Capitalogix

Capitalogix Commentary 09/06/09

Our credit market debt is approximately 375% of our Gross Domestic Product.  That caught my attention; it shows how much more burden the economy carries now than it did during the Great Depression.  The unemployment situation adds to that burden. 

If that isn't frightening enough, the next chart gives a slightly different perspective.  It helps visualize the cost of the government's massive action and stimulus.  Consequently, we are staring at the largest estimated budget deficit as a percentage of nominal GDP since World War II.  It wouldn't surprise me if the projected $1.84 trillion deficit for fiscal 2009 should soon prove to be a conservative estimate, and it moves above $2 Trillion.   Here is a recently updated chart of Federal Spending.

For more on this, here is a link to some interesting commentary from TCW Group.  The Great Debt Binge: A Tragedy in Three Acts. And this link from Crestmont Research has a different perspective.

Another Way For NASA to Get Back to the Moon.

There is talk that budget woes may hurt NASA's plans to get back to the moon.  Perhaps there is another way ...

Current Market Commentary.

Speaking of rocket rides, once again the markets held up well, even after a worse-than-expected jobs data report shows the highest level of unemployment since 1983.  The equity markets have surprised many by consistently fighting off worries that they have climbed higher than economic fundamentals warrant.  However with September being a notoriously bad month, historically, for stocks ... Concerns are high that a correction is likely as trading volume increases after the holiday weekend.

How Does This Rally Compare to the Great Depression Bear Rallies?

For some perspective on the current stock market rally and how it compares the 1929-1932 bear market, this chart illustrates the duration (calendar days) and magnitude (percent gain) of significant Dow rallies that occurred during the 1929-1932 bear market (solid blue dots). For example, the bear market rally that began in November 1929 lasted 155 calendar days and resulted in a gain of 48%. As this chart illustrates, the duration of the current Dow rally (in yellow highlight) is longer than any that occurred during the 1929-1932 bear market. As for magnitude, only the November 1929 bear market rally resulted in a better performance than what has occurred during the current rally to date.

Many of the analysts I follow are starting to lighten-up their long exposure. For example, Doug Kass called the top a week ago.  Likewise, Art Cashin said he is selling stock and taking some risk off the table.

If you were limited to "going-long" equity indices, then there would be a lot to worry about.  Instead, this situation creates other opportunities.  Let's look at some of them.  StockCharts.com is a good source for a bigger picture. The next chart shows how some of the these intermarket trade opportunities have done over the past month or so (like Gold, Bonds, Yen, US Dollar, Euro, and of course the S&P 500).

I was looking for Gold to break-out; however, I wasn't aware that other defensive plays, like Bonds or the Yen, have been doing so well recently.

By the way, the chart above is interactive; so by clicking the picture, you can drag the yellow-highlighted date range slider to see how the change plays-out over time.  You can also add or change the markets this comparison uses.

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

• Arrest Over Software Illuminates Wall Street Secret. (NYTimes)
• Fed Minutes Show It Expects Slow Growth Ahead. (NYTimes)
• Is China's Stockmarket an Indicator of Where Ours Is Going (Economist)
• China Begins to Open-Up to Private Equity. (WSJ)
• India's High-Flying Bank Stocks 130%+ from its March Lows. (WSJ)
• Six Months In: How Successful is the President's Leadership Style? (Wharton)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• EBay Gives Up Control of Skype to Private Investors. (NYTimes)
• Brazilian ID Thieves Using Twitter as BotNet Command Channel. (ZDNet)
• Amazon Web Services Rolls-Out Virtual Private Cloud for the Enterprise. (ZDNet)
• New iPhone App Uses Virtualization to Deliver Computer Desktops. (Forbes)
• How Long Does It Take to Build a Technology Empire? (WSJ)
• More Posts with Lighter Ideas and Fun Links.

Capitalogix Commentary 08/30/09

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.

Capitalogix Commentary 08/23/09

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.

An Experience Worth Paying For ...

What does $1.2 billion buy nowadays? Apparently, an amazing stadium that will change the way you experience events.

As I was leaving the first preseason football game played in the new Dallas Cowboys stadium, one of the guys I went with said "that was the best football game I've ever seen." He was wrong; it was, however, probably the best experience he's had at a football game.

