We just saw a 24% rally unfold in a little over two weeks. But a rally like that doesn't make too many people happy. For most, this is where fear and greed collide.
Prudence dictates that position size and risk should stay small while in a serious long-term downtrend, especially with a stock like Citibank recently trading under a dollar. Yet a rally that big and steep often makes people feel like they should have been in the market, and wish they would've traded "this, that, or the other" stock or sector that they noticed a week or two ago.
Don't Worry, This Little Bit of Mind Control Won't Hurt A Bit ...
This week I saw several news reports using the phrase "The Great Recession". This might be part of an interesting strategy on the part of the International Monetary Fund, which used that phrase a few weeks ago. Naming something gives you control over it (or at least the appearance of control over it). And "Recession" sounds so much less severe than "Depression". If you can just get people to adopt that phrase, it might give them enough hope that you actually avoid a depression? But just as it's hard to call a recession until you're well into it, I think it's pretty hard to tell whether you come out of it than till you're actually out of it. Still, it is a nice try.
Likewise, I have been impressed by how the administration has played the financial crisis lately. There seem to be some sound ideas, talked about in ways that make sense to the public, which get announced at strategic times. Moreover, it seems to be working; and the market looks like it's responding.
However, the key word there might be "looks". I'm certainly not convinced that the worst is over yet.
Where Are We in the Cycle?
A few weeks ago I noted the spread between smart money confidence and retail investor pessimism was at levels that often indicated short or intermediate-term bottoms. In hindsight it worked again, and there was a pretty sizable rally. However, retail traders are becoming confident again, too quickly for my taste. And the spread is no longer significant. So I don't see an edge there at this point.
I don't believe this is the end of the bottom. Instead, I hope this is the beginning of the bottoming process. My sense is that there are many businesses hanging on by a fingernail, or sheer will. Some of them are getting tired, others are running out of money, while still others are finding it hard to sell something in this environment. The point is that I suspect we're due for another round of culling the herd. That's not necessarily a bad thing, either.
What I'll be looking for, this time, is that I think we'll see a number of deals get done as prices get lower again. The companies that are going to survive, the companies that are going to thrive, the companies that are going to become new leaders in this next phase of our economy are going to start moving forward again.
Chances are this will give you a different perspective on their impressive land-grab and expansion.
There are three simple reasons I'm looking at Walmart. Tough economic times have Americans looking to save money. Proximity is power. And that means most Americans don't have to look far to find a Walmart. So I'll be watching how they do.
Data visualization is an important tool in trading. Sometimes work skills carry-over into personal life. Watching stuff like this interests me. Not sure if that means my hobby is part of my work, or if work is part of my hobby.
As the recession deepens, the Federal Reserve announced a plan to revive the struggling economy. It will pump more than an
extra $1 trillion into the mortgage market and longer-term Treasury
securities. Short-term, equity markets did push higher.
The problem with desperate measures, though ... they can end up stoking fear, not confidence. In this case, the plan to buy-up bonds caused the decade's steepest one-day fall in the Dollar against the Euro as investors worried that the Fed's decision to print new money would lead to inflation.
One Man's Trash Is Another Man's Treasure:
In business, I'm constantly facing a build or buy decision. Namely, is it cheaper to develop something that does what I want, or can I simply buy something that does it already?
Well, that equation may soon produce a different result for many companies. A key indicator is flashing. Companies are starting to notice. What is it?
For the 4th quarter of 2008, Argus Research notes the "Q" ratio declined its lowest level since the 4th quarter of 1991. This implies that it is cheaper to buy a company than to build a replacement. To me this is an early indicator that merger and acquisition activity is about to increase. So, expect to see more deals like IBM's proposed acquisition of Sun.
Sector Rotation: Will Financials Take the Lead?
Sector rotation theory posits that Financials are a leading indicator of the economy. Historically they start to perform well six to twelve months before the general market. Perhaps one of the reasons is that they tend to generate big fees from M&A activity. And M&A activity starts to get interesting while certain assets are still cheap. Consequently, I'm watching the Financials and the level of deal activity.
