On Reflexivity & Animal Spirits: What Moves the Market from Here?
by ilene - September 20th, 2010 8:54 pm
Kent Thune’s wonderful blog The Financial Philosopher is not just a financial site, it’s a "learning experience." I highly recommend that you visit him and read some of his latest inspirational articles, such as Get Busy Livin’ or Get Busy Dyin’, To Embrace Death is to Embrace Life, and Entrepreneurs: Use Your Delusion, Sell the Illusion. – Ilene
On Reflexivity & Animal Spirits: What Moves the Market from Here?
Courtesy of Kent Thune, at The Financial Philosopher
Are capital markets leading economic indicators or do they provide fuel for a growing economy? Or is it both? Isn’t the function of capital markets to raise capital for the financing of corporate and government operations through the sale of securities (stocks and bonds)?
If the stock market is rising, would this not then create the economic condition it is "predicting" as an economic indicator? In the absence of government stimulus, might financial markets save themselves? If so, how? Can financial markets rise spontaneously or do they require a fundamental boost or outside stimulation?
Capital markets have many functions and their participants have numerous objectives; however, we may simplify them all into two basic categorical functions: 1) Passive and 2) Active. Depending upon economic conditions and variables, capital markets can play one or both rolls. Consider recent comments by George Soros (Hat tip to Captain Jack):
…financial markets do not play a purely passive role; they can also affect the so-called fundamentals they are supposed to reflect. These two functions that financial markets perform work in opposite directions. In the passive or cognitive function, the fundamentals are supposed to determine market prices. In the active or manipulative function market, prices find ways of influencing the fundamentals. When both functions operate at the same time, they interfere with each other. The supposedly independent variable of one function is the dependent variable of the other, so that neither function has a truly independent variable. As a result, neither market prices nor the underlying reality is fully determined. Both suffer from an element of uncertainty that cannot be quantified. I call the interaction between the two functions reflexivity…
Mr. Soros’ idea of reflexivity asserts, as he says, "that financial markets do not necessarily tend toward equilibrium; they can…
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S&P 500: On a knife’s edge
by ilene - August 23rd, 2010 11:32 am
S&P 500: On a knife’s edge
Courtesy of Prieur du Plessis, Investment Postcards from Cape Town
Last Thursday was a so-called 90% down-day for American stock markets (and many other bourses also recorded downward dynamics). A 90% down-day is defined as a day when downside volume equals 90% or more of the total upside plus downside volume and points lost equal 90% or more of the total points gained plus points lost. The historical record show that 90% down-days do not usually occur as a single incident on the bottom day of an important decline, but typically on a number of occasions throughout a major decline. As far as the very short term is concerned, 90% down-days are often followed by two- to seven-day bounces.
The stock market is on a knife’s edge at the moment as seen in the chart below, showing the long-term trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (ROC) indicator (red line). Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1990, 1994, 2000 to 2003, and in 2007. And 2010? With the ROC delicately perched just above the zero line, the primary trend is still bullish, but barely so.
Source: StockChart.com.
Regarding seasonality, I have done a short analysis of the historical pattern of monthly returns for the S&P 500 Index from 1950 to August 2010. The results are summarized in the graph below.
Source: Plexus Asset Management (based on data from I-Net Bridge).
As shown, the six-month period from May to October has historically been weaker than the period from November to April as seen in the average monthly return of 1.05% for the “good six months” compared with 0.25%% for the “bad six months”. Importantly, when considering individual months, September (-0.18%) and October (-0.19%) have historically been the only two negative months of the year. (A word of warning, though: one should take cognizance of seasonality but understand that it is not a stand-alone indicator and it is anybody’s guess whether a specific year will conform to the historical pattern.)
Where does this leave us at this juncture? Considering an array of indicators, we are somewhat in no-man’s land regarding whether the bull or bear will…
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Fibozachi Forecast: Week of April 26th
by Chart School - April 26th, 2010 2:53 am
Trading ideas for early next week. Courtesy of Fibozachi.
