Thoughts about the markets, automated trading algorithms, artificial intelligence, and lots of other stuff

  • Capitalogix Commentary 10/25/10 – Don’t Fight the Fed

    Barry Ritholz had a great quote this week.

    "If your job is to identify opportunities and risks in the market, you have to recognize that when the Fed is pouring fuel on the fire, when they send their minions out to discuss the Greenspan put, some people rush for the fire hoses … but my job is to go grab some marshmallows and sticks and head over to the Boy Scout jamboree campfire.  If your job is a policy analyst, well that’s a different situation. But if you’re an asset manager, you can’t fight the tape constantly. You have to recognize when massive Federal Reserve liquidity is going to goose the market. But I’m not going to argue with people who say this ends badly. Hey, every bull market eventually ends badly. You know, I can’t tell you if it’s a 25% correction or down 1,000 [points]. But you know what? You’ll have plenty of time to make that decision. Right now, as long as they are giving us an opportunity to make some hay, you have to participate while the sun is shining."

    Dow Stalls With High Volume Near April High.

    With a surge from 10,000 to 11,200, the Dow Jones Industrial Average is trading near its April highs and close to a 52-week high. However, it has started to stall with high volume. The chart shows the Dow battling the 11100 area with above average volume the last seven days. Arthur Hill notes that the trend since late August is still up.  Nonetheless, a high volume stall could give way to a short-term reversal that starts a correction. High volume is often present at or near inflection points.

     

    101024 Turning Points Often Marked By Big Volume
    The yellow areas on the chart show volume surges that occurred at turning points.

    For now, the Dow has yet to show any signs of weakness on the price chart. The Average established support at 10,900 with two lows over the last few weeks. This support level looks similar to the April support level. Notice how the April support break provided a clear signal. The bulls are in good shape as long as current support holds. A move below 10900 would argue for a correction that would be expected to retrace a portion of the prior advance.

    Are there any other clues we can watch?

    How Does the Dollar Affect the Dow?

    Looking at the charts below, it is easy to see that there is a strong inverse correlation between the U.S. Dollar and the Dow. According to TSP Talk, this is not always the case … but when it is, it does assist us to predict direction changes.

    101024 Dow and the Dollar
    The upcoming quantitative easing (QE2) by the Fed could be seen as a catalyst for the dollar's decline, as more money being pumped into the system means a weaker dollar. If QE2 is priced-in to the market already, then we could have a “buy the news” reaction in the dollar, which in turn would likely hurt the stock market.  In the mean time, the trend is clear.

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

    Lighter Ideas and Fun Links that I Found Interesting This Week

    • Sun Tzu: The Best Leadership Teacher Of All Time?  (Forbes)
    • Coffee May Combat High Blood Pressure. (WebMD)
    • 10 Most Expensive Zip Codes: Monocles & Top-Hats Not Included. (Advisor)
    • Should You Nap at Work If You Really Need One?  (Newser)
    • Obama Booked to Appear on Jon Stewart's 'Daily Show' & Mythbusters. (EW)
    • More Posts with Lighter Ideas and Fun Links.
    Related articles
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  • Capitalogix Commentary 10/25/10 – Don’t Fight the Fed

    Barry Ritholz had a great quote this week.

    "If your job is to identify opportunities and risks in the market, you have to recognize that when the Fed is pouring fuel on the fire, when they send their minions out to discuss the Greenspan put, some people rush for the fire hoses … but my job is to go grab some marshmallows and sticks and head over to the Boy Scout jamboree campfire.  If your job is a policy analyst, well that’s a different situation. But if you’re an asset manager, you can’t fight the tape constantly. You have to recognize when massive Federal Reserve liquidity is going to goose the market. But I’m not going to argue with people who say this ends badly. Hey, every bull market eventually ends badly. You know, I can’t tell you if it’s a 25% correction or down 1,000 [points]. But you know what? You’ll have plenty of time to make that decision. Right now, as long as they are giving us an opportunity to make some hay, you have to participate while the sun is shining."

    Dow Stalls With High Volume Near April High.

