Big Week of Economic Reports

Monday, August 30th, 2010

This is a jam packed week filled with big economic reports:

Tuesday: Chicago PMI, Consumer Confidence, Case-Shiller Home Price Index and FOMC Minutes
Wednesday: ADP Employment, ISM Manufacturing Index
Thursday: Jobless Claims, Pending Home Sales Index
Friday: Employment, ISM Non-Manufacturing Index

The economic numbers seem to be getting worse and worse over the last 3 months and expectations are very low for many of these reports. If the reports are better than expected I think we can expect to see the markets hold up and maybe even trade slightly higher. If they come in worse than expected I think there is a possibility of a big sell-off taking us to new yearly lows.

It would not surprise me to see a few beat expectations and few disappoint to the downside. It really is all going to come down to Friday’s employment number. Goldman Sachs came out today and revised their estimate for private job growth to zero which if true won’t be taken kindly by the markets.

Either way I think the stock market is firmly entrenched in a down trend and has some tough sledding ahead of itself moving into September and October.

Posted in Economics, Risk Management, Trading, Trend Following | No Comments »

Euro/Yen Signaling Major Market Weakness

Monday, August 23rd, 2010

The Euro/Yen cross has been one of the best indicators of risk and stock market direction for the past few years. It is now moving towards making new lows since its peak in 2007.  This can’t be seen as a positive sign moving into the next few months which are typically the worst for equities.

Here is the chart and notice the break towards new lows today:

Posted in Market Psychology, Risk Management, Trading, Trend Following | No Comments »

Consumer Stocks Are Weaking…Pointing To A Correction

Monday, April 19th, 2010

The consumer staples, consumer discretionary, and retail have been leading the market higher since the February lows. Now they are all under performing the broad market averages. I take this as a sign that a correction is upon us. How big is correction going to be? I would guess in the 4-6% range but I don’t really know for sure. I think the best way to protect your long positions is to buy May puts which are cheap and will protect you during a correction of any magnitude. Check out the consumer etf charts:

XRT – Retail

XLP – Consumer Staples

XLY – Consumer Discretionary

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Study Suggests Stock Market Slides May Cause Heart Attacks

Saturday, March 13th, 2010

According to a new study by Duke University stock market declines may prompt heart attacks. The article goes on to say:

Duke University researchers found a link between how a key stock index performed and how many heart attacks were treated at their North Carolina hospital shortly after the recession began in December 2007 through July 2009, when signs of recovery emerged.

The trend weakened after they did a second analysis taking into account seasons of the year. Some research suggests heart attacks are more common in winter, meaning the initial finding could have been a statistical fluke.

However, leading scientists unconnected with the work said they found it plausible and worth further research in a nationwide study.

“I do think there’s merit to their first-round conclusion,” said Dr. James McClurken of Temple University in Philadelphia. He is chairman of the American College of Cardiology’s annual conference, where the study results were released Saturday.

Dr. Janet Wright, vice president of quality and science for the cardiology college, agreed.

“This is an intriguing study and yet another example of how stress can affect a person’s heart health,” she said. “It is important to be aware that personal stressors — in this case an economic one — can be a trigger for cardiac events.”

Earlier studies have found higher rates of heart problems after World Cup soccer matches, earthquakes, Hurricane Katrina and other stressful events.

Mona Fiuzat, a doctor of pharmacy and researcher at Duke, had the idea for the new study. She tallied all patients who had a heart attack among those coming to the hospital for a test to detect heart disease. There were 965 heart attacks during the study period.

She then researched economic indices and how to best measure financial changes over time.

“This is not as clear as say Sept. 11,” a specific date, she said. The health effects of bad financial news may emerge over weeks rather than on a single day, so she averaged heart attacks over three months, taking into account a period before and after each one, and compared these with the Nasdaq composite index.

“We felt the Nasdaq was most appropriate for the mainstream because it reflects small businesses” and therefore would have the most impact on the general public, Fiuzat said.

As stock market values decreased, the incidence of heart attacks rose; the reverse also was true, she found.

Source: http://news.yahoo.com/s/ap/us_med_stocks_heart_attacks

A simple solution to this problem would be to place stop loss orders on every trade, thus eliminating the worry and stress. Very few long term investors use prudent risk money management approaches when it comes to their investments. Money management is the paramount to long term trading and investing success.

