Technical analysis of S&P 500

Just wanted to throw this out to see if it holds and water (in terms of predictive power), and also educate the masses :)

Technical analysis is a highly debated topic. The way I see it is that if most of the traders believe in it, it makes sense to follow the logic of the crowd (see what happened to the mavericks ;))

S&P is right now at about 879. Looking at the 3 month chart, notice the trend line from Nov 21st low (741) to the Dec 5th low (818). Generally, on the downside, stocks will go back and test either moving averages or trendlines. So based on this, the current trendline is near 850. Interestingly, the 20 day moving average is at 857.

Now there something a lot of technicians love called the head and shoulders patters. What does it look like? Well, head and shoulders!! A bigger peak with two smaller peaks at either side. Now consider and inverse head and shoulders pattern...a lower low bounded by two higher lows. The Nov 21st value at 741 can be thought of as the inverse head and the left side higher low is the Oct 27th value at 852. So if this theory is to hold, then 852 should be the max downside.

Now, the fun part is the reaction, or the "sentimental" low which stands at 840. This has been a value we've tested a number of time both on the downside and the upside. Below this, there will be a number of stop losses that will trigger which can pull the index down pretty sharply. 

So the way I see it, we should have a low between 840 to 850 before moving into gear for a year-end rally.

I'll try to post some pictures later to illistrate all of this. For now, hope this link to the yahoo finance technical analysis chart works.

Idea factory: Alternate SMS infrastructure

Tired of paying 10 to 20c per sms? Wonder how retarded it is that you still have to pay for SMS even with a data plan!! Here's the solution...SMS over Wi-fi/3G data connectiion. The idea is as follows

- User chooses recepient; chooses if message is urgent/not urgent

- Atl SMS client side app sends data to server which checks that both are registered with the service. 

- It then monitors to see if a Wi-fi connection is avbl. If not, it checks whether a 3G data connection is avbl (this can be disabled if you don't want to use 3D data plan at all).

- If avbl, it sends the SMS to recepient and the client app at the other end confirms receipt of message! So you are sure your SMS went through

- If not avbl, and you chose urgent, it will send the message using the cellphone providers SMS service. If you chose not urgent, it will hold the message in outbox until some data network is available

Guess who thinks this is'nt an awesome idea..the mobile service providers of course, since this will strangle their juicy revenue stream. Well screw them! Power to the people :)

Comment on WSJ article: Deepak blames America

I came across an article in the WSJ. This piece is written by a member of the WSJ editorial board..here's the link to the article: Deepak Blames America

After reading it, I posted the below comment in the forum section of this article.

What I find interesting is that your newspaper gives an outlet for people to vent their frustration. I guess most of your readers think THEY are the true patriots and anyone wishing that the US change its policy based on the repercussions (i.e. use soft power more effectively, than raw military force) must be a traitor! I won't comment directly on the interviews with Dr. Chopra since I did not see them (given that I hardly see television in the belief that the written word tends to be less sensational). I guess then that it is your newspapers' agenda to make even this media more jingoistic. Kudos to your success.
Stimit

Idea factory: Non-profit to kill Dawood

Here's an idea. The bastard behind the Bombay bomb blasts and the one who provided intel to this recent bunch of shitholes was Dawood Ibrahim. How about starting a non-profit fund to catch him, better dead than alive? The fund will collect money and the kitty will grow until the prize is awarded..to the one who brings his head on a platter.

Idea factory: And now I cannot stop it! An iphone game idea

It's now started raining ideas, to add to the flood :)

My idea is of a multiplayer app and to explain it in short, it's a contest of tetris + bricks with one person playing tetris and the other playing bricks! Hope you have a picture now of the basic gameplan but just to elaborate a little more, one person is playing tetris and building the wall while the other person is seeing the same wall from below and trying to eliminate it! Any iphone SDK programmers in the house?

Idea factory: It's officially a flood! Skype on your cell

Oh boy. I can't sleep until I write this down! 

Now that we have blazing fast Wi-fi (read my previous post), how about some video telephony? Say you're in a coversation with someone (maybe that someone special :) and decide you want to see the other person's face (or maybe more importantly you're out of your daytime minutes). Both of you determine that you have access to free reasonably good quality wifi (either at home or even at work). So you initiate a conversation over wifi, a video conversation like skype in fact using that same userid. Remember, you still haven't dropped off the cellphone call. One you determine that both of you are sufficiently happy with the wifi call, you simply switch over seamlessly and terminate the cellphone call. Voila!! Free unlimited talking. So who's going to sell this cellphone now?

