August 2009

The market is strong right now.  How do I know?  Aside from the near-audible moan of bears, Price going up is a pretty good primary indicator. 

Kidding aside, other indicators are worth looking at here too.  One of them is the NYSE High-Low line. 

The following chart shows this market breadth indicator.  It is calculated at the end of each day by taking the number of NYSE stocks making New 52-week Highs and subtracting the number of stocks making New 52-week Lows. What is important to notice is the shape of the line – up is strong (or bullish), down is weak (or bearish).  Sometimes a picture is worth a thousand words.

You can view updated versions of this chart anytime on StockCharts.com at this link. For some context, after clicking the link, scroll down to see the weekly version of that chart.  For additional context, this link will show you what it looked like last November.

Our Rally Isn't Just Our Rally.

Below are a series of iPhone screen captures showing the daily performance of World Equity Market Indices from Bloomberg.  The thing to notice is that while the news media in America made a big deal about the market being up because of positive news in the housing market … a quick glance around the world showed equal or bigger gains. This type high correlation continues to attract my attention.

How Far Have We Come?

Here is a chart showing Fibonacci retracement lines drawn from the high back in late 2007 to the low in November of 2009.  We are barely back to the second major retracement level … and still a considerable distance from the 50% mark.

There is art and science involved in drawing Fibonacci retracements and extensions.  For example, where do you start and end?  Would it be better to have started from the highs in May or September of 2008 instead?  Click here for more Fibonacci Commentary.

Early Warning Signs?

Here are a few signs that the rally is getting a little worn-out.  There has been more volatility lately, and that can be a bearish early indication.  For the past few months markets have gone up, even on bad news (like the recent bank closings); however, this past week saw the first hints of markets selling-off after good news.  And we are coming into September, which is historically a week month for markets.

The trend is your friend, until it turns. 

A Little Humor.

Thought this cartoon about the Cash-for-Clunkers program ending was worth posting.

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

• U.S. M&A Sinks to 15-Year Low. (Reuters)
• Surge of Filings Signal Busy Fall for IPOs. (Reuters)
• The Investment Mistakes We Make & Why We Make Them. (WSJ)
• Credit Card Issuers Cutting Lending Limits. (Reuters)
• AT&T and Apple Admit To Limiting VoIP Apps. (MediaPost)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• After a 30-Year Run, Rise of the Super-Rich Hits a Wall. (NYTimes)
• NPR Offers New Type of iPhone News App. (Mashable)
• 8-Bit Trip, Nintendo-Inspired Stop-Motion Video. (eGuiders)
• The Evolution of Retweeting. (Technology Review)
• Know What You Don't Know: The Mindset of a Problem-Finder. (Wharton)
• More Posts with Lighter Ideas and Fun Links.

The market is strong right now.  How do I know?  Aside from the near-audible moan of bears, Price going up is a pretty good primary indicator. 

Kidding aside, other indicators are worth looking at here too.  One of them is the NYSE High-Low line. 

The following chart shows this market breadth indicator.  It is calculated at the end of each day by taking the number of NYSE stocks making New 52-week Highs and subtracting the number of stocks making New 52-week Lows. What is important to notice is the shape of the line – up is strong (or bullish), down is weak (or bearish).  Sometimes a picture is worth a thousand words.

You can view updated versions of this chart anytime on StockCharts.com at this link. For some context, after clicking the link, scroll down to see the weekly version of that chart.  For additional context, this link will show you what it looked like last November.

Our Rally Isn't Just Our Rally.

Below are a series of iPhone screen captures showing the daily performance of World Equity Market Indices from Bloomberg.  The thing to notice is that while the news media in America made a big deal about the market being up because of positive news in the housing market … a quick glance around the world showed equal or bigger gains. This type high correlation continues to attract my attention.

How Far Have We Come?

Here is a chart showing Fibonacci retracement lines drawn from the high back in late 2007 to the low in November of 2009.  We are barely back to the second major retracement level … and still a considerable distance from the 50% mark.

There is art and science involved in drawing Fibonacci retracements and extensions.  For example, where do you start and end?  Would it be better to have started from the highs in May or September of 2008 instead?  Click here for more Fibonacci Commentary.

