12/23/05 - SP500's Committtment of Traders Report shows large increase in commercial short selling.
12/19/05 - The 2006 Conundrum. Did you know that private investors are buying up public companies at a record pace? These private consortiums are gobbling up public companies and converting them into private companies. Now ask youself why? The fact is being an investor in a public company is quite inefficient. Point blank, when you buy a share in a public company, you're not an equal partner, and corporations across America exploit this fact.
American Corporations curently exploit investors by paying exorbitant salaries, expensing everything they can, burning cash like it grows on trees because it's "other people's money" (OPM). The average investor is the guilty one here because we've excepted the current reality. Think about this. If your friend asked you for your life's saving and offered you less than 1% stake in the company, you wouldn't give them the money. So why are you giving you money to strangers whose goal is to con you out of your savings? These strangers are public companies that claim to become successful companies, but how many of them actually do become successful. How many of these companies run them with you in mind? How many are grateful for your investment and are rewarding you handsomely? The fact is public companies are the epitome of handouts and don't care if they ever pay you back for your investment. You gave them your money and it's theirs now. It's the greater fool theory. So long as their is another fool after you, you can cash out and get some money back. But if not, you will be stuck with worthless stock. The point of all of this is that the average investor isn't getting a fair shake and isn't rightfully getting their fair share of the profits.
The fact is private consortiums want to buy public companies because they see the real underlying profits and the waste that public companies have created to hide them. Once these public companies become private, the shinanigans stop and the owners capture profits public investors never saw. In addition, thanks to the tax law changes that are in effect, the game of "hide-and-seek" from the IRS has allowed companies to pay less income tax than ever. This huge loop-hole is one of the driving mechanisms behind the current wave of corporate privatization. The second is the fact that taxes on dividends are less than ever which means once the company is privately owned they can pass more profits in the form of dividends to the new private partners. They don't have to share any profits with public investors and worry about stock prices. Insiders no longer need to sell shares to raise cash. They now simply pay out more dividends to themselves. Third, the alternative minimum tax has effectively been suspended for the wealthy. So there's another tax loop-hole to exploit.
So, think about this. What if you bought a public company that used many tax loopholes to legally avoid paying taxes and converted those paper profits to dividends for you and your buddies. If you and your buddies bought the company, you wouldn't have to share the profits with the public. You wouldn't be subjected to the Sarbaes-Oxley reporting standards and you wouldn't need all those expenses. You wouldn't spend excessively because it's "other people's money" (OPM). You and your buddies would become the most aggressive cost cutters in the world, and you could take every beneficial tax break that exists, and your group would shave expenses down so that you could pass through as much profit as you like.
The question now facing the average investor is if the wealthiest investors aren't investing in public companies, why are you? The answer is maybe your investments will be the target of a future conversion which will drive up the price of the stock. Two, the stock market as a whole, will be driven higher as these private consortiums continue to pick-off public companies. (Wall Street has a keen smell for these activities and will not let these public companies go for "rock bottom" prices.) Three, you aren't seeing the forest through the trees (or somethng like that). Fourth, you don't have any other choice. What else is there to invest in?
The problem for you is anticipating when will this wave of corporate privatization end? This is unclear. However, higher prices won't be sustainable when the party ends. This means that higher prices can continue for awhile longer, but we all know what happens in musical chairs. One wins and everyone else loses. Maybe it's time to stop playing the game.
Think about it. Your other invesetment option is to pay off your debts. This isn't glamorious or popular, but it's a guaranteed return that protects you from future losses. If you get rid of your mortgage at 7% (or higher), think about how much money you could save- $100,000 or more! Elminating debts are guaranteed investments/returns that will sever your umbilical cord with your bank and protect you from the black hole of debt. Plus, paying off your debt will also reduce your expenses as you begin to reduce your interest expense.
If you haven't heard yet, banks have lobbied for stricter bankruptcy laws and they got them. So now you can't even declare bankruptcy for protection. They want to get paid and they will take everything you've got. This means you need to fight back. Why invest and get a paultry 5-7% gain when you are paying out 7%-15% to borrow money? Just think about this, what it would be like if you didn't have a mortgage, car lease/loan, credit card debt? How much could you live without? How much less income would you need to live in case you got laidoff or lost your job? If you consider these real outcomes then paying off your debt is truly a win-win. Plus, what if you're just plain tired of working 60 plus hours a week? If you didn't have the debt, you wouldn't be under so much pressure to make more money. Life could be easier. You could watch your kids grow up, or maybe one of you (you or spouse) could simply afford to stay home.
The fact is every one is sold on the idea of increasing their income tax deductions, but as real tax rates decrease, the value of these deductions diminishes. Why should you spend $1,000 to get back only $150 in tax credits? That is exactly the current situation for many homeowners. They borrow thinking that they are getting a great money saving tax deduction when in fact, the govenmernt has been slowly and methodically making it worthless. Currently, if only pays to have a mortgage if you're in the highest tax bracket. If you're not, then you should be paying off your mortgage, home equity loans, and second mortgages as soon as possible. Never mind investing in the stock market, save a guaranteed 7%-15% by reducing your interest expenses. That's 200% more than the stock market if currently giving you!
Choose to get rid of your banker. Break the cycle before they break you, because remember this, hurricane Katrina taught us that US Government will not take care of you. You must force yourself to live within your means or else corporate america will force you to the streets. The greatest transfer of wealth is occurring right now and you need to wake up and start owning something or else your creditors will take it from you.
12/16/05 - Mutual Funds make huge payments. Mutual Fund Investors should expect big checks this quarter as $8 Billion in payouts occurred this past week. This is a huge amount even for the industry. The reason for this is that more companies are rewarding investors not with higher stock prices but with cash. Dividends are the now back in vogue. So if you're wondering why prices rose this past week, it's because much of this cash is being reinvested. Many mutual fund investors simply reinvest their dividends, which creates additional buy orders.
12/12/05 - Congress passes delay to AMT. The alternative minimum tax was introduced 35 years ago as a mechanism to close loopholes. It was designed to prevent wealthy taxpayers from using every legal trick in the book to reduce their taxes to zero. Well, Congress has now approved a tax law that does away with the AMT temporarily. They have extended this year's reprieve for another year. The reason for this change in heart is that Congress now expects the AMT will force Middle-Income wage earners to be included in the AMT formula. They expected the number of taxpayers subjected to the AMT to balloon from 3 million to 19 million. They are in essence admitting that the AMT formula’s, which defines the meaning of “rich”, is invalid. So while this is good news (paying less taxes) for the middle class, the other sly consequence is to give the wealthiest group (for which the AMT was intended) a freebie.
Once again, in the twisted world of politics, the citizens who need help can only get it when they “stroke the backs” of those more powerful. In summary, (regardless of fairness) the passage of yet another tax break is good news for the markets.
12/8/05 - Q4 2005 Shuffles the Deck. Are you ready to play? The old adage "better late than never" seems to apply to investors in 2005. Interestingly, this was the same pattern that we saw in 2004. But more importantly, the question is what caused this year's rally? What it earnings? Was it lower energy prices? Was it GDP growth, lower interest rates, etc.? The answer is Q4 2005's rise was due to the greatest short covering rally the market has ever seen.
After reviewing the Buy/Sell volumes (not up/down, nor adv/decl) and studying the mutual fund's asset sizes, the evidence is clear. Between October 2005 and today, investors have moved 25% of their money from "bear" funds to "bull" funds. $500 Billion out of $2 Trillion was transferred from one side to the other. The consequence of this was that mutual funds had to buy back shares as customers redeemed their shares.
Normally when an investor buys shares in a mutual fund, they are "long" the market. Typically, an investor wishes to buy shares at a lower price only to sell them later at a higher price (bullish). However, when an investor buys shares in a "bear" fund, they are essentially "shorting" the market. They are hoping the market goes lower rather than higher in price. However, when an investor calls a fund and purchases shares in the "bear" fund, the transaction behind the scenes goes like this. First, the fund must acutally sell shares short for the investor. So rather than buying shares, the investor is actually selling shares before they own any. This is confusing at first, but Wall Street allows you to reverse the order of the routine executions to buy and sell shares. By selling first, this allows the fund to then buy these shares at a later date. The goal for this type of transaction is to "sell high and buy low" (bearish) rather the traditional "buy low and sell high" (bullish) strategy. Then when the investor redeems their shares in the bear fund, the opposite transaction must occur. The fund must place an order in the market to buy rather than sell. So when an investor buys a "bear" fund, the investor's first transaction is to sell the market, then when they redeem their shares, they buy. The traditional order of these transactions is reversed.
For the past 55 days, investors didn't just buy more shares in traditional "bull" funds they simply moved money around from one fund to another. They did this because they don't have any more cash to spend on stocks. So what investors did collectively is change their minds. For some reason millions of investors decided to get out of "bear" funds and move into "bull" funds at the same time causing a large number of buy orders to hit the market. Basically, $500 Billion worth of buy order came into the market which did not represent new additional cash. It was just the same money changing sides.
This is how the largest short covering rally, the market has ever seen, was created. It was truly a massive amount of money that represents a full 25% of the money invested in both bull and bear funds. So now that you know what caused the rally. The good news is that now you are informed. The bad news is you must decide if this rally, which was born from of this one behavior, will continue to rally. The question now is where will new money come from to propel prices higher. If the average investor is tapped-out; mutual funds are fully invested (they don't have any cash left to invest. click our chart link); companies have spent all of their spare cash repurchasing stock( see comments from 921/05) ; and foreigners have invested all that they are going to, who will pour the next $500 billion into the stock market?
As always, The Small Investors Software Co ignores traditional media news, and the dribble they report, to expose the real mechanics behind the behaviors. Once again, we're the first to give you the information you need to protect your money!
11/28/05 - Option Expensing is now being seriously scrutinized. Who loves to read company annual reports? The answer to this one is obvious. But more importantly, who has the knowledge to rework the figures to include all of the footnotes? Next, who has the time to perform this task across the entire spectrum of stocks so that all reported earnings are standardized? Again the answer is obvious - no one.
The problem of option expensing was supposed to be addressed and remedied by 2006. But fortunately for investors, Standard and Poors has once again pushed the standard forward despite the apparent squawking from US companies. US companies were hoping to delay the new reporting standards so that they can accelerate the payout before they officially need to report how much of the company they gave away.
Standard and Poors has released a white paper on Option Expensing that every investor should read. Please find the time to review this document.