Short Trade Candidates
GME: Gamestop (Short-Term to Intermediate-Term)
Current Price: 25.22
Candlestick Patterns: None
After rallying for eight consecutive weeks, Gamestop appears due for a pullback that allows price to digest gains and consolidate before re-testing a wide band of horizontal resistance that spans 26 – 28. With price quickly approaching resistance at 26.05, the chances of registering a multi-week swing high appear well above-average. Last week’s narrow range (near doji) plotted alongside the highest weekly volume tally since the first week of January. This type of high-volume ‘churn’ is a flashing yellow light, warning of possible inflection ahead.
Entry: Immediate (with daily confirmation) or with a move below 24.77
Target (Short-Term): 22.75
Target (Long-Term): 21.11
Stop-Loss: 26.06 or higher
Potential Risk: $1.29
Potential Reward (Short-Term): $2.02
Potential Reward (Long-Term): $3.66
Reward: Risk Ratio: 1.6 & 2.8
WAT: Waters Corporation (Short-Term to Long-Term)
Current Price: 70.03
Candlestick Patterns: Doji
Last week’s high-volume doji marked an end to WAT’s eleven week non-stop rally from 56 – 72 and now is an ideal time to begin looking the other way. WAT appears primed to pullback towards 63 over the next few weeks, where even a bull flag would target 64 – 65 before inflecting. An extended move would carry price down towards the previous swing low area of 56 – 57 from the first week of February.
Entry: Immediate (with daily confirmation) or with a move below 68.36
Target (Short-Term): 63.00
Target (Long-Term): 57.00
Stop-Loss: 71.62 or higher
Potential Risk: $3.26
Potential Reward (Short-Term): $5.36
Potential Reward (Long-Term): $11.36
Reward: Risk Ratio: 1.6 & 3.5
LINTA: Liberty Media Holdings (Intermediate-Term to Long-Term)
Current Price: 16.38
Candlestick Patterns: Doji (Perfect)
LINTA has now registered back-to-back dojis up at a previous swing high, which is a specific trading setup that we scan across markets for each and every day. While last week finally provided a bit of venting for Liberty’s eleven week monster rally, price popped back up at week’s end to close just a single penny lower for the week; some weekly…
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THE BIG MONEY IS BULLISH WHILE SMALL MONEY IS BEARISH
by ilene - December 17th, 2009 2:08 pm
THE BIG MONEY IS BULLISH WHILE SMALL MONEY IS BEARISH
Courtesy of The Pragmatic Capitalist
As a futures trader I routinely check the commitment of traders report released by the CFTC. For those who aren’t familiar with the report it is a breakdown provided by the CTFC of each Tuesday’s open interest for market positions in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. It’s widely followed in trading circles and gives a glimpse into what the big money, commercial money and even the small money is doing with their positions.
What piqued my interest in this data were comments in Tuesday’s “Breakfast with Dave” by Gluskin Sheff’s David Rosenberg implying that the equity markets were overly bullish because the commitment of
I have found over the years that the commitment of traders report tends to be a fairly weak short-term indicator. In fact, the COT tends to be more useful in following the long-term trends of large institutions and where they are currently investing money. Mr. Rosenberg’s implication that the current net bullish position should be seen as a contrarian sign is not necessarily true. After all, big money moves prices and knowing where the big money is going is more often than not a good indicator of where to put your money as opposed to what to avoid. But let’s go even further.
One of my favorite indicators is actually the reporting of small speculators in the CFTC’s report. This shows us what the amateur and small-time futures traders are doing with their money. I have found over the years that this is a fairly reliable contrarian indicator. As you can see in the chart below these traders were net bullish in just 4 weeks over the last year. The last time small traders were substantially net bullish was just before the market crumbled at the beginning of 2009. But what is it telling us now? As of last week’s report it is showing the largest net short position since the week following the March 8th bottom. In other words, small speculators were this…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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