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…
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.
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…
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…
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.
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…
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at email@example.com with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
Quick take: Based on the August S&P 500 average of daily closes, the Crestmont P/E is now 90% above its arithmetic mean and at the 98th percentile of this fourteen-decade monthly metric.
The 2011 article P/E: Future On The Horizon by Advisor Perspectives contributor Ed Easterling provided an overview of Ed's method for determining where the market is headed. His analysis was quite compelling. Accordingly I include the Crestmont Research data to my monthly market valuation updates.
The first chart is the Crestmont equivalent of the Cyclical P/E10 ratio chart I've been sharing on a monthly basis for the past few years.
Peter Sekaer Times Square with Father Duffy statue 1937
This it. The is the biggest we’re going to get. We won’t grow anymore. Not bigger, not wider, not taller (just thicker perhaps, in the sense of more stupid). I return to this from time to time, and still I never see even just one voice in the media with even one hair’s breadth of doubt about the overarching theme of growth at all costs. Is this a sign that economists and other poorly educated people have taken over the world, or is it simply what we are all programmed for?
The only discussion out there is how we can best return to growth. Never if we should return to it. But still, when I look around me I don’t have the feeling that we desperately need to grow bigger. Th...
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Buffalo Wild Wings Inc. (Ticker: BWLD) shares are in positive territory in early-afternoon trading on Thursday, reversing earlier losses to stand up 0.50% on the session at $148.50 as of 12:15 pm ET. Options volume on the restaurant chain is running approximately three times the daily average level due to heavy put activity in the October expiry contracts. It looks like one or more traders are buying the Oct 140/145 put spread at a net premium of roughly $1.45 per contract. As of the time of this writing, the spread has traded approximately 3,000 times against very little open interest at either striking price. The put spread may be a hedge to protect a long stock position against a roughly 6% pullback in the price of the underlying through October expiration, or an outright bearish play anticipating a dip in BWLD shares in the next couple of months. The spread makes money at expiration if shares in BWLD decline 3.3% from the current price of $148.50 to breach the breakeven point...
Gradient Senior Analyst Nicholas Yee reports on six companies that are using a variety of techniques to shift pretax profits to lower-tax areas. Featured in this USA Today, article, the companies include CELG, ALTR, VMW, NVDA, LRCX, and SNPS.
Mt Gox may be long gone in the annals of bankruptcy, but its founder refuses to go gentle into that insolvent night. And, as CoinDesk reports, the disgraced former CEO of the one-time premier bitcoin trading platform has decided to give it a second try by launching new web hosting service called Forever.net and is registered under both Karpeles’ name and that of Tibanne, the parent company of Mt Gox.
Author Helen Davis Chaitman is a nationally recognized litigator with a diverse trial practice in the areas of lender liability, bankruptcy, bank fraud, RICO, professional malpractice, trusts and estates, and white collar defense. In 1995, Ms. Chaitman was named one of the nation's top ten litigators by the National Law Journal for a jury verdict she obtained in an accountants' malpractice case. Ms. Chaitman is the author of The Law of Lender Liability (Warren, Gorham & Lamont 1990)... Since early 2009, Ms. Chaitman has been an outspoken advocate for investors in Bernard L. Madoff Investment Securities LLC (more here).
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Well PSW Subscribers....I am still here, barely. From my last post a few months ago to now, nothing has changed much, but there are a few bargins out there that as investors, should be put on the watch list (again) and if so desired....buy a small amount.
First, the media is on a tear against biotechs/pharma, ripping companies for their drug prices. Gilead's HepC drug, Sovaldi, is priced at $84K for the 12-week treatment. Pundits were screaming bloody murder that it was a total rip off, but when one investigates the other drugs out there, and the consequences of not taking Sovaldi vs. another drug combinations, then things become clearer. For instance, Olysio (JNJ) is about $66,000 for a 12-week treatment, but is approved for fewer types of patients AND...
I just wanted to be sure you saw this. There’s a ‘live’ training webinar this Thursday, March 27th at Noon or 9:00 pm ET.
If GOOGLE, the NSA, and Steve Jobs all got together in a room with the task of building a tremendously accurate trading algorithm… it wouldn’t just be any ordinary system… it’d be the greatest trading algorithm in the world.
Well, I hate to break it to you though… they never got around to building it, but my friends at Market Tamer did.
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