    With a surge from 10,000 to 11,200, the Dow Jones Industrial Average is trading near its April highs and close to a 52-week high. However, it has started to stall with high volume. The chart shows the Dow battling the 11100 area with above average volume the last seven days. Arthur Hill notes that the trend since late August is still up.  Nonetheless, a high volume stall could give way to a short-term reversal that starts a correction. High volume is often present at or near inflection points.

     

    101024 Turning Points Often Marked By Big Volume
    The yellow areas on the chart show volume surges that occurred at turning points.

    For now, the Dow has yet to show any signs of weakness on the price chart. The Average established support at 10,900 with two lows over the last few weeks. This support level looks similar to the April support level. Notice how the April support break provided a clear signal. The bulls are in good shape as long as current support holds. A move below 10900 would argue for a correction that would be expected to retrace a portion of the prior advance.

    Are there any other clues we can watch?

    How Does the Dollar Affect the Dow?

    Looking at the charts below, it is easy to see that there is a strong inverse correlation between the U.S. Dollar and the Dow. According to TSP Talk, this is not always the case … but when it is, it does assist us to predict direction changes.

    101024 Dow and the Dollar
    The upcoming quantitative easing (QE2) by the Fed could be seen as a catalyst for the dollar's decline, as more money being pumped into the system means a weaker dollar. If QE2 is priced-in to the market already, then we could have a “buy the news” reaction in the dollar, which in turn would likely hurt the stock market.  In the mean time, the trend is clear.

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

    Lighter Ideas and Fun Links that I Found Interesting This Week

    • Sun Tzu: The Best Leadership Teacher Of All Time?  (Forbes)
    • Coffee May Combat High Blood Pressure. (WebMD)
    • 10 Most Expensive Zip Codes: Monocles & Top-Hats Not Included. (Advisor)
    • Should You Nap at Work If You Really Need One?  (Newser)
    • Obama Booked to Appear on Jon Stewart's 'Daily Show' & Mythbusters. (EW)
    • More Posts with Lighter Ideas and Fun Links.
    Related articles
    Enhanced by Zemanta

  • Global M&A Deal Activity Has Increased 38 Percent This Year

    101018 Deal-Flow-Indicator The Q3 2010 IntraLinks Deal Flow Indicator™ (DFI) was just released and reports a 38 percent increase in global M&A deal activity in Q3 2010 versus Q3 2009. In the last quarter, deal activity is up nine percent compared to Q2 2010, a 68 percent increase from the Q1 2009 low.

    Results show six straight quarters of growth in M&A deal volume, with a 68 percent increase from Q1 2009

    The overall positive trends are consistent with the following factors in the marketplace:

    • General improvement and stability in the market
    • Impending tax environment changes and stockpiles of committed capital have provided the return of private equity buyers and sellers
    • Reduced strategic buyer fear of “double dip” recession resulting in more exploration of opportunities to supplement slow organic growth prospects and enter new markets.

    Here is a chart.

    101018 Deal-Flow-Indicator Chart
    Read the Q3 2010 IntraLinks Deal Flow Indicator at www.intralinks.com/dealflow.

    Related articles
    Enhanced by Zemanta

  • Global M&A Deal Activity Has Increased 38 Percent This Year

    101018 Deal-Flow-Indicator The Q3 2010 IntraLinks Deal Flow Indicator™ (DFI) was just released and reports a 38 percent increase in global M&A deal activity in Q3 2010 versus Q3 2009. In the last quarter, deal activity is up nine percent compared to Q2 2010, a 68 percent increase from the Q1 2009 low.

    Results show six straight quarters of growth in M&A deal volume, with a 68 percent increase from Q1 2009

    The overall positive trends are consistent with the following factors in the marketplace:

    • General improvement and stability in the market
    • Impending tax environment changes and stockpiles of committed capital have provided the return of private equity buyers and sellers
    • Reduced strategic buyer fear of “double dip” recession resulting in more exploration of opportunities to supplement slow organic growth prospects and enter new markets.

    Here is a chart.

