Making Smarter Investing Easy.

Exploring the mechanics behind the behavior:

11/28/06 - Stock Buybacks and Dividends in perspective. This website has long attributed the rally to several peices of legislation that affect corporate behavior (the change regarding Dividend taxation and Sabarnes-Oxley). These two legislative acts coupled with a low interest rate environment created a "risk-free" investment opportunity that begged to be exploited. The concept from Washington was to increase investment in America in an effort to make it more competitive worldwide and to keep US companies from leaving. The offshore corporate migration was problematic and Washington wanted to protect its revenue stream - corporate tax receipts.

Second, the seemingly daily Wall Street scandals of malfeasance and corruption were rampant and needed action. Hence the Sabarnes-Oxley Act was passed to protect investors from "fuzzy" accounting practices. Basically, companies had to clean up their reporting and disclosure standards forcing them to disclose their underhanded and devious tactics. At first, the bad news was revealed which drove stock prices down then the fear that more bad news was still "out there" kept prices low. However, after this period, tighter reporting standards have shown investors quite convincingly that companies are more profitable than ever.

The bad news for companies is that they can't hide this fact and they have to report these profits and now pay taxes on them (before they hid these facts to steal from investors and from the US treasury). This has lead to companies with a conundrum - what to do with their cash? Interest rates are low, and other business opportunities through the M&A era gone-by, had shown corporate boards that expanding into multi-national multi-conglomerates actually dilutes earnings and profits. So they focused on their core business and either reinvested in themselves or found ways to remove the company from the public marketplace.

Basically by going from a public company to a private company, it served two purposes. One, it allowed some companies to avoid the costly restrictions imposed by Sabarnes-Oxley. Some companies did a cost-benefit analysis and made a business decision to go private because it would cost them too much to remain a public company. The second reason for becoming a private company was that it enabled corporate insiders to keep the insane amount of profit that their company was earning for themselves. Basically, if you can't hide/steal money from investors anymore, why share a good thing with other investors?

These behaviors were a "no-brainer" as there was, and is, an incentive to do so. This activity of buying back stock came along with a "risk-free" 15% investment opportunity which was two to three times larger than any other investment opportunity. Essentially, if you had several million dollars would you invest it in something risky or would opt to invest it in something absolutely safe that guaranteed you a 15% return? Historical records show that investing in stocks produces only a 7% annual return over the long haul. That means 15% is double the historical average for a risky investment. And as for bonds the historical average is less. It's 4.5% to 5%. So why wouldn't you park your hard earned millions in a "risk-free" 15% investment? It's guaranteed income and it beats the current rate of inflation. That 15% investment is creating/building wealth without any risk.

This explanation serves as an example to demonstrate the thought process going on right now by those who are in the position to take advantage of these opportunities. So by default corporate insiders increased their company's stock buyback activity. This was also coupled with an increase in dividend payouts (why not, since they own more of the company) which meant that companies got a double whammy. They got to increase their ownership and they got to keep more of their profits. Plus insiders who generally own a large share of the company (from extravagant compensation packages via stock options, etc.) also got a tax freebie - a discount on their taxes.

The two graphs below highlight the trends in stock buyback and dividend activity within the 500 component companies of the SP500 index. It's clear from these graphs that until the laws change, there's no reason to expect that these trends will change.

Are you on the lookout for the next mega-trend? Will Democrats interfere with this corporate bonanza? And if they do, how will the Democrats curtail these perks without forcing companies to leave US shores? Plus, will Democrats even care about these wealth consolidating/building trends despite the fact that they aren't fair?

BTW, these activities aren't fair because of the manner in which investors obtain stock. The average investor who buys stock in a company makes a purchase at current market prices. When they do so they now possess the same 15% "risk-free" investment opportunity as the insiders. The dividends that the company pays all investors creates the opportunity and this part of the equation is fair. If you invest in the company you get a share of the profits at a reduced tax rate. There's nothing wrong with this.