Last week I posted a chart highlighting the performance of the banking sector, noting that it hadn't been able to sustain a rally longer than a week for quite a while. Well, it looks like decision time. Just a few weeks ago, Citi's stock price was under $1. Saturday Night Live made a joke that it was the first major bank to make it onto McDonald's value menu. Well, it has tripled since then. And the rally has taken prices in this sector to interesting levels. The chart below shows that the rally has a series of heavy technical burdens to overcome.
However, making it past this price area would go a long way towards convincing me that an intermediate term rally was starting.
One other potential negative, indicating a reversal back to the down-side (at least in the short-term), is that the Equity Put-to-Call ratio just hit its ten month low ... and that is often a reliable sell-signal.
The Red Ribbon is a fun video worth watching. It is a reminder that Hope, Inspiration and Passion are important catalysts to moving forward, regardless of what you do for a living.
It's a puzzle. Is this yet another bear-market bounce, or the start of something more meaningful? It was just the second gain in 10 weeks; but the 12% rise from 12-year lows was enough to start the debate.
The usually bearish, and quite well-respected, Doug Kass suggested that we might be seeing a "generational low" here. Personally, I'm skeptical. But when Doug Kass and Warren Buffet agree, I'm going to try and see what they see.
Also note that tech is leading, and the financials are doing reasonably well, right now, too. For a sustained rally, that is as it should be. Nonetheless, the proof will be in the follow-through.
With that in mind, here is a chart of the Banking Index from Bill Luby's VIX and More. It shows that we've had one-week rallies several times since August. A bigger move might be an important sign?
Also note that the major US Equity Indices are rallying into the overhead resistance created by the November lows. And that is where we start the week.
There's a joke amongst traders: The Trading Gods allow you to buy the low-tick then sell the high-tick ... once. After that, you're free to do the opposite as often as you want.
Note that there is a kernel of truth in most good humor ... and if you haven't seen Jim Cramer on the Daily Show, it's worth watching.
I finally got around to reading this book, and it was worth it. This
review has links to videos and related material to help you get more
from the book. Bottom-line: It was fun and easy-to-read ... with short
chapters and memorable stories that make practical points.
Magic, Markets and the Mind ... A Little Back-Story.
Magic fascinated me when I was younger. I loved learning new and cool illusions. There's something satisfying about seeing behind the curtain, and understanding how it works.
Now, as an adult, I'm struck with how similar that is to my fascination with understanding stock markets and trading techniques. Of course, increased skill in this area is potentially rewarding financially. But there also is something intellectually pleasing about believing you can see and understand what's really happening in the markets.
Taking that a bit further, it's not surprising that people spend so much time and money trying to understand how the mind works. Our brains didn't come with a user's manual; though sometimes it would be useful to have one to help understand why something is happening or
how to get a different result.
Some aspects of my mind that truly amaze me, while other parts of my mind confound me. Have you ever asked yourself: How can someone so smart be so dumb, at the same time? I suspect that most people have.
Obviously that is why there are whole industries that help shine a light into that darkness. Whether it's through personality or temperament testing, learning to use NLP, or finding some other way for us to optimize our performance or understanding ... people want insights and answers.
That is why I'm happy to review the book Predictably Irrational. It was interesting and fun; and it provides some insights worth having. Think of it as a few of the missing chapters from our Owner's Manual.
Predictably Irrational: The Hidden Forces That Shape Our Decisions.
When it comes to making decisions in our lives, we think were in
control. We think we're making smart, rational choices. But are we?
In a series of illuminating, often surprising experiments, Professor Dan Ariely refutes the common assumption that we behave in rational ways.
His book, Predictably Irrational: The Hidden Forces That Shape
Our Decisions, contains an interesting mix of psychology and economics, he calls "behavioral
economics". The main point of the book is that while irrational behavior is a
part of human nature, people tend to behave irrationally in a predictable fashion.