I've been to hundreds of professional sporting events. Yet, Jerry and Stephen Jones, HKS Architects, and the rest of the team that built that stadium found a way to surprise and excite me, while exceeding my expectations on almost every level.

Years ago, I read a book called "The Experience Economy: Work Is Theater & Every Business a Stage", which explains that as the world cascades towards sameness, a business can achieve a sustainable competitive advantage by differentiating the experience it provides to its customers. The Cowboys have done that with this stadium.

There's a certain amount of theater, pageantry, and spectacle that you expect from a professional sporting event. Even the word "event" implies that, doesn't it?

Well the Cowboys got it right; and it was larger than life.  Watching people as they walked in the stadium, it was amazing to see how many of them said "Wow!" And during the game, I can't tell you how many times I heard somebody say "this is incredible" ... and they weren't talking about the game.

Do You Watch the HD Screen ... Or the Field?

A few weeks ago I wrote about the stadium.  This time I'm writing about what it is like to attend an event there.  One thing worth noting, the GINORMOUS HD video screen is so clear and so large that it changes how you see the game (I certainly never paid attention to cheerleaders before this, and the video is so clear you can literally read the tattoos on a player's arms during a play).  Frankly it was slightly unnerving because I couldn't figure out how best to watch the game. I found myself drawn to the massive video screen rather than the field. I literally had to train myself to watch the play on the field, and then to allow myself to look up to see the replay (often from multiple angles).

You know how some movies whisper "wait for the DVD" while other movies were clearly built for the Big-Screen. This stadium changes how you consume a live event product (like an NFL game), and makes it worthwhile to be there.

It is hard to control what happens on any given Sunday, but with this, the Jones have created a sustainable brand promise and set a new standard.

You've got to experience it for yourself. 

My guess is that it will change stadiums around the world. Bravo.

For More On This:

• Here is an Article Giving a Different Perspective on the Stadium.
• Here is the NYTimes Take on the Video Board.
• Here is a DMN Article Getting Reviews From Fans.

Capitalogix Commentary 08/16/09

The unemployment numbers came in slightly better than expected, and the market reacted very favorably. Then quietly, adjustments were made for other months, which were very unfavorable. Moreover, examining recent numbers a little closer suggests that some portion of the slowing growth of unemployment is probably due to the way the number is constructed. Some people are being dropped from the ranks of the unemployed, even though they haven't found jobs, because their unemployment is now long enough that they no longer qualify for benefits.

Market Commentary.

There has been a lot of bad news in the press lately.  Nonetheless, the markets have held up well. There have been several sharp drops, which made me expect much worse; only to be met with another rally. As much as my gut wants to warn about "head fakes" and "finding the last buyer", this is the type of market action we see during bull market trends.

Comparison of World Index Performances.

The next chart shows how some of the big, thickly-traded, world equity indices (like the DAX, CAC, and FTSE) have performed year-to-date.  I like using a chart like this to get a sense of the bigger picture.  Last week's chart showed that the Emerging Markets have done much better so far this year.  Both charts show highly correlated trading.

The chart is interactive; so by clicking the picture, you can drag the yellow-highlighted date range slider to see how the change plays-out over time.  Try going back 232 days (which is the past year of trading days).  You can also add or change the markets this comparison uses.

Disaster Readiness.

"If this were an actual emergency" ... would you have learned anything from the events of the last year?  As a trader, I've been burning the midnight oil and studying the bear market data to figure-out which of our systems held-up best during those periods.  In addition, I'm looking for early indicators that would signal a phase shift out of the bullish trend.

Governments are probably going through a similar exercise, even though the Fed says the recession is ending and that it would take a step back toward normal policy as things return to normal.  Frankly they'd hope so, because the alternative is pretty scary.  How many things are left in their bag of tricks?

Exchange Certified Bullion.

Coincidentally, I'm hearing a lot more about investors and hedgers taking delivery of precious metals, like gold, silver, platinum, and palladium. Why? Apparently, unlike ETFs (like GLD), buying Warehouse Depository Receipts conveys title to specific, numbered, metal bars, which means they are not reportable as financial assets, yet you can still pledge them as collateral or sell call options against them.

