Last Week's Trading Call
Last week's trading call, unedited, typos and all, is now posted: Welcome to the Second Half!
Here's the money quote:
However, given the ongoing decay in the fundamentals --- the economy is actually getting worse, not better -- we would look at any bounce as just that: An oversold counter-trend rally that should be sold into, not chased upwards.
Not the greatest timed trade, but the overall sentiment is about right . . .
Wednesday, July 09, 2008 | 10:53 AM | Permalink
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Welcome to the Second Half!
NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Tues 7/1/2008 after the market close
This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers.
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What now?
That's the questions investors are asking themselves after the worst June in 70 years, and the worst first half since 1970.
Here is our market overview: The Dow is now off nearly 2,000 points -- almost 10% since in less than two months. Year-to-date, the Dow Industrials have lost move than 14%. The Nasdaq gave up 8% over the past month, and has fallen 13% since January 1. Since mid-May, the S&P500 is off 6%, while losing 12.5% YTD.
This has created a deeply oversold condition. As of the market close on July 1, we are at levels that typically suggest a move to the upside is in the offing. However, given the ongoing decay in the fundamentals --- the economy is actually getting worse, not better -- we would look at any bounce as just that: An oversold counter-trend rally that should be sold into, not chased upwards.
Let's look at the charts for the Dow. The first chart below is suggesting that we are looking at a potential reprieve -- at least for a short while.
Dow Industrials, 6 Month Chart
Candlesticks 101: Above I have circled what the "Hammer Bottoms". These are days that trades deeply down, accompanied by an intraday reversal, closing at or near the highs of the session. We not only saw that today (July 1 2008), but we saw similar moves during recent lows in January and then in March of this year.
Note that the longer term chart below shows the MACD reversal corresponding with temporary -- not permanent -- tradeable lows. In the battle between Bulls and Bears, the Bulls have been losing. Now is the Bulls moment to shine -- at least for a few days or so.
Dow Industrials, 18 Month Chart
Why is this so? The Hammers circled above are usually viewed as bullish, as they suggest that sellers may have (temporarily) exhausted themselves. This presents buyers with an opportunity to reverse their losing streak, at least for a while.
Why only a while?
To start with, we have a relatively high degree of complacency. This VIX reading -- the VIX is known as the Fear Index -- from last week has barely budged! As thge chart below shows, we are no where near the levels of fear that have accompanied lasting lows. I would have thought the most recent drop might have frightened investors just a tad; Instead, the bottom callers were out in full force. There is still a whole lot more greed then fear.
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The Bottom Line: The above is why we look as this bounce as just that -- not a lasting change in markets or the economy. It is as an opportunity to exit whatever stocks you want or need to get rid of. Anything you are uncertain about should have a trailing stop placed under it.
Tuesday, July 01, 2008 | 07:34 PM | Permalink
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BEAR MARKET RALLY
NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Tues 4/1/2008 after the market close
This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers.
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Markets staged a mighty rally today -- the type of rally that is typical in Bear markets. In normal, healthy markets, 400 point days are simply not necessary. They tend to take place in an environment of negative sentiment, risk aversion, and short selling.
Today’s Q2 starter was a similar affair.
However, overall volume was heavy and the up down volume was nearly 10 to one. This suggests that today's move will have some legs, and we looked at this present surge as a typical oversold rally that should run anywhere from two to eight weeks.
While this move began from a condition of deep negativity. This has quickly been replaced by an excess of speculative optimism. The classic example was the recent Barron’s headline, “Dow 20,000 by year's end.”
Thus, we do not want to maintain short positions for the next few weeks, as we believe this rally is a classic bear market bounce, and it presents a selling opportunity later this month.
March represented the fifth consecutive negative month for indices. This is only the 10th time that such a streak has occurred since 1928. Of the prior nine times where five consecutive negative months occurred, only four saw markets higher six months later. The average total return during those previous periods was -2.64% after three months. What this suggests to us is that a five-month streak indicates the early portion of a lengthier bear market.
