter: People Tweet 27 Million Times a Day. (HuffingtonPost)
• Let Them Eat Dog. (WSJ)
• Forbes Blog Post on How Leaders Balance Urgency & Patience. (Forbes)
• More Posts with Lighter Ideas and Fun Links.

A Matter of Perspective

What could turn this boy, who I happily go to Cowboys games with ...

... Into this boy?

When it happened, I posted this comment on Twitter: "My high-school age son came home today as a Platinum Blond. Hooray ... it makes guessing 'What's Next' so much more fun." 

The responses were clever.  One guy said: "Grounding is next, I expect."  Someone else thought providing a little contrast would help. They said: "Here's what could be next ... Well, hope not ... but you never know".  Click this link to see what they were referring to.

As it turns out, his blondness was something many football players did to celebrate their team making the play-offs and getting to play at the new Cowboys' Stadium.

Somehow (in this context) he looks better to me already ... But he doesn't have my burst of slowness, yet.

The point is that many things we initially perceive one way, may turn out to be something quite different all-together.

Here is a Story to Illustrate This Better ... And to Make it Stick.

This is another one of those stories I get, in different forms, from time-to-time.

It is called "Who Knows?" And sometimes it is told as an old story from China, while other times it is set during the American Civil War.

Nevertheless, "Who Knows?" is one of those  "sticky" stories that people like to re-shape and re-tell.  So, with no further ado, here it is for you to read for yourself.

Who Knows?

A farmer's horse ran away one day and all the villagers came to him saying, Oh what bad luck you've had! Your horse that you need to do your work is gone!

The farmer shrugged his shoulders and said, Good luck, bad luck. Who knows?

Several days later, the farmer's horse returned, followed by a herd of wild horses!

Oh what good luck you have, cried the same villagers! Not only has your horse returned, he has brought you many horses!

The farmer again shrugged his shoulders and said, Good luck, bad luck. Who knows?

One day not long after, the farmer's son was trying to break one of the wild horses. He was thrown off the horse and broke his leg.

Oh what bad luck you have! Cried the villagers. Now your son has a broken leg. Who will help you?

The farmer shrugged his shoulders and said, Good luck, bad luck. Who knows?

Not long after, as the son was recuperating, an army came through the village and took all the young males to fight in a war in another region. They did not take the farmer's son because of his broken leg.

Oh what good luck you have! The villagers cried once again. Your son has been spared being taken off to war because of his broken leg!

The farmer shrugged his shoulders and said, Good luck, bad luck. Who knows?

We Don't Know ... Yet.

This is a great story to remember when you're projecting far beyond the present moment ... or even when you're just worrying about what will happen next?

The things we think are good fortune can often have bad endings; and vice-versa. How many times have you looked back on what seemed like bad luck, when it happened, but later realized that it was the start of something better?

Made to Stick: 

This story reminded me of the book by Chip and Dan Heath, called Made to Stick: Why Some Ideas Survive and Others Die.  It is a fascinating explanation about what makes an idea memorable or interesting.

The premise is that you should focus on the six things that make ideas stick – which they summed up in the mnemonic "SUCCES" (yes, I know that success has two "s"s at the end ... I didn't make up the acronym).  Here is what that represents:

• Simple — find the core of any idea;
• Unexpected — grab people's attention by surprising them;
• Concrete — make sure an idea can be grasped and remembered later;
• Credibility — give an idea believability;
• Emotion — help people see the importance of an idea;
• Stories — empower people to use an idea through narrative.

Other Resources:

• Link to the Book: Made to Stick: Why Some Ideas Survive and Others Die
• Link to the Heath Brothers' Made to Stick Website
• Link to Videos about Made to Stick.

A Lesson Learned About the Time-Value of Living

This weekend marked 10 years since my dad passed away.

It's amazing to me how fast time flies, and yet how important he still is in my life. Rather than mourn his death, I celebrate what a great job he did living.

One of the things his passing taught me was the "time-value of life".

At the end, to him, one more year of living seemed priceless. Yet at that point, he was older and more infirm than at any other point in his life.

Wouldn't it be better to recognize the importance of living fully, earlier?

In other words, the best way to capture and leverage the value of this year is to live it fully now.

Wouldn't now be a good time to start?

Capitalogix Commentary 11/15/09

What do you think is the most bullish indicator of our markets?  It's not a trick question; the answer is "price".

The markets have held-up nicely, throughout this rally, despite lots of bad news about the economy. And that, in-and-of-itself, is bullish.

It doesn't matter what technical analysis indicator you use (increasing negative divergences and selling on down days ... or less positive momentum and market breadth), the markets have given us a clear message recently. Price is the primary indicator, and it has stayed above support. 

For example, here is a daily chart of the Russell 2000 Small-Cap Index.  It is holding its gains; yet, sitting at a decision point. 

Last week I posted a chart showing the Elliott Wave count of this index.  Nothing in this chart changes that analysis.