Consequently, Ariely suggests that we would be better off if we designed systems to compensate for our limitations. With that in mind, this
book can change the way you interact with the world, one decision at a
time.
Why Smart People Do Dumb Things:
Blending
everyday experience with research, he explains how
expectations, emotions, social norms, and other invisible, seemingly
illogical forces skew our reasoning abilities.
Not only do we make
astonishingly simple mistakes every day, we make these same types
of mistakes, repeatedly.
We consistently overpay, underestimate, and
procrastinate.
We fail to understand the profound effects of our
emotions on what we want. And
We overvalue what we already own.
Yet
these misguided behaviors are neither random nor senseless. They are
systematic and predictable - thus, making us predictably irrational.
Here is a brief video that explains more about how you can use behavioral economics to combat the Predictably Irrational.
The Book Illustrates Some of the Ways We Exercise Bad Judgment in the Economics of Life.
There are a lot of interesting tidbits in this book. For example, the book explains why cautious people make poor decisions when excited, or why
you enjoy the more expensive option over its cheaper counterpart.
One study in the book shows that Cheap is Good; But Free Seems Better. When asked if they’d like a 15-cent Lindt truffle or a one-cent Hershey’s Kiss, 73% of people buy the truffle. However, simply drop a penny off the price of each - so ... a 14 cent truffle or a free Hershey’s Kiss - and only 31% choose the Lindt. Is eating the chocolate you don’t really want worth saving a penny? Probably not; but it is human nature.
According to Ariely, we should re-examine and re-cast our understanding of economics to reflect the systematic (and unsurprising) irrationality of human nature. Ariely argues that greater understanding of previously ignored or misunderstood forces (emotions, relativity, and social norms) that influence our economic behavior brings a variety of opportunities to better predict individual motivation and consumer choice, as well as economic and educational policies.
There is a kernel of truth in most good humor. So last week I posted a clip of Jon Stewart poking fun at CNBC on the Daily Show ... and it was funny. This week, Jim Cramer went on the Daily Show to defend himself ... and the results are funnier, with even more kernels of truth. Here are un-edited extended versions of that interview. This is certainly worth watching.
You've probably heard the joke about the difference between a recession and a depression. It's a recession when your neighbor loses their job; and it's a depression when you lose yours.
Here is a cartoon that pokes fun at something similar.
The 1929 crash got off to a much faster start, but we have now more or less caught up. That isn't as funny because of how true it is becoming.
Bespoke had an interesting tidbit, only 5% of stocks in the S&P 500 are still trading above their 50-day moving averages. Three sectors -- financials, industrials, and utilities -- have zero stocks trading above their 50-days. Technology has the highest percentage of stocks above their 50-days at just 12%.
Because of the unrelenting selling, many believe that stocks are ripe for a bounce. Supporting that are several reasonably reliable indicators. The first is that Smart Money
is continuing to get more bullish (while retail investors continue to get
more bearish). We are getting close to levels that often signify
rallies. Similarly the American Association of Individual Investors (AAII) reported the highest level of bearishness (over 70%) since they started measuring in 1987. This is often construed as a contrarian indicator, since the highest levels of bearishness often occur at market bottoms. So at least now you can feel good that people feel bad.
Sometimes the truth in humor tells the story better than other methods. Here is a clip from Jon Stewart's Daily Show. In it, he does what he does to CNBC. It's pretty funny.
This drawing made me smile, even though the market continued down.
Sentiment is bearish; not surprising since we're at market lows not seen in 12 years. You know it's bad out there. But to put it in perspective, Bespoke presents some sobering stats in "Ugly Stock Stats From an Ugly Bear."
Adding to the market's concerns, here is a chart showing that Goldman Sachs slashed their S&P 500 Earnings Forecast. They are expecting a peak-to-trough decline of 56% (behind only the Great Depression and WW1).
And here is a chart showing the deterioration of major bank market caps since 2007. The Blue Bubbles show market value in Q2-07, while the Green Bubbles show recent values.
Regardless of the data, the real question is whether it will get better or worse from here?