11/17/05 - Connections/Causality - In the quest to explain market behavior, here's a thought on last week's rally. Last week, Standard and Poors announced the launch of a new family of indices called the 'Dividend Aristocrats' on 11/9/05. There are three indices in this family. One based on the top dividend yielding stocks on the SP1500 named the 'S&P High Yield Dividend Aristocrats'. One based on the Dividend Aristocrats of the SP500 named the 'S&P 500 Dividend Aristocrats'. And the third is derived from the SP European 350 index named the 'S&P Europe 350 Dividend Aristocrats'.
Here's yet another way to pour more money into the same group of stocks, which will only further increase the level of program trading. Be on the look-out for upcoming iShares, Holders, ETFs, and futures contracts based on these indices.
BTW, these indices may very well become the new benchmark on Wall Street as these indices provide a diversified portfolio that produced over 3% more per annum over the traditional S&P500 index. Put these indices on your watch list and definitely consider them for your retirement holdings.For more details visit S&P.
11/16/05 - An unusual behavior revisited. The beginning of October brought us a nasty price decline. But did you know that the setup for this started in September? During the last days of September, an unusual event occurred. No buyers entered the market.
For some reason a huge drop in the purchasing of stock materialized. Now you would expect that prices then fell, but they didn't. Prices rallied. I surmise that the increase in price was to scare investors back into the market, but in the days that followed, they didn't return. Then in October - bang. Prices fell rapidly. Still no buyers. Then after heavy selling and short selling, buyers appeared slowly.
Notice that prices rallied smartly off the October lows. But also be aware that buyers have again vacated the premises. This could be a repeat of last month. Here's a chart that shows you the data.
The Small Investors' Software Co. (SISCO) is as always sharing with you what you need to know. The 'goings-on' inside the market.
BTW, for those unfamiliar with tracking trading activity. There are several pieces of data that can be confusing. First, there's up and down volume, and there's purchasing, selling, and short selling. The third metric is tic volume
Tic volume counts the number of changes in prices. More tics means more excitement as the number of price changes increases. However, price changes can't differeniate between a purchase, sale, or short sale. They can only show you the popularity of specific prices as these changes can be converted into a frequency histogram for each price. From this you can discover where the statistical mean, median, and mode are for each day, and therefore deduce the current 'fair value' more precisely than a moving average. Furthermore this information enables you to infer the liklihood of seeing such prices and therefore create probabilities for a given price range. You can then understand and define what an exreme price is statisticially.
Second, the up and down volume differs from purchasing and sales data. Up and down volume show you the amount of trading volume in stocks that are up, or down, in price for the day, which isn't the same as saying the up volume equals purchasing volume. Knowing that there is more up volume when prices are higher is consistent, but it doesn't mean that the all of those shares traded in those stocks that are rising in price are purchases. It just is a tool that generalizes the activities of each stock exchange and one assumes if prices are rising that there must be more buyers. But that actually isn't the case 20% of the time.
The NYSE actually issues a weekly report that shows you the actual level of buying and selling in reference to the volume of shares traded and in dollars spent. You can see the actual total volume of purchases and sales along with the volume of short sellers. This chart will show these activities. These three activities all point to a disturbing trend that is presented graphically on our Charts Link. The fact that price and trading activity have decoupled is quite bewildering and disturbing, as this violates a tenet of economics. As always SISCO is giving you what you need to know...
11/9/05 - ??? How about a theory that explains the decrease in volatility? This is an original theory by the author of this website.
On our charts page, there are some new and interesting views regarding price. And after veiwing them, you will quickly see that this is where the action is in financial quantitative analysis. Technical analysis is slowly becoming obsolete as every financial institution is now employing highly evolved software that utilizes advanced statistical analysis and complicated mathematics to jump ahead of the average investor.
As proof, option trading is soaring and program trading is phenomenally popular. Program trading now routinely accounts for more than 56% of all trading volume. This is all possible as traders are given the increasing ability to hunt for thousands of opportunities every minute of the day. All of this is possible by combining the computation power of computers and the best analytical methods that science has to offer. However, there is a causalty from all of this statistical analyses - volatility. My theory behind the decreasing trend in volatility is that market inefficiencies are being squeezed out of the market as a result of all of those computers zeroing in on statistical probabilities.
As an analogy, just think of how aerodynamics changed the shape of cars from the 1970s to the 2000s. As engineers pursued the reduction of each car's coefficent of drag, all cars started to look more alike. The science is the same regardless of who applies it. So there can only be one optimal design and every engineer was converging on the same shape. But eventually engineers recognized this and stopped pursuing this one criteria. They did it to stop all cars from looking alike because after all, they still needed to distinguish themselves in the marketplace. So they pursued other priorities to make their cars different.
On Wall Street, science and math are pushing trading the same way. As investors of all calibers increase their reliance on computers, the science available makes it way to more particpants. First, the big firms get to use the new idea because they hire the creators of the idea. Then eventually an underling branches out and now consults with other firms. Then eventually, someone makes a new product out of it, Then many products appear which fuels competition which drives down prices. Essentially, the idea gets commoditized.
This is exactly what is happening now on Wall Street. The fanciest tools are slowly watering down to the average investor as prices of these products are becoming more affordable. The only difference between the auto industry and Wall Street is that Wall Street isn't interested in the "coefficient of drag". On Wall Street, traders are converging on probabilities which is reducing the variability on price. Of course prices can still fluctuate, and special events will cause prices to jump wildly, but look at the VIX . It's downward trend is hard to understand without the knowledge just described.
Remember volatility can still increase, but now when it does the damage will be cataclysmic as each computer will be firing off the same message to everyone who uses the "new software". Convergence in this case won't just mean a lack of diversity in car shapes; it will trigger a cascade that similarly starts a nuclear meltdown.
This pun is intentional as physicists have brought their science, and the drestuctive forces that they study, to Wall Street. You have been warned.
Have you paid off your mortgage yet? Well, then invest in your house. Pay it off. There's a guaranteed 7% return (or whatever your interest rate is).
11/8/05 - "Houston we have a Problem." These famous words were immortalized in the movie Apollo 13 by Astronaut Jack Swigert.
It's week 45 and where is the rally? It's one of the few weeks in the year that investors can count on for a rally, but it hasn't appeared yet. This day number number 4 of being stuck in a narrow range, which isn't good news. The seasonal tendency is so strong that this overhead resistance must be substantial. Why are prices being capped at the SP500 futures level of 1225-27?
For 2005, there have been 18 such periods and only 6 produced higher prices 3-5 days later. If you go back and include all of 2004, then there were 34 such occasions and only 13 ended up higher. As you know, empirical statistics are good for conversation but do these statistics hold up under further scrutiny? The answer is no. The Chi Squared test which asks if these are due to a random process or a non-random process fails in both instances. So while these empirical data are interesting facts, they aren't due to a non-random process. These facts are just a normal variation of a random state, which means - 50/50. But if your a seller, watch out for a quick "head fake" to the upside before prices fall.
11/8/05 - Show me the money. That's what investors are saying and it's working. According to Standard and Poors, the number of companies paying dividends increased again in 2005. The total number of companies paying dividends increased from 2004's level of 377 to 386 in 2005. The amount paid out increased from $19.44 to $21.85 which is a double digit increase over last year. That means $203 billion is being given back to those who invest in any of the 500 constituents within the SP500.
Well, it's about time investors get paid for taking a risk. But have you noticed that investors haven't seen any price appreciation? So dividends have increased to a lofty level of 1.9%. But wait, prices haven't risen all year. So investors total return is a whopping 1.9%. Yeah, that's good news.
11/5/05 - Global Malaise. October wasn't kind to investors around the world. According to Standard and Poors rising interest rates both in the US and in Europe are spooking investors. Even emerging markets returns fell in October. There wasn't a rock to crawl under anywhere last month.
11/1/05 - Today's Sandwich - Stuck in the middle. In case you didn't know, yesterday and today have got the indices stuck between the 50 day simple moving average (SMA) and the 200 day SMA.
11/1/05 - October Summary. First, let's examine price. Here are some facts. October started higher and ended lower. This fact alone goes against history, which has October as one of the most predictable months for having the order of Low to High. Go, figure. October spent most of the time below the last year's closing price (SPX 1211.92, NYA 7250). The last two days of the month produced a rally that hit resistance at last year's closing price (SPX 1211.92). Second, the volume levels this month were heavier than last month's by 11% and option volume increased by 20%. These volume levels increased as price broke through the monthly lows of August and September. Third, price volatility increased. Fourth, this earnings cycle peak produced fewer cumulative positive earnings reports than the previous 2 quarters and positive revisions are way down from previous quarter's levels. Fifth, retail gasoline prices are falling back to pre-hurricane season prices while natural gas and heating oil are up dramatically from last winter. Last October's retail heating oil prices was 1.65 and this year it averaged 2.45. That's a 50% increase.
In general, a plot of the total cumulative volume shows a healthy advance in price with an accompanying rise in volume. Indicating that price and volume are tightly correlated for 2005 and the drop in price this October is nothing more than a correction. Second, the market internals such as the statistical adv/decl oscillator, the up/dn oscillator, and the tick oscillator are in the buy zone. Third, the committment of traders report shows professionals as being relatively bullish. However, after 10 months of trading, prices are still below the last price of 2004. Despite record levels of corporate buybacks and corporate profits, prices still aren't rising above last year's level. So one could argue that the worst of the bad news (ie: mutual fund portfolio adjustments, energy prices, natural disasters, Iraq's death toll) is behind us and better times lie ahead. But despite the fact that investors kept getting good corporate news during 2005, they haven't been rewarded and the market hasn't even compensated investors for the rate of inflation. Even bond holders are locked into their committments (bond holdings) as interest rates keep climbing.
In addition October should be renamed to "Mutual Fund Madness" month. The impact from this industry is felt every year as they close the books on their fiscal year. This year, October saw a decline of 6% from the September high. This is largely due to the mutual fund industry's portfolio adjustments. It's been a difficult year for trend followers as prices are flat thus far. So mutual fund managers have to sell their worst performers so improve their portfolio's appearance in the quarterly report and in the annual report. Plus, they also get the chance to cover up these losses by letting go of some their top performers to avoid substantial tax penalties. So their impact on prices is enormous. So while the end of October brings an end to these activities it also is a time to highlight serveral other trends within the industry.
First, another resistance level was encountered. According to the mutual fund industry, Investor's have recovered from the losses of 2000-2003 as measured by the total net assets within the industry which have surpassed the previous all-time peak of 2000. 2005 brings investors a new all-time high in net assets. This milestone not only signifies a restoration of their wealth (at least on paper) but it also gives investors the chance to breath and the chance to reallocate their portfolio. This opportunity to reallocate funds represents another reason why prices aren't above 2004's closing price. Essentially, investors are taking this opportunity to move money around which means they are both sellers and buyers. The consequence of this is exemplified by the fact that prices weren't thus far substantially higher in 2005 than in 2004.