    101018 Deal-Flow-Indicator Chart
    Read the Q3 2010 IntraLinks Deal Flow Indicator at www.intralinks.com/dealflow.

    Related articles
    Enhanced by Zemanta

  • Awareness Test Video – Your Attention Span Is Smaller Than You Think

    You look, but do you see?

    Daniel Simons' experiments on visual awareness have become famous.  The primary conclusion drawn from his research is that we can miss incredibly obvious things, right in front of us, if our attention is focused elsewhere.

    Test Your Awareness.

    Watch this video and count how many passes the team in white makes. 

    This is worth doing so you experience it yourself.

    Try to ignore the black team.  Just focus on the white team, and see if you can accurately count how many times they pass the ball. 

    OK, click the video to do it now.


     

    Did you get the right answer?  Even though I knew what to expect, the result or effect was surprising.

    By the way, there is a newer version of this video, here.

    Think how often your focus blinds you to the obvious.

    Change Blindness.

    Missing an invisible gorilla or a moon-walking bear may seem strange.  However, the next experiment may be more surprising.

    This video demonstrates "change blindness".  In an experiment, 75% of the participants didn't notice that the experimenter who bent under a counter was replaced by a different person.


     

    If you liked that, here is a version done by Derrin Brown. It is quite clever and worth watching. It was even more surprising to me because it was done in public with "real people".   How did people not notice a white male switching with a black guy (or an asian female) in the middle of a conversation?

    Warning: Objects In Your Attention Span Are Fewer Than You Perceive.

    101022 Invisible GorillaMoment by moment, the brain selectively processes information it deems most relevant. Experiments, like these, show the limits of our capacity to encode, retain, and compare visual information from one glance to the next. 

    More importantly, this suggests that our awareness of our visual surroundings is far more sparse than most people intuitively believe.  Consequently, our intuition can deceive us far more often than we perceive.

    Clearly, in an information-rich environment, attention is a scarce and essential resource. So, pay attention (or automate the things you know need to be done right, every time).

    Related Resources.

    Related articles
    Enhanced by Zemanta

  • Awareness Test Video – Your Attention Span Is Smaller Than You Think

    You look, but do you see?

    Daniel Simons' experiments on visual awareness have become famous.  The primary conclusion drawn from his research is that we can miss incredibly obvious things, right in front of us, if our attention is focused elsewhere.

    Test Your Awareness.

    Watch this video and count how many passes the team in white makes. 

    This is worth doing so you experience it yourself.

    Try to ignore the black team.  Just focus on the white team, and see if you can accurately count how many times they pass the ball. 

    OK, click the video to do it now.


     

    Did you get the right answer?  Even though I knew what to expect, the result or effect was surprising.

    By the way, there is a newer version of this video, here.

    Think how often your focus blinds you to the obvious.

    Change Blindness.

    Missing an invisible gorilla or a moon-walking bear may seem strange.  However, the next experiment may be more surprising.

    This video demonstrates "change blindness".  In an experiment, 75% of the participants didn't notice that the experimenter who bent under a counter was replaced by a different person.


     

    If you liked that, here is a version done by Derrin Brown. It is quite clever and worth watching. It was even more surprising to me because it was done in public with "real people".   How did people not notice a white male switching with a black guy (or an asian female) in the middle of a conversation?

    Warning: Objects In Your Attention Span Are Fewer Than You Perceive.

    101022 Invisible GorillaMoment by moment, the brain selectively processes information it deems most relevant. Experiments, like these, show the limits of our capacity to encode, retain, and compare visual information from one glance to the next. 

    More importantly, this suggests that our awareness of our visual surroundings is far more sparse than most people intuitively believe.  Consequently, our intuition can deceive us far more often than we perceive.

    Clearly, in an information-rich environment, attention is a scarce and essential resource. So, pay attention (or automate the things you know need to be done right, every time).

    Related Resources.

    Related articles
    Enhanced by Zemanta

  • Capitalogix Commentary 10/18/10 – Are Expectations Priced In Yet

    Well, it is possible to dig out of a big hole.

