Trading

As the markets hover in the rare air of their recent advances, there is a quote I've thought about several times recently.  It is a little colorful … yet, it gets the point across.

Market Wizard, Ed Seykota, reminds that:

BusinessInsider had an interesting piece on David Einhorn's criticism of Ben Bernanke in his fourth quarter letter to investors.  Here's what he wrote:

On August 27, 2010, Fed Reserve Bank Chairman Ben Bernanke gave a speech in Jackson Hole, Wyoming where he hinted that the Fed would provide additional monetary easing. At the time, the S&P 500 was down more than 3% for the year. From that point through the end of the year, the s&P rallied 19%. At the same time, oil prices rose 16%, copper prices rose 32%, coffee prices rose 34%, corn prices rose 43%, and cotton prices rose 57%.

In front of Congress, Mr. Bernanke credited his policies for "significant improvements in stock prices" which are "contributing to a better outlook for the economy." Mr. Bernanke also said his policies are not to blame for the sharp increase in the price of oil, which he claimed is the result of strong demand from emerging markets. Does Mr. Bernanke really believe anyone buys that? Ostensibly, it's a coincidence that many of the necessities of life came into simultaneous shortage and shot up in price just as Mr. Bernanke promised additional monetary stimulus.

Later in the letter, Einhorn continues the tirade against Bernanke for, among other reasons, that Bernanke told "60 Minutes" that he was 100% certain that the Fed could control inflation. Einhorn's take: "As for the future, we are 100% certain of nothing."

Beware What You Wish For …

Bears just can't catch a break. 

The Market is holding up well.  By that, I mean it isn't going down well.

The Smallest "Biggest" Decline in 50 Years.

Why are the markets going up?  Does it matter?  Clearly, there has been virtually no selling pressure; and it's been that way for months.

Jim Cramer said: "Really bad markets go down on the same news over and over again. Really good markets just keep going up on news that is well-known and is, well, hardly, news."  By that definition, we are in a good market.

Respect the Trend.

The primary trend is higher.  Higher highs and higher lows is the definition of an up-trend. Until price tells you otherwise, the key message is that Bulls control the market.

Imagine how frustrating it has been to be a Bear (because they simply haven't caught a break, and classic bear setups just aren't working). Will there come a time when Bears control the market again?  Of course there will.  Before that there will probably be a few nasty selling episodes. For now, though, all they know is that the market simply won't fall, no matter what the readings say, and no matter how overbought the daily index charts happen to get.

The Markets are a harsh teacher … and the hard lesson to learn is to avoid front-running a move. Over the long-term, it is safer to respect the primary trend.

A Condensed Restatement of the Bullish Case.

One of the StockTwits columnists posted this excerpt from a post in Barron's written by Michael Santoli.

The reasons the bulls are bullish are also pretty universally agreed upon. The industrial economy has gathered some momentum, the emerging markets are surging, companies are flush, profits look set to rise decently again, the Federal Reserve is seeking new ways to penalize risk aversion, taxes won't go up and the market tends to do well in the year after a midterm election.

And we can add to the list the likelihood that another financial-engineering cycle is just getting into gear, so expect lots of equity-friendly refinancings by stretched companies, re-leveraging by cash-rich ones and buyouts hither and yon.

The thing is, it's all pretty much true. And because of that, and given that stock valuations are not excessive, it's tough to think a likely pullback or worse would signal some major top.

That pretty much says it … Hope you have a great week.

Why are the markets going up?  Does it matter?  Clearly, there has been virtually no selling pressure; and it's been that way for months.

Jim Cramer said: "Really bad markets go down on the same news over and over again. Really good markets just keep going up on news that is well-known and is, well, hardly, news."  By that definition, we are in a good market.

Respect the Trend.

The primary trend is higher.  Higher highs and higher lows is the definition of an up-trend. Until price tells you otherwise, the key message is that Bulls control the market.

Imagine how frustrating it has been to be a Bear (because they simply haven't caught a break, and classic bear setups just aren't working). Will there come a time when Bears control the market again?  Of course there will.  Before that there will probably be a few nasty selling episodes. For now, though, all they know is that the market simply won't fall, no matter what the readings say, and no matter how overbought the daily index charts happen to get.