Second, investors are shifting funds from mutual funds to ETFs. The popularity of ETFs is phenomenal and Wall Street is salivating as they once again regain market share. This is simply the beginning as investors respond to the simplicitiy of owning the indexes as if they are stocks. When the mutual fund industry shot themselves in the foot with all of the illegalities exposed by the Attorney Generals of New York and Massachusetts, this opened the door for Wall Street to recapture once was their domain - the retail investing market. Over the past two decades, the mutual fund industry has taken that segment away from Wall Street, but ETFs have changed the landscape.
Third, another shift occurring is the meteoric rise in investing overseas. Investors are increasingly allocating more funds to non-domestic mutual funds and ETFs. India and Asia are the benefactors, but other nations rich in natural resouces are a close second. Eastern Europe is also popular but still quite risky.
Fourth, the fear of bankruptcies weighed heavily on prices early in the month as the bankruptcy laws changed early this month. Airline failures along with the prospect of millions of Americans claiming bankruptcy chilled investor confidence.
11/1/05 - 2005s Preliminary Summary - Is the era of Consumerism over?
Thus far in 2005, investors have had major trend changes which have stimied prices of the traditional Wall Street benchmarks (SPX, DJIA, NYA). First, Corporations have had record profits which also has the impact of increasing Government's tax revenues. But these are both waning. Public Corporations also had to deal with Sarbanes-Oxley but still had the tax break given to them last year, which reduced their tax liability to 5% of all foreign derived profits. This gave them an incentive to bring those dollars home. Once those dollars came home, they were reinvested in company stock buybacks, which produced increased dividends to the company. These increased dividends increased cash flow and corporate assets, while at the same time were being taxed at a lower rate. Essentially, money was moved around the globe back into the USA for tax related reasons. These incentivized transactions satisfied corporate boards because they ended up with more money, paid less in taxes, and improved earnings. On the other hand government increased their tax revenues (yes, they offered a discount but made up for it in volume) when they needed it to offset their spending. Investors saw the extra expense of Sarbanes-Oxley offset by increased dividend cash flow, and saw the net result in a positive quarterly report. At first, these performance increases were well received, but now, well just say that the "paper shuffling" of "paper profits" is apparent. Investors are wondering when companies are going to show them real value and real growth.
2. Natural disasters have had devistating affects on millions of Americans throughout the USA while higher energy prices have been rising. Both have been cutting into discretionary consumer spending as Americans donate time and money to help those in need and as their budget is increasingly being drained by energy costs. While spending is increasing from governement at the federal, state, and local levels, devistated areas from the south and other flood victims from other areas are also spending to rebuild their lives. The insurance industry and the reinsurance industry are fueling this spending spree, but of course, they are reeling from the claims they have incurred. Finanical companies represent nearly 20% of the SP500 and consumers and energy represent another 30% of the index. So 50% of the SP500 index was dramatically affected this year. So here's another reason why stock prices are stuck.
3. Investing behaviors are changing. The dominant Mutual Fund industry is losing market share to Wall Street as ETFs and investing overseas have become the new "it" (not I.T.= information technology). Any new money flowing into investments isn't going towards the traditional market indices, so again this is another reason why stock prices are stuck.
4. The only US index on a tear is the AMEX index (XAX). All of the others SP500, DJIA, NYA, NASDAQ, SP400, SP600 and the Russell 2000 are barely above their 200 day moving average, and these averages are all flattening out. This is the factual evidence that stock prices are stuck.
5. Washington has passed one spending bill after another as if no one is looking. Every week billions more are being given away without any regard or hope of paying it back. It's as if those in Congress have conceded, and excepted the reality, that they will never say no, and that they will never live within their means. It will always be the next guys problem and so what if they're voted out of office. They will land a lucritive position in the private sector which will keep them in Washington anyway. The consequence to investors however is that this increased spending is good for corporations. As long as money is flowing, they will get their piece of the pie, which insures a revenue stream. Longer term, the increased burden of government debt will only get passed on to the taxpayer and everybody knows that individuals pay a larger share than corporations. Corporations may pay millions, but proportionately, the individual taxpayer antes up more. The problem is that corporations are dependent on the American consumer, and when they run out of credit. The game is over. Americans have already run out of cash, and they are quickly using up their credit. Now throw the ability to pay your taxes with a credit card and you see the that the government is being paid with credit. The fact is there isn't any cash left. The only real asset remaining is land. And the ramification of this is that if there truly isn't any cash left, then where's the fuel for future purchases of stocks? As was noted throughout the year in earlier comments, the retail investor is missing. Now increase taxes and ask yourself who's going to buy stocks?
6. The Iraq war may have had started on morally high ground but is quickly losing polical will. Plus regardless of how well intentioned it is to spread democracy, and to secure the largest oil reserve in the world, the execution of the plan has been mangled and self-depricating as seen by the rest of the world. The USA is hardly conveying to the world the benefits of democracy. Our President had the opportunity to demonstrate to the world visionary leadership, unity, and peace. And what they saw is vengeful retaliation, calamity, and death. It's a shame that the largest oil reserves in the world were put into the hands of the world's tyrannts. But putting this aside, the insurgents have successfully changed our President's war in Iraq from a mission of peace and stability to eliminate terrorists, into a religious war which is a no-win situation and has no end.
If that weren't enough, the White House is in political trouble which simply means that our President and the executive branch of our government is pre-occupied with preserving the status quo. Nothing new will flourish; and all existing matters will stagnate. This is hardly a good time to invest as uncertainty, or chaos, rises. The latest development, which is increasing the level of chaos, is that another country is being dragged into the war against terrorism - Syria. More uncertainty equals fewer investments. It's a simple equation. By the way as a caveat to this simple equation, put your money to work in a country unrelated to these events. Now maybe you see the connection as to why the trend to invest overseas is rising. This gives man ythe impetus to invest overseas.
7. Housing prices are starting to soften but the displacment of millions of hurricane victims is supporting regional increases. Jobs and homes in America represent the wealth of Americans. High paying jobs are harder to find and yet new construction jobs in the South are quickly being taken by Mexicans. The fact as to whether they are legal aliens or not isn't the pont. The point is that not even the locals from Mississippi and Louisiana, many of which are poor African Americans, are clamoring for these jobs. You have to ask why, as these jobs traditionally pay more than Wal-mart? Homes are being mortgaged (borrowed against) in excess of 100% (include all debt: first and second mortagage balances, credit card debt, taxes). Americans seemingly owe more than they own and Government will realistically be forced to raise taxes and let the dollar's value decline. This doesn't represent a healthy investment environment. By the way, toss into this mix higher rates of inflation and higher interest rates. Now we are talking about a really healthy investing climate - NOT. (Reason number 2 for money to leave the USA. Now do you see the correlation to the ramping up of overseas investing.)
8. Claiming personal bankruptcy is out of the question. Now that Americans can even pay their taxes with a credit card, the only asset remaining will be taken from them - their home. On October 17th, the bankruptcy laws in the USA changed making an individual accountable and liable for their expenditures. This is good, but America runs on recycling dollars (credit). And if everyone is now responsible to pay for what they buy, well let's just say the era of a consumer based economy is over.
I'm guessing the new job for the new economy will be to replace the retail clerk with the repossessor? What do you think?
10/21/05 - Eureka! 2005's first 2% day. Sorry, I'm sure this wasn't fun for many of you. But the warning for increased volatility was posted of 10/3/05. Wednesday's price range was the first 2% range for 2005. Then the next day we get another one. Two 2% day's in a row. This reminds me of April 2001 when the market went down then back up the following day. This pattern of up and down or down and up is called "Railroad Tracks". Tracks also occurred back in: Sep. 2001, Aug. 2002, Sep. 2002, Oct. 2002, Nov. 2002, Jan. 2003, and Feb. 2003. This pattern hasn't been seen in quite some time. For a historical table of 2% days, review the following link to our 2004 highlights.
10/19/05 - A response to the Wall Street Journal's "Living with Sarbanes-Oxley" (SO). This past weekend's WSJ contained several articles regarding the impact of this recently enacted legislation. The one glaring element missing was the insurmountable cost of fraud and corruption that was perpetrated against many investors. The article's factual content illuminate the reader to the increased expenses and difficulties that SO has wrought upon all public companies, but the tone of the article compels the reader to feel sympathetic towards US companies. It is as if the WSJ is "whining" to Congress, and crying out "Uncle" - we give. Please make SO go away.
The problem besides the WSJ's intent to enlighten Congress is that it is an attempt to pressure Congress into "watering-down" SO. Plus it now gives Corporate leaders the "green" light to whine openly in public. This must be countered by letters from individual investors who have lost money in the stock market as the direct result of fraud, and disception. Congress needs to be reminded that Billions of Dollars were stolen from the public and Companies must pay the price. As the old saying goes "if you abuse it, you lose it".
So don't be mislead by the WSJ's whining. Just remember why SO was enacted and that these rules were enacted because corporations are constantly on the prowl to take advantage of "Other People's Money". After all, it's not their money. So morality be damned.
It's a shame the WSJ didn't convey the tone and demeaner that sympathizes with investors. It would have been easy for them to write articles in a manner that attempts to sooth investors by informing them how SO is working for them and how SO is protecting them. But no, WSJ readers got whining and crying over the hardships now facing all public companies.
As a caveat to this, if you read between the lines. SO is now an excuse for anything that goes wrong as companies had to divert attention from the task of pushing more product out the door and making more money. SO held them back; cost them opportunities; made them miss targets, etc. Lasly, SO is the reason for a slumping market. The expenses and costs are weighing on the stock prices.
It may not seem fair that all public companies must spend more money on stricter accounting, but let's not forget why SO is needed. Companies had their chance to prove their honesty and integrity for the past 100 years. The laws in this country and around the globe have had to adapt to the ever changing climate of deceit and larceny that has evolved on Wall Street. It is after all "Other People's Money" and Wall Street has always managed to find a new way to defraud investors.
So after 200 hundred of years of Wall Street chicanery, you should have learned that human nature doesn't change, the players do. Unfortunately the axiom born out this is that if it is truly getting harder to steal it then where will they go next - overseas? What does that mean for "real" corporate performance if they have to tell the honest and unadulterated truth?
10/17/05 - The flood-gates on Bankruptcy are now closed. Individuals are now personally responsible for their debts. Yippy! It gives Corporate America new meaning the to the phrase "What's in your wallet"?