We can't abandon the discipline of looking to technical analysis, just because early indicators haven't tipped us off to the end of rally, yet.  All that means is that the rally hasn't ended, yet.

The trading action during rallies is often characterized as "climbing a wall of worry".  So, how long can this rally last?  The next section suggests that a rally can last a lot longer than this one has, so far.

How Does This Rally Compare With Historical Rallies?

The Dow made another rally high this week, as it moved further above the 10,000 level.

To provide some perspective to the current Dow rally that began back in March, all major market rallies of the last 109 years are plotted on the following chart from Chart of the Day.

• Each dot represents a major stock market rally as measured by the Dow.
• The Dow has begun a major rally 27 times over the past 109 years,
  which equates to an average of one rally every four years.
• Also, most major rallies (73%) resulted in a gain of between 30% and 150% (29.8% to 150.5% to be exact) and lasted between 200 and 800 trading days (9.5 months to 3.2 years).
• These "typical rallies" are highlighted in the blue-shaded box.

As it stands right now, the current Dow rally (noted with the yellow highlight) would be classified as both short in duration and below average in magnitude.

On a different, but related, topic ... I think it's time to pay some attention to what's happening to the U.S. Dollar.

What Happened to the U.S. Dollar - Or ... Why Is Everything Else Going Up?

Here is a Performance Chart showing how the major world currencies have performed since last March.  This chart made me think of the Sesame Street song "One of These Things is Not Like the Others". Notice that all the currencies, except the U.S. Dollar, are up since then.

To me, this implies that the government made a decision near the March lows. Here is a link to an insightful post on why you should care about the strength of the dollar.  In general, there is a strong inverse relationship between the strength of the U.S. Dollar and the strength of the U.S. Stock prices.  Here is a chart showing what that looks like.

At some point, the economy will be more important than the market.  To that end, U.S. Treasury Secretary Timothy Geithner said a strong dollar is in the nation’s interest; and that the government recognizes the importance it plays to the economic health of the United States and the global financial system.  We'll see.

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

• Cisco's Profit Falls 19% - Shares Rise Anyway. (WSJ)
• Roubini: Bernanke Can Avoid A Crisis by ... Actually He Can't. (BusinessInsider)
• Congressman Ron Paul Says Be Prepared for the Worst. (Forbes)
• Fed Sees No Need to Raise Rates Soon. (NYTimes)
• Buffett's Unusual Train of Thought on Burlington Northern. (WSJ)
• A VC Win: Greylock Partners Raised a $575MM new fund in six weeks. (WSJ)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Moon Crash - While Public Yawns, Scientists Celebrate. (PhysOrg)
• Manhattan Providing Incubator Office Space for Businesses to Grow. (NYTimes)
• Learning in the Womb: Newborn Babies Cry in Native Tongue. (LiveScience)
• Hands-Free Parallel Parking in Your Next Car. (WSJ)
• Does Being Sad, or Complaining, Make You Smarter? (MarginalRevolution)
• Brain Scanners Can Tell What You're Thinking About. (NewScientist)
• More Posts with Lighter Ideas and Fun Links.

Review of Alphatrends' Book on Technical Analysis Using Multiple Time Frames

This is one of the few books that I recommend to traders regardless of their expertise. There's something valuable in here for novice traders, and perhaps even more for experienced traders.

The book was written by Brian Shannon. He is a professional trader; and he has developed quite a following on Twitter under the name "AlphaTrends".

Over the years, I've read many books about trading, the markets, and psychology. This book is a very nice combination of those topics, with some common sense thrown in for good measure.

What is in the Book?

The book starts by explaining some basic technical analysis concepts, like trends, moving averages, and support & resistance levels.  Next, Shannon explores some of the common volume and market patterns (dealing with what to expect, and why it happens that way).

He also talks about the four stages of a stock's economic cycle. Whether you call it expansion, peak, decline, and recovery ... or ... accumulation, mark-up, distribution, and decline ... these four stages show-up repeatedly, in different stocks and on different time frames. Recognizing these cycles, and what they mean, is a good step forward in understanding the markets and which techniques are most likely to work in a particular market condition.

The Disciplined Trader.

Along the way, he also does a nice job pointing out some of the nuances of trading, from risk management to exit strategies.  This is a book that balances opportunity with defense and discipline. 

I appreciate that the book focuses on the risk management side of trading, and doesn't pretend that there are magic indicators or trading systems. He stresses that risk management and position sizing are more important than what you choose to trade.

More Than Patterns: The Entry and Exit Matter Too.

Shannon states that his edge is based on observing the market clearly and objectively, then implementing trades based on what the market dictates. He teaches to initiate a trade only when you have a perceived edge and the price action confirms your theories.

He warns that the most difficult job on Wall Street is picking tops and bottoms.  There are lots of lower risk ways to trade.  For example, while trend following is one of the techniques he advocates, he explains how using multiple time frames helps you identify trend alignment, which you can then use to help place trades during situations where you have a better edge.