Early Warning Signs?

Here are a few signs that the rally is getting a little worn-out.  There has been more volatility lately, and that can be a bearish early indication.  For the past few months markets have gone up, even on bad news (like the recent bank closings); however, this past week saw the first hints of markets selling-off after good news.  And we are coming into September, which is historically a week month for markets.

The trend is your friend, until it turns. 

A Little Humor.

Thought this cartoon about the Cash-for-Clunkers program ending was worth posting.

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

• U.S. M&A Sinks to 15-Year Low. (Reuters)
• Surge of Filings Signal Busy Fall for IPOs. (Reuters)
• The Investment Mistakes We Make & Why We Make Them. (WSJ)
• Credit Card Issuers Cutting Lending Limits. (Reuters)
• AT&T and Apple Admit To Limiting VoIP Apps. (MediaPost)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• After a 30-Year Run, Rise of the Super-Rich Hits a Wall. (NYTimes)
• NPR Offers New Type of iPhone News App. (Mashable)
• 8-Bit Trip, Nintendo-Inspired Stop-Motion Video. (eGuiders)
• The Evolution of Retweeting. (Technology Review)
• Know What You Don't Know: The Mindset of a Problem-Finder. (Wharton)
• More Posts with Lighter Ideas and Fun Links.

Impressive action in the markets this past week.  While the markets climb a wall of worry, the bottom-line is that every time it has looked like a sell-off, recently, the market moves back up and punished the short-sellers.

I'm hearing talk of traders expecting a rally in the dollar.  I take that as "code" that they are expecting a downwards correction for the general market, but have been wrong about the rally ending for long enough to call it something different.

Put me in that camp too.  While I'm impressed by the strength and stamina this rally has shown, I am keeping a vigilant eye on the charts.

Here are three things that caught my eye this week.

1. Stocks Are Expensive Again.

Perhaps because of the rosy picture the recent rally paints, few notice the plunge in S&P 500 earnings. 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 recent plunge in earnings and the 5-month stock market rally, the PE ratio has spiked to 144 – a record high, and is currently at a still lofty 129.

Click here for a different perspective on the use of PE Ratios.

2. Declining Volume May Be Signaling Another Leg Up in the Rally.

I subscribe to Marty Chenard's StockTiming site.  He often has an interesting perspective on what's happening.  It is worth a look.  This is straight from his site.

To really understand what the market is doing, one must observe many different sets of data.  It is like a puzzle … it isn't until you have enough pieces fitted together that you can get an idea of what the picture is going to be.  There are always key pieces that add especially critical information.

The stock market is no different … there is enough different kinds of available data for a person to drown in confusion.  It is why focusing on smaller amounts of key data is important.

For instance … the amount of, and the trend of Declining Volume on the New York Stock Exchange can be a critical piece of data.  

Take a look at today's chart which shows the Declining Volume of the NYSE.   You know, that if Declining Volume is increasing, then it would make sense for the stock market to move lower.

So, in other words, they move opposite to each other.   I always like to see charts where the information flows in the same direction, so we invert our Declining Volume charts. 

In this way, we see the stock market's action relative to what the Declining Volume's action should be telling us about what to expect. 

So here is our inverted, NYSE Declining Volume data chart.   Take note of the vertical lines and how the NYSE's daily movements correlate with the Declining Volume's action.   Pretty neat data, isn't it?

* Note: The data presented is as of the close this past Wednesday.  Do notice, that although negative, the Declining Volume has been improving by decreasing during the past few days. 

3. Wolfram Alpha Has Some Helpful Data for Traders.

Here is a screen capture from Wolfram Alpha's new stock comparison feature.  This compares many things about the two companies; in this case IBM and Accenture.  Obviously, you can compare other companies.  This was just to give you an idea of what it can do for you.

I have been using Wolfram Alpha more recently.  They keep adding new things; check it out. 