Now if Congress would enact legislation protecting individuals from marketing schemes that would balance out the equation. If Congress would force Companies to give consumers a try before you buy period without any money changing hands, then the playing field would be equal. You could try AOL and if you wanted to purchase it, you would call and buy it. If you didn't call you didn't purchase anything. Currently, if you don't call you are charged by default for not cancelling a subscription that you don't want. As another example, you could try a travel discount program for FREE and if you wanted to purchase it you would call them and purchase a subscription. Again, you wouldn't be charged by default if you don't call to cancel. Now add in the value of all rebates and telephone marketing schemes. While these small transactions seem innocuous, they add up to Billions of dollars that befuddle consumers. They are by design schemes to trick and confuse consumers. Who's fault is it when our education system fails to teach logic and reason? As it stands, Companies can reach into your wallet and take your money first, then you get to fight to get a refund or a rebate
Never mind that this type of behavior also formed the basis for most of the fraudulent reporting of corporate financial statements. They reported sales when there really weren't any, as many of these types of transactions were later cancelled by consumers. The cash flow from these transactions formed a ponzi scheme of sorts, which then allowed companies to misrepresent real and acutal sales. This occurred because cash was constantly flowing into the company which made sales growth appear real. Then of course, they put aggressive sales people in customer service to outwit the weak, and used other tactics to thwart those who couldn't or wouldn't persevere. Refunds were the bain of these companies existence and refunds were avoided at all costs.
Extrapolate these types of activities at the wholesale level and Sunbeam comes to mind. Remember Sunbeam counting deliveries as sales? Officers weren't even concerned that no money was transferred. To them, goods were cash. It's amazing how far companies pushed the envelope of the original "Ponzi" concept.
Next, let's discuss the unfairness within the Banking Industry. If you get into debt, Banks change their relationship with you. First, they want you to incur debt so that they make more money, but when you make one mistake and miss a payment, they change your status. You're no longer a customer. You're a money machine.
First, they tag you as a credit risk. This then increases the fees and interest rates on your account. But wait, this information is passed to a credit reporting agency which then notifies every other bank and financial institution. You are "red flagged" and now every credit card raises its fees despite the fact that you haven't missed a payment with them. Fees spiral upwards, which in the old days would be considered a crime (of course laws were changed to accommodate current Banking behavior). However, because you're now an increased risk to the Bank, they are justified in raising your fees. These fees increase your debt that now locks you into a cycle from which there is no escape. You could now potentially be liable to pay 5 to 10 times more than what you originally borrowed. Yippy! (said the Bank) You're now personally responsible for your debt because you no longer have the option of claiming bankruptcy. Do not pass Go - What's in your wallet?
PS - technically some individuals can still pursue bankruptcy, but the rules are such that it is so difficult to do so. The rules are so difficult that only 5% of the current bankruptcies granted prior to 10/17/05 would be considered post Oct. 17th.
So Corporate America gets paid which is a short term windfall for stock prices. But this is temporary, because as more individuals get into finanical trouble, the economic engine that fueled the current bull market will run out of gas. They will eventually be forced to stop spending because they've run out of credit; they will be deverting funds to fees and interest charges; and let's not forget the impact of higher energy costs. So increased financial fees and energy costs will stime the consumer driven economic engine.
As you can see, the deck is stacked in Corporate America's favor. The outcome is that Americans will learn to live within their means. This is good on face value. The return to the values of yester-year of being held accountable and responsible for one's actions is good isn't it?
The problem is with the timing of all of these changes and with fairness. It isn't fair that after a generation of nuturing a 25 year span of indulgence, the Government only puts the brakes on the consumer. The Government and Corporate America of course are still entitled to spend beyond their means and declare "whoops" I made a mistake. Sorry, I can't pay you. And by the way, we spent your pension money too. Sorry.
With respect to the timing of this change, well this puts a nail into the coffin of the American consumer. They were already beginning to slow their rate of spending as higher energy costs vaporize their discretionary funds. This decrease in discretionary spending will impact corporate revenues by reducing sales. Some companies won't survive. Those foreign companies that are dependent on US consumers will be forced to layoff workers around the globe. This will then lead to more layoffs which only accelerates the impact on other companies' revenues, and the cycle leads to a global recession. This time a recession in the USA will cause many mortgages to default which leads to a sellers market. This will cause a sharp decline in home prices which leads to a financial crisis as banks are lending more than 100% of the value of the underlying asset. This spirals into a depression as there are no jobs to be found. The US Government is broke and can't afford to dole out unemployment compensation. Tax revenues dry up which creates increasing debt levels relative to GDP of upwards of 90% which are levels not seen since the 1950s (currently federal debt level to GDP is 66%. 2006 is predicted to be 67.5% which is the highest level in 47 years.). The US Mint prints more money than ever which triggers a dramatic devaluation of the dollar which increases the price of Crude Oil as it is benchmarked to the USD. The USD no longer is the "world currency" as double digit inflation ruins and devalues wealth around the globe.
In the end the American worker, 1. lost their pension, 2. lost their job, 3. lost their health insurance, 4. lost their savings, and 5. lost their home. They can't even afford to bury themselves. The standard of living that was the envy of the world is now that of a third world country. What's in your wallet? You'd better find a way to keep it.
10/7/05 - What's an investor to do? US or Overseas. The mutual fund data is out and it's very clear. US stocks are out and International Stocks are in. For the past three weeks, US Domestic funds have had net outflows, while Non-Domestic funds have had huge inflows. The three week total is -813 Million (withdrawn) from US Funds versus the overseas funds +5,320 Million (purchased). Now there's a swing. Oops! Mainstream media once again forgot to tell you about it.
10/5/05 - Who's got the Yo-Yo? Who's pulling the string? The media blames yesterday's downward gyration on rising inflation and interest rates. But these aren't a secret. What the media didn't tell you is that there was an imbalance in two of the world's most popular indices - the SP500 (SPX) and SP100 (OEX) index. On Friday, the SP500 and the SP100 index were changed. What makes this event unusual is that it left the index with 499 components versus the normal 500 and 99 versus the 100. So for a day, all of the other components were weighted more heavily. Then after the Monday's close (meaning Tues.), the weightings were changed again as the last component was added. So prices rose Thursday when the weightings increased and prices fell when the weightings were reduced. So we're back to where we started. The reason for the dramatic effect is because the media again forgot to tell you something. They didn't tell you that there aren't many "little guys" in the market anymore. This fact is duly noted within these comments below (see 8/22/05).
In addition, what made this even more unusual is that this index reshuffling occurred on one of the most predictable events of the year - the October "Window Dressing" period. So nobody noticed the upward gyration because it was disguised by this very prominant periodic event (see Charts Oct Window Dressing).
Aren't you tired of being spoon-fed mushy media dribble? Gimme' back my yo-yo.
10/3/05 - How kind is October to investors? Well, first remember this. The end of October is very important to the Mutual Fund Industry. It marks the end of the Fiscal year for many firms which means performance bonuses are hanging in the balance. So if a manager can improve the after-tax performance of their fund by dumping losers to offset capital gains, then there's an incentive to do so. Also if there are "dogs" in the portfolio, then managers dump them before the end of the month so that investors don't see these losers in the upcoming quarterly report. Also if a manager failed to own the hottest stock on the Street then they're going to buy it regardless of the price so that the quarterly report reflects their "wisdom". They simply want to impress you. The point behind this is that what ever managers can do to make themselves look good is done in October. Be prepared for an increase in volatility as this past year wasn't an exciting year and therefore expect many adjustments. The market is up 10.2% on price appreciation alone from Sept. 2004. Despite this reminder about the mutual fund industry, here are some statistics for you to consider.
These twelve statistics look for any signs of predictability and regardless of how you analyze it, there isn't any predictable behavior in October, nor is there any convincing evidence of any bias. In summary, this October statistically is slightly better than 50:50. So the question is how would you trade this month? How can you use price volatility to your advantage?
9/22/05 - Down Streaks.
9/22/05 - Short Selling Makes new high for 2005. This past four day selling streak has been difficult for investors.As always, we bring to your attention uncommon details and behaviors seen within the market. Today's oddity is that the level of short selling has reached a level not seen in 2 1/2 years. Second, the level of outright selling is at an extreme but it hasn't created a yearly high. Late April's selling was relatively stronger, but not by much.
The problem here is that not only is selling increasing towards record levels, but also that the level of buying has dried up. The only good news is that current level of selling is pegged at the boundaries of observable recent behavior. As for buying levels, well let's just say that they're just at neutral and less buying could still be in the offing. The point of this is that there is hope that a technical bounce in prices may appear soon as selling temporary abates. Plus, having five down days in a row is rare. Third, the Dec.31st closing price of 1211.92 should act as support albeit atemporary one.
If you're wondering why prices are diving. Well, don't think too hard. The size of Katrina wiped out 90,000 square miles of valuable ports and industrial complexes. Hurricane Rita appears to be currently larger and stronger, which will wipe out the remaining major ports in the Gulf along with many other industrial complexes. Basically, trade/commerce will be severly affected. Companies based inland, such as Dallas, Austin, Houston, will also be affected. So the country will be limping along as it is preoccupied with not only one disaster but two.
If that weren't enough, investors can't see how our Government can continue to spend hundreds of billions of dollars in diaster relief. The shear size of these disaster areas will translate into fewer tax revenues for the Government. So not only is spending out of control, revenue will dissintegrate which will create a potentially catastrpophic increase in the Deficit (we're already broke).
Lastly, the hope of rebuilding is certainly going to temper these tremendous losses, but imagine this. 25% of the country is offline and another 15% of the country is preoccuppied with relief. Corporate America is definitely going to take a hit initially. It will take 3-6 months just for insurance companies to let go of their money, so by the 6-9 month timeline the bulk of the spending spree will be full swing. What would you do with your money from now until 6 months from now?
Well, take your profits and run would be a smart start and then look for lower prices to reenter the market.
If your new to this website, then read our comments from 7/7/05 "Mid-year Probabilities". We stated back in early July that the probability of losing money stands at 71% from June 2005 to June 2006. The closing price of the SP500 index for 2004 was 1211.92. The closing price of June 30,2005 was 1191.33. The high for 2005 thus far is 1245.86 and that was with heavy company stock buyback activity, good to great corporate earnings (better than 2004), the passage of an Energy Bill, and after hundreds of Billions of dollars in Government spending programs.