The unfair part of this wealth building opportunity is quite insidious and subtle. It's not unfair that corporate insiders typically acquire their stock in exchange for salary. It's not unfair to reward someone with stock as compensation for their contribution to the company, or in lieu of a salary. However, what is unfair is that ownership in the company and the amount of stock that is being offered to employees is decided by those who recieve it. The conflict of interest in the problem that remains. Notice that all employees don't get access to stock at the same price nor do they get the same opportunity in the form of stock options. The fact that corporate boards get to decide amongst themselves how to distribute ownership of the company is the unfair and insidious nature of the problem. In summary, retail investors pay market prices for ownership while insiders receive a salary plus an increase in the ownership of the company. They are giving away ownership at the expense of the retail investor.

Secondly, as these insiders acquire more ownership at discounts to the public or retail investors, they have found another investment characteristic to exploit - risk. This unfair and cleverly disguised tactic is another consequence of the inherent conflict of interest that currently exists, because the dispersion of risk associated with the company isn't fair and equitable. It isn't fair because insiders don't pay retail price for their shares of the company and therefore their risk to capital loss is lower.

In short, insiders have less to lose than retail investors despite the fact that they may own more shares. The insiders don't pay for their shares using after-tax dollars at retail prices. They acquire these shares through presumably "sweat-equity", but at no time did they use their after-tax dollars to purchase these shares. They aren't at risk to lose any discretionary investment dollars. If the company's stock price falls, their net worth decreases but they didn't lose any currency. Whereas the retail investor diverted some of their currency to invest in this company. Should the stock price fall, they lose that amount invested. Note that both the insider and the retail investor see their net worth decline, but the insider's loss doesn't compare in severity to the retail investor's loss. This is what is meant by the inequitable dispersion of risk. This means that when the insiders make a bad business decision, or put the business in greater risk, and the stock price declines, the retail investor suffers more than the insider. This will inherently cause some retail investors to abandon the company and sell out. This is in essence a predatory practice, but is difficult to prove. However, it wouldn't be so far fetched to suppose that the next decline in the stock market will cause many retail investors to leave the market, which will give companies the ability to buy more shares at reduced prices. This then will allow corporate boards to yet again control the dispersion of ownership with little or no risk to themselves.

11/20/06 - What's going intraday? Below are three atypical views of intraday prices. First of all, the SP500 futures 5 minute intraday data is used for these graphs. Next these 5 minute snapshot prices are then converted using two different methods. The first method simply subtracts the current period's price from the opening price of the day so that each day's range of prices in converted into a range of relative prices. This method tracks the change in points just like like intraday traders do. The second method is again converting the intraday prices relative to the open, but this time each period's price is converted into a percentage. The advantage of using percentage changes rather than point differences is that it facilitates better comparisons from day to day.

Graph 1 simply displays the previous 11 days of intraday price action. Each 5 minute period of the day is simply labeled 1 through 82 and each day's price action is overlayed with the other two weeks of price action. The value of this overlay is that it quickly provides the range in percent of the past two weeks and it shows you the frequency of any sharp price moves and when they are likely to occur. Plus it also confirms or disspells the likelihood of a particular price action's persistence from day to day.

Graph 2 again displays the intraday price action in percent for each of the 82 periods but it does so for the same day of the week. The day of the week being presented is that of the date of the chart. For example 11/17/06 was a Friday, so the plots on the graph represent the current Friday plus the nine past Fridays. Once again, you can instantly see if any patterns emerge based on the day of the week.

Graph 3 uses the same intraday data but it converts these intraday prices into statistical oscillators rather than using traditional technical indicators/oscillators. In this graph the daily maximum and minimum price change relative to the open in points are used in various ways to produce these oscillators. In one instance the monthly z-score of the maximum relative price to the open is used to create the 8 day Z-oscillator. In another instance the monthly variability of the maximum price above the open is compared to the monthly average maximum price above the open. And the last instance compares the monthly average maximum relative price to the average minimum relative price.

In summary, these three different perspectives on intraday trading, help traders focus on recent events. By comparing the price action of the recent 10 days and comparing the price action of the same day of the week, you can begin to understand where and when traders made and lost money. When the make money they do the same thing; when they lose money they reverse gears. The third perspective allows you to use intraday information in a different context which enables longer cycles to emerge. These can of course be incorporated into your daily models to add another dimension to your analysis.