    101016 Rescue Team Cartoon - Parker
    Bernanke Outlines 'Case for Further Action' to Spur Economy Forward.

    Fed Chair Ben Bernanke has some ideas about pumping more money into the flagging recovery to get us out of a different kind of hole.  In talks last week, he clearly presents the case for more action.

    • He predicts a weak recovery and continued high unemployment.
    • Bernanke talks about a mandate-consistent 2% inflation rate — further emphasizing this idea that the Fed will aggressively target positive inflation.
    Barry Ritholz posted a word cloud of the speech.  It speaks for itself.

    101016 Bernanke-speech
    You can read Bernanke's whole speech here.

    According to the WSJ, the Fed sent an even clearer message in its written remarks.  How? Bernanke used italics only four times in the report.  Do those four instances constitute a 'font of wisdom' message from the Fed chairman. Let's look at the message.

    First, Mr. Bernanke said the Fed takes its cues from two primary objectives: the "longer-run sustainable rate of unemployment" and the "mandate-consistent inflation rate." He later made clear what the Fed thinks about both right now: Inflation is "too low" and unemployment "too high."

    That makes further Quantitative Easing pretty much a given, to the relief of investors who have already priced it in with a 12% surge in the S&P 500 since late August.
    However, some commentators (like David Rosenberg) are skeptical about how much of the gain is priced-in already.  His message: Sell the news, Quantitative Easing will do more harm than good.

    Market Commentary

    Even though stocks are overextended after a seven week run, I have not yet seen compelling evidence of weakness that would signal the start of a correction or pullback.

    Nonetheless, I'm watching a few things closely.  For example, we are seeing some negative divergences in the banking and financial sectors.  They have not enjoyed the same success as the rest of the market over the last several weeks, and this may be telling us something.

    101016 Banking Index Under-Performing the Nasdaq

    On the other hand, the Nasdaq 100 Index (comprised of the large capitalization tech stocks) is leading the move higher. The recent strength in this index not only made a new 52-week high last week, it also hit levels not seen since late 2007.  Should the S&P 500 Index follow this leader, the short-term future looks good.

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

    Lighter Ideas and Fun Links that I Found Interesting This Week

    Related articles
    Enhanced by Zemanta

  • Capitalogix Commentary 10/18/10 – Are Expectations Priced In Yet

    Well, it is possible to dig out of a big hole.

    101016 Rescue Team Cartoon - Parker
    Bernanke Outlines 'Case for Further Action' to Spur Economy Forward.

    Fed Chair Ben Bernanke has some ideas about pumping more money into the flagging recovery to get us out of a different kind of hole.  In talks last week, he clearly presents the case for more action.

    • He predicts a weak recovery and continued high unemployment.
    • Bernanke talks about a mandate-consistent 2% inflation rate — further emphasizing this idea that the Fed will aggressively target positive inflation.
    Barry Ritholz posted a word cloud of the speech.  It speaks for itself.

    101016 Bernanke-speech
    You can read Bernanke's whole speech here.

    According to the WSJ, the Fed sent an even clearer message in its written remarks.  How? Bernanke used italics only four times in the report.  Do those four instances constitute a 'font of wisdom' message from the Fed chairman. Let's look at the message.

    First, Mr. Bernanke said the Fed takes its cues from two primary objectives: the "longer-run sustainable rate of unemployment" and the "mandate-consistent inflation rate." He later made clear what the Fed thinks about both right now: Inflation is "too low" and unemployment "too high."

    That makes further Quantitative Easing pretty much a given, to the relief of investors who have already priced it in with a 12% surge in the S&P 500 since late August.
    However, some commentators (like David Rosenberg) are skeptical about how much of the gain is priced-in already.  His message: Sell the news, Quantitative Easing will do more harm than good.

    Market Commentary

    Even though stocks are overextended after a seven week run, I have not yet seen compelling evidence of weakness that would signal the start of a correction or pullback.

    Nonetheless, I'm watching a few things closely.  For example, we are seeing some negative divergences in the banking and financial sectors.  They have not enjoyed the same success as the rest of the market over the last several weeks, and this may be telling us something.