Currently, the airline industry is in dire straits. Another massive disaster area will stimie the airlines. If Hurrican Rita hits as hard or worse than Katrina, then the USA will be serverly crippled as fewer goods will be imported and exported, 25% less fuel will be refined, massive unemployment will strain municipalities, many smaller companies will cease to exist, transportation routes will be destroyed, and larger companies will be running without their "right hand" - the South. BTW, let's not forget Florida has had two hurricanes recently and should be included, or factored, into your analysis. More areas devistated means less manpower to service the immediate needs of victims as relief efforts are spread out throughout the entire South! This translates into a slower recovery timeline. If that weren't enough to think about then add this to your list of questions although with any other trade you wish, "how many roofers, framers, plumbers, masoners, electricians, drywallers, carpenters, etc. are there"? To quip, I think we got retail sales clerks covered.
9/21/05 - Standard and Poors issues second report this year on company buyback activity. As noted here, "Where is the Retail Investor?" and back in April, it appears that companies themselves are driving prices higher with their huge increase in stock buyback activity.
9/14/05 - SP500 daily ranges relative to opening price. If you're a day trader setting stop levels is an art-form. However many investors aren't watching their screens all day and hence they need to "set it and forget it". The problem is what is the "best" stop level. Well, statistically, you can use probabilities to give you an edge. Below is a table that is used by many "black box" trading systems because these mechanical systems simply assess the current market conditions and "play the odds".
First, compare the ranges from 2000 to present to the data from 2002 to present. Notice the current decrease in the ranges. This is why volatility is currently extremely low.
Second, the remaining data contained within the table just teases apart up days from down days. Please note that at the onset of each day, you don't know whether the trading will be an up day or a down day. But if you begin the day thinking today were going to be an up day and go long (or buy), then you should anticipate the typical price range. These data help you to understand where you should set your stop level. Just select the probability range of your choosing, and you should have more confidence in your decision knowing that your optimizing your trade to current market conditions.
Third, deciding when to exit a profitable trade is as important as protecting it. So again these data assist you by helping you to understand "how far will it go"? If you use the current market's probabilities then you know that a 50 point up day is possible but not likely. So set your sell limit to appropriate probability range and you can be assured that your optimizing your profits. Notice that if you were a buyer from 2000 to 2002 the 95% level was 30 points. Now if you're a buyer the 95% level is 15 points. So waiting for 25 point trade means that your waiting for something that is rarely going to occur.
Lastly, if you review the up and down data carefully, you'll notice quite a bit of symmetry. In addition, it is interesting to see that if your "long the market" (buying) you're looking to make 15.3 versus losing 6.5, or if you want to risk less then you would be willing to make 13.3 and lose 5.2. In either case the market is telling you that the current risk to reward ratio is 2.3 to 2.5. If you examine the down days you'll see the same ratio appear. This fits nicely with an old traders "rule of thumb" of 3:1, which means should make $3 for every $1 lost if you want to survive in the market. In essence, this table is showing you the collective behavior of all of its participants, and just like at the track, the odds are being set by the influx of bettors. This is what they (all investors) are comfortable making and losing.
Summary. Making the most of what the market offers most of the time is smart. Using the odds to optimize and maximize you goals is the key to consistency and profitability. We all want to hit a home run, but why not hit consistent doubles or triples. Over the long haul, this is what will bring you home.
| SP500 Daily Ranges Relative to Open | ||||||
| sample size | 95% | 90% | 80% | 70% | 60% | |
| From 1/2/2000 | 1433 | |||||
| Open to High | 22.5 | 18 | 12.8 | |||
| Open to Low | 26 | 20 | 14.5 | |||
| From 1/2/2002 | 933 | |||||
| Open to High | 18 | 14.5 | 10.5 | 8.5 | 6.7 | |
| Open to Low | 19 | 16 | 12 | 9.5 | 7.5 | |
| Up Days from 1/2/2000 | 726 | |||||
| Open to High | 30 | 22.6 | 17.3 | 14.4 | 12.2 | |
| Open to Low | 11.7 | 9.4 | 6.4 | 4.5 | 3.6 | |
| Up Days from 1/29/2004 (411 days) | 228 | |||||
| Open to High | 15.3 | 13.3 | 10.7 | 9.1 | 8 | |
| Open to Low | 6.5 | 5.2 | 4.7 | 2.9 | 2.2 | |
| Down Days from 1/2/2000 | 705 | |||||
| Open to High | 11.5 | 9.2 | 6.5 | 5.1 | 3.8 | |
| Open to Low | 34 | 26 | 19.3 | 16.4 | 13.8 | |
| Down Days from 1/29/2004 (411 days) | 183 | |||||
| Open to High | 6.5 | 5.1 | 4.1 | 3.1 | 2.7 | |
| Open to Low | 17.5 | 15.3 | 12.4 | 10.5 | 9.7 | |
|
Notes: If you want to now the probability of occurrence for up days then simply take the number of occurrences and divide it by the total number of days. For example, the probability of an up day from 1/29/04 is 228/411 or 55%. However, computing Chi Squared is more complicated. In this example, it's 4.93 which is significant. ©2005, The Small Investors' Software Co. | ||||||
9/13/05 - SP500 index Probabilities. Let's review the current set of probabilities from 1/1/82 to 9/12/05 and from the most recent 26 weeks. The overall probability from the 5977 day sample that the SP500 will close higher than the previous day is 52.7% with a chi squared value of 17.89. This indicates that this isn't random. Plus, here is a case where reversion to the mean applies to probabilities.
| Day of Week Probabilities | |||||
| Mon | Tues | Wed | Thu | Fri | |
| Series Probabilities | 53.9% | 50.9% | 53.9% | 51.6% | 53.4% |
| Chi Squared | 6.98 | 0.39 | 7.69 | 1.20 | 5.50 |
| Recent Half-year | 69.2% | 53.8% | 65.4% | 53.8% | 34.6% |
| Chi Squared | 3.85 | 0.15 | 2.46 | 0.15 | 2.46 |
|
Notes: Chi Squared values greater then 3.84 indicate that a non-random process is probable. In other words, there's a 5% chance that the statistic is still due to random process, or chance. However, if the Chi Squared value is greater than 6.64 then there's only a 1% probability that the statistic is governed by chance, or a random process. Also, note that some probabilities are greater than others and yet fail the randomness test - Chi Squared. This means that these observations most likely represent streaks or runs. Relevant probabilities are highlighted in green. ©2005, The Small Investors' Software Co. | |||||
Note that Mon. Wed. and Fri. are generally favorable to higher prices, and that during the last 6 months, Mon. and Wed. appeared to have had the best odds. However, these odds, or probabilities, despite there seemingly high proportions, are really just normal variations of the underlying series probabilities. This means that these probabilities are bound to regress to the mean.
For example, Monday's Series Probability is 53.9% while the most recent 6 months demonstrated a remarkable 69.2%. The Chi Squared statistic is 6.98 for the series, which is greater than 6.63. This means that this probability statistic has a 1% of being the result of a random process and has a 99% probably of being the result of a non-random process. Conversely, the most recent 6 months produced a higher probability than the series probability. However, note that the Chi Squared is lower than the series statistic. It barely makes the 5% level of 3.84 and it doesn't reach the 1% level as does the series chi squared. So the current observed behavior on Monday's is temporarily lopsided to the upside and eventually the series probability of 53.9% will return.
That's why when you discuss probabilities you need to put them into context. While all of these facts are true, the probability of Monday's closing higher than the previous Friday's close constantly fluctuates. If the sample were 6 weeks then we would expect 3 up occurrences for a probability of 50%. But some periods may have 1,2,4,5, or 6 up occurrences which is why the chi squared statistic is important. The chi squared validates the importance of the probability. So in this case, a sample of six isn't going to provide us with very meaningful probabilities. However, if we increase the sample period to 26 the laws of statistics state that if the number of up days is between 17 and 9 then this is probably due to normal variation of a random process. The odds are still 50%. However, 17 our of 26 creates a 65.4% probability which is pretty good, except for the fact that it really is a useless statistic.
This is hard part to understand. Although this observed probability of 65.4% is real (hypothetically by example only), it doesn't mean that this currently observed outcome will continue to occur in the future. The chi squared test is telling us that this is more likely to be the result of chance than due to a rational or true non-random process. Therefore, we can not expect this 65.4% to exist in the future. This empirical data describes the present, but has no value in describing future events. So if you had to guess what the probability of Monday's close being higher than Friday's is, you would have to use 50% for future expectations because the hypothetical probability of 65.4% is useless.
So this brings me back to the table of results. Which of these probabilities are useful? The series data for Mon. Wed. and Fri. are all useful probabilities. Second, we know that the probabilities of the most recent 6 months don't pass the chi squared test and as a result indicate that they are variations about the series probabilities. So from these data, Mon. and Wed. are above the norm and they will revert back to the norm, while Fri. is below the norm and so Friday's probability will increase.
The translation here is that you can expect fewer Mondays and Wednesdays to close higher while more Fridays will close higher in the upcoming months because Monday's present probability of 69.2% is on the edge of normal variation for Monday and the number of future Monday's closing higher must decrease to the overall average probability for Monday of 53.9% .
Now moving to more specific probabilities. Below is another table of probabilities with the associated Chi Squared. The day of week was selected for each month going back 23 years and the number of up days were counted. Notice that there aren't that many useful statistics. Most of the time you're flipping a coin but on a few occasions, the market does have a bias worthy of a trade. But caution, the best odds the market will give you is 2 up for every 1 down day versus the traditional 1 up for every 1 down (or even money or 50%), so there's still plenty of uncertainty. But 2:1, or 67%, is better than 50%. So take those odds when you get them.
