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…
Following US Manufacturing PMI's tumble to two year lows, amid slowing new orders and employment, Markit reports that US Services PMI rose to 56.5 - its highest since April. Amid a solid increase in job creation (low-paying compared to the job weakness in manufacturing) and improvement in business growth, the divergence between Services & Manufacturing is at its highest since Q3 2013 which presaged a complete collapse in Services.
Does 2013 ring any bells?
Commenting on the flash PMI data, Chris Williamson, chief...
Tomorrow is Thanksgiving. Black and Blue Friday will follow, putting U.S. Consumers and Stores in Face Off Over Discounts. A Reuters/Ipsos survey found more people planned to cut holiday spending than increase in every category surveyed: clothing, jewelry, electronics, food and toys, and that 46 percent felt they could wait longer in the season to buy because of faster shipping.
Appliances, entertainment items, infant products and hardware showed narrowing discounts, MarketTrak reported, while promotions for apparel, toys and electronics were getting bigger.
Kurt Jetta, head of retail industry researcher TABS Group, found the discounts underwhelming....
A second day for bulls to shine despite modest end-of-day gains. Some indices did better than others. The Russell 2000 was the key performer. It finished with a MACD trigger 'buy' and looks ready to outperform the Nasdaq 100. This is an important development for bulls looking for more from other indices. A move to challenge - then break - its 200-day MA, would convert August-November action into a healthy basing action.
The Nasdaq registered higher volume accumulation as a brief sojourn below the 20-day MA was reversed. It's nicely set up for a push to new swing highs.
Some weeks when I write this article there is little new to talk about from the prior week. It’s always the Fed, global QE, China growth, election chatter, oil prices, etc. And then there are times like this in which there is so much happening that I don’t know where to start. Of course, the biggest market-moving news came the weekend before last when Paris was put face-to-face with the depths of human depravity and savagery. And yet the stock market responded with its best week of the year. As a result, the key issues dominating the front page and election chatter have moved from the economy and jobs to national security and a real war (rather than police ...
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I've decided to build our startup - Veritaseum, a peer-to-peer financial services platform, directly on top of the Bitcoin Blockchain. Many queried why I would voluntarily give up a lucrative advisory and consulting business to chase virtual coins in cyberspace. That's exactly why I decided to do it. That level of misunderstanding of what is essentially the second coming of the Internet gave me a fundamental advantage over those who had deeper connections, more capital and more firepower. I was the first mover advantage holder.
You see, Bitcoin is not about coins, currency or price pops. It is a massive computing net...
1) The shares of one of my largest short positions (~3%), Exact Sciences, crashed by more than 46% yesterday. Below is the article I published this morning on SeekingAlpha, explaining why I think it’s still a great short and thus shorted more yesterday. Here’s a summary:
The U.S. Preventative Services Task Force’s Colorectal Cancer Screening Draft Recommendation issued yesterday is devastating for Exact Sciences’ only product, Cologuard.
I think this is the beginning of the end for the company.
My price target for the stock a year from now is $3, so I shorted more yes...
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Baxter Int. (BAX) is splitting off its BioSciences division into a new company called Baxalta. Shares of Baxalta will be given as a tax-free dividend, in the ratio of one to one, to BAX holders on record on June 17, 2015. That means, if you want to receive the Baxalta dividend, you need to buy the stock this week (on or before June 12).
Back in December, I wrote a post on my blog where I compared the performances of various ETFs related to the oil industry. I was looking for the best possible proxy to match the moves of oil prices if you didn't want to play with futures. At the time, I concluded that for medium term trades, USO and the leveraged ETFs UCO and SCO were the most promising. Longer term, broader ETFs like OIH and XLE might make better investment if oil prices do recover to more profitable prices since ETF linked to futures like USO, UCO and SCO do suffer from decay. It also seemed that DIG and DUG could be promising if OIH could recover as it should with the price of oil, but that they don't make a good proxy for the price of oil itself.
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 firstname.lastname@example.org 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.
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