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

• Fed Holds Steady and Moves to End Debt Buying. (NYTimes)
• What Happens If the Fed Takes the Economy Off Life Support? (Forbes)
• Lowry Research’s Intermediate Trend Buy Signal. (TradersNarrative)
• Prechter Expects Dollar to Rally for Next 3-Years. (OutlookProfit)
• Judge orders Microsoft to stop selling Word. (CNet)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• FriendFeed Updates Status: Married to Facebook. (NYTimes)
• Hold Innovation Tournaments to Find the Most Promising New Opportunities. (Wharton)
• Sony Adopts Open Book Strategy Against Amazon. (MediaPost)
• Mobile Phones Get Augmented Cyborg Vision. (BBC)
• DriveSharp Claims It Can "Train the Brain to Think and React Faster On The Road". (WSJ)
• More Posts with Lighter Ideas and Fun Links.

What If You Outsourced Your Job Overseas?

News satire from The Onion. It is funny, well done, and like most good humor ... it has an insightful kernel of truth.  This one provides a different perspective on employment and outsourcing.

More American Workers Outsourcing Own Jobs Overseas

Capitalogix Commentary 08/09/09

The rally continues, and the S&P 500 has gotten back above 1000.  Pretty impressive on many fronts.  How does it compare to other markets though?  This chart shows how several other world markets have done so far in 2009.

The strength of the rallies don't make sense to me based on logic.  But trends don't depend on logic. So, I dusted-off my copy of Trend Following and will simply ride the bucking bronco.

Why Citigroup's Volume Is Significant.

Last week saw some interesting trading in Citigroup, as it recorded an "utterly insane" amount of volume - 2.7 BILLION - in a single day. That huge volume value caused problems throughout the financial information world. Financial systems are designed to handle certain ranges of values. If a number is outside that range, it "overflows" the data field for that value. Citigroup's volume overflowed, which should tell you something about how likely that level of trading is to occur.

Flash Player 9 or higher is required to view the chart
Click here to download Flash Player now

View the full C chart at Wikinvest

I watch volume patterns.  Capitulation bottoms typically happen on huge volume spikes.  I don't know if the reverse holds true as well.  But the markets are extended so I'm watching things a little more closely.

What About Gold?

If the Markets start a deeper pull-back, then Gold looks poised for a break-out to the upside.  Here is a chart showing a potential Reverse Head-and-Shoulders bottoming pattern.  There recent shoulder is a triangle pattern, which indicates we should expect expanded volatility soon.

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

• Can 'Cash for Clunkers' Help Jump-start the Auto Industry? (Wharton)
• More Stimulus: Senate Adds $2 Billion to 'Clunkers' Plan. (WSJ)
• Job Losses Slow to 247,000; Unemployment Rate Dips. (WPost)
• Will Apple's iTouch Tablet Will Become Its Flagship Product? (Seeking Alpha)
• What the Hotness of Your Waitress Says About the Economy? (NY Mag)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Google Developing An Operating System for the Cloud (TechReview)
• Did Cyber-Warfare Tactics Take Down Twitter & FB This Week? (TechChuck)
• NFL Formulating Game Day Twitter Policy (WPost)
• Protect Yourself Against Social Media Identity Hijacking. (MediaPost)
• Innovation Is A Hot Topic For Big Businesses Too. (NYTimes)
• More Posts with Lighter Ideas and Fun Links.

PC Prices - An Offer I Couldn't Refuse

Does it make sense to try and fix a broken PC?  I used to think so; now I'm not so sure.

I'm often early adopter of technology. That's kind of code for "I've had to reformat my computer many times over many years". And when it came to hardware, let's just say that the local CompUSA people smiled when I walked in the door. I love technology; and it seems that I never met a faster video card, bigger hard drive, or clever invention that I didn't want to buy.

Your Rules of Thumb May Be Out-Dated.  Mine Were.

Over the years, I developed a strategy for acquiring new computers. I typically bought the absolute top-of-the-line, as soon as the second version of it came out. Oh, I bought many when the first version came out; but that's how I developed a strategy to buy one-step back from the newest and best.

A lot has changed in the PC industry.  For example, our local CompUSA and Circuit City stores are now closed, and today I got a pretty good idea why that happened.