Buyers into today's rally who are looking for more than a trade must believe that prices of stocks reflect the full impact of recession. However, this is not truly reflected in the earnings consensus for the S&P 500. We note that current third and fourth quarter earnings consensus are at +20% (Q3) and +50% (Q4). This hardly reflects anything beyond this a mild brief first-half recession.
Our expectations for the ongoing economic climate will include a much deeper and more prolonged recession than is currently reflected by equity prices.
Intermediate term, the market is also facing several Buzz saws over the next few weeks, which have the potential to take some of the wind out of its sails: We start with Friday's non-farm payroll (NFP). While we frequently advise investors not to put too much attention on any one datapoint – its best to focus on the overall trends -- this Friday's NFP certainly has the potential to be a major market mover.
After NFP, markets will confront what is likely to be a rather mediocre earnings parade. The season will begin in full force next week. At this point, expectations for the financial sector are grim. Yet despite this negative outlook, it seems that many firms in the financial sector are finding new and clever ways to disappoint: To wit, UBS, Deutsche Bank, and Merrill Lynch. (Kudos to Lehman Brothers for their surprise capital raise. Its worth noting, however, that healthy companies do not need to scrape together surprise $3 billion capital raises).
Outside of the financial sector, we have seen significant weakness in earnings in the technology, retail, and non-exporting sectors.
On top of what is likely to be a mediocre earnings season, the next hurdle for stocks to overcome will be lowered guidance. In general, CEOs and CFOs have been unusually circumspect regarding both the economy and their firm's prospects. That weaker guidance will very likely lead to a lowering of earnings prospects for the second half.
And stocks still are not cheap. A trailing one-year P/E ratio of 18 is reasonable, but hardly what we would expect to see at the beginning of a new bull market.
Lastly, is the surprise factor. There are simply too many unknowns, too much bad paper stuffed into too many dark corners, for us to embrace the markets for anything other than a trade at this time.
Nothing in the overall economy has changed: we are continuing to see an ongoing economic slowdown, characterized by a weak consumer spending, ongoing difficulties in the credit market, a still more abundant housing market, inflationary pressures found everywhere – except in wages and income.
-Barry Ritholtz
April 1, 2008
Tuesday, April 01, 2008 | 04:52 PM | Permalink
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Batten Down the Hatches!
NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Tues 2/29/2008 before the market closed.
This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers.
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Several weeks ago, we discussed the likelihood of a tradable low being put in place. On January 23, 2008, we thought conditions were in place that would allow agile traders to play for a bounce -- but advised that long-term investors avoid the sloppy tape. At that time, we suggested an 8, 10, or 12% bounce trade was in the offing.
That has come to pass. We now find ourselves in a situation where the markets have rallied significantly on lighter volume, and have since rolled over. This is a significant sell signal.
Consider: Over the past month we have seen one-day rallies of nearly 200 Dow Jones points on four separate occasions. A review of the headlines shows all too infrequent arguments against the possibility of a recession, or if there is a recession it being mild and fairly discounted by the equity markets. The economic news continues to worsen, while the Bulls maintain a steadfast state of denial. Articles abound, explaining why there won’t be a recession, or if there is a recession, it will be mild and is already priced into equities. My favorite piece last week was “How to play the coming recovery.” These are signs that people are still speculatively inclined, are buying the dips. The bigger fear is not any on stocks, but missing the rally. That is not what you see at market bottoms.
These optimistic views are increasingly being proven false. We are now in a Bear market and are in all likelihood in the beginning quarters of a recession – one that is potentially deep and long lasting. Housing inventories are at record highs, the US dollar is at record lows, Oil is over $100 a barrel, and Gold has set all-time highs.
These are not the sort of conditions that lend themselves to economic growth or stock gains.
As of leap day, February 29, 2008, you have several choices ahead of you: a) you can try and catch the falling knife and, an activity that in the past has proven to be dangerous and painful; b) You can sit tight, watching your portfolio decrease in value, confident in the belief that stocks will eventually return to their previous valuations (What is unknown now is whether that will take months or years to occur; c) Or, you can aggressively become even more defensive than we have advocated in the past few quarters. Preserve precious capital, wait out the storm.
