Capitalogix

An Oversold Market Doesn’t Always Bounce

Our markets remain oversold on short-term charts.

However, while last week was tough on the Markets, a quick glance shows that selling was relatively contained.

 

Without committed sellers, it won't take much to prop things up again.  However, without the liquidity of organic buying, the Markets remain vulnerable to fear, uncertainty and doubt.

As you know, the news out of the Euro-zone has not been good. There are bank problems, an inability to agree on solutions, yields rising, and sentiment crumbling. As a result, traders worry that we'll miss this year's Santa Claus Rally. Nonetheless, conventional wisdom says not to short a dull market. 

At a time when interest rates are historically low, we are seeing strong out-flows of cash from funds and almost no new money entering to buy stocks. At this point, it seems as though people are more interested in 'not losing' rather than worrying about how much they can make on their money.

This is when careful trading trumps hopeful seasonality.  Consequently,  expect traders to be on the look-out for short-term opportunities and diversification into other markets.

 

Related articles

• Guest Post: A Glimpse Into The Future Of The Stock Market And Dollar (zerohedge.com)
• Investor Sentiment - Looking Ahead (investmentpostcards.com)

Here Are Some Interesting Links for Your Long Weekend Reading

 

Here are some of the posts that caught my eye. Hope you find something interesting.

Lighter Links:

• Jeff Bezos Owns the Web in More Ways Than You Think. (Wired)
• Tattoo Barbie. Really? The perfect gift for an enemy's daughter. (Forbes)
• Top 50 Most Motivational People on the Web. (Under30CEO)
• CIA Mines Social Media Data. The 'Ninja Librarians' Are Watching. (DNews)
• Science Is Sure - Smart People Are More Prone to Use Drugs. (Atlantic)

Trading Links:

• A Behind the Scenes Look at MF Global's Last Days. (SeattleTimes)
• Here Are the World's 29 'Too Big to Fail' Banks. (TheAtlantic)
• Obama to China: Behave Like a 'Grown Up' Economy. (CNBC)
• Algo Trading Continues to Pick Up Pace Despite Challenges. (OptionsCity)
• 3 Reasons Why CEO Confidence Surged in November & Why It Won’t Last. (CEO)

How Do You See the Coming Week for the Markets?

From a chartist's perspective, the S&P 500 Index broke out of its recent triangle pattern by moving lower.  This was an unpleasant surprise for bulls, because triangles are most often considered a continuation pattern. As such, when the pattern ends, prices are normally expected to continue in the direction they were trending before the continuation pattern (consolidation) began.


In this case, the breakdown casts a bearish pall on a picture that been bullish since the October low.

A positive aspect to the price breakdown is that a number of ultra-short-term indicators hit climactic oversold readings the same day. On the chart, above, we can see how these oversold spikes generally coincide with the start of rallies of at least short-term duration.

Carl Swenlin at DecisionPoint explains that climaxes are often a sign of either initiation or exhaustion. An initiation climax signals that price will begin moving in the direction of the climax, while an exhaustion climax occurs at the end of a move. Immediately following a climax, prices can chop around for a day or two before the follow-through begins.

So, was the breakdown actually a shakeout, intended to turn people bearish just ahead of a rally?

Unfortunately, we are still on a longer-term sell signal, which means things could be about to get nasty again.  The following chart shows a weekly view of the S&P 500 Index.  Notice that price could not get back above the up-trend line (marked by the green arrow) or the overhead support-resistance line (marked by the pink highlight).

 

 

Other clues? Historically, this is a seasonally bullish time.  And trader talk is that markets may pop on a significant government intervention we are likely to see. 

All-in-all, it points to another interesting week.

 

Related articles

• Many Triangles Break Down (by Springheel Jack) (slopeofhope.com)
• How to Trade This Headline Driven Stock Market (zerohedge.com)

Just because you're a paranoid trader doesn't mean the markets aren't out to get you

The good news is that the Markets have responded well to much uncertainty.  Moreover, without committed sellers, it has been easier for prices to get pushed higher.  The bad news is that the uncertainty comes from real issues. 

I'm reminded of the phrase: "Just because you are paranoid, doesn't mean people aren't out to get you."  Here are two things that to watch.

The Continued Risk of Default in Europe.

So far, none of the European austerity and bailout plans have not managed to stem the European debt crisis.

Some would claim that the severity of the crisis has only increased over time, given that Italy (the world's eighth largest and the euro zone's third largest economy) is now becoming the latest European nation threatening to require a bailout.

The following chart helps illustrate the risk of European debt by plotting out the 10-year government bond spread for all the PIIGS (i.e. Portugal, Italy, Ireland, Greece, and Spain) from 2007 to the present (versus the German Bund).

 

For example, (at the time this chart was constructed) the Greek 10-year government bond yield (light blue line) is currently a whopping 32.5 percentage points greater than that of the relatively stable German Bund. That is a far cry from where it was back in the summer of 2009 and shows the risk premium imposed based on the perceived likelihood of default.

Perhaps more important, however, is the status of Italy (dark-blue line). Italy has €1.9 trillion ($2.6 trillion) of debt outstanding. This level of debt is greater than that of all the other PIIGS combined. Due to the severity of the situation, the European Central Bank may ultimately be forced to do unpleasant things (like deciding to print a significant amount of euros – something they are very much ideologically opposed to doing).

The Relatively Poor Performance of Banks.

Banks often lead rallies higher.  The logic is that banks make more money when they are lending, doing deals, and helping companies go public.  In 2011, investors have been hesitant to buy into further gains in this sector.  

Looking at the chart, below, notice that the S&P 500 Index (symbol: SPY) has been trending up since April 2010, while the Banking Index (symbol: $BKX) has been trending down since April 2010.

 

 

What Else Is Wrong With That Picture?

According to StockTiming.com, the Financials component on the S&P 500 is the second largest component representing 13.78% of the index. 

 

 

Consequently, this chart implies that the "other components" (as a group) have been strong enough to overcome the huge weakness in the Banking sector.  

Negative divergences like this cannot go on forever. For the S&P to continue trending up in the future, the non-financial sectors will have to stay strong, and stay strong enough for the Financials to start reversing its down trend. 

So, while the markets have held up well through the recent negative sentiment and external risk factors, there are still some big challenges ahead.  Perhaps all that means is that this is a more a trader's market than an investor's market.  On the other hand, diversification seems like a good goal here.

 

Related articles

• ECB as Lender of Last Resort Would End Crisis for Silva (businessweek.com)
• Goldman Sachs On The One PIIG That Really Matters: Italy (businessinsider.com)

Beware the Cold Reality of Hot IPOs (at least recently)

After much speculation, Groupon (GRPN) went public last Friday.  Its first day of trading ended with the stock closing 31% above its offering price.

Groupon's successful IPO raises a bunch of questions.  What does it say about the market? Do you care that they floated less than 5% of the company?

Another question is how other hot IPOs have fared recently?

 

via Bloomberg BusinessWeek 

What comes after a blockbuster IPO tends to be less pretty. The chart, above, shows the post-IPO performance of 25 hottest offerings of 2010 and 2011. There’s a lot of red: after the initial “pop” (which is the jump from the offering price to the open), 20 of those 25 tanked. Many have fallen 50 percent from their first day opening price in the stock market* (one high profile example: Demand Media, down 68 percent since its January debut), a few more than 80%.

 

Related articles

• Why Groupon's IPO Shouldn't Erase Skepticism (technologyreview.com)
• Groupon Has The Second Biggest IPO In Tech History (GRPN, GOOG, MSFT, AMZN, LNKD) (businessinsider.com)

Here Are Some Interesting Links for Your Weekend Reading

Here are some of the posts that caught my eye. Hope you find something interesting.

 

 

Lighter Links:

• Siri’s Snark Becomes the Internet’s Next Big Thing. (Techland)
• MBA Applications Down at 21 of the Top 30 Schools. (BusinessWeek) 
• Run of the Century. 100-year-old man now the world’s oldest marathoner (TheDaily)
• Real 'Sybil' Admits Multiple Personalities Were Fake. (NPR)
• Quantum Minds. The fuzziness & weird logic of how particles behave applies to how humans think. (NewScientist)

Trading Links:

• Is Goldman’s Loss a Bad Omen for Wall St. or a Way to Deflect Scrutiny? (NYTimes)
• GOP is Fed Up: Mulling Replacement for Bernanke. (TheDaily)
• New Bankruptcy Ripples May Emerge as Corporate Failures Pick Up. (Reuters)
• Cloud Economics: The Business Case for Cloud Computing. (WallSt&Tech)
• Hackers Takes Down NYSE.com for a Minute - Trading Unaffected. (4029TV)

 

What To Do If the S&P 500 Index Starts to Out-Perform Asian Markets

There is a slight, but potentially growing, disconnect between the S&P 500 Index and the Asian stock markets (specifically the Hang Seng).

On Friday the Hang Seng lost 1%. Moreover, looking at the recent price performance action … on a 20 day basis, the Hang Seng acting very different than other world markets.

 

Signal Financial Group just updated their seasonal chart series for the Hang Seng Index.  It indicates that we could be at a turning point, with little upside expected based on historical patterns.

 

 

A Little Risk/Reward Exercise in Portfolio Diversification.

If the S&P continues to the upside … the Hang Seng may not follow.  Thus, over the next few weeks, some traders may look at a potential Long S&P and Short Hang Seng play.

Just as an example, here is a quick look at a portfolio study covering 6 weeks, comparing the performance of a portfolio based solely on the S&P 500 Index versus a portfolio that is long the S&P (using 90% of capital) and short the Hang Seng (with 10% of capital).  

 

Portfolio Allocation:

Equity Portfolio:		100% Long S&P 500 Index
Mixed Portfolio:		90% Long S&P 500 Index and 10% Short Hang Seng

 

The chart below provides a basic analysis, identifying the differences between the two portfolios. The chart is divided into three sections: return comparison, risk comparison and portfolio change. The first section shows the percent return figures for the portfolios over a recent six week period. The second section focuses on risk, which is defined as standard deviation of return, over the same six week time period. The final section shows the net percentage change to the portfolio's performance based on the small 10% allocation to Hang Seng.

 

The diversification helps the risk/reward ratio in the study.  That looks like something to watch for in the coming weeks.  Hope it helps.

 

Related articles

• Watch the Hang Seng (ritholtz.com)
• Hang Seng Soars On Chinese Bank Investments (businessinsider.com)
• Asia update: It's getting grimmer (ftalphaville.ft.com)

Some Interesting Links for Your Weekend Reading

Occupying Wall Street or Defending Wall Street? ... Agitation is percolating and spreading.

Here are some of the posts that caught my eye. Hope you find something interesting.

Lighter Links:

• Have You Tested Your Strategy Lately? Ten Timeless Tests. (MckinseyQuarterly)
• Latest Game Theory - Mix Work & Play to Motivate Employees. (WSJ)
• What iOS 5 Brings to the iPad. (Reviews)
• Computer Virus Hits U.S. Drone Fleet. (Wired)
• Would You Drink Google Beer?  (Neatorama)

Trading Links:

• Bernanke Downbeat about U.S. Economy. (FT)
• Marc Andreessen Says There’s No Bubble Because “Stuff Just Works”. (VentureBeat)
• Investors May Regret Not Warming Up to Microsoft. (Fortune)
• Good at Chess? A Hedge Fund May Want to Hire You. (NYTimes Dealbook)
• Key Reversal Day? Did the market hit a major bottom on the very day that it also satisfied the official definition of a bear market? (MW)

How Does Your Income Compare with John Paulson's?

Contrast your annual salary with a hedge fund legend (and someone who most probably earns a bit more than you).  The interactive infographic "You vs. John Paulson" employs a wide array of comparisons, clocks, and sliders to keep you interested in

 

 

It was fun to put the numbers in context. For example, if you make $500K per year, according to the infographic, it takes Paulson less than an hour to make that.  Or, put in a different way, Paulson can spend $300,000 the way I buy a cup of coffee. 

Try it here.

 

Related articles

• John Paulson Has A Message For The Protesters (businessinsider.com)

Ten Links Worth a Glance this Weekend

Here are some of the posts that caught my eye. Hope you find something interesting.

Lighter Links:

• The Science of Lean Startups by Eric Ries [Video]. (BusinessOfSoftware)
• What China's five-year plan means for business. (MckinseyQuarterly)
• The Therapist Will See You Now, via the Web.  (NYTimes)
• Tiny Bugs are Controlling Your Mind: Read This Before You Take Another Probiotic. (Kurzweil)
• 25 Great Photographs of Rice Terrace Patterns. (TwistedSifter)

Trading Links:

• Jedi Monetary Policy: Letting the markets do the work for you. (Economist)
• The Recovery Is Fading for Banks: Weak Lending Hurts Profits. (Reuters)
• Buffett Buyback Shows S&P 500 Passes Berkshire's Value Test. (Bloomberg)
• The Secret to Trading System Development is to Fail Faster. (Quantisan)
• Technical Analysis May Actually Work! (Empirical Finance)

 

Related articles

• A Neophyte's Guide to the Singularity (thinkthatthrough.wordpress.com)
• Commentary on OpenView's Interview with Eric Ries (garyjense.wordpress.com)