Posts Tagged
‘price’
by ilene - September 18th, 2010 9:05 pm
Joshua argues that we don’t need volume to confirm a stock market breakout. – Ilene
Courtesy of Joshua M Brown, The Reformed Broker
Here’s a composite quote that could come from the market strategist of virtually any major firm, I’m certain you’ve read something like this over the last few days:
"The stock market is nearing overhead resistance, a punch through would be a positive catalyst only if volume picks up before or during the breakout."
- Any Chief Market Strategist, Any Firm USA
Wrong!
Price rules in this environment. Volume is completely and totally irrelevant until about 5 to 7% afterthe breakout.
The breakout could come with only 60% of normal volume and be just as meaningful. In counter-distinction to the conventional wisdom, I would argue that a low volume breakout would actually bepreferable right now. Here’s how I arrive at this idea…
Nobody is in. Nobody. We’ve documented the equity fund outflows ad nauseum, they are bigger than Precious after Thanksgiving dinner. Fine. The question becomes, what can we agree is the more motivating condition for investor psychology right at this moment, Fear or Greed?
The answer is undoubtedly Fear. How else to explain the endless Treasury rally and the full scale retreat from equities? Fear is the conductor of this train right now, period, end of story. With that in mind, I ask you to think about the one thing that American investors fear more than anything else – the fear of missing out on the big opportunity.
Nothing freaks out the average investor more than watching the train leaving the station without them. I could put up 75 charts showing parabolic blow-off tops in various markets or I could just remind you that I’ve worked with over 1000 individual investors over the years and I know this stuff.
Fear of missing out is exactly why a stealth rally in stocks with low participation would be more meaningful and bullish than almost any other scenario. What could possibly draw hundreds of billions out of money markets faster than a 5% S&P rally that no one was a part of?
So please, stop regurgitating the "we need real volume" pablum, it is functionally backwards. What we need are higher prices, the lower the participation the better. That’s the kind of milkshake…
Tags: fear, greed, investors, price, rally, Stock Market, volume
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by ilene - September 5th, 2010 7:25 pm
Courtesy of Tim at The Psy-Fi Blog
Odd Water
"The world’s supply of fresh water is running out. Already one person in five has no access to safe drinking water. "
Well, so says the BBC. But water’s an odd thing. You can’t live without it but it’s not particularly valuable. In fact the stuff in your faucet is free, it’s just the cost of getting it there that we pay for.
Water is, perhaps, the pre-eminent example of the old truism that price is what you pay but value is what you get. Only thing is, how do you value something that has no market price? Fortunately teams of highly trained thinkers have been working on this, just so we know the price of everything even if we’re not willing to pay it.
Paradoxical Water
While we absolutely require water every day to survive we can live a lifetime without diamonds, although don’t tell my mother. Yet water’s effectively free while if you want a diamond you need to pay an arm and a leg. This is a paradox that Adam Smith noted:
“Nothing is more useful than water; but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it”.
As ever, there’s a difference between price and value and that makes all the world of difference. Especially if you’re thirsty. Michael Haneman gives a fabulous review of the economic principles surrounding the use of water in The Value of Water, which we’ll only summarise here, but it’s a great starting point for anyone wondering why intangibles are invaluable.
Marginal Value
Basically the difference between value and price is a pretty important one for investors and economists because it makes clear that the economic value of something isn’t the same as its market price. There are things that have economic value that price doesn’t accurately measure and this fact makes investment analysis rather more tricky than simple share price followers would like.
The critical key to understanding the difference in valuation between water and diamonds is the idea of marginal value. If you have twelve litres of water to hand – which…
Tags: fresh water, H2O, market price, price, safe drinking water, value, water
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by ilene - August 3rd, 2010 4:23 pm
Courtesy of Doug Short
Here’s the latest update of my preferred market valuation method using the most recent Standard & Poor’s "as reported" earnings and earnings estimates and the index monthly averages of daily closes for July 2010, which is 1179.80. The ratios in parentheses use the July monthly close of 1101.60. For the latest earnings, see the accompanying table from Standard & Poor’s.
- TTM P/E ratio = 18.3 (17.1)
- P/E10 ratio = 21.7 (20.3)
Background
A standard way to investigate market valuation is to study the historic Price-to-Earnings (P/E) ratio using reported earnings for the trailing twelve months (TTM). Proponents of this approach ignore forward estimates because they are often based on wishful thinking, erroneous assumptions, and analyst bias.
TTM P/E Ratio
The "price" part of the P/E calculation is available in real time on TV and the Internet. The "earnings" part, however, is more difficult to find. The authoritative source is the Standard & Poor’s website, where the latest numbers are posted on the earnings page. Free registration is now required to access the data. Once you’ve downloaded the spreadsheet, see the data in column D.