Flash Player 9 or higher is required to view the chart
Click here to download Flash Player now

View the full BBY chart at Wikinvest

My laptop finally gave out; and all of my software utilities, Internet searches and efforts had failed to bring it back to life. My wife made me promise to go get a new machine before I drove myself (or her) crazy.

What Kind of Deals are Available Today?

So this morning I walked into my local Best Buy determined to find a worthy replacement. I was quite surprised to find that I walked out the door with a brand-new laptop, much more powerful than the one that had broken, for less than $500.

I also found a desktop machine with Intel's newest chip, 9-gigs of memory and a terabyte hard disk for about $1,000.

That means hardware is becoming disposable. There comes a point where it's literally not worth trying to fix something, or re-load an operating system and your programs to make something work reasonably well, when you can upgrade to a newer more stable platform for so little money.

What Does This Mean For You?

The point is technology is now cheap enough that you should look at your business and think about the point of diminishing returns. Which machines are calling-out to you that they are past their prime, and it's time to replace them with something new?

The PC manufacturers are trying to get rid of their Vista machines ... because the new Windows 7 operating system officially comes out this fall. I recommend you take this opportunity to investigate what is out there ... and bring some of it home.

Capitalogix Commentary 08/02/09

Declaring Victory Over the Financial Crisis?

This week's news brought President Obama declaring: "We have stopped the free-fall. The market's up and the financial system is no longer on the verge of collapse. ... So there's no doubt that things have gotten better." Obama also defended the bailout of the banks as a necessary measure to hold-off greater financial trouble; explaining that he inherited "the worst economy of our lifetimes." That's all well and good; yet, it reminds me of a different President who declared "mission accomplished" ... just a tad too quickly.  Time will tell.  I  just hope we keep making progress.

The Markets Have Done Well Recently.

During the last three weeks, the S&P 500 climbed more than 10% higher on better than expected earnings.  So far over 70% of companies have beat earnings estimates.  The Dow Jones Industrial Average Index is strong too.  Here is a chart showing recent performance.

What is Driving the Rally?

Sentiment is driving the markets higher.  But, does it worry you the earnings picture isn’t actually improving?  How about that the defensive posturing by corporations evidenced by massive cost-cutting is not true organic income statement improvement?  It’s certainly not sustainable, and it’s only questionably good news.  Still, the market has continued to respond bullishly to “better than expected”.  This is similar to celebrating that the economy and consumer spending are shrinking ... but less than expected.

Markets can continue to rally in the face of logical questions about its true strength.  For proof, you can look at the following chart of Shanghai's market, which many skeptics believe is a bubble waiting to pop.

So, are we really in a new bull market?  Or is this prolonged rally a massive trap, sucking-people-in, only to collapse back down? In my opinion, it doesn't matter.  Despite what we call it, whatever will be, will be.  What matters is how you trade it.

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

• Major Dow Theory Buy Signal; But Should You Take It? (Barrons)
• Triggering an S&P 500 Buy Signal That’s Worked Since 1950’s. (Traders Narrative)
• Ned Davis' Seven Factors to Determine a Secular vs. Cyclical Bull Market. (Ritholtz)
• Some Promising Signs for the Economy and the Equity Market. (Dash of Insight)
• CNBC Viewership Down 28%. Does that say something about the Market? (ZeroHedge)
• "Cash for Clunkers" May Cost Up to $45,354 Per Vehicle. (Seeking Alpha)
• High-Frequency Trading: A Good explanation of the Core Issues. (WSJ & NYTimes)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Flipping Out - Think a Coin Toss has a 50-50 Chance? Think again. (Big Money)
• Wriston’s Law: Capital Goes Where it's Wanted, Stays Where it's Well-Treated. (Forbes)
• Obama Chia Pet - Determined Pose.  Truth is so much funnier than fiction. (Drugstore.com)
• A Better Way to Rank Expertise Online. (Technology Review)
• Things to Call Your Robot When You're Angry at It: from "Lost in Space". (PromisedPlanet)
• Finding New Ways to Shoot Down Spam. (Technology Review)
• Proof I'll Do Anything to Win a Bet. (YouTube)
• More Posts with Lighter Ideas and Fun Links.

Capitalogix Commentary 07/26/09

This video from The Economist is a great metaphor for where we are in the market.