Here is a positive sign. Smart Money is starting to get more bullish (while retail investors continue to get more bearish). We are not yet at the levels that often signify rallies, but we are closer.
As we get closer to intermediate-term lows, I pay more attention to Sentiment measures. So I'll be keeping an eye on Trader's Narrative because they have lots of good content.
I added a feature to the website this week. A place where I link to the news that catches my eye. I'll continue to post the best links here, and I'll have a bunch more for you on the blog.
Likewise, in uncertain times, it is natural for people to worry that there will be less for them.
But it doesn't have to be that way.
All We Have To Fear Is Fear Itself. I keep talking about market psychology and human nature. The reason is that markets are really a reflection of the collective fear and greed of its participants. And people tend to get paralyzed during scary times like these.
But it's not the economy that makes people feel paralyzed.
People feel paralyzed because of their reactions and their beliefs
about the economy.
A little examination reveals that most fear is based on a "general" rather than a "specific" trigger. In other words people are afraid of all the things that could happen and are paralyzed by the sheer scope of possibilities. These things don't even have to be probabilities in order to scare them.
Your Antidote to Anxiety. You gain a competitive advantage as soon as you recognize that it's
simply human nature when you "make things up" to scare yourself. Why?
Because as soon as you distinguish that fear is just an automatic
response and not necessarily "true", you can re-use your energy and
insights to focus on things that move you forward.
It's easy to be a lot more resourceful by simply dealing with the specific items, and coming up with a plan to deal with them or transform them into opportunities.
Even a tough environment, like this, presents you with opportunities if you watch for them ... or even better, if you create them.
Capitalogix Commentary 03/27/09
We just saw a 24% rally unfold in a little over two weeks. But a rally like that doesn't make too many people happy. For most, this is where fear and greed collide.
Prudence dictates that position size and risk should stay small while in a serious long-term downtrend, especially with a stock like Citibank recently trading under a dollar. Yet a rally that big and steep often makes people feel like they should have been in the market, and wish they would've traded "this, that, or the other" stock or sector that they noticed a week or two ago.
Don't Worry, This Little Bit of Mind Control Won't Hurt A Bit ...
This week I saw several news reports using the phrase "The Great Recession". This might be part of an interesting strategy on the part of the International Monetary Fund, which used that phrase a few weeks ago. Naming something gives you control over it (or at least the appearance of control over it). And "Recession" sounds so much less severe than "Depression". If you can just get people to adopt that phrase, it might give them enough hope that you actually avoid a depression? But just as it's hard to call a recession until you're well into it, I think it's pretty hard to tell whether you come out of it than till you're actually out of it. Still, it is a nice try.
Likewise, I have been impressed by how the administration has played the financial crisis lately. There seem to be some sound ideas, talked about in ways that make sense to the public, which get announced at strategic times. Moreover, it seems to be working; and the market looks like it's responding.
However, the key word there might be "looks". I'm certainly not convinced that the worst is over yet.
Where Are We in the Cycle?
A few weeks ago I noted the spread between smart money confidence and retail investor pessimism was at levels that often indicated short or intermediate-term bottoms. In hindsight it worked again, and there was a pretty sizable rally. However, retail traders are becoming confident again, too quickly for my taste. And the spread is no longer significant. So I don't see an edge there at this point.
I don't believe this is the end of the bottom. Instead, I hope this is the beginning of the bottoming process. My sense is that there are many businesses hanging on by a fingernail, or sheer will. Some of them are getting tired, others are running out of money, while still others are finding it hard to sell something in this environment. The point is that I suspect we're due for another round of culling the herd. That's not necessarily a bad thing, either.
What I'll be looking for, this time, is that I think we'll see a number of deals get done as prices get lower again. The companies that are going to survive, the companies that are going to thrive, the companies that are going to become new leaders in this next phase of our economy are going to start moving forward again.
Business Posts Moving the Markets that I Found Interesting This Week:
Lighter Ideas and Fun Links that I Found Interesting This Week
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