We choose “C.”
We will go into greater details on the economy in a future missive, but for now, from an investor's standpoint, understand what your role is today and preserve capital, and be cognizant of risks. Now is the time to Batten down the hatches to preserve capital and to wait patiently for the greater opportunities that will exist to play equity's on the long side. Rallies are opportunities to exit equities. We are constantly looking for better opportunities to put your hard earned capital to work, and today, the in a long side of US equities is not it.
-Barry Ritholtz
February 29, 2008
Friday, February 29, 2008 | 03:48 PM | Permalink
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Time for the Bounce
NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on 1/23/2008 before the market closed.
This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers.
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Last week, we noted the % of NYSE stocks trading below their 200 day moving average was about 23%. That suggested we were close, but not at a tradable low.
Today, our trusty Bloomberg terminal is showing just 13% of NYSE stocks trading above their 200-day moving averages.
That is lower than anytime in the 2000-02 bear market. And lower than anytime in the 1998 and 1994 bear markets.
This indicator is saying that sentiment has become excessively negative -- considering we are only 3 months off of the all time S&P500 highs.
This suggests we should begin the counter-trend rally shortly. We would expect this to last anyway from 2 weeks to 2 months, run 5-15%.
We also would use this upcoming lift as an opportunity to sell equities.
This is a bounce, not a major shift in trend . . .
-Barry Ritholtz
January 23, 2008
Wednesday, January 23, 2008 | 03:14 PM | Permalink
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Buying Panic?
Several people have specifically asked for my explicit investing thesis, as opposed to the more general economic discussion/market analysis we see on the blog.
It is a fine line to provide stimulating discussion here, while at the same time not being unfair to the people who actually pay for our research and commentary. Anytime research runs in the press (Such as this "Real Estate and the Post-Crash Economy") some subscriber lodges a complaint.
An astute observer should be able to deduce what my general views are from the various posts and appearances. I do not think any of the paying subscribers will be offended if I pull an introductory quote that reveals some additional details from a much longer piece.
This is the intro from yesterday's market commentary:
"In a seeming paradox, we have a rapidly accelerating market, and a rapidly decelerating economy. Hopes for a rate cut in the face of this asset inflation are pushed out further and further into the future. This is now a trading market, where momentum and trend dominate, increasingly detached from the decaying domestic fundamentals. Global growth remains strong, and despite that – or perhaps because of it – US markets are lagging their overseas peers (see table of global bourses on page 5).
How much further this market can rally is anyone’s guess, but a “Melt-Up” to Dow 14,000 would not surprise us. While overdue for a pullback (see #1 below), the markets have shown little interest in any such activity. Instead, traders seem to want to rally ‘em on any news, good or bad.
A melt up would likely be accompanied by rush back into equities by the one group notably absent from the current action: the public. As the trading volumes at the major online brokers have revealed, John Q. Public is nowhere to be found in the current market. We suspect that the aforementioned rush back in would be accompanied by a significant spike in Bullish sentiment. Until that excessive Bullish sentiment develops, it is not safe to trade on the short side of the market.
Meanwhile, a “melt up” presents a high risk trading, not investing, opportunity. A melt up inflates the air pocket that has already developed underneath the present environment; only the most nimble traders are capable of avoiding the ensuing danger."
Today's WSJ had an interesting quote describing Wednesday's action as a Buying Panic, a characterization I do not disagree with:
"For the next week or two, I would advise investors who have money that they're thinking of putting in the market to hold off," said strategist Al Goldman, of A.G. Edwards & Sons. Mr. Goldman said there seems to be a "buying panic" this week among money managers who have come to regret keeping clients' money on the sidelines during last month's gains. "At the end of the day, these guys are paid to manage stock, not to manage cash," he said."
That oughta hold the little bastards . . .
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Sources:
Next stop, Dow 14,000?