Idea factory: What I'd want from a new phone

I was thinking what I'd want in a new phone. Not that I need one, but I do need a camera. And hence what if I could get a phone with a decent camera, say 3 megapixels, with 3x zoom. Throw in a 1GB memory stick. But that's not the design win I foresee. How about adding blazing fast Wi-fi (remember, this is not 3G but plain vanilla wifi). Say the Android OS. So now you can use Picasa to sync photos you got on your cellphone with your comp over the Wi-fi. And if possible, throw in music player functionality too!

What price point would such a phone retail? Now sell this phone direct to consumer without the networks to intermediate. You just get the SIM card from them and pay per month. No need of data plan. This would work with the GSM guys only (Cingular, T-mobile).

So maybe the price point turns out to be a little too high for stupid Americans who think it's fine to pay 200 bucks upfront and get suckered into a 2 year contract with a $30 data plan. Instead, maybe Google can subsidize the cost of such a phone and force you to watch some ads while browsing? With the new "open" wireoless spectrum that was freed up with the digitization of TV signals, we could have over the air Wi-Fi? Now wouldn't that be a compelling alternative and a breath of fresh air compares to the old school telcos. Hmm..not if only I could get someone to buy into this idea :) Oh wait..Nokia already designed this into the N95 and it retails at buy.com for 350 bucks. Google..want to drop that price to 150?

Watch this space

for a review of the latest treasury lending program

It's not the news...

but the reaction to the news that matters. Did the announcement of Tim Geithner as the incoming treasury secretary trigger a rally on Friday? Or was it the market move on Friday that made this news THE news of the day? Consider that The market was very oversold, an extremely high VIX reading, heavy short interest, it was options expiration Friday and some kind of Citigroup news was imminent over the weekend. Taking into account the fact that Geithner, as head of the NY Fed has taken active part in every part of the recent bank bailouts, it makes me wonder what news stuff he brings to the table.

So yeah. The media thinks the Geithner caused the rally. I think the rally made the Geithner news known to everyone.

Helping people understand their finances while helping out with social causes

Hi everyone...it's been a while since I posted. I'm glad atleast a couple of you missed my posts :)

So I had this idea just now. This stems from my desire to do my bit towards social causes while at the same time helping people traverse this minefield of financial investment. I was thinking of starting a service where I would give out solicited advice on all issues financial and charge for it, with the money going to the person's favorite charity. That way, I act just like an intermediary to keep you disciplined and make sure that the money is sent to the non-profit of your choice. From your perspective, you can think of it as donating to a cause while getting financial advice for free. Or you can look at it as paying for getting financial advice and I can have the joy of giving to your favorite cause for free.

Please post back in comments with thoughts, suggestions and potential fees I could/should charge.

From Bush the Abomination to OBAMANATION

The big news incoming..

Dole loses, democrats pick up 3 in senate

Pennsylvania stays Democrat

Ohio is Obama country (6:30pm PT)

The US is Obama country (8pm PT)

And I'm crying in joy...

Please watch this

I don't intend this to be a political blog and voice my opinion on political matters. Nor do I intend to tell people how to vote, although if you know me well enough, you will know who I support. 

However, there are some things that make me cringe. Keep in mind..i'm not a guy who gets easily freaked out. However, watching this PBS documentary (instead of studying, but that's another story) did make me want to puke! So I urge you to watch it. It's titled "Torturing democracy" and is available online.

I really hope that with the changing of the administration, Guantanamo is closed and if at all possible, Donald Rumsfeld and Dick Cheney are tried in a war crimes court! What they have allowed and abetted is reprehensible and below any human dignity. Bush should retire from public life since there is no way in hell he's going to be able to save his legacy as being the worst president ever and THE person to blame for America's decline. 

Not bigger but definitely badder

Above is a graph comparing the present market downturn compared to those in prior bear markets. What I make of this is that in % terms, we are comparable to prior crashes, but this time the descent has been really really fast! That's what happens when the crisis is first seen in asset prices rather than in the real economy. Bubbles that are intentionally blown bigger burst much faster.

Intl stock markets vs US markets

Of late, international stocks have been falling more rapidly than US stocks. There are a couple of reasons for this.
- Redemptions from hedge funds, US mutual funds investing in intl stocks. Note that the dollar has appreciated very significantly in the near past. This is of course both the cause and the effect for investors pulling cash out of other currencies, markets and commodities.
- US equities stared off with lower P/E's at the high so have less to fall
- Since the rest of the world especially China was a big manufacturer of goods destined to the US, there is significant overinvestment in capital expenditures. Also, commodity producing countries like Brazil, Australia and Russia have been hammered.
- In India, the monetary policy is still quite restrictive thus encouraging saving. Inflation has also not subsided enough but