Capitalogix

There's Usually Some Pain to Endure On the Road to Good Market Returns

No matter how you look at it, big stock market sell-offs happen regularly.

For example, we've seen two violent sell-offs in the second half of 2014. The first came when the S&P 500 quickly tumbled 9.8% from its then all-time high of 2,019 on Sept. 19 to as low as 1,820 on Oct. 15. The second came when the S&P plunged 5.1% from 2,079 ion Dec. 5 to 1,972 on Dec. 16.

Buy and Hold investors must stomach significant drawdowns to get their returns — even in 'good' years.

This chart shows S&P 500 intra-year declines compared with calendar year returns. The bars represent year-end returns since 1980, while the purple dots mark each year's market low.

 

Business Insider via JP Morgan Asset Management.

 

Basically, you have to understand that 10-15% pull-backs are normal (perhaps even healthy) for the market.

For reference, here are market correction averages and their historic frequency. Since 1900, we've seen:

• 5% market corrections: 3x per year.
• 10% market corrections: Once per year.
• 20% market corrections: Once every 3.5 years.

Interesting.

 

And yet, the S&P often recovered those losses and then some.

Importantly, these big sell-offs often occur during years when the markets head higher. 

Despite average intra-year drops of 14.2%, annual returns have been positive in 26 of 34 years.

Bottom line: Sell-Offs happen. And sometimes they're big ... But they're normal.  So, stay calm and carry on.

Best wishes for a Happy New Year!

Here Are Some Links For Your Weekend Reading

Here is a picture of Obama rocking a tiara like the leader of the free world should.

 

 

(h/t JB via ABC News)

The president understood that he was broke a cardinal presidential rule.  "Here’s the general rule," Obama explained: "You don’t put stuff on your head if you’re president.  That’s politics 101. You never look good wearing something on your head."

Chief White House photographer Pete Souza posted a photo to Instagram showing the president donning a tiara alongside a group of Girl Scouts from Tulsa, Oklahoma.

Some things you find on the internet actually happened.

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

 

Lighter Links:

• The 25 Top Personal Development Leaders of 2014. (Success)
• 22 Pictures That Prove That 2014 Is Already the Future. (Buzzfeed)
• See the Most Beautiful Data Visualizations of 2014. (Fastcocreate)
• 5 Most Insidious Conspiracy Theories of 2014. (Alternet)
• The 20 Best Songs of 2014. How many do you know? (Vulture)

 

Trading Links:

• Citigroup to Move Headquarters to U.S. Capitol Building. (New Yorker [Humor])
• The Federal Government Now Employs the Fewest People Since 1966. (RTE)
• Top Market Themes for 2015. (Goldman Sachs)
• Frequent - But Inefficient. HFT might reduce liquidity, not boost it. (Economist)
• A Good Problem to Have During the Holidays: Vatican Finds Hundreds of Millions of Euros 'Tucked Away'. (Reuters)

Here Are Some Links For Your Weekend Reading

This cartoon made me chuckle. Perhaps you know someone like this?

 

 

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

 

Lighter Links:

• Lockheed Martin's New Fusion Reactor Might Change Humanity Forever. (Sploid)
• Which Technologies Will Dominate in 2022? (Wired)
• The Odds, Continually Updated. A surprisingly understandable look at Statistics. (NYTimes)
• Mind Expanding: 7 ways to fine-tune your brain. (New Scientist)
• How Pixar Uses Math to Make Characters Look Perfect. (Gizmodo)

 

Trading Links:

• Big Banks Manipulate Physical Market Prices. (The Big Picture)
• Tony Robbins: Mastering the Game of Money. (Interview)
• The Decline and Fall of Fund Managers. (WSJ)
• Future Opportunities, Future Shocks. 6 Trends Reshaping the World Economy (Citi)
• Attack of the CyberMen. Sophisticated viruses will be the workhorses of 21st-century spying. But there should be rules. (Economist)

A Jazz Quartet Explains High-Frequency Trading

There was an opinion piece on MarketWatch about how information flow influences how often you should trade.

As part of it, there was a video that explained how algorithms effect trading (using a jazz quartet).

 

via Marketwatch.

The Meaning of Money: Listen to how computer algorithms changed the music of the market.

 

Faster trading brings up important economic questions: What are the costs and benefits to investors for speeding up trading? Is there an “optimal” trading frequency at which the financial market should operate? And does a faster market affect one group of investors more than another?

 

Here are a few of the points made:

• A higher-frequency market is more responsive to new information.

• The optimal trading frequency depends on how the benefit and cost balance each other.

• The more frequently the market allows investors to transact, the stronger their incentive to split orders over time to avoid price impact.

From my perspective, faster trading is inevitable.  However, as more traders gain access to it, speed for the sake of speed will lose its appeal.  What will continue to matter is the speed at which a trader can identify an edge and capture its profit opportunity.

A Look at Black Swan Market Risks - Or Not

Have you noticed that people keep using the term "Selfie" to describe tons of pictures that aren't selfies?

Same with "Spoiler Alert" ... People use the term to mean a variety of things now ... few of which are actually spoiler alerts.

There is something similar happening in the financial world. People have latched on to the term "Black Swan".

Here is an example. 

Wall Street was up for the sixth straight week, despite the oil rout.

What could go wrong?  What are the "potential Black Swan events"?

To annswer, Société Générale releases a quarterly chart  of "Black Swan" risks. 

The most recent example is below.

 

 via BusinessInsider.

The concept of a "Black Swan" event takes its name from Nassim Taleb's 2007 book "The Black Swan."