In summary, the market isn't giving up any free $100 bills. There are no clear patterns based upon the day of the week that lead you to a sure thing.
| Day of Week Probabilities for each month | |||||
| Mon | Tues | Wed | Thu | Fri | |
| January Series | 52.2% | 49.0% | 56.8% | 58.8% | 52.4% |
| January ChiSquared | 0.18 | 0.04 | 1.92 | 3.18 | 0.24 |
| February Series | 61.6% | 48.5% | 51.5% | 44.3% | 51.0% |
| February ChiSquared | 3.96 | 0.09 | 0.09 | 1.25 | 0.04 |
| March Series | 49.0% | 50.5% | 47.7% | 54.7% | 54.0% |
| March ChiSquared | 0.04 | 0.01 | 0.23 | 0.94 | 0.64 |
| April Series | 54.4% | 57.3% | 48.5% | 58.3% | 53.5% |
| April ChiSquared | 0.79 | 2.18 | 0.09 | 2.81 | 0.42 |
| May Series | 57.8% | 51.9% | 56.6% | 49.1% | 51.9% |
| May ChiSquared | 2.04 | 0.15 | 1.85 | 0.04 | 0.15 |
| June Series | 49.0% | 48.5% | 54.8% | 51.5% | 54.5% |
| June ChiSquared | 0.04 | 0.09 | 0.96 | 0.09 | 0.80 |
| July Series | 49.0% | 49.5% | 56.3% | 57.8% | 58.4% |
| July ChiSquared | 0.04 | 0.01 | 1.64 | 2.51 | 2.86 |
| August Series | 61.7% | 53.3% | 56.6% | 47.2% | 45.3% |
| August ChiSquared | 5.84 | 0.46 | 1.85 | 0.34 | 0.94 |
| September Series | 53.2% | 48.0% | 48.5% | 46.0% | 50.0% |
| September ChiSquared | 0.32 | 0.16 | 0.09 | 0.64 | 0.00 |
| October Series | 55.4% | 51.0% | 53.9% | 51.0% | 54.9% |
| October ChiSquared | 1.20 | 0.04 | 0.63 | 0.04 | 0.98 |
| November Series | 50.5% | 51.5% | 62.2% | 61.3% | 52.5% |
| November ChiSquared | 0.01 | 0.09 | 5.88 | 3.85 | 0.25 |
| December Series | 55.2% | 51.5% | 54.1% | 40.8% | 63.2% |
| December ChiSquared | 1.04 | 0.09 | 0.65 | 3.31 | 6.58 |
|
Notes: Chi Squared values greater then 3.84 indicate that a non-random process is probable. In other words, there's a 5% chance that the statistic is still due to random process, or chance. However, if the Chi Squared value is greater than 6.64 then there's only a 1% probability that the statistic is governed by chance, or a random process. Relevant probabilities are highlighted in green. ©2005, The Small Investors' Software Co. | |||||
9/11/05 - Please take a moment to reflect on happened this day four years ago.
9/6/05 - Investor's look past tragedy. Hurricane Katrina's tragic impact made for a dismal and grim news cycle. However, this week the money that will be spent on the cleanup is brightening Wall Street's outlook. The Federal Government approved $10.5 Billion and the Presiden is looking for another $30 Billion. Insurance claims are estimated at another $30 Billion. Donations from around the world will are nearing another $1 Billion (Kuwait $500 Million and Qatar $100 Million biggest contributors thus far.) So investor's are seeing this as a $70 Billion shopping spree.
9/2/05 - Long Term Investors reach New Highs. There are many investors who buy stock regularly every month. Pension plans are the main reason for this activity. The fact is that many investors are dollar averaging each month and this activity has reached a milestone - a new high in total value.
If an investor, for example, has been continuously investing $100 per month in an SP500 mutual fund and has never sold any shares. This individual reached a peak account value back in Aug. 2000. Then the bear growled. Prices dropped. This past August of 2005 was good news for long term investors because they saw a new high in the value of their SP500 mutual fund.
So hurray for those who dollar-average. The bad news is that they had to contribute an additional $6,000 in capital to achieve this new account value. So the new high in account value is bittersweet. Additionally, if you had invested in the SP500 on a monthly basis since Jan. 2004, in 20 months you made a paultry $154 (total return - capital gains and dividends) and that's before taxes. This is only 7.7% gain in 20 months, or 4.4% compounded annually.
The point here is three-fold. One, now that long-term investors have recovered their losses they can "breath". They now have the opportunity to re-evaluate, or reallocate, their portfolio. Some may believe that USA, Inc. is strong will continue to grow and keep their money in the stock market while others may transfer their holdings. They were "burned" once. They won't let it happen again.
Two, some may reconsider their position in the stock market because the "risk premium" paid from stocks isn't enough. Why buy stocks when they aren't outperforming risk-free bonds?
Three, if you are using returns that are greater than 5% in you forecasts, and future projections, then you need to re-evaluate your goals. This past century's average rate of return is only 5.8% (the average total real return) as stated by E. Dimson in his book "Triumph of the Optimists". The DJIA's current 10 year return is 8.1% which is down from 2003's 10 year return of 10.8%. So 10% -20% annual gains aren't typical nor should they be expected.
For those long term investors, the last 20 months haven't been good when compared to 10 yr Treasury Notes. Back in Jan. 2004 the beginning of the month started out with 4.4% and ended the month aroung 4.15%. Then in June 2004 the rates were around 4.75%. So basically, if investors had put their money into bonds rather than into the SP500 mutual fund, they would have nearly the same return without any risk! Yes, the tax consequences would be different, but the added risk of potentially losing money in the stock market is real and these equity investors didn't get any additional premium for taking the risk. So while investing in stocks still has the allure of future profits, bonds have been the place to be for the past 20 months. Plus, interest rates are lower than they were back in 2004 so bond holders have also realized a slight captial gain on them. For those of you unfamiliar with bonds, these T-notes are now selling above par which means these bond holders will get back more than what they paid for them. This is in addition to the 4.4% interest they were earning while they hold the bonds.
Lastly, the last 20 months has been a diffifcult period for all investors. Despite favorable tax law changes and improving earnings, the stock market is just plain stuck. From the bond market's point of view, bonds yields, or returns, are near 40 year lows, however they are still competitive with stock market returns. Two, the yield curve is nearly flat, which isn't good news. This means short and long-term interest are the same. What's an investor to do?
BTW, did you know that 40 years ago stock market returns were below 10 yr. Tnotes yields for 10 years?
8/22/05 - Good News? Below is the bad news "Where is the retail investor?", so here is the good news. Interestingly this is the most favorable week of the year to buy stocks.(ISO week 34 is one of the most predictably up weeks of the year, see comments from 10/28/2004). This could be the last hurrah. Two, last week's price action took the market to new weekly lows but with less volume.
Note that the average 3 month weekly range is 20.5 SP points versus the 52 week average range of 24.5 points. Any weekly range beyond 36.8 would be considered exceptional and special.
8/22/05 - Mutual Fund Review. Where is the retail investor? This isn't your typical mutual fund summary. The important fact to be revealed is that retail investor is missing. First, the level of liquid assets that Mutual Funds are holding is extremely low. Currently, they don't have much cash left to invest. As a matter of fact, the MF industry's cash levels are almost as low as they were March 2000 (the market top). Second, investors aren't pouring money into Mutual Funds. Mutual Fund cash inflows are not rising with prices as is typically the case. As an interesting caveat, this latest rally from 4/27/05-8/3/05 has actually been without an influx from the retail investor - inflows have been diminishing as prices have been rising.
The point behind this summary is to make you aware of the broad trend that institutional investors are controlling the market - this current rally from May 2005. Program trading is at record levels, and mutual funds are nearly tapped out. Add to this that we're in "back to school" season, and you know that retail investors are net withdrawers and spenders. Tuitions for both private schools and college need to be paid along with the typical "back to school" expenses. This means that cash, the fuel that propels the market, is in short supply for new stock purchases.
So why have prices rising despite rising energy costs and rising interest rates? Well, as compared to one month ago, prices have actually stalled and currently they are 2% from the highs. The late spring rally appeared as five positive developments were on the stage. 1. China's revaluation 2. A real Energy Bill from Congress that was suppose help with energy prices 3. Stabilizing Oil prices (crude oil prices from Apr. to May were trending lower and if you include June prices were flat.). 4. USA was back in Space. 5. More company had better earnings than the previous quarter.
Now investors are facing higher energy costs, interest rates, and inflation ( bad for future growth in earnings forecasts). Plus NASA's shuttle program is once again grounded. The only good news is that merger and acquisition activity is up. This is always seen as a positive because if someone is willing to purchase a company and pay a premium for it then logically it must be currently undervalued. This gives the go-ahead for prices to move higher. Well, this revaluation based on this logic seems to near an end.
Without the retail investor's participation, who else is their to buy into this logic? Please note that if the "big boys" feel the need to exit their positions, the risk is a 5%-10% rapid decline as was expericence in July 2002.
BTW, the July 2002 decline was precipitated by a massive reshuffling of the SP500 index on 7/19/02 forcing all of the institutional participants to adjust their portfolios at the same time. Essentially, half of the July 2002 decline (total decline was 16%, so 8% is associated with the SP reshuffling) can be accounted for this one far-reaching event.
8/18/05 - Heavy put action in NDX today. There was $4 Million in puts were traded versus only $1 Million in calls. First, a $5 Million day in the NDX is rare period. (There hasn't been such a day in over a year). Second, in statistical terms today's dollar volume was an 8 sigma day! Third, the last time the put/call dollar volume ratio was 4:1 or higher was 4/15/05 and 1/21/05. Interestingly, these two dates are associated with bottoms. However, while these two dates did have high put/call ratios, they weren't accompanied by such heavy spending. With respect to dollar-valued option trading volume, these were only 1 sigma days. (Sigma is greek letter used to express standard deviations.) So today was not just a negative day for the NDX, it was a scary day in the NDX pits. It might be large enough to qualify as climatic selling, but when investors are scared and are in a hurry to buy puts, it signals fear. BTW, fear tends to last more than one day. The odds are now that the NDX price of 1576 will not hold.
8/16/05 - Monetary Summary. The stock market is always in competition for investment dollars and the major alternative to stocks are bonds. So it is only fitting to review the yield curve and the money supply. For charts and graphs please visit the Federal Reserve and view their Monetary Trends publication (Aug 2005 ).
Currently the Yield curve is flatting out as short term rates have been rising. Second, the growth of the supply of money is slowing down. Third, consumer credit is slowing down. Fourth, Checkbook and Savings accounts are dwindling at a faster rate. However, money put into time deposits (Cert. of Deposits) are rising. Money Market Funds are holding steady while the growth rate of Eurodollars is on a tear (dollars are being accumulated overseas at an incredible rate). Total bank borrowings are down as well as non-commerical paper. Inflation is rising while Treasury spreads are decreasing. Again, short-term are rising while long-term rates are falling. The velocity of monetary growth which was extremely positive from mid-2002 to mid-2004 is now flat to negative. GDP is still growing but it isn't accelerating either. It is in fact decelerating. So there you have it.
So what does this all mean? In simple terms, the money that the FED injected into the economy after 9/11/2001 has been absorbed and the excesses that it created are now gone. True competition based on real market forces are now in effect. Interest rates are rising as money becomes more scarce in relative terms. Investors will now be deciding if bonds are a better alternative than stocks. Remember, when interest rates were 1-2%, stocks were paying dividends of 3-5%, while at 20-40% discounts (lower stock prices). This investment choice was a no-brainer for many long-term investors(and they were handsomely rewarded). However, stock prices have risen from their lows and interest rates have risen as well.
