When Market’s Get Rattled: The Flight to Quality February 25, 2011
Posted by smarttradepro in Current Issues.Tags: and sell when everyone else celebrates, buy at the start of a conflict, continued flight to asset quality.
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What began as a localized uprising in the small North African country of Tunisia has spread throughout the Middle East. The Economist magazine notes that Egypt has long been a political bellwether for the Arab world. If that’s so, then Mubarak’s exit signals that other Arab regimes may be in jeopardy. Decades old dictatorships have now fallen in two countries now and a third fall seems imminent already as rebels appear to control the eastern part of Libya.
What does this political unrest mean for traders and investors? One thing for sure: it means more volatility. If the negative news from this region continues, it will drive equity prices down and oil prices up. We saw big jumps in volatility (stocks down, oil up) on 1/28 (Egypt’s significant news day), and on 2/22 (when the Libyan air force killed hundreds of protestors). We should probably be prepared for similar conditions, and we can also benefit from another phenomenon that occurs when volatility picks up.
Flight to Quality
Until the unrest stops spreading, we should expect a continued flight to asset quality. We saw that yesterday (2/22) as bonds and gold rallied. In the equities markets, there is also a shift to quality. In times of turmoil we see people leaving riskier sectors (like small caps) and heading into large cap stocks. The chart below shows the ratio of the S&P 500 (large caps) versus the Russell 2000 (small caps).
During the biggest scares of the real estate and credit crisis during the fall of 2008 and spring of 2009, the S&P 500 was at its highest valuation versus the Russell 2000. Recently, however, the markets have been more complacent and moving up so people value the Russell more highly. Investors have felt safe enough to chase bigger returns. You can see that trend in ratio indicator (the blue line) in late 2010. Now, the ratio indicates that S&P valuations just started to pick up a bit.
The US equities markets have been stretched to the upside for some time. With the current political turmoil, the markets may finally find a reason to relieve its overbought condition.
Canons and Trumpets
This is probably a good time to remember Lord Rothschild’s famous epigram to “’Buy to the sound of cannons and sell to the sound of trumpets.” In other words, buy at the start of a conflict (when things look bleakest) and sell when everyone else celebrates the end of it. In our case, remember that negative geopolitical news will drive equity prices down and oil prices up, but they will likely rebound after the impact of the news wears off.
I’d love to hear your thoughts and feedback on this article or about trading and investing in general at drbarton “at” iitm.com. Until next week…
Great Trading,
D. R.
Sector Action Since the March 2009 Bottom February 18, 2011
Posted by smarttradepro in Current Issues.Tags: how sectors have fared, The Geographic View, The Sector View
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While lovers celebrated each other on Valentine’s Day on Monday, the S&P 500 made a new post-real-estate-bubble high. The cash index hit 1332.96—less than a point from a doubling of the March 6, 2009 low of 666.79.
This level was a key “hidden” resistance level identified by W.D. Gann. It will be very interesting to see if this resistance level can hold the bull market that has been steaming ahead.
To commemorate the S&P doubling off the bottom, I thought it would be intriguing to take a quick look at how sectors have fared since the gloom and doom of March 2009.
The Sector View
Below is a busy little chart from one of my favorite sites: stockcharts.com. This performance chart shows percentage moves from a specific period and includes the S&P 500 sector SPDRs commonly refer to as “spiders.”
You may have trouble reading the color key for the lines so here’s the order for the sectors from top to bottom: financials, consumer discretionary, industrials, consumer discretionary, materials, technology, energy, healthcare, and utilities.
It should come as no surprise that all of the sectors are up for this period. With the financial sector taking the biggest losses heading into the March 2009 lows, it’s also logical that they would rebound the most on a percentage basis (the financial sector is the top brown line).
Conversely, one would expect the sectors that weathered the big crash the best to rebound less gingerly—this, indeed, was the case. Utilities, health care and consumer staples have had the most tepid responses and are represented by the three sectors clumped around the 50% line.
Most surprising to me, the tech sector has basically mirrored the broader S&P 500 with a gain of about 100% off the lows.