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The More Things Change, the More They Stay the Same

Thursday, March 11th, 2010

This is a great video about how the markets operate in the framework of human behavior:

Posted in Emotions, Risk Management | No Comments »

The Decennial Pattern – Years Ending in 0, Watch Out Below

Sunday, March 7th, 2010

Earlier in the year the Chart Store posted some interesting charts on the decennial pattern. While I am familiar with these charts and the decennial pattern, I am more interested in further detail about the performance of the Dow Jones intra-year. My own analysis about the intra-year behavior, which I think is even more important than these charts is contained in the table below the charts.

The decennial pattern charts from the chart store:

Source: http://www.thechartstore.com/default.aspx

Here is my 2 cents which I think goes hand in hand with the above analysis and may be even more important:

I went back and checked the data for all years ending 0 since 1900 and found that every year had at least a 13.5% decline sometime during the year. This doesn’t tell you how the year is going to end up but it does tell you to be extra careful and on the look out for a pretty significant decline at some point. Here is the raw drawdown data for each year ending in 0 since 1900:

Year Drawdown

1900 -23.65%

1910 -25.14%

1920 -39.25%

1930 -46.44%

1940 -26.81%

1950 -13.54%

1960 -17.42%

1970 -22.20%

1980 -20.50%

1990 -22.48%

2000 -17.84%

Average: -25.03%

Thus, my conclusion is that we can probably expect at least a -13.5% decline, at a minimum, this year. When is that decline coming? That is the $64,000 question! More importantly, make sure your stops are in place to protect yourself if such a decline does occur.

Posted in Risk Management, Trading | 3 Comments »

The Reason to Follow the Technicals and Not the Economists or the Fundamentals

Wednesday, March 3rd, 2010

Over the past year the markets have rallied sharply from their lows. The economy on the other hand has hardly improved and everyday there is more and more negative news about how things are not getting better or actually getting worse fundamentally. Sure over the long run the fundamentals and the technicals will merge, but over the short to intermediate term they can diverge wildly, case in point, right now!

While I respect the fundamentals I never defer to them. Market psychology, sentiment, and technical forces significantly outweigh fundamentals 80% of the time. Those odds are all I need to know and want to know.

Let’s take, for example, the financial crisis of 2008, the technicals clearly showed you that the markets were reversing their trends and it was time to get out or go short. The fundamentals lagged by 3-6 months before telling you the same thing. Then in early 2009 the markets reversed course and by late spring, early summer the technicals told you to reverse your positions again, while the fundamentals were just telling you that nothing was improving. While some of the fundamentals have turned positive, the technicals turned positive well in advance of any of those fundamental indicators.

The fundamentalist will argue that the technicals have predicted impending recessions 26 times over the past 30 years and yet we have only had 4 or 5 real recessions. I would counter that by saying risk management, protecting capital, and making money are more important than being right over the long term.

Do the technicals always get it right? The answer is no. Do the fundamentals always get it right? Again, the answer is no. Can you make money using either methodology? Yes. The caveat is that you need to manage your risk and whether or not you believe in technicals you must always remember to protect your capital by managing your risk. I just happen to find the technicals more responsive and thus better for making money trading.

Lastly, fundamentals work great in normal market environments, but last time I checked we seem to be experiencing 50 year storms every 5-7 years . Case in point, 1974, 1981, 1987, 1994, 2000, 2001, 2008. In addition, we have gone no where for the past 10 year, the lost decade as it is being called, and yet many technical money managers have made a fortune.

Posted in Risk Management, Trading | 2 Comments »

Have We Reached the Tipping Point?

Wednesday, February 24th, 2010

While the equity markets and many commodity markets have had a “V” shaped recovery the economy has not. The problem is the two eventually come into parity and the economy is turning back down and I expect the market to follow. The weight of the negative news is stacking up more and more everyday. And, although the market loves to climb a wall of worry this wall could collapse at any time. Here are just a few headlines hitting the tape from the past two days:

Lending Falls at Epic Pace

New Home Sales Hit Record Low in January

Fed’s Next Move to Hit Housing, Mortgage Rates

The Death of American Capitalism

If these headlines were appearing after a severe market decline I may be looking to be buyer, but we are up 50-100% across the various markets in the past 12 months. Warren Buffet’s partner Charlie Munger, who is arguably the real mastermind of Berkshire Hathaway, is warning that America is on a ‘Road to Financial Ruin.’ I agree 100% and think this is the tipping point where the markets fall back into line with the economy which is on life support at best.