Common Sense Insights About the Markets Isn't as Common You Might Hope.

As Shannon describes the different patterns, he does a nice job of providing charts and narrative to explain what's happening, what some buyers might be thinking, and why he takes (or avoids) trades at different points in time.

He cautions that the market is not always rational and "reasons" are often revealed only after price has moved.

I like that reading this book feels like you're having a conversation with someone who really knows what they're talking about.  And as you get further through the conversation, you realize that you're making progress, learning new things, making new distinctions, and putting things together in a way you hadn't thought of before.

This book doesn't talk down to readers; yet, it doesn't try to dazzle them either. It's well-written, balanced, and full of practical ideas and insights.

Bottom Line, it's certainly worth reading.

In addition, click the picture below to watch a recent video he did about what's happening in the market.  It is a nice example of his trading style.

Other Resources:

• Here is a link to the website for his book.
• Here is a link to his StockTwits blog.
• Here is a link to a collection of charts he posts.
• Here is a link to a video he did for the CBOE this month.
• Here is a link to a video about his experience and techniques.

This Video Made Me Smile

Watch a soldier being greeted by his dogs after returning home after 14 months in Iraq.  I suspect even cat people will be touched by this.

I learned something from the dogs, and the man.  Hope you enjoy it too.
 

Jump Point: How Network Culture is Revolutionizing Business

This is a compelling book.  The title refers to a change in the environment, so startling that we have no choice but to re-group and re-think the future.

When it happens, everything changes and the old trusted rules of the road to go out the window.

The book hype says: The Web 3.0 world of “pandemic economics” is a new economy that will function outside the traditional laws of commerce, free from today's impediments to business growth, and in a world where every person is connected to each other. Jump Point will help you to challenge old assumptions, re-think your business models, and take advantage of this fast-moving, unfettered, and fiercely competitive environment.

When Does It Happen?

The economic history of the world is punctuated by Jump Points. The tricky part has been identifying them at the right time.

Very often, we mistake the arrival of a stunning new invention for the Jump Point.  It is easy to get mesmerized by a new innovation, and to think the world has changed the day a new technology leaves the lab. But that is rarely, if ever, the case. That is not the Jump Point.

Instead, technology revolution is a fitful process. New technologies take time to be absorbed, diffused and adopted. We are a curious species; it is human nature to tinker, and experiment, test, and play. And most inventions improve with application, adoption, and time. Therefore, most Jump Points occur well after the enthusiasm settles and the parade has passed.

Real Jump Points most often arrive after we grow complacent about that invention, when the technology becomes routine and unremarkable, after the novelty has worn off and the technology has gone mainstream. It is then that rapid change finally happens.  Interesting.

Jump Point: How Network Culture is Revolutionizing Business

The Rules Are Changing

Goldman Sachs lost money trading only one day last quarter, and only two days the prior quarter.

Come on, how could that be? Their boss does say that banks "Do God's work."  I'm not sure that is a sufficient explanation.  When a firm's trading performance challenges not only all preconceptions of realistic trading, but also of statistical distributions, it's worth looking into.

Here's what ZeroHedge has to say about it.  Here is a chart that demonstrates Goldman's YTD trading track record: out of 194 trading days in 2009, the firm has made over $100 million on 116 occasions! This alone accounts for at least $11.6 billion in revenue (and is likely much more).

Yves Smith, at Naked Capitalism, adds: maybe I am just hopelessly out of touch, or perhaps more accurately, the Fed has created such a ridiculously favorable environment for banks and traders that if you are moderately competent, making money is like shooting fish in a barrel. But a winning streak this consistent looks like a rigged game. Is this just, ahem, “information advantages”? Greater ease in pushing markets around that have fewer players? Just a function of those monstrously wide bid-asked spreads? I’m curious for a sanity check from people closer to the action.

The party line comes in the Financial Times:

The performance – revealed on Wednesday in a regulatory filing – compares with two losing trading days in the previous quarter and confirms that the authorities’ drive to revive markets after the crisis is yielding huge windfalls for some banks.

Before the crisis, banks regularly recorded trading losses on several days in a quarter.

Goldman made more than $100m in profits on 36 of the 65 days in the three months to September and recorded more than $50m in profit on more than eight out of 10 trading days, the filing shows.

These figures were down from the second quarter, when Goldman reported record trading revenues and had 46 days with $100m-plus in profits. The smaller number of days with $100m-plus profits in the third quarter partly reflects the bank’s decision to rein in risk-taking in areas such as interest rates and equities.

There is a suggestion here that banks like Goldman might be taking advantage of the Fed and Treasury (although that might be by design, yet another hidden subsidy).

Let me know what you think about this.

Here is a how there stock is doing.

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Click here to download Flash Player now

View the full NYSE:GS chart at Wikinvest

Here is a link to a prior Goldman Sachs article worth checking-out.