The Geographic View
Worldwide, emerging economies have not fared as well as the established rank and file. Let’s look at another comparative performance chart to see the percent gains of some regions and countries on a more recent timeframe—since the November 5th, 2010 swing high in the markets.
Here is the order from top to bottom: Japan, US S&P, and EAFE are above the zero line, while Latin America, Emerging Markets, China, and India are all below the zero line.
Since November 5th, only Japan, the US (SPY) and EAFE (first world regions) made new highs. Latin America, China and especially India have swooned since then. It will be very hard for the bull market in the first world regions to keep charging ahead if the rest of the world maintains its downward slide.
I’d love to hear your thoughts and feedback on this article or about trading and investing in general at drbarton “at” iitm.com. Until next week…
Great Trading,
D. R.
Being Passionate About Trading February 11, 2011
Posted by smarttradepro in Current Issues.Tags: exercising first thing in the morning, follow that passion., this great game of trading
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Every Monday, Wednesday and Friday, about a dozen guys make their way to the Western YMCA in Newark, Delaware to play basketball. The first game starts at 5:45—that’s a.m.
Why in the world would level-headed people forsake the comfort of their Tempur-pedic mattress and drive to the gym in 12°F (-11°C) weather to run up and down a court? The answer is simple: an undeniable passion for the game of basketball.
There’s something almost therapeutic about playing basketball, especially pick-up games at the local gym or playground. (A pick-up game has no formal teams or referees. People just show-up, choose sides and play.) The game offers camaraderie, competition, and a psychological release. On top of all that, it’s great exercise, too. Finding a good bunch of guys for a regular game is tough, so when you find such a group, you stick with them.
This morning I was struck by the true passion these guys have. Never are there any fights or long arguments; every shot is contested and every foul is called. There are no easy baskets. These people love to play; this shows not only in the high level of ball that we play, but more importantly, in their enjoyment of this early morning ritual.
I believe that it is much tougher to learn a complex skill, like basketball or trading if you don’t have passion for the sport—or the markets. Competence makes no requirement for passion, although passion offers the shortest and most enjoyable path in the pursuit of excellence.
The Shortest Path to Success: Align With Your Passion
If you have a passion for something, spending the time required to master that subject will come more easily because it is so enjoyable.
Let me say a word about the concept of passion. The type of passion I’m referring to is an enjoyment to the point of absorption. I don’t believe that we are born with this type of passion. I believe that it grows in us as we become involved in an area and start to receive enjoyment from the experience. This type of passion shows up in all walks of life. I know passionate cooks, guitar players, gardeners, engineers, doctors, programmers and performers. And I don’t believe that any of them were necessarily born with that passion.
I have met traders and investors who I wouldn’t consider passionate. Some were proficient, others competent, and a few were even successful. When they spoke about the markets or trading, however, they lacked any spark for the topic. Most likely they will not reach the top tiers of their field.
I have also met passionate people who eat, breathe and live the markets. Most of them do it with some balance in their lives, but they love the markets. They love the research. They love to talk about what they’re doing in their trading and investing. Many of these folks are at the top or headed in that direction.
My best friend and trading and business partner will not go to bed without reading the Wall Street Journal. He hasn’t missed a weekly Barron’s in 30 years. He reads scores of market commentary emails every day. He is a walking market encyclopedia. When he talks about the markets, you can’t miss the gleam in his eye and the energy in his voice. He has passion and is in the top tier of his field.
You don’t have to have a passion for the markets to enjoy trading and investing or even to get good at it. But if you find a part of the market experience where you really enjoy your time there—where you get lost in the moment—pay attention to that feeling! It might be researching individual companies, system building, fundamental analysis of commodities or technical analysis of charts. Find what you like about this great game of trading and investing and follow that passion. That’s the quickest way to get good at something.
And as an aside, if you haven’t tried exercising first thing in the morning, I highly recommend it for several reasons. It’s a great way to get your day going! If you are doing any mental activity (like trading or investing for example), the extra flow of blood to the brain through exercise has proven to raise performance in mental exercises. And this doesn’t have to be a long run or playing full court basketball. A good walk at a brisk pace will do the trick. Get your blood moving and shift your mind to higher gear.