RR&A, May 2, 2007
http://www.ritholtz.com/component/option,com_docman/task,cat_view/gid,26/Itemid,126/
'Buying Panic' Drives Stocks As Blue-Chip Rally Goes On
PETER A. MCKAY
WSJ, May 3, 2007; Page C1
http://online.wsj.com/article/SB117814978098390167.html
Thursday, May 03, 2007 | 06:56 AM | Permalink
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GDP Revisited
NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Mon 2/12/2007 5:35 pm;
This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers. We expect to post future advisories in a similar manner -- after the call, but in the correct chronological location on the blog.
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When the Q4 2006 GDP data was initially released at 3.5%, we noted that it did not comport with the data we were seeing elsewhere. And in January, we approvingly referenced Caroline Baum's analysis (Q4 Data Doesn't Add Up).
Then last week, the Commerce Department released their data on Inventory levels. Based on that, it turns out that our prior criticisms of GDP were dead on:
"U.S. wholesalers' inventories took the biggest tumble in more than three years during December as overall demand for their goods raced forward.
Wholesale inventories decreased by 0.5% to a seasonally adjusted $393.76 billion, the Commerce Department said Thursday. November inventories rose by 1.1%, adjusted from a previously reported 1.3% climb.
The 0.5% decrease in December wholesale inventories surprised Wall Street, which expected a 0.5% gain. It was the sharpest drop since 0.6% in May 2003."
Inventories being drawn down are different than actual production of goods. Hence, this is why the Commerce data overstated Q4 GDP by as much as 75 basis points (my estimate) to 100 basis points (JPMorgan's est.).
Have a look at these two charts. The first is the official Commerce Department data, based only on the prelim GDP. The second chart reflects our new estimates based on the latest inventory data:
The original release (above) gives the impression of an economy moving sideways, growing at a consistent rate between 3 and 3.5%. This is consistent with the soft landing thesis many of the strong Bulls believe in.
Reality check. With the new Inventory data from Commerce, however, that rosy scenario fades away. First, most of the big GDP pop came when rates were at generational lows and were that way for a year. This artificial stimulation is what gave the economy its pop:
Using the most recent J.P. Morgan estimates (chart 2), we see that GDP has actually been on the downslide since peaking in late 2003/early 2004.
If the economic deceleration continues on (as I suspect it will), there is a very real possibility we will see GDP slip to 1-2% by mid 2007.
-Barry Ritholtz
February 12, 2007
Note: I have also included today's software sector update ; Later this week, I will update our prior stock selection Mosiac Company (MOS)
Sources:
MONTHLY WHOLESALE TRADE: SALES AND INVENTORIES
U.S. Census Bureau News, DECEMBER 2006
http://www.census.gov/mwts/www/currentwhl.html
Monday, February 12, 2007 | 05:30 PM | Permalink
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Looking at Technology: Caution is Warranted
NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Thu 2/8/2007 6:12PM; This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers. We expect to post future advisories in a similar manner -- after the call, but in the correct chronological location on the blog.
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We continue to watch the Nasdaq 100 very closely. While we have found pockets of strength, there are also signs of non participation and actual weakness in the Index. Given the traditional leadership of Technology, this remains worrisome.
We looked at why this Technology rally has been different from prior moves. We have attached our conclusions.
We also that we have been finalizing our research into the sub-prime mortgage markets, and should have that ready by early next week. As we do this, Mortgage Underwriters and Home Builders have been running into trouble. This research is unusually interesting, and we expect you to find the results quite intriguing.
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Some of
the best known and largest tech stocks have done exceedingly well since the
July 2006 market bottoms: Cisco, Oracle, Microsoft, Google, Apple, Akamai, Sun
Micro, EMC, have all put together an impressive streak.
There can
be little doubt that the environment for lots of tech firms have improved
notably since 2002. Balance sheets are much better, new web apps (User
generated content, Web 2.0) have made up for the decreased demand from the enterprise
side. Indeed, much of the excitement in Techland these days is from the newest
tech properties: The YouTubes, MySpaces, and Googles have been where the action
is. Cisco has been enjoying the growth of the Video over the internet business
(See above names), which according to CEO John Chambers, has been booming.
(Apple is a unique creature courtesy of a breakout product).
But not all tech firms are
enjoying a resurgence.
