Counter-argument to a market rally:
As per July, 2011:
* Cash at higher levels
* margin debt elevated
* Investor net worth remains very low
* NYSE debit balances remain high (correlates with the expansion of margin debt)
* Investor's Intelligence Bull/Bear Ratio still not reflecting extreme pessimism
If traders/investors have increasingly been buying on margin, and have negative net worth (negative available cash), then how can they confidently buy equities in the event of a correction? Now keep in mind the above statistics are illuminating margin speculators and not the universe of investors as a whole (overall investor cash levels are very high). However, could these 'fringe' players adversely effect any downside correction or prolong a market rally as they are prevented from making leveraged purchases on an on-going basis? (since they are already over-extended?). These data points are more relevant and are distinguished from the May 2010 era (characterized by less utilization of margin debt and higher speculator net worth).
Argument for a market rally:
VIX, RSI, AAII, and other technical indicators suggest the market is positioned for a 15% rally off of the 1120 base over the next two months.
Reply:
Is the over-reliance on technical indicators a consensus view? Keep in mind that algorithmic traders base their models on historical examples- if enough of the crowd moves in one way, will the market surprise us by moving in the other direction?
Friday, August 12, 2011
Thursday, August 4, 2011
This Cat's Dead But Probably Will Bounce in 100 Days
26 observations since 1960 of SP500 one day selloffs off over 4.5%. There are 5 unique examples of times the market behaved in this manner and quickly reversed without further trauma. Of those, 9/11/1986 and 10/27/1997 and 8/31/1998 seem the most comparable to today. In 1986 and 1997 the market was basically flat over the next year. After the 1998 crash [13.5 % negative], the market immediatly rallied for a month, crashed back to the same level, then resumed rallying until 2000.
Most of the -5% observations were in 2008. As such, based on this data alone the odds of a further 5% depreciation within the next 100 days are roughly 65%.
However, after measuring the 100 day maximum return (the highest the market rallies over the next 100 trading days) the picture is much brighter: of the 26 times since 1960 that the S&P500 has fallen by over 4.5% in one day, the market has reached a maximum average appreciation of 12.4%.
Conclusion: wait on the sidelines for a short while, then consider initiating some medium term bullish trades
Most of the -5% observations were in 2008. As such, based on this data alone the odds of a further 5% depreciation within the next 100 days are roughly 65%.
However, after measuring the 100 day maximum return (the highest the market rallies over the next 100 trading days) the picture is much brighter: of the 26 times since 1960 that the S&P500 has fallen by over 4.5% in one day, the market has reached a maximum average appreciation of 12.4%.
Conclusion: wait on the sidelines for a short while, then consider initiating some medium term bullish trades
Saturday, May 21, 2011
Data Stew Blabberings
Comment 1: How Lost Is Our Decade?
Spent a few minutes this morning looking over interest rate and economic data from Japan since 1984. There were several major Nikkei correction events: 1987, 1991, 1996-98, 2000-2002, and 2007-present. What's the one major outlier here? 1996-1998. The other correction events correlate with global slowdown/recession events, similar in duration to the U.S. economic cycles. (with the exception being 1987 which was arguably due to the first ever computer generated 'flash crash'). Keep in mind that 1996-1998 in Japan appears to have been characterized by economic stagnation- real GDP rising no more than 1.5% but at times posting slightly negative quaterly numbers. But- the key thing to distinguish here is what was happening in the region at that time: the Asian financial crisis, exclusive of Japan. Remember LTCM, the hedge fund that had placed 100x leveraged bets on Asian currencies. Once those speculative currency bets began to go sour, a great market disruption began in the region. As a result, Asian investors/traders sold off risk (regional currencies, and equities including the Nikkei) and purchased relative safety (the U.S Dollar, U.S. Treasuries and Japanese long bonds). The Japanese 10 year note went from 3.25% fresh off of Japanese Central bank QE or quasi-QE to 1.5% and below. The Yen greatly weakened -and- the stock market sold off by +30%. A few years later, the stock market nearly regrasped its former glory, only to head south as the tech bubble bursted in 2000. Overall, the story behind 1996-98 looks more like that of risk contagion run amok; not very similar to a traditional theory of a 1930's style depression prolongued or avoided. Does the U.S. face similar risks today? Is there a post-recession LTCM(s) waiting in the wings to blow up, that has been taking avantage of QE 1 and 2, and the ensuing USD carry trade? Notice the trend in currency movement in the U.S. that syncs closely with that of Japan in 1996-1998.