11/10/06 - Is it a Trendy Market? The "trendiness" of a market has been thoroughly explored by technical analysts and many indicators and oscillators have been devised and utilized. But in practical terms, let's revisit the concept of "trendiness". Let's break it down in simple terms and count the number of times in a 10 day period that the previous day's midpoint is crossed and let's count the number of higher highs and lower lows.

First, you'd expect that the current rally must surely qualify as the "trendiest" rally and all oscillators should be pegged at their extremes. From late July to late October prices have gone straight up. And for many oscillators, this is true. But if you were to dissect this rally and examine it closely, you'd see that the rally was really the culmination of a series of steps and at no time did we see a 10 day period of higher highs and high lows. This is surprising considering the strong run up in prices.

The point being, you'd expect a strong run in prices to have many higher highs and very few midpoint crossings. So intuitively, you'd expect a steep decline in prices or a steep rise in prices to produce a low number of days in which the current day's trading range retraces yesterday's midpoint. The graph below illustrates that this natural intuition is wrong, and that in fact, it is rare to see a steep drop or rise in prices coupled with a low number of intraday retracements. How else do you think traders can survive when they are just as likely as you to pick the wrong direction? Why else do you think so many stops are hit along the way up?

11/07/06 - Who's in their buying this market? We can't name names, but there are broad categories of participants that are tracked by the NYSE. The NYSE provides us with various data that monitor the activity of Odd-Lot investors, Retail investors, Brokers, Specialists, Floor Traders, and Program Traders. Currently, some of these data are available of a daily basis and while others are only available on a weekly basis.

Below is graph that focuses on the activities of Brokers (large firms). The NYSE provides a daily volume summary of the top ten Brokers and therefore investors can track their behavior. Unfortunately, these volumes don't provide any clues as to what type of transactions they are making. We don't know if they are buyers or sellers, but their intensity can be monitored in two ways. First, you can compare their activities from day to day and to previous swing points in the market (highs and lows). Second, you can compute their proportion of the day's trading volume and hence their participation rate. These two attributes of course can then be subjected to all of the traditional analytical techniques available to you, but here is an unusual view and perspective that you won't find any were else on the web.

Rather than plot the daily top ten broker volume in the traditional manner (price and volume chart), or plotting the price versus the proportion of their volume to the day's total volume, below is a graph that converts their volume activity into statistical z-scores referenced to a rolling 63 day period. These z-scores are then summed to create the z-oscillator for both the Top Ten Broker Volume and their participation rate (ie: Broker Volume/Total Volume). The advantage of the z-oscillator is that it enables you to compare two vastly different quantities (large swings in millions of shares versus small changes in fractions) on the same scale. Plus it also enables you directly compare the changes of these two vastly different quantities. By continually converting each day's data into a statistical z-score, each day's data is relative to both the current mean and the variance. This means that a value of 2 means has the same interpretation for both quantities - it's a rare event. While a value of 0 means that the value is average. So on a daily basis, a z-score of ±2 represents a rare event. Now when you add these together you create an oscillator that can identify periods of extreme activity.

For example, if you had a streak of 8 days that produced +2 each day the oscillator's value would be +16. As you can see, that hasn't happened yet because by definition it's a rare event. But in the Spring of 2006, the Top Ten Broker Volume did get close to +15. Conversely, if you had a streak of -2 for 8 days, the oscillator would produce a value of -16. So far in 2006, the lowest value is -11. This represents the least amount of activity. The farther away from zero you get the more extreme, or rare, the level of activity represents. So in the Spring, Brokers were heavy traders and during the August they disappeared from the market. The only question that remains regarding their fluctuating trading volume is whether or not this is a seasonal behavior (vacation time) or was it related to price, fundamentals, economic conditions, Global value, or investment risk? We can't be sure that Brokers scaled back their activities because they went to their summer house or if they were waiting for a breakout in prices, but we can see that they were heavily invested during April-June. Regardless of this quandry, the fact remains that the data exists for you to explore when different investors enter the market.