The table here shows the TTM earnings based on "as reported" earnings and a combination of "as reported" earnings and Standard & Poor’s estimates for "as reported" earnings for the next few quarters. The values for the months between are linear interpolations from the quarterly numbers.
The average P/E ratio since the 1870′s has been about 15. But the disconnect between price and TTM earnings during much of 2009 was so extreme that the P/E ratio was in triple digits — as high as the 120s — in the Spring of 2009. In 1999, a few months before the top of the Tech Bubble, the conventional P/E ratio hit 34. It peaked around 47 two years after the market topped out.
As these examples illustrate, in times of critical importance, the conventional P/E ratio often lags the index to the point of being useless as a value indicator. "Why the lag?" you may wonder. "How can the P/E be at a record high after the price has fallen so far?" The explanation is simple. Earnings fell faster than price. In fact, the negative earnings of 2008 Q4 (-$23.25) is something…
Tags: earnings, P/E, P/E10, price, Stock Market, trailing twelve month earnings, valuation
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by Chart School - May 29th, 2010 9:35 pm
Courtesy of The Pragmatic Capitalist
By Decision Point:
FROM A SUBSCRIBER: Hi Carl. I’ve never written but have followed you for many years (since AOL) and have learned more about reading the market from you than any other source. You have such a clear and common sense view that it is really refreshing. I love the new daily blogs and am so glad Erin is learning the ropes. I would write her directly, but don’t see her email address anywhere. I rarely disagree with what is said, but in this case I am very suspicious of a bullish interpretation of today’s (May 27) rally, mostly due to the low volume. It seems more like a bear market, short covering rally to me. Was wondering what you think of the volume issue. Thanks for any comments.
Thanks for the compliment!
I try not to engage in discussions in order to reconcile differences of opinion about the market, because, even if I manage to convince my “opponent”, it doesn’t mean I’ll be right about the outcome. We try to be methodical in our analysis and clear in presenting our conclusions.
After several days of sloppy, downward-sliding price action, on Thursday the market finally had the first day of what could be a full rebound from very oversold conditions. Sloppy action in oversold conditions signals a very dangerous situation, one from which a crash can result, and on Thursday we breathed our first conditional sigh of relief.
While we have emphasized the danger involved “buying into weakness” with oversold markets, we have believed that the odds favor an end to the correction because we are technically in a long-term bull market, and corrections rarely morph into bear markets in those conditions.
It is true that volume was pathetic, but volume has been unimpressive throughout this bull market, and for Thursday there is also the issue of the upcoming Memorial Day weekend. People are leaving town early.
We can also see a clear descending wedge pattern, a bullish pattern which has a high reliability for resolving to the upside.
Most important is our philosophy that price is primary, breadth and volume are secondary. Not that we don’t look at breadth and volume, but they need to be subjectively interpreted based upon the bull or bear bias of the market. As a result, none of our mechanical timing…
Tags: bear market, breadth, BULL MARKET, price, Stock Market, strategy, timing models, volume
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by ilene - June 9th, 2009 4:36 pm
Courtesy of Jesse’s Café Américain
There are three basic inputs to the market price of something:
1. Level of Aggregate Supply
2. Level of Aggregate Demand
3. Relative Value of the Medium of Exchange
Let’s consider supply and demand first, since they are the most intuitively obvious.
The market presents an overall demand, and within that demand for individual products in particular.
Supply is the second key component to price. We are not going to go into more detail on it to here, since what we are likely facing now is a decrease in Aggregate Demand.
It can seem a little confusing perhaps. Just keep in mind that if the demand decreases for products overall for whatever reasons, like unemployment, if supply remains available the prices will drop overall with some variance across products because of their inelasticity to change. This is known as the Law of Supply and Demand.
How we do know when Demand is decreasing?
Gross Domestic Product = Consumption + Investment + Government spending + (exports − imports),
or the famous economic equation GDP = C + I + G + (X − M).
Consumption, or Aggregate Demand, is a measurable and key component of our GDP figures.
Given the huge slump in GDP, it should be obvious that we are in a demand driven price deflation on many goods and services.
Now, that covers supply and demand as components of price, but what about money supply?
Money
Notice in the above examples we talk about Price as a value without a label.
Money is a medium of exchange. It is the label which we apply to give a meaning to our economic transactions.
If you are in England, or France, or Argentina, or China, the value label you apply to Price is going to be different.
Money is the predominant medium of exchange that a group of people have agreed to use when engaging in economic transactions.
The source and store of wealth are the ‘credits’ within the system which one uses to exchange for products. The money is the medium of exchange.
If you work for a living, you are exchanging your time and your talent, which is your source of
…
Tags: demand, price, supply
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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.