But there's a slight problem with the chart above: acknowledging an event's possibility means it can't be a Black Swan.

The chart suggests that further deterioration in the economic situation in Europe poses a risk to the market. However, a "Black Swan" is an event or occurrence — a tail event, as Nassim Taleb would call it — that is so remote that it is completely unforeseen. 

In his book, Taleb uses the Thanksgiving turkey as an example.

"Consider a turkey that is fed every day," Taleb writes. "Every single feeding will firm up the bird's belief that it is the general rule of life to be fed every day by friendly members of the human race 'looking out for its best interests,' as a politician would say.

"On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief."

Here's what it looks like in chart form. 

 

 

This is basically the book's entire message wrapped up in one graphic. 

"Consider that [the turkey's] feeling of safety reached its maximum when the risk was at the highest!" Taleb writes.

"But the problem is even more general than that; it strikes at the nature of empirical knowledge itself. Something has worked in the past, until — well, it unexpectedly no longer does, and what we have learned from the past turns out to be at best irrelevant or false, at worst viciously misleading."

And this is really what the problem of Black Swans is all about. 

It isn't that we can't know the future, but that we delude ourselves into thinking we can ... making forecasts about events that are inherently unforecastable and giving us false belief about what can (or will, or might) happen in the future. 

When a Black Swan event occurs, it seems outside what had previously seemed possible.

However, Taleb suggests, the event only seems outside previous beliefs about what was possible because of how we arrived at those possibilities ... by using the past to forecast the future.

Here Are Some Links For Your Weekend Reading

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

 

Lighter Links:

• The 25 Best Inventions of 2014. (Time)
• Peter Thiel's Very Negative - And Very Useful - Advice For Entrepreneurs. (Fortune)
• Google Glass Failed, but Here’s the Path Its Successors Will Take. (MIT TReview)
• Why Do People Believe in Conspiracy Theories? (Scientific American)
• Will NFL Broadcasts Ever Embrace Advanced Stats? Sabermetrics changed pro baseball. Now comes football. (MMQB)

 

Trading Links:

• The Science Behind Casino Profits. (The Week)
• Facebook 'Newspaper' Spells Trouble For Media. (BusinessInsider)
• U.S. Economy: Four Indicators Paint Very Negative Picture. (Business2Community)
• USPS Takes on FedEx and UPS with 7-day Delivery This Holiday Season. (B2C)
• Black Friday Online Sales Up 8.5% Over Last Year, 20% Of Sales Came From iOS. (TechCrunch)

Seasons of the Economic Cycle

Just re-looked at this chart depicting the four seasons of our basic economic cycle. 

 

Pretty clear where we are. 

 

 

LPL Mid-Year Outlook via Josh Brown.

 

I like maps (like this one) because they help you anticipate, rather than simply react to what happens. 

Are You Expecting More Selling - Or a Buying Opportunity

"Insider Selling Mounts as Markets Hit All-Time Highs" screamed the headline.

A glance at the charts showed that the S&P 500 Index tested below its 50-Day Moving Average for the first time in a long time.

Meanwhile, the Russell 2000 index experienced what technical analysts call a “Death Cross” ... where the near-term 50-day moving average dips below its long-term 200-day moving average.

 

 

What does it mean?

The "worry" is that this move is the beginning of a new bearish trend ... and the long-term moving average is seen as the new resistance level.

So far this year, small-cap stocks have underperformed their larger counterparts. Year-to-date, the Russell 2000 is down almost 3% while the S&P 500 has gained over 7%.

Moreover, the small-cap index has been weakening and is off almost 7% from its all-time high set at the start of July, while the large companies in the S&P 500 and the Dow Jones Industrial Average have been hitting new highs.

The main issue is that small caps are under-performing and traders wonder what that says about the strength and breadth of the recent rally.

Nevertheless, the last time the Russell 2000 formed a death cross in July 2012, no significant sell-off followed as the index recovered and continued an uptrend.  My guess is that this pattern would get far less media attention if it was named "Phlarg" or a "50/200 Crossover".

These are the types of "early warning signs" you should watch.  However, they are just early warning signs ... until they prove themselves to be more.

Four of the world's most valuable internet companies are now based in China.

Four of the world's most valuable internet companies are based in China. 

 

 

 

$BIDU $JD $TENCENT $BABA -  via StockTwits

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Alibaba IPO will make it biggest internet company in China and third biggest in the world

Alibaba IPO is wake-up call for Silicon Valley

Here Are Some Links For Your Weekend Reading

The U.S. is supposed to be the model for free market economics.  So, why do we have the highest corporate tax rate in the world?

 

Here are ten posts that caught my eye. Hope you find something interesting.

 

Lighter Links:

• These Are Some of Best Time-Saving Hacks for A Productive Day. (AlltopStartups)
• There are Now 50 Colleges that Charge More Than $60,000 Per Year [List]. (Insider)
• If Logos Had Honest Slogans ... (TwistedSifter)
• Amazon Tests Kindle Unlimited, Its Own E-book Subscription Service. (FastCompany)
• Dad Claims Kingdom So 7-Year-Old Can Be Real Princess. (HuffingtonPost)

 

Trading Links:

• The Moneyball of Quality Investing. (ResearchAffiliates)
• The Difference Between a Good and a Bad Trader: What Brain Imaging Reveals. (ZH)
• Central Bank Exec Says Stocks Are 'Irrational'; China Poised To Crash. (BizInsider)
• A Cheat Sheet for Understanding the Different Schools of Economics. (Pragcap)
• 5 Everyday Products Whose Prices Are Hitting All-Time Highs. (Fool)