The Markets are a harsh teacher … and the hard lesson to learn is to avoid front-running a move. Over the long-term, it is safer to respect the primary trend.

A Condensed Restatement of the Bullish Case.

One of the StockTwits columnists posted this excerpt from a post in Barron's written by Michael Santoli.

The reasons the bulls are bullish are also pretty universally agreed upon. The industrial economy has gathered some momentum, the emerging markets are surging, companies are flush, profits look set to rise decently again, the Federal Reserve is seeking new ways to penalize risk aversion, taxes won't go up and the market tends to do well in the year after a midterm election.

And we can add to the list the likelihood that another financial-engineering cycle is just getting into gear, so expect lots of equity-friendly refinancings by stretched companies, re-leveraging by cash-rich ones and buyouts hither and yon.

The thing is, it's all pretty much true. And because of that, and given that stock valuations are not excessive, it's tough to think a likely pullback or worse would signal some major top.

That pretty much says it … Hope you have a great week.

So long 2010.  Here is a quick recap of 2010 from JibJab.

Here is a Look Back at the "Year-That-Was" from a Market-Perspective.

Despite a shaky start, it was a strong year for the markets. Since July, the bears lacked conviction … and the bulls pushed things higher.

The 20 Top Charts of 2010 from the Economist

What makes a popular chart? The theme running through the 20 most viewed daily charts published on the Economist's website in 2010 is hard to discern, with charts detailing everything from iPad prices to beer consumption. The most popular, by far, showed the ratio of the salary of a country’s leader to its GDP per person. (On this measure, India’s prime minister is especially poorly rewarded.)

The interactive graphic tree map, below, indicates the relative popularity of the top 20 charts. Such maps are handy for showing a large number of data values that would visually overcomplicate a pie chart. Coloring groups subsets within the data, as in this case, to create a heat map.

So, goodbye to 2010; I look forward to sharing 2011 with you.

So long 2010.  Here is a quick recap of 2010 from JibJab.

Here is a Look Back at the "Year-That-Was" from a Market-Perspective.

Despite a shaky start, it was a strong year for the markets. Since July, the bears lacked conviction … and the bulls pushed things higher.

The 20 Top Charts of 2010 from the Economist

What makes a popular chart? The theme running through the 20 most viewed daily charts published on the Economist's website in 2010 is hard to discern, with charts detailing everything from iPad prices to beer consumption. The most popular, by far, showed the ratio of the salary of a country’s leader to its GDP per person. (On this measure, India’s prime minister is especially poorly rewarded.)

The interactive graphic tree map, below, indicates the relative popularity of the top 20 charts. Such maps are handy for showing a large number of data values that would visually overcomplicate a pie chart. Coloring groups subsets within the data, as in this case, to create a heat map.

So, goodbye to 2010; I look forward to sharing 2011 with you.

The S&P 500 Index has had quite a run.  On Wednesday, Bespoke noted that it has been up 14 out of 16 days.  Since 1990, the S&P has only been up 14 out of 16 trading days two other times — once in September 1995 and once in May 1990.

So, You Might Guess That Bullish Sentiment is High.

Well, it is probably higher than you realize.  We haven't seen readings like this in a long time.  The American Association of Individual Investors poll had the highest percentage of bulls (63) since October 2004, and the lowest percentage of bears (16) since October 2005.

Moreover, lots of other sentiment measures are showing similar readings. 

Carl Swenlin, from DecisionPoint, reminds that while high levels of bullish sentiment among advisors, investors, and money managers usually occur at market tops, market tops do not always occur when sentiment is very bullish. Sometimes people respond to the obvious and correctly align their market posture with the price trend. In situations like this we have to wonder whether or not they are wrong.

In other words, an excess of bullish sentiment is a caution sign and should cause concern because such sentiment peaks are often followed by price corrections, if not bull market tops.  However, that doesn't mean it is safe to use sentiment as a timing tool. Perhaps sentiment is better used as a simple indicator to help paint a picture of the market environment. So far we have no indication from our trend-following models that there are major problems ahead.

Another Measure Brims With Confidence.

Here is a slightly different take on perceived risk.  The Barron’s Confidence Index is a confidence indicator calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. For example, a rising ratio indicates investors are demanding a lower premium in yield for increased risk  and thus are showing confidence in the economy. 