    101016 Banking Index Under-Performing the Nasdaq

    On the other hand, the Nasdaq 100 Index (comprised of the large capitalization tech stocks) is leading the move higher. The recent strength in this index not only made a new 52-week high last week, it also hit levels not seen since late 2007.  Should the S&P 500 Index follow this leader, the short-term future looks good.

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

    Lighter Ideas and Fun Links that I Found Interesting This Week

    Related articles
    Enhanced by Zemanta

  • The Big Mac Index – A Feast of Burgernomics

    Bigger Big MacImage by Simon Miller via Flickr

    The Economist's Big Mac index seeks to make exchange-rate theory more digestible.  They say it is arguably the world's most accurate financial indicator to be based on a fast-food item.

    The Big Mac index is based on the theory of purchasing-power parity (PPP), according to which exchange rates should adjust to equalize the price of a basket of goods and services around the world. For them, the basket is a burger … a McDonald’s Big Mac.

    According to this measure, the most undervalued currency is the Chinese yuan, at 40% below its PPP rate.  In China, a McDonald’s Big Mac costs just 14.5 yuan on average, the equivalent of $2.18 at market exchange rates. In America, the same burger averages $3.71.

    The tensions caused by currency misalignments prompted Brazil’s finance minister to complain last month that his country was a potential casualty of a “currency war”. The Swiss, who avoid most wars, are in the thick of this one. Their franc is the most expensive currency on our list.

    The table below shows by how much, in Big Mac PPP terms, selected currencies were over- or undervalued.

    101016 Big Mac Index

    The index is supposed to give a guide to the direction in which currencies should, in theory, head in the long run. It is only a rough guide, because its price reflects non-tradable elements ­such as rent and labor. For that reason, it is probably least rough when comparing countries at roughly the same stage of development.

    Which Currencies Are Beating-Up On the Dollar?

    You know the dollar has been in freefall since the middle of the summer. BusinessInsider posted a chart, from Morgan Stanley, showing which currencies have appreciated the most since then.

    The big winner? The Swedish Krona. Note that the much-hyped yen is just in the middle of the pack.

    101016 Which Currencies Are Beating-Up On the Dollar

    Related articles
    Enhanced by Zemanta

  • The Big Mac Index – A Feast of Burgernomics

    Bigger Big MacImage by Simon Miller via Flickr

    The Economist's Big Mac index seeks to make exchange-rate theory more digestible.  They say it is arguably the world's most accurate financial indicator to be based on a fast-food item.

    The Big Mac index is based on the theory of purchasing-power parity (PPP), according to which exchange rates should adjust to equalize the price of a basket of goods and services around the world. For them, the basket is a burger … a McDonald’s Big Mac.

    According to this measure, the most undervalued currency is the Chinese yuan, at 40% below its PPP rate.  In China, a McDonald’s Big Mac costs just 14.5 yuan on average, the equivalent of $2.18 at market exchange rates. In America, the same burger averages $3.71.

    The tensions caused by currency misalignments prompted Brazil’s finance minister to complain last month that his country was a potential casualty of a “currency war”. The Swiss, who avoid most wars, are in the thick of this one. Their franc is the most expensive currency on our list.

    The table below shows by how much, in Big Mac PPP terms, selected currencies were over- or undervalued.

    101016 Big Mac Index

    The index is supposed to give a guide to the direction in which currencies should, in theory, head in the long run. It is only a rough guide, because its price reflects non-tradable elements ­such as rent and labor. For that reason, it is probably least rough when comparing countries at roughly the same stage of development.

    Which Currencies Are Beating-Up On the Dollar?

    You know the dollar has been in freefall since the middle of the summer. BusinessInsider posted a chart, from Morgan Stanley, showing which currencies have appreciated the most since then.

    The big winner? The Swedish Krona. Note that the much-hyped yen is just in the middle of the pack.

    101016 Which Currencies Are Beating-Up On the Dollar

    Related articles
    Enhanced by Zemanta