As for the Top Ten Brokers participation rate, this too provides another perspective as to their influence on the market. While their average participation rate fluctuates in the range of 54% to 60% of total volume, these values aren't displayed. Their more useful z-oscillator values are plotted. The fact that they are the dominant participants has been known for years so this fact isn't as important as compared to whether they represent a larger or smaller share of the day's trading volume. The z-oscillator give us that information and give us the advantage of putting it on the same scale as with trading volume. So now you can see when the Broker's share of participation waxes and wanes. Interestingly, when their volume increased in the Spring to near +15, their participation rate in the market dropped to -8. This means that many other investors participated besides the Top Ten Brokers despite the increase in their trading volume which was above the quarterly average. Basically, when prices broke the previous lows everybody was interested at these levels.

So the story that this graph tells starts in April 2006. Prices pulled back slightly and then broke the previous high to set all time new highs 5/8/06. As prices broke the previous high, Top Ten Broker Volume (TTBV) went from below average to above average, but at the highest highs, their volume dropped slightly. While this was going on, their participation rate slowly dropped from above average to below average (+5 to -5). This means that other investors contributed more to the total trading volume at the highest highs. Then prices dropped for to a low of 8062 on 5/24/06. During this decline, TTBV increased substantially to +15 on the scale! But interestingly, this extreme increase didn't match the increase in volume from other investors. Other investors rushed in so much that the TTB's participation rate fell to the year's lowest level. Other investors were extremely intested in the market once it broke the previous low. Plus don't forget that Brokers were also extremely interested at these price levels. So the surge in volume came from everywhere. Prices tried to bounce and as they did TTBV dropped while their participation rate climbed. This means that the other investors left the market as prices rose above the previous lows around 8220. Then prices dropped hard and fast again to a low of 7720 on 6/13/06. Notice that as prices declined the TTBs increased their activity again, but this time their participation rate was now above average. Again, other investors a share of total volume continued to decrease. So while prices stablized until the end of the month, TTBV remained above average at +10 and their participation rate also became +10. Then as the TTBs eased up on the trading activities so did the other investors, which caused the TTBs to remain at the +10 level in terms of their participation rate. They were in statistical terms still quite above the average as the dominant investor class despite their declining daily volumes.

Now as prices began to rise going into July, other investors returned briefly at the 8150 level because the TTB participation rate dropped for three days from +10 to +5. At the same time, the TTBV dropped to -6.5 which confirms that they eased up substantially in their trading volume. Then as prices hovered around the 8200 level the TTBs eased up a bit more and so did other investors as evidenced by the nagging +10 participation rate. Then when prices fell in July to 7900, both the TTBV fell and so did their participation rate. In relative terms, their participation rate fell faster than their actual daily trading volumes, so this means that other investors were extremely interested in the market at this juncture and they dove into the market making up a greater proportion of the trading volume. So much so that it had been nearly two since the TTB participation rate was just normal, or average (a value of 0). So the TTBs had an average participation rate and below average trading volume when prices started to rise in the latter half of July. But when prices broke above the previous high the TTBV crossed over to above average trading volume and their participation rate climbed to +7.5. Once again, they seemed to be more interested than other investors and prices dipped. It is at this time during August that prices broke higher, but now the TTBV continued to decrease to indicate that they had their weakest period in the year, a value of -11. At the same time their particiation rate remained fairly steady at +5.5 to +4.5. This means that despite their decrease in trading volume, in relative terms they were still above average in their proportion of the total trading volume. So when Summer was over and eptember came, they began to increased their trading volume, but this time their activities created a new high in the proportion of total trading volume. Their participation rate climbed to +13, which is the highest for the year thus far. This means that other investors weren't around. Then as prices sat at 8370 near option expiration, the TTB participation rate dropped to +8.5, which is still quite abit above average. This means other investors joined in before prices broke the previous high. When prices did break the previous high, once again other investors activities waned increasing the TTBs participation rate to another annual high of +14! Now the TTBV is above average and their participation rates are the highest for the year!