So what has changed? Now the risk of owning stock is greater as the price discount (stock prices are higher) has evaporated. So despite the fact that investors can still get dividends paying 3-4%, Treasury notes offer the same rates with less risk.
Last month (see below 7/7/05 comments), the probabilities of winning were stated to be only 29% versus the traditional 71% for any given year. These monetary trends seem to pointing towards the same scenario. Lower stock prices have a greater statistical probability than higher prices for the next 12 months. Now, the only way for stocks to rise are if Congress continues to pass legislation favorable to the economy. So until they get back to work, August is a true trading month. September will be focused on how much debt the Gov't created and how they're going to pay for it as the fiscal year of the USA comes to an end. October is realistically a time when Congress might accomplish something tangible and real. So in this case no news is bad news for stocks as the economy starts to slow down.
Also note, that this is the start of the educational season. College tutition and tutitions for all private schools need to be paid this month. There will be the annual "sucking sound" of dollars leaving the stock market from now until mid-September. Note that there will be a rally of some sort within the next four weeks, but it will be due to Fund Managers and other Wall-Street professionals making adjustments as they return from their "Summer in the Hamptons" (Cape Cod, etc.). Typically this rally occurs 10 days before Labor day weekend, which means next week (ISO week 34 is one of the most predictably up weeks of the year, see comments from 10/28/2004) should be a positive one.
7/15/05 - Isreal pulls out of Gaza. This unprecedented move is paving the way for a palestinian state.
7/29/05 - Washington, DC had a productive week. CAFTA bill passed. Energy bill passed. Six year Highway Bill passed. The President's Supreme Court candidate, John Roberts Jr., is sailing through the nomination process. The debate for embryonic stem cell research has taken a turn. USA doesn't want to be left behind in the biological sciences, but Senators are trying to find a "backdoor" [a logical argument to their current dilemma; conservatives position of preserving life (morality) versus developing a new industry which will create millions of jobs (greed)] to allow public funding in this area, which will enable conservatives to say yes. Please note that the House has already passed two bills that would allow the use of surplus embryos. Now it's up to the Senators. Senator Frist, shocked everyone by endorsing these bills. Of course, they will all go home for their summer break before anything is settled.
7/26/05 - NASA is back in space.
7/24/05 - Unusual Statistics. This rally has been great, and it's time to explore its strength. Basically, its rare to have such a strong three week period and something has caused valuations to change (see below, as many cross currents are discussed). And for those of you who haven't been counting, the SP500 has had 12 up days over the last 15 days . So its only natural to ask, how often has this occurred?
First, let's examine the SP500 over the last 55 years (using extrapolated data as the index isn't 55 years old) and count the number of times there have been 9 up days out of 10. The answer happens to be 352 times. Now ask how often did prices rise 1% two weeks later versus dropping 1% (using only closing prices), when there were 9 up days out of 10. The answer is prices rose 1% or more close-to-close two weeks later 131 times versus 49 times closing lower 1% (72.8%). This is basically 3:1 in favor of higher prices.
Now let's look at the statistics for a 15 day period. After applying the rules, first there have only been 141 times that 13 out of 15 days were up, and out of those, 42 rose 1% two weeks later versus 14 dropping by 1%. Again the 3:1 in favor of higher prices. The only snag with the 15 day data is that the SP500 needs to close higher tomorrow for there to be a 13 out of 15 day winning streak. Currently, the SP500 only has a 12 out of 15.
Now if the SP500 closes higher tomorrow and we get 13 out of 15, the combination of these two statistics get even better. Now ask how many times did the SP500 have extremely strong two and three week periods coincide? The answer is 46 times and the ratio of 1% higher versus lower prices is 17:3 , or 85%. What's even better is that if the highs are factored in, there were 31 times out of the 46 occurrences (67.4%) when investors could have at least 1%. However, only 12 times did investors make 2% or more.
If your wondering why this is better, the anwer is that 17:3 was comparing the bias of 1% higher to 1% lower. Clearly these statistics favor a continuation of the rally, but over the next two weeks expect prices to hover and consolidation while still posting higher highs. So to clarify, while the bias is up for the next two weeks, the actual number of times prices rose 1% was only 17/46 (40%). However, including the daily highs in the analysis increased the chances of investors gaining an additional 1% to 67.4%.
Basically, a two to three week rally of this strength is very unusual and indicates a fundamental shift in the perception of value. Also worth noting, is that these rare periods of strength tend to be correlated with higher prices 3 to 6 months later. So history is telling us to buy, but if you look at your technical indicators, they're all pointing to a sell. Add to this the fact that the supply of stock is currently at the historical upper boundary, and price consolidation is most likely. Another confounding factor is that the percentage of trading volume related to buying is now decreasing. So the market is making higher highs with less buying activity.
This reminds me of the summer of 2003 when prices broke the upper trend line a zoomed higher. However, the difference between then and now is that in 2003 the supply of stock was low, so the increase in demand propelled prices. Currently, the supply of stock is high and so any increase in demand shouldn't have the same effect. Prices will rise as the statistics demonstrate, but the future increases will be tempered due to the increased supply.
In plain English this means uncertainty is high. And for those investors that have been long since May 13th @1152, history is telling us that the next two weeks will not be explosive, and there isn't much left to the upside to capture. As for looking 3 to 6 months forward, the crystal ball is cloudy which only indicates an increase in volatility, or a wider swing in prices. In addition, watch out for increases in option premiums.
PS - On 7/21/05 (see below) we posted that it was President Bush's move in the game of "chess" between the Chinese and the US. However, it seems that Wall Street is taking the initiative for the next move. If you believe China's revaluation is at the root of this rally, then the theory behind these rising prices is to mitigate any discounts (currency arbitrage) that the Chinese may exploit when buying US companies. These higher prices are in effect trying to recapture the money we gave them by purchasing their exports.
Higher prices for US companies means that the Chinese lose their engineered currency discounts and the wealth is transferred back to the US. The only problem is that the flow of money, once again, is from the little people to the rich.
Here's how it flows. The average person who buys the chinese imports pays for the goods in the US Dollars. The company responsible for the Chinese made products, orders more, which sends those Dollars to China. China uses those Dollars to expand its manufacturing facilities, and moves it toward an industrial society. They now grow sufficiently large and create demand in China for the products once only affordable to Americans. They now need to buy US companies as they need more capacity and resources as they need to expand quickly. They buy the US company, which returns those Dollars that the American consumer spent on Chinese made goods back to the US. These returning Dollars go into the hands of Wall Street Brokerage houses and to the US company. Yes, stockholders do get their share, but in reality, the Executive Board gets most of it. As for the Wall Street firms underwriting the transaction, well as always, their fee is in the Millions of Dollars for shuffling paper. So the "big boys" once again end up with the little guys money, and they get a larger peice of the pie because the price of the stock is inflated to compensate for the currency induced discount.
Now if some of this money were directed to our national debt than the little guys partipation in this scenario wouldn't be in vain. But for now, this cynical view of events is playing out because a few people have found a way to exploit the current laws and financial climate. Americans are losing jobs over outsourcing and as we all spend our money on goods produced outside the USA these Dollars are finding there way back into the hands of the those that don't need more money.
Wait, do you hear it? That sucking sound. It's the sound of money being sucked out of America's wallet. First, they gave us cheaper products, then they took away our jobs, and now their grabbing our wealth. The rich always want more and they have just found another way to get it.
7/22/05 - Summer Duldroms to come. This is just a warning to those of you not accustomed to summer trading. Widen your stops, or better yet, don't trade if you can't afford to widen your stops. This is the season where "locals" go "fishing", and by fishing, I mean that they are looking for stops. Don't be surprised to see 5-7 SP (ES) point swings for no apparent reason. When liquidity disappears (fewer traders around), prices tend to gyrate back and forth, particularly mid-afternoon. Traders use the term "Whipsaw" for these sort of days. You been warned - DON'T GET CUT!
7/21/05 - More London Bombings.
7/21/05 - Now we know what's going on. The Wall street insiders (professionals) have been causing this rally because they were banking on China's devaluation. This is what Washington wanted, but it's not why the Chinese adopted a floating currency. Think about this.
For the past 50 years , China has been building its export industries. It was largely an aggrerian society and low on currency. They have amassed a huge amount of foreign money over this time and now are seeking to spend it. They have taken in Trillions of US Dollars, albeit at a low exchange rate, but it gave them the ability to convert their economy into an industrial one. Now they need to buy companies to satisfy their insatiable appetite for products. This means they will be on a buying binge and they will be spending their money, which we gave to them, by purchasing Chinese made products.
The Yuan has been pegged at 8.277 for a decade, but now they want to buy foreign companies. They currently need to spend 8.277 Yuan for every dollar. But if the Yuan drops to 7.000 then they only need to spend 7 for every one dollar. So while it is true that exports to the USA will cost more, the benefit to USA, is that it will help American Companies compete against Chinese companies. However, this isn't a concern for the Chinese. They can now go it alone as they rapidly developed various industries. They no longer need America, and as evidence, they are now willing to change the exchange rate.
Their only concern is that their citizenry have enough resources and jobs. So they will need to buy other companies to supplement their needs. And if the Yuan drops to 7.000 or 6.000 then they will be spending less to buy the same company. For example, if the Chinese would pay $10 Billion USD for a company @ 8.277 Yuan, their cost is $82.77 Billion Yuan. If the exchange rate changes to 7.000 then the cost of that company purchased to the Chinese is $70 Billion, which saves them $12.77 Billion Yuan. So you see, they are only interested in changing the value of their currency so they can essentially buy American Companies at a discount.
They already took our money, which we gladly gave them ( thanks to Wal-Mart), only to use it against us in the upcoming years. BTW, European companies aren't safe either. And if that weren't enough, think about this. Using the same logic, they will now be paying less for Crude Oil. How's that? Well, as they drop their exchange rate, they will also be paying less for Crude Oil. So while their oil consumption is rising, they have found a way to reduce their energy costs by using exchange rates.
So watch Senators claim a victory in the upcoming days and weeks, but know that the Chinese are laughing at us as they use our money against us. In the game of Chess, this could be considered "Check" (your on the "ropes" but you have a slim chance of victory) - President Bush it's your move.
7/19/05 - What's going on? Since the passage of the Energy Bill (see Below for details on the bullish implications), the stock market has been on a upward track and yesterday showed the first sign of tiredness. Normally, one would expect a pullback, but we're at an intersection. So a list of pros and cons is only apropos.