Not participating have been those companies with “issues;” Intel and AMD are
stuck in competitive price wars; other firms have had management problems
(Dell, Yahoo!) or are having problems with recent acquisitions (eBay); still
others can’t seem to get out of their own way (JDSU). Indeed, many tech
companies for one reason or another have been mostly exempt from the Tech
Rally: SAP, Symantec, Sirius/XMSR, Citrix, Flextronics, Qualcomm, etc.
Then there’s Microsoft.
Since July, its stock is up 50%. We’ve consistently heard three themes given for the move up from MisterSoftee Bulls:
- The
introduction of Vista
- The
roll out of the new MS Office
- Zune (The iPod killer)
It is hard to describe these product introductions as anything but disappointing. Despite a $500 million dollar advertising budget, Vista arrived with a thud. Only 15% of existing PCs are equipped to handle an upgrade to Vista; Fortunately for the PC makers, Vista’s introduction has led to a surge in PC sales. Indeed, Consumers will primarily get Vista via new PC purchases, and not through (profitable) upgrades. Its looking more and more like the current upgrade cycle won’t be remotely close to that of Windows 95 or XP – missing most of that extra revenue and profit.
And, as far as Enterprise users are concerned, most of the major tech consultants (Gartner, Yankee Group, McKinsey) are advising IT departments wait at least a year before migrating over. The new version of Office has been favorably reviewed, but the huge learning curve may dissuade a rapid migration. As to that mighty iPod slayer, the Zune – it was pretty much DOA. Its program head was unceremoniously shown the door (“he wants to spend more time with his family”). The Apple iPod freight train felt the impact of the Zune like it was a bunny sleeping on train tracks.
Given all this, Microsoft’s shares have begun to soften. We
suspect this is due to reality starting to get recognized by the investing
community that is partial towards tech.
With
Microsoft softening, the charts are showing signs of technical deterioration.
They have made a lower low; and the uptrend in place since July has been
broken. This is not a particularly healthy technical signal.
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We
continue to wonder why technology has been so inconsistent, eschewing its traditional leadership role in a bull market. Leaving aside Semiconductors – which have not participated in a
meaningful way in the rally, or in nearly any recent time frames –
technology and telecom has seen an uneven, even lumpy distribution of gains.
Given
this mixed performance, we wonder: Has the sudden improvement in Technology Indices
since July 2006 been fundamentally driven, or might something else entirely
been driving share prices?
Let’s
look at some charts for a clue. Prior to this recent leg up, Tech and Telecom
have significantly underperformed other sectors:
Since the 2000 peak, or the
pre-war lows, Tech & Telecom have enormously under-performed:
Buyers of Tech prior to the start
of the War have similarly not been rewarded:
After
under-performing since previous major milestones, the Techs have managed to put together a very nice run. But it is only
since the July 2006 lows that Tech and Telecom have put together a decent
string of out-performance.
As the chart below shows, the ratio of Technology stock to Energy Stocks has finally turned positive. For the first time in years, Tech & Telecom is outperforming Energy.
Why is that significant? Primarily, energy prices having reversed since this past summer. And that’s when Tech/Telecom began outperforming. As the charts above reveal, other time frames have been far less kind to technology.
Ratio of Tech to Energy:
This ratio bottomed precisely in July 2006. Not coincidentally, July 2006 was when Goldman Sachs cut the energy exposure of the GSCI commodity index in half. This subsequently led to a 30% decrease in Oil prices.
Our read is that much of the gains in Tech have come via sector rotation. As fast momentum money pulled out of Energy and Materials, they rotated into these big cap liquid tech names: The Ciscos, Oracles, Microsoft’s, Sun Micros, etc.
As the next chart makes clear, Tech seems to trade inversely to oil lately:
NASDAQ 100 versus US Oil
USO = US
Oil, based on Texas Spot Oil prices
Our suspicions are that the sudden affection for Tech may not be long lived if Energy prices tick back up. As the red line above shows, they are threatening to do just that.
This leads to our conclusion: Investors need to be extremely selective in Technology. There are pockets of large cap strength in Techland, especially big cap Tech – and they may be masking weakness elsewhere in the overall sector.