Comment 2: Is the Shiller/Graham 10 Year PE Still Relevant?
Point: Hussman forecasts that the SP500 will see a 3.5% annual gain over the next 10 years. He formulated this prediction based on moving averages, the shiller 10 year PE, interest rates, and sentiment ratios.
Counter-point: the Shiller PE was above 28 in the mid-90s yet the SP500 returned +10% annually over the next 10 years
Response: in the Mid 90's the ten-year T was near 7%, long run interest rates were expected to fall, and private debt was expanding. Today the ten year is close to 3.0% and private debt is contracting or stagnant. Rising interest rates will throw cold water on future PE ratio expansion. Also higher multiples can't be easily reached since widely available private credit won't be widely available [institutions and common folks won't be able to lever up on margin like they used to be able to do]. Perhaps the time tested average PE isn't irrelevant after all? Maybe the 24+ ratios of ages past (not mid-90s) are a harbinger of tougher times ahead?
1 year maximum: 1430
1 year minimum: 1225
Spent a few minutes this morning looking over interest rate and economic data from Japan since 1984. There were several major Nikkei correction events: 1987, 1991, 1996-98, 2000-2002, and 2007-present. What's the one major outlier here? 1996-1998. The other correction events correlate with global slowdown/recession events, similar in duration to the U.S. economic cycles. (with the exception being 1987 which was arguably due to the first ever computer generated 'flash crash'). Keep in mind that 1996-1998 in Japan appears to have been characterized by economic stagnation- real GDP rising no more than 1.5% but at times posting slightly negative quaterly numbers. But- the key thing to distinguish here is what was happening in the region at that time: the Asian financial crisis, exclusive of Japan. Remember LTCM, the hedge fund that had placed 100x leveraged bets on Asian currencies. Once those speculative currency bets began to go sour, a great market disruption began in the region. As a result, Asian investors/traders sold off risk (regional currencies, and equities including the Nikkei) and purchased relative safety (the U.S Dollar, U.S. Treasuries and Japanese long bonds). The Japanese 10 year note went from 3.25% fresh off of Japanese Central bank QE or quasi-QE to 1.5% and below. The Yen greatly weakened -and- the stock market sold off by +30%. A few years later, the stock market nearly regrasped its former glory, only to head south as the tech bubble bursted in 2000. Overall, the story behind 1996-98 looks more like that of risk contagion run amok; not very similar to a traditional theory of a 1930's style depression prolongued or avoided. Does the U.S. face similar risks today? Is there a post-recession LTCM(s) waiting in the wings to blow up, that has been taking avantage of QE 1 and 2, and the ensuing USD carry trade? Notice the trend in currency movement in the U.S. that syncs closely with that of Japan in 1996-1998.
Comment 2: Is the Shiller/Graham 10 Year PE Still Relevant?
Point: Hussman forecasts that the SP500 will see a 3.5% annual gain over the next 10 years. He formulated this prediction based on moving averages, the shiller 10 year PE, interest rates, and sentiment ratios.
Counter-point: the Shiller PE was above 28 in the mid-90s yet the SP500 returned +10% annually over the next 10 years
Response: in the Mid 90's the ten-year T was near 7%, long run interest rates were expected to fall, and private debt was expanding. Today the ten year is close to 3.0% and private debt is contracting or stagnant. Rising interest rates will throw cold water on future PE ratio expansion. Also higher multiples can't be easily reached since widely available private credit won't be widely available [institutions and common folks won't be able to lever up on margin like they used to be able to do]. Perhaps the time tested average PE isn't irrelevant after all? Maybe the 24+ ratios of ages past (not mid-90s) are a harbinger of tougher times ahead?
1 year maximum: 1430
1 year minimum: 1225
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