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Remember, Greece isn’t the Only Problem

Monday, February 15th, 2010

While the debt situation in Greece is plastered all over the front pages today, remember that they are not the only problem. Their European neighbors in Portugal, Italy, Ireland, and Spain all have massive debt problems as well. Dubai is also in the headlines about its problems. Japan is another one with huge debt problems and they have been in a massive deflationary spiral for decades. And the US has more than its fair share of problems as well.

Here in the US alone we have Trillion Dollar deficits as far as the eye can see with no end in sight. On top of that several states are in huge trouble, as well. The main point behind this post is that there are many more shoes to fall both in the US and abroad. So, keep your eyes open and realize that there are still substantial risks to this recovery and the global economy. I just don’t see this ending well.

The question is now will these countries make the tough decisions necessary to get themselves back on track or will they destroy their currencies by borrowing more and printing money? I haven’t seen any tough decisions made yet…

Kiss That V-Shaped Recovery Good-Bye: The U.S. “Worse Than Greece,” Says Economist

Posted in Economics, Risk Management | No Comments »

Why Winning Streaks End

Saturday, February 13th, 2010

Why Winning Streaks End
04:08 PM Monday February 08, 2010

By Rosabeth Moss Kanter

Reprinted from: Why Winning Streaks End

That crashing sound you hear is not an accident caused by sudden acceleration of your hybrid car; it is the continuing toppling of idols, such as hybrid car companies, off their pedestals. Listen hard, lest you be next.

Toyota, the world’s leading auto company, faces a series of product problems causing a $2 billion recall, an investigation by the National Highway Traffic Safety Administration, and a galling loss of face for a company from face-conscious Japan. This follows its first annual financial loss in 50 years, with profitability regained partly through cost-cutting.

Sayonara for a while to Toyota’s reputation for quality control and invincibility. But in Dearborn, Michigan, there are no smug smiles. Ford announced that it is also fixing electronic brakes in its hybrid cars after a damaging review by Consumer Reports and more generalized concerns about electronics in cars.

The noise continues. In banking, the latest jackhammer blow to any remaining pedestal pieces is a civil fraud lawsuit against former Bank of America CEO Kenneth Lewis. Okay, bankers might not be saints, but the saintly are crashing, too. Ten U.S. missionaries were arrested in Haiti on charges of abducting children, apparently admitting that they had neglected to secure all the necessary permissions, and with hints that some of the “orphans” had living parents. Do some people who feel they are doing good think that they can bend a few inconvenient rules to do it?

And if these weren’t enough reminders about fallen idols for one week, the Super Bowl did not feature my favorite team, the New England Patriots, whose period of NFL dominance snapped this fall among hints of eroding focus and discipline.

All too often, long periods of continued success are undermined not by the competition but by self-inflicted wounds. I uncovered common patterns in business, sports, leadership, and life in research for my book Confidence: How Winning Streaks & Losing Streaks Begin & End.

Winners become sinners when confidence turns into complacency and arrogance. They over-estimate their own invincibility and under-value mundane disciplines. Whenever someone feels on top over a long period of time, they are tempted to neglect the very fundamentals that helped them succeed in the first place. They might even start to feel that the rules don’t apply to them.

Success means that people or teams or organizations survive long enough to need maintenance, repairs, and reinvestment. Winners undergo natural aging processes, as people get older, slow down, leave. Facilities, tools, and bags of tricks get older, deteriorate, and run down. Newcomers might get less rigorous training while long-timers forget what they learned. As momentum runs down, people and buildings begin to look run down. Neglect takes on tangible physical manifestations, such as out-of-shape bodies or broken windows. Add to this the pressures in a recession to cut costs and defer expenditures.

Erosion begins by removing a process or discipline. Let’s defer those roof repairs for another year… Let’s cut out one practice; we already have so many… Let’s save time by eliminating the weekly team meeting… The Chernobyl nuclear plant disaster was said to be caused by engineers neglecting small portions of routine safety checks because they had done so before, and nothing had happened. Oops.

Whether you head a company, lead a good cause, or coach your children’s soccer teams, your job is to root out complacency. Remember to:

* Keep up the essential disciplines every single day, not skipping a single one.
* Keep checking everything carefully.
* Repair, renew, relearn, and reinvest regularly.
* Don’t rejoice in others’ misery, because you could be next.
* Thank anyone who points out flaws. Listen to disgruntled customers or disaffected constituencies.
* Treat even small setbacks as occasions for redoubled efforts.

“Winning is great, but sometimes it takes a loss to get you motivated again. It humbles you down to reality,” said a high school athlete in my research. That youth speaks truth! Although he might not be old enough to drive a Toyota, he is headed in the right direction.

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