Earning season is upon us and despite an increase in "warnings" not seen since 2003, positive earnings are coming in. There's still another 2 weeks to go before we'll know if this quarter was as good as the previous, but the optimists are in charge. The glass is currently "half-full".
Terrorism is always lurking and scaring investors, but the world continues to move on ( NYC plans to rebuild Ground Zero were released in May.). Consider this point of view as an investor, and not as a fear monger, whatever they blow up will be rebuilt. Somebody is going to profit from all of this destruction. Just do your research and find out who benefits.
Another major threat to investors is China. The dragon has awakened and is gobbling global resources at an alarming rate. However, when China announced bids for Maytag and Unocal, it shocked WallStreet. The question on the "street" now is are companies undervalued? The answer must be yes as prices have been rising ever since these announcements (6/22/05). And now there is a bidding war for Maytag.
Mutual Fund cash flow is showing that investors aren't pouring money into Funds. As a a matter of fact, retail investors are missing from this current rally. Further evidence supporting this, is the fact that sentiment for the DJIA is very low. It's almost as low as it was 9/11/2001. In simple terms, retail investor's currently aren't interested.
Program Trading activity is currently extremely high and indicates professionals are dominating current activity.
Since the passsage of the energy bill, the amount of activity in down stocks has been increasing which typically foreshadows lower prices. However, the last 10 days have steadily produced above average buy volume levels. Even yesterday with an up/down volume ratio of 3/8, buy volume was heavier than normal. So as stocks are dropping in price, they are attracting buyers and the buyers aren't the average investor.
On the other hand, you have the Specialists who were huge (and I mean enormously huge) buyers last summer, but have been slowly selling into this rally. So which group of professionals out there is buying is a guess. An educated guess would be from the companies themselves. Stock buybacks are up (see below). Favorable tax law changes have made this their safest return on investment. Another measure of professional activity is from the Commitments of Traders report. This report shows that professionals have been increasing their short positions. So there is another group of professional selling besides the specialists.
As far as activity goes, June saw trading levels decline as prices rose, but again since 6/30/05, trading volume has been increasing, except for yesterday.
Lastly, the probability that higher prices are in the offing for 2005 are extremely high. The empirical data from the dicennial cycle (see below) indicate an average gain of 28% for investors in those years ending in "5". From a purely statistical point of view, the years ending in "5" had the highest average gain out of the 10 years and it also had the lowest variability, but as a whole, the dicennial cycle fails the ANOVA (analysis of variance) test. So technically, this cycle isn't valid in scientific communities, but empirically, this is a fact. Admittedly a weak one, but according to history, years ending in 5 are typically quite strong.
So if the average gain were applied to the SP500, that would propel the SP500 to 1550. This would mark a return to the all-time highs set in 2000. Currently, the market has made a higher high penetrating the previous high of 2005 set on March 7th and it did so with an increase in trading activity (this is positive), but getting to 1550 doesn't seem likely since crossing 1230 has been met with resistance.
Remember that this was a weak statistic scientifically, so another interpretation of these historical data is to say that the likelihood, or probability, of making a profit in any year ending in "5" is 99%. And so investors are who bought stock on Dec. 31, 2004, when the SP500 was 1211.92 were looking at great odds despite buying at the highest prices since 2002. Currently, these investors from Dec. (now were at 1221 with a high of 1233), are currently making a profit, albeit a small one. Therefore for these investors, the 99% probability of making a profit has been fullfilled. All bets are off from this point on.
Another set of probabilites worth considering are those for August. First, the odds of prices rising 10% from the July Option Expiration to the August Option Expiration are 1/10. The odds of prices rising 5% are 3/10. The odds of prices falling 5% are 3/10. Not much help is it.
Second, the month of August has a another set of probabilities. The probability that August will gain10% from the July 31st close, is 2/55 while losing 10% is 4/55. Gain 5% is 16/55 while losing 5% is 15/55. Basically, the odds of lower prices are 50.1% and the odds of higher prices are 49.9%. So August is a month without a bias. However, the third week in August is one of the most reliable up weeks in the year. Also worth noting is that it has been 21 years since August rose 10% for the month. So with odds of 1/27.5, one of the next 6 years is going to be a winner. This could be the year. Despite this guess, recent data shows a small gain for August is more likely.
Interest rate are on the rise, proving that economic activity is indeed increasing. Plus stock investors are beating short term rates, so this insures that investors will stay in the stock market.
So where do we go from here? News out of Washington is negative (terrorism, Sino-phobia, Oil prices, etc.), but policies are positive. Global perception of value is positive (merger activity is up). Company perception of value is postitive (stock buybacks are up). Overall company performance is up (earnings are positive). Macro-economic data is up but is near the upper extreme range not seen since 1/2000 (market went down) and 9/2003 (market went up). NASA is going back into space (symbolic). NYC plans to rebuild "Ground Zero" (symbolic). Plus, historical data favor higher prices.
In addition, if you're a student of history you'll recall the critical price level during the summer of 2003. All technical indicates pointed towards selling, but then the upper trendline was penetrated to the upside, creating an upward surge in prices. The impetus for higher prices back then were tax law changes that changed the perception of value. This wasn't detected by technical analysis and once again we're at a critical juncture in which external forces are challenging the current perception of value. Currently, the market is in an uptrend making higher highs and higher lows. It also has successfully tested the SP500's 1150 zone, which is now support, but was resistance in 2004.
You decide. Are we making a top or pushing higher?
7/13/05 - What's the best salute Wall Street can give to our Astronauts? How about a new yearly high, for their high adventure. Today could be the day that the SP500 index breaks the previous high for this year, set on March 7, 2005 @ 1229.1. How appropriate and coincidental, isn't it. Good luck to the Discovery Mission, and to all investors.
7/11/05 - Look up. NASA is once again launching men into space. On Wednesday, the Shuttle Discovery will be launched. Did you ever wonder about Wall Street's reaction to these events? Well, here is a summary of these events in an MS-Excel spreadsheet. (Don't worry, it's quite small.) NASAflights.xls If the suspense is killing you, what else would you expect from Wall Street - 50:50.
7/7/05 - Terrorists Attack London Subway. Four blasts within one hour leaves 40 dead and injures 800.
7/7/05 - Mid-year probabilities. It's always interesting to examine the past for clues regarding the future. So here are the SP500 index's probabilities based on empirical evidence. The impetus for this is because the closing mid-year price of the SPX is lower than the last price of 2004. Since 1950 there have been 18 similar occurrences. Nine of those proceeded to rise in the second half of the year, so that the last price of year was higher than the June 30th price, and the other nine didn't rise. Isn't it remarkable how often the odds of 50/50 appear in the stock market? So how can this information be useful to you as an investor? Well, this fact isn't.
It would be easy to disregard this information, and move on, but how about asking a slightly different question? If the Presidential cycle were considered, how would that affect the probabilities? Again going back to 1950, there were 14 elections. The question is how many times was the June 30th closing price of the SPX lower than the previous year's closing price (the Presidential election year). The answer is 8 out of 14 (57.1%). Now ask how did the stock market do one year later (which is the subsequent June 30th. 18 months after the election year. )? The answer is of those 7 occurrences (there is no data available for the current occurrence 6/30/2005), in which the June 30th price was lower than the preceding Dec 31th closing price, the SPX was lower one year later 5 out of 7 and broke even once. Only once did the SPX rise the subsequent year.
So what does this mean? Well, to better understand this let's review other probabilities first. For instance, if you were to average out the past 50 years of annual price appreciation (not total return), the average price appreciation is 9.2% ± 16.5%. This translates to mean in terms of probabilities that you have a 29% chance of losing money every year, or you will either break even or make money 71% of the time.
For those of you interested in how this was determined, here's a quick lesson in statistics. If you remember the "Bell-shaped" curve from your education, then you realize that the average and the standard deviation defined a set of occurrences. The area under the curve determines the probabilities. So if you average the ratios of the Dec. 31 closing prices (current year/previous year), then all ratios greater than one mean that prices rose, or you made money. Therefore if the ratio is less than or equal 1.0 then prices declined and you lost money. Now all that's needed is to find the area under the bell-shaped curve. This is easily computed by computing the following z-score (1.0-1.092)/0.165 = -0.5575. This translates into the 29% probability of a loss.
The good news is that over the past 100 years, the US stock market has been steadily rising and this statistic of 71% chance of making money is validated by this trend. But now we have another more selective statistic for the probability of the SPX rising (or declining) one year later six months after the Presidential Election year. The probabilities presented are 6 out of 7 (85.7%) didn't make any money.
The question is how do you fit these facts together? The answer for this lies within Baye's Theorem. This statistical principle applies in this case, which states certain causes have prior probabilities which produce an effect with conditional probabilities. This allows us to calculate the probability of the cause giving the effect. So despite the uncertainties presented in this case, Bayesian methods can compute the new reality or probabilities. The way to solve this is to do the following:
Annual Statistic: WIN = 71% LOSE = 29%
Presidential Statistic: WIN = 14.3% LOSE = 85.7% (one year after the 6 months after the election year.)
Results: WIN = 10.15% (.143 x .71)
LOSE = 24.85% (.857 x .29)
Total: 35% (10.15%+24.85%)
New Probabilities: WIN = 29% (10.15% / 35%)
LOSE = 71% (24.85% / 35%)
So after these two are combined in accordance with Bayesian statistics, the new probabilities of the SPX rising from 6/30/2005 to 6/30/2006 are only 29%! The probability of winning dropped from 71% to 29%. The probability that the SPX will decline is now 71% !
Isn't fascinating how the annual average data, which predicts a 71% chance of making money next year, is completely reversed to a 71% chance of losing money for the next 12 months. This was a remarkable turnaround worthy of your consideration. As always, The Small Investor's Software Company is continually finding new ways to help you to teach yourself. Sleep on it.
6/29/05 - Senate passes energy bill. It now goes on to a House-Senate Conference Committee. The key component of the bill encourages development of alternative renewal sources of energy which paves the way for the next major upheaval in our economy. If the legislaturors "get it", it will become the new economic engine for the USA.
Over the last 100 years, America has converted itself from a coal based economy which bore the Industrial Revolition. Then America successfully made the transition to an Oil based economy, which created millions of new jobs and high paying jobs. Then the information age brought us millions of new high paying jobs. If Legislators in Washington understand the significance at this juncture, the USA could once again build a brand new economy for the world. By developing and utilizing new renewal energy sources, America has again an opportunity to create millions of new high paying jobs. These jobs require knowledge and skills for the new frontier and pioneering work that lies ahead. Plus these jobs will be American jobs, not outsourced jobs. 40% of th