As you can see, the TTBV was significant as the market made new annual highs this year. Their trading activity is well above average and so is their participation rate. Their behaviors once closely scrutinized provide clues as to their bias and can help guide average investors. However, please note that the TTBV doesn't tell you if they are buyers or sellers.

Interesingly, we can infer from future prices their inclination towards being buyers or sellers, but this is after the fact. Let me explain. When prices rise, there must be more buyers than sellers. The net result could be due a lack sellers or an extreme amount of buyers amidst a normal amount of sellers. (BTW, this information is also available, see below). For instance, back in May 2006 when the market broke the previous lows of April, the TTBV was huge. In addition, it just so happened that other investors also committed a huge amount of volume, which from this chart indicates that it was more than the TTBs. The problem is at that moment in May, it could not be determined from this chart whether they were net buyers or sellers at that price level 8062. It was only one week later as prices rose can we deduce that buyers represented the majority of the trading volume. This was followed by another wave of selling as prices broke lower once again. Were the TTBs sellers then buyers? Were they buying all the way down as other investors were selling? The answers to these questions can't be determined by these data as they are produced, but as time passes we can guess what these large Brokers were doing .

As a guess, let's now compare the TTBs actvities from May's highs to the Oct. highs. Back in May, the TTBs trading volume was above average but their participation rate was below average. In October, their trading volume is greater than it was back in May and their participation rate is way above average, at +10, versus May's below average -5. It appears that since they were the dominant players during October's rise, they were responsible for the recent pullback going into November.Currently, their participation rate remains high as their trading volume is increasing. So if prices are dropping, it's because of the TTBs and they must be net sellers at the moment. Think about it. They're locking in their profits and hoping to sell their shares to other investors. The problem is if these large Brokers all decide to leave the market and sell their positions, this could easily create a scary drop in prices, which is similar to what occurred eariler this year. Plus we can deduce that prices will fall back to the 8250 level because that's the last time we saw the proportion of the TTBs being average. This means that other investors were just as interested as the TTBs. Since the 8250 level, the TTBs have been dominating the price action.

10/29/06 - Who's ready to take this bet? Let's see how many of you know how many times the market had a string of 13 up days out of 15 anytime in the past 15 years? The answer is zero! Plus how many times has a 3 and 6 week period registered 12 and 22 up days at the same time in the past 15 years? With the exception of last week - none! Currently, the string of up days out of the past 15 days for the SP500 is at 12 days and out of 30 days it's 22 days. Now if the market can manage to go up three more days then the first 13 day stretch of up days out of 15 days will have occurred in 15 years! Are you ready to make this bet? The SPX is flirting with 1400. Do you think Traders aren't gunning for it?

BTW, ask yourself what makes these past three weeks the most positive three weeks in terms of producing the largest streak of up days in 15 years? Why did the last 6 weeks produce the most up days since 1998?

Here's another count. Rather than count days the graph below counts months. Please tnote that you are looking at 50 years of monthly data.

10/27/06 - Cycle shift. Collectively average Retail investors have a routine. The annual ebb and flow of cash flowing into stocks is quite consistent. However this year the cycle of events has been shifted, or shortened, by one month. Below is a graph that not only shows you the shift but also shows you the change in intensity. Basically, after Income Taxes are due (April 15), retail investors don't put as much money into stocks as they do during March. As the graph illustrates, funds flowing into equities decrease from April to Oct. then they rebound. In the past during 2004 and 2005, there was no period when investors collectively redeemed shares. The mutual fund industry enjoyed a continuous inflow of cash for 2 1/2 years. However in 2006, this cycle was different. Investors continued to invest one month longer than usual after April 15th and then stopped investing. This was followed by a period of redemptions which wasn't seen in the previous years, and now investors are being taunted by record prices to come back and buy.

This simple graph shows you that the pattern for the next few weeks is more likely to see an influx of cash into equity funds than not. The cause for this influx is just the seasonal pattern of investors returning to stocks. It happens every year. However this year, investors are contemplating investing at record high prices and it is possible that these record prices will keep this money on the sidelines and wait for a correction or pullback in prices before they return. One way to anticipate this return is to watch the Money Market Fund cash flows. So below the Equity Funds Cash Flow graph is another graph that highlights Money Market Fund cash flows.