The Economist is one of those magazines that piles-up in my office.  I don't want to throw it out; but I also don't read it as often as I want to, or should.  I tell myself it is because I want to read it thoroughly.  Then, when I finally read them, I think that I should read them when they come in (rather than putting them in the pile). 

Nonetheless, The Economist always seems to provoke thought, and they throw-in something funny more often than you might expect.  I like that they often talk about the "bigger" ideas ... and as a trader, I too often get sucked-in by the Siren's Call of urgency and "news".

So, this week I thought I'd write about two of the bigger ideas that the markets are provoking me to think about recently. 

The first is how much stock to put into China's recent economic growth?  The second, perhaps related, is really a question about how much can we trust the recent rally, in light of what happened just beforehand. With regard to the second question, I'm talking about the U.S. Markets too.

First, Let's Look at China.

The Chinese market and economy seem to have rebounded quickly.  However, there are some signs that all might not be well behind the Great Wall.  For example, here is a chart that shows a dramatic decrease in electric power usage.  It leads to this question. Although Chinese government officials claim GDP is well, are they lying or making things out of thin air (meaning, without electricity).

When confronted with this inconsistency, China had a quick response; it stopped releasing that data.

With tongue-in-cheek, here is a video where China celebrates its status as the world's biggest polluter, as proof of its productivity and prosperity.

China Celebrates Its Status As World’s Number One Air Polluter

Getting back to our markets, I continue to be surprised by the length and strength of the rally.  Apparently,  Artificial Intelligence is a good substitute for lack of the real thing. So at least my trading systems have been comfortably "long"... even though I'm feeling bearish. 

Could The Recent Rally Simply Be a World-Wide Reflex?

At its simplest, most people try to create a diverse portfolio by trying to buy different types of assets. For example, banks, utilities, tech, staples, and cyclicals. Other classes of assets include things like real estate, precious metals, currencies, and energy. Common sense says that some things go up, while other things go down; that is called "Sector Rotation".  However, during times of economic and financial market distress, a surprising number of things move in the same direction, resulting in few safe havens. 

This asset class correlation was prevalent during the past year.  There were days when virtually everything, around the globe, seemed to fall.  I saw unusual correlation in our trading systems, too. When the markets really broke down, the diversity we normally see in our trading signals disappeared. It is tough to be long and wrong when trading models say it is more likely that the next move is back up, but the markets keep falling.  Discipline says follow the model; but common sense says the model was designed for normal (or at least "mostly normal") market conditions ... and that was not the type of market we were in at the time.

Not surprisingly, research shows that high correlations were a result of the steep fall in market prices and investor sentiment. An interesting article about this is "Do Correlations Matter When the World is On Fire".  In addition, Felix Salmon poses a disturbing question: since we're still seeing such a high correlation, even as so many things are going up ... is it possible that this is a natural artifact of the recent financial crisis, and perhaps another sign that the market is still in a time of economic and market distress. Likewise, Bloomberg points out that investors are moving in-lockstep like never before, driving up stocks, commodities and emerging markets.

The point is this high correlation actually creates a risk of replaying last year. In other words, the herd mentality threatens to leave investors with little refuge once again. 

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

• Buffett’s Goldman Stake Pays Richly. (DealBook)
• Morgan Stanley Compensation Soars to 72% Of Revenues. (Business Insider)
• Europe Falls Behind Silicon Valley In VC Deal Flow. (WSJ)
• Implications of High-Speed Trading Systems On Markets & Investors. (NYTimes)
• What Went Wrong with Economics? Avoiding the Mistakes of the Past. (Economist)
• Investors in India Bet on the Weather. (WSJ)
• Superstition & Finance: A Total Eclipse of the Brain. (Economist)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• What Makes the Dalai Lama ... well, the Dalai Lama? (NYTimes)
• Trading Psychology Is Psychological Capital. (Trader Psyches)
• Two Dallas Cowboys Players Tackle The Smashburger Restaurant Chain. (WSJ)
• Combining Facial Recognition & Augmented Reality. (Gizmodo)
• Amazon Cripples Mobile That Use Their Data. (WebMonkey)
• Clean-Up Your MP3 Collection Automatically. (WSJ)
• Top VC Blogs, Based On Number of Readers. (TechCrunch)
• More Posts with Lighter Ideas and Fun Links.