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

• Is Liquidity the New Volatility as a Timing Tool? (BigTrends)
• Professor Buffett's Tongue-in-Cheek Butterfly Effect Lesson. (Street)
• Are We in a Bull Market Yet? Why Technicians Say "No." (Barrons)
• U.S. to End Clunker Rebates This Week. (Reuters)
• In New Phase of Crisis, Securities Sink Banks. (WSJ)
• Starbucks Lowers Price Of Some Drinks To Stimulate Demand. (Reuters)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• How Technology Is Changing the Face of Innovation. (WSJ)
• IBM Uses DNA to Make Next-Gen Microchips. (Reuters)
• iPhone App Allows USAA Bank Check Deposits. (eWeek)
• Why Exercise Won't Make You Thin? (Time)
• The Art of Sprinting: In Business and Life. (Genius Catalyst)
• A New Look Inside Babies' Minds Reveals Much. (Time)
• More Posts with Lighter Ideas and Fun Links.

Impressive action in the markets this past week.  While the markets climb a wall of worry, the bottom-line is that every time it has looked like a sell-off, recently, the market moves back up and punished the short-sellers.

I'm hearing talk of traders expecting a rally in the dollar.  I take that as "code" that they are expecting a downwards correction for the general market, but have been wrong about the rally ending for long enough to call it something different.

Put me in that camp too.  While I'm impressed by the strength and stamina this rally has shown, I am keeping a vigilant eye on the charts.

Here are three things that caught my eye this week.

1. Stocks Are Expensive Again.

Perhaps because of the rosy picture the recent rally paints, few notice the plunge in S&P 500 earnings. 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 recent plunge in earnings and the 5-month stock market rally, the PE ratio has spiked to 144 – a record high, and is currently at a still lofty 129.

Click here for a different perspective on the use of PE Ratios.

2. Declining Volume May Be Signaling Another Leg Up in the Rally.

I subscribe to Marty Chenard's StockTiming site.  He often has an interesting perspective on what's happening.  It is worth a look.  This is straight from his site.

To really understand what the market is doing, one must observe many different sets of data.  It is like a puzzle … it isn't until you have enough pieces fitted together that you can get an idea of what the picture is going to be.  There are always key pieces that add especially critical information.

The stock market is no different … there is enough different kinds of available data for a person to drown in confusion.  It is why focusing on smaller amounts of key data is important.

For instance … the amount of, and the trend of Declining Volume on the New York Stock Exchange can be a critical piece of data.  

Take a look at today's chart which shows the Declining Volume of the NYSE.   You know, that if Declining Volume is increasing, then it would make sense for the stock market to move lower.

So, in other words, they move opposite to each other.   I always like to see charts where the information flows in the same direction, so we invert our Declining Volume charts. 

In this way, we see the stock market's action relative to what the Declining Volume's action should be telling us about what to expect. 

So here is our inverted, NYSE Declining Volume data chart.   Take note of the vertical lines and how the NYSE's daily movements correlate with the Declining Volume's action.   Pretty neat data, isn't it?

* Note: The data presented is as of the close this past Wednesday.  Do notice, that although negative, the Declining Volume has been improving by decreasing during the past few days. 

3. Wolfram Alpha Has Some Helpful Data for Traders.

Here is a screen capture from Wolfram Alpha's new stock comparison feature.  This compares many things about the two companies; in this case IBM and Accenture.  Obviously, you can compare other companies.  This was just to give you an idea of what it can do for you.

I have been using Wolfram Alpha more recently.  They keep adding new things; check it out. 

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

• Is Liquidity the New Volatility as a Timing Tool? (BigTrends)
• Professor Buffett's Tongue-in-Cheek Butterfly Effect Lesson. (Street)
• Are We in a Bull Market Yet? Why Technicians Say "No." (Barrons)
• U.S. to End Clunker Rebates This Week. (Reuters)
• In New Phase of Crisis, Securities Sink Banks. (WSJ)
• Starbucks Lowers Price Of Some Drinks To Stimulate Demand. (Reuters)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• How Technology Is Changing the Face of Innovation. (WSJ)
• IBM Uses DNA to Make Next-Gen Microchips. (Reuters)
• iPhone App Allows USAA Bank Check Deposits. (eWeek)
• Why Exercise Won't Make You Thin? (Time)
• The Art of Sprinting: In Business and Life. (Genius Catalyst)
• A New Look Inside Babies' Minds Reveals Much. (Time)
• More Posts with Lighter Ideas and Fun Links.