The NASDAQ 100 now trades at a forward P/E of 33. That means the average Tech stock is somewhat pricey.
Growth rates vary dramatically from company to company, and so to do improvements in revenue. Earnings gains are not uniformly distributed, many tech names have run up in anticipation of sector wide growth – growth that is not very likely to be broad based. Some of the capital appreciation (rising share prices) has come in anticipation of events that may have already taken place, or as with Microsoft, may not come anytime soon, if at all.
Because of this, we urge Investors in the Tech and Telecom sector to be cautious . . .
Thursday, February 08, 2007 | 06:12 PM | Permalink
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Bullish Sentiment Survey
NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Mon 1/22/2007 11:05 AM;
This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers. We expect to post future advisories in a similar manner -- after the call, but in the correct chronological location on the blog.
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American Association of Individual Investors (AAII) - Bullish Sentiment Survey
Sentiment may be the key factor in terms of making the determination when this market may be tired and ready to significantly correct. Anecdotally, we have spoken to numerous individual and institutional clients recently about how long bull markets tend to build high levels of over-confidence; Those high levels of over-confidence are frequently accompanied by over-investment.
What sentiment surveys highlight is the level of investor commitment to the markets. Why? Surveys have shown that people become Bullish after they put their money to work. When sentiment is bullish or excessively bullish it suggests investors are at or near full investment. When that happens, there is little fuel left to power the markets substantially higher.
This report includes two of the indicators in our master sentiment model: 1) The American Association of Individual Investors (AAII) Bullish Sentiment Survey (above); and 2) the American Association of Individual Investors (AAII) Asset Allocation Survey (below). Each shows that investor confidence and asset allocations towards equities are at bullish (optimistic) levels. Although these levels are not at extremes yet, they need to be watched, as bullish and overly bullish levels suggest investor buying power is diminishing.
Since they act in a contrarian manner these bullish levels are typically symptomatic with future corrective activity.
A note of caution: Sentiment is never known for being a very timely indicator so it obviously needs to be confirmed by other metrics such as; price weakness, aggressive downside price and volume action as well as breaches of key support levels. We continue to watch $42.00 on the Q's, which we recently highlighted on Nasdaq Comp Review (January 17 2007) as an area of key support.)
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5 Week Moving Average American Association of Individual Investors (AAII)
Asset Allocation Survey
Note that the Asset Allocation Survey, while not terribly over-allocated to US Equities, is nears the high end of its range. Compare those levels with what equity allocations looked like at highs in 1998 and 2000, and again at lows in after 1987, 1990, and 2003.
We use a moving average to eliminate the short term noise and volatility associated with surveys of this sort. While the actual measure of asset allocation has pushed into the over-allocated zone, it would need to stay high for a few weeks to bring up the moving average into the danger zone.
We will be watching this crucial sentiment indicator closely over the coming weeks. . .
Monday, January 22, 2007 | 11:02 AM | Permalink
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Intra-Day Reversal
It’s rarely any one single element that leads to major reversal such as we saw today. However, we can identify a half dozen elements today are significant and contributed the mid-day sell off:
1) The intraday reversal was set up by the opening exuberance and emotional New Year buying – not fundamentals.
2) The drop in Copper and Oil is reflecting a slow down in the United States economy; The CRB Index broke support at 300
3) ADP data – which in the past has been none too reliable -- surprised to the downside significantly;
4) Both Ford and GM saw sales declines of 13% in December;
5) ISM remains near the flatline, as Manufacturing is still struggling with inventory and decreased demand; (who is all excited about 51% and change?)
6) FOMC minutes reveal inflation remains the primary risk to the economy, even as it shows signs of being a "touch softer" than the Fed previously believed.
Note that the selloff in equities began an hour prior to the FOMC minutes . . .
It's still early, and after dropping 150 points, equities are clawing back. Regardless, today is quite interesting.
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UPDATE January 4, 2006 5:55am
Trader Mike has a good couple of charts and several worthwhile links to those who are interested in the Technical underpinnings of the reversal . . .
Wednesday, January 03, 2007 | 03:32 PM | Permalink
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