Daily Investment Interpretations

November 11, 2011

2011-11-11: (Friday Night): Stock market indices continued their advance today on good news: 2% stock gain saves week, Easing of Italy fears aids financial stocks. The NASDAQ Composite marched up 53.6 points (2.04%) to close at 2,678.75. The Dow added 259.89 points (2.19%) to 12,153.68; the S&P 500 increased 24.16  points (1.95%) to settle at 1,263.85. Oil advanced to 99.02: Oil at highest since July; gold jumped to 1,790: Gold's safe harbor offers new means of escape, Gold ends 1.6% higher after two-session drop. The VIX dropped 2.27 points to 30.04.
    Yesterday, I said, "To me, today's action suggested a dead-cat bounce. It remains to be seen whether or not there's follow-through." Well, whaddya know! I was wrong! 
    Today was a "good-news" day: University of Michigan Consumer Sentiment Index Continues to Improve, Italy's Senate Approves New Law; Berlusconi Era Coming To End, and New Greek Government To Be Sworn In.
   State of the Markets' David Moenning has written what seems to me to be a very good article, Why Isn't This Working Anymore? In the article, he addresses the fact that in a market that's subject to wild daily swings... huge moves... that tip the rules of investing into the trashcan. With the  markets at the mercy of headline-driven supercomputers racing each other for instant access to the latest market news, "many traditional indicators of the market's internal strength are no longer as valuable as they once were. Take for example, the idea of a "90% up (or down) day." Historically, when either breadth or volume was "one sided" - to the tune of 90% or so - it was an indication that the move had some "oomph" behind it and was likely to continue. But since the market now moves in either a "risk on" or "risk off" mode, it seems that most days are 90% days. As such, I now put very little emphasis on the idea of breadth or up/down volume - at least on a daily basis."
    Mr. Manning goes on to say, "The same can be said for very simple trend indicators. It is said that price is a "pure" indicator due to the fact that nothing can cause price to diverge from itself. Thus, the idea is that if you can stay on the right side of the prevailing trend, you should be in good shape. This idea has led to the widespread use of moving-average indicators over the years, where the price trend of the index or security in question is smoothed out by averaging the prices of the last X-number of days. Then when the security you are trading crosses above or below the moving average, you buy or sell accordingly." This no longer works. "Ian Naismith, who is a fine analyst, a past President of NAAIM, and the head of Sarasota Capital, did some research on the subject that he presented to a group of active managers this week. His conclusion: Using moving average crossovers as buy and sell points is a complete waste of time and a terrible signal. Ian illustrated his point by showing the results of trading the SPY using a simple 20-day ma since the inception of the SPY. Total return of the system over the period: +15%. The problem is the buy-and-hold approach returned +165% during the same period - oh, and less than 30% of the trades were successful. Yikes!"
    Mr. Moenning continues, "I won't bore you with the rest of the stats, but the results, while better when you went with a longer ma, did not beat holding the SPY since its inception. So, as I've been saying recently, we've got a new market environment on our hands. This can be said for the period that began in 2000 as well as the post-flash crash era. Therefore, as market analysts, we've got to do more than just relying on age-old trend indicators because many of those indicators just don't work anymore."
    Obama prods supercommittee to reach deal  And when they do, look out below!
    Profit from the January Effect. This is predicated upon the idea of the four-year market cycle. But the four-year market cycle is based upon the monetary policies of the Fed, and now that we're in a liquidity trap, the Fed is no longer in control. Lots of luck with that presidential cycle forecast!
    Get set for Monday bond selloff  This article notes that because the news out of Europe is suddenly much better, there won't be the flight to safety that we've seen since Wednesday. And that means that U. S. bond interest rates will rise and bond prices will fall. 
    Long-term-care costs: What’s next?  This article, by Robert Powell, describes the parlous, bankrupt-inducing plight of the elderly (and their children) when it comes time for nursing home care.
    Seven reasons Italy may fall further
    2012 could be a good year for the markets.  This is the same kind of four-year cycle forecast as the January Effect article above. 
    Jon Markman has written: Dissecting the (ugly) Italian Job His point is that every country which has gotten into deep debt has issued more paper money, and that's why gold is headed toward (he says) $3,000 an ounce.

    State of the Markets articles include:
    Technical Talk: Stocks Poised to Test Resistance    
    Video Update: Weekly Market Summary