The following graph shows you the same oscillators as above except that they were applied to Money Market Fund cash flow data. In this case, you can see the rise in Money Market Funds, which means that investors have more money in the bank than at any other time in the past three years. As you can see, up until June 2005, cash was not accumulating in these funds. In fact investors were withdrawing funds from their money market funds as these oscillators produced negative values. But since June 2005, investors have been storing more money in money market funds. Notice that the decrease in Money Market Fund cash flows coincidentally occurred with a spike in Equity cash flows (shown above). Here you have evidence that investors moved cash out of storage into stocks when the market was at a high. But will they do it again remains to be seen. One thing is clear, those investors who invested at the previous high are making profits so they're feeling good now and are more likely to exhibit the same behavior again because they're winners.

The question now is are these cash flows into savings going to cease or continue? Secondly, will these savings find there way into equity funds providing the fuel to propel prices even higher? Will investors now place protective stops to protect their winnings?

10/11/06 - Apparently the "Bears" are hibernating. Below are graphs of the NYSE volume from yet another source - SDOT. The NYSE's super dot system records the actual volume of buyers, sellers and short sales which is different from up and down volume. This new information provides investors with a new level of transparency never seem before and The Small Investor's Software Co. is once again the first to present it to you on the web.

Below you can see the net amount of buyers and sellers.

Below you can see the individual components that were used to create the graph above. This allows you to see the individual influences of the three types of transactions before they are combined into one net figure. Notice that the net positive effect disclosed above is due to the fact that sellers have left the market. Buying isn't at extreme levels; short sales are increasing; and selling has abated. These factors have created a relatively positive situation for prices. The only question now is when will selling return to the market?

In the graph below, you are given the ability to compare several ratios in an effort to enlighten you regarding their correlation to price. Notice how the traditional up/down volume ratio is not even above the zero mark which indicates that there is more down volume than up volume. However, the SDOT buy/sell ratio clearly shows you that buyers outnumber sellers and that buy volume is overwhelmingly more than sell volume during the Fall 2006 rally. Secondly, notice that the earlier peak in price in April 2006 (left side of graph) wasn't associated with a buying surge. In fact, the April 2006 peak was met with sellers. The only question that remains is when will the buyers run out of money?

10/6/06 - DJIA float changes. Despite the luke warm economic outlook; despite declining retail investor participation in domestic companies; despite the growing uncertainty regarding the upcoming elections; stocks have been climbing higher. Perhaps corporate buybacks and the declining supply of shares should be factored into your analysis?

2/6/06 - Why is more money going into non-domestic funds than in US domestic funds? This graph says it all.

1/11/06 - How would time the Heating Oil market? Let me guess. Price, volume, and technical analysis -right? The next obvious source of information are the American Petroleum Institute (API) reports which summarize the weeks supply and demand figures. Third, world and current events. It seems as though you can't trade this market without becoming a news junky. Fourth, if your really looking an edge then those 5 and 10 day weather forecasts will do but aren't they particularly troubling to read? The point here is that digesting news and weather is synonymous with trading the energy sector. But who has time to read all that stuff!

Once again, The Small Investor's Software Co. takes a different slant and is the first on the web to present this to you. Ask yourself are you doing what everyone else is doing? Do you to follow the crowd or anticipate it?

Below is a graph of the daily average temperature as compared to the daily average from the previous year. In addition, to smoothen this data, the daily average temperatures were subjected to a 6 day moving average. This is then overlaid with another moving average to create an oscillator. As you can see, temperature fluctuations in the Northeast are the norm. The not so obvious fact is that we have information you don't regarding how to trade this market.

Aren't you tired of mainstream media's hold on you? Aren't you tired of reading thousands of news stories? Plus, who's going to tell you what's important and what's not? Isn't it time you started trading smarter? Well, instead of spelling it out for you, here's a little homework for you. When did heating oil prices start to drop this fall? If you're interested, and follow through with the homework assignment, you might learn something.