As shown below, there has been a solid improvement in the ratio since its all-time low in December 2008.  This indicates that bond investors have grown significantly more confident, opting for more speculative bonds over high-grade bonds. The ratio is back at levels last seen in October 2007, before the financial crisis.

Presidential Cycle Points to a Bullish 2011.

Here is another piece of data pointing upwards.  Historically, the third year for a president produces a good return for investors. Investment strategists Liz Ann Sonders and Sam Stovall say why 2011 will be no different.

Bottom-Line:  The economy and stock market end the year stronger than expected.  Happy New Year!

The S&P 500 Index has had quite a run.  On Wednesday, Bespoke noted that it has been up 14 out of 16 days.  Since 1990, the S&P has only been up 14 out of 16 trading days two other times — once in September 1995 and once in May 1990.

So, You Might Guess That Bullish Sentiment is High.

Well, it is probably higher than you realize.  We haven't seen readings like this in a long time.  The American Association of Individual Investors poll had the highest percentage of bulls (63) since October 2004, and the lowest percentage of bears (16) since October 2005.

Moreover, lots of other sentiment measures are showing similar readings. 

Carl Swenlin, from DecisionPoint, reminds that while high levels of bullish sentiment among advisors, investors, and money managers usually occur at market tops, market tops do not always occur when sentiment is very bullish. Sometimes people respond to the obvious and correctly align their market posture with the price trend. In situations like this we have to wonder whether or not they are wrong.

In other words, an excess of bullish sentiment is a caution sign and should cause concern because such sentiment peaks are often followed by price corrections, if not bull market tops.  However, that doesn't mean it is safe to use sentiment as a timing tool. Perhaps sentiment is better used as a simple indicator to help paint a picture of the market environment. So far we have no indication from our trend-following models that there are major problems ahead.

Another Measure Brims With Confidence.

Here is a slightly different take on perceived risk.  The Barron’s Confidence Index is a confidence indicator calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. For example, a rising ratio indicates investors are demanding a lower premium in yield for increased risk  and thus are showing confidence in the economy. 

As shown below, there has been a solid improvement in the ratio since its all-time low in December 2008.  This indicates that bond investors have grown significantly more confident, opting for more speculative bonds over high-grade bonds. The ratio is back at levels last seen in October 2007, before the financial crisis.

Presidential Cycle Points to a Bullish 2011.

Here is another piece of data pointing upwards.  Historically, the third year for a president produces a good return for investors. Investment strategists Liz Ann Sonders and Sam Stovall say why 2011 will be no different.

Bottom-Line:  The economy and stock market end the year stronger than expected.  Happy New Year!

The Markets are up, so all is well.  Meanwhile, Obama Claus is suited-up and ready to continue delivering the debt. Consider it our gift to future generations …

Market Commentary

The S&P 500 Index remains at the top of its trading range and is making new highs for the year. 

Watch For Weakness as Breadth Weakens.

Notice the negative divergence, marked by the red arrow.  While the S&P 500 Index surged higher, less than 80% of the stocks in the index are trading above their 50-day moving averages.  This means that not all stocks have been participating in the current rally, which is a potential warning sign of impending weakness.

Looking For a Positive Sign? 

Lumber is surging.  Moreover, the Homebuilders SPDR and the Home Construction iShares  both are showing strength. This may show an increase in demand and often implies more construction.

Seems like good news to me.  Jim Cramer recently advised: "It is never too late to change. Things are good, not bad. Don't play irony. Don't be too skeptical. Be opportunistic."  What do you think?

The Year-End Bespoke Roundtable.

At the end of each year, the big financial media outlets typically conduct roundtables to get outlooks from key players in the financial markets.  The Bespoke Roundtable asks twelve of the most popular financial blogs/websites the same 34 questions regarding their 2011 outlooks and their take on 2010.  There are many insightful tidbits worth thinking about.

The consensus view is that the S&P 500 will be up in 2011, bonds will be down, oil will be up, the dollar will be up, US home prices will be up, and China's stock market will be up.  Interestingly, the consensus view was the exact same as it was last year for all asset classes except for gold.  Less participants think gold will go down in 2011 than they did in 2010.  Here is the link to the full post.