I’d love to hear your thoughts and feedback on this article or about trading and investing in general at drbarton “at” iitm.com. Until next week…
Great Trading,
D. R.
Interesting Markets: Short Term versus Intermediate Term February 4, 2011
Posted by smarttradepro in Current Issues.Tags: a cautious tone t, Technically, The market is a bull, we will need a pullback
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“May you live in interesting times.”
—- Attributed Chinese Proverb / Curse
Yes, I have used the quote above in earlier articles. It always seems to pop into my mind when thoughts of “two-handed economists” come along. Two-handed economists give both sides of the analysis and say, “On the one hand…but then on the other hand…” without ever reaching a conclusion or providing a recommendation. This must be an everlasting occupational hazard since this notion was immortalized by George Bernard Shaw in the early twentieth century when he said, “If all economists were laid end to end, they would not reach a conclusion.” But I digress.
The current market is a prime “two-handed” example for market observers. On the one hand, almost all of the technical analysis community is looking for an overdue technical pullback. On the other hand, every down move in this market has been met by more buying.
For the fundamental crowd, it’s a two-handed market as well. On the one hand, many economic metrics continue to improve, albeit from monstrously horrid numbers in the spring of 2009. On the other hand, inflation is heating up and unemployment numbers have not significantly improved over the last 18 months.
Which “Hand” Is It?
When faced with conflicting viewpoints, it’s useful to see if narrowing down information to an applicable time frame offers some clarity. Luckily in this case, I believe it does.
For the short-term viewpoint, the market has spoken. Despite being technically overbought (by some measures, severely overbought), and in the face of significant political turmoil in the world’s most volatile region, the market shook off Friday’s big drop and in two days hit new 52-week highs.
When the market shakes off bad news (specifically the massive protests in Egypt) and heads the other way, we cannot ignore the signal it provides. The market is a bull until price action tells us otherwise.
In the intermediate time frame, the data may tell a different story. Technically, we will need a pullback to relieve the intermediate term overbought condition in the market. The inflationary pressures of rising commodities prices are starting to affect corporate earnings. Hershey blamed rising cocoa and sugar prices for their earnings miss and Whirlpool cited the rising cost of plastics (think petroleum) for theirs.
The threat of inflation is meaningful. By now, we all know that quantitative easing really means “printing more money.” Even my third grade economics students know that when there is more money chasing the same amount of goods and services, prices go up. So all things denominated in dollars have been going up.
A Revealing Chart
The most interesting inflation graphic that I have seen in awhile came from Barclay Leib’s newsletter. The “Food and Fiber Index” depicts a commodity-based index to its 200-day moving average. The index tracks cocoa, coffee, sugar and orange juice (the foods) and lumber plus cotton (the fibers).
Again, this chart shows how far the food and fiber index has moved away from its 200-day moving average. The two times in the past where it rose more than 40 points away from the 200-day MA in the past 15 years were followed by memorable market corrections. The index hit that level two months before the Asian currency crisis in 1997 and two months prior to the 2008 market highs. With cotton hitting all-time highs recently and other commodities hitting extreme levels as well, the index has alerted us to a “red flag” point once again.
Bear in mind that this chart tells a fundamentals story; it’s not a piece of technical analysis. When prices for consumables get too high, they begin to have a material impact on corporate profits. So the rosy earnings picture that we’ve seen over the past couple of quarters could be in jeopardy. Should the Fed decide to slow inflationary pressures, their actions definitely will impact the markets in the intermediate term.
The Traders View
An equities market’s slow and consistent climb higher doesn’t always end when the technical analysis says it should. Meanwhile, we can’t ignore the bigger forces that continue to work in the intermediate to longer time frames. These subdued but ultimately stronger forces lend a cautious tone to the equation.
I’d love to hear your thoughts and feedback on this article or about trading and investing in general at drbarton “at” iitm.com. Until next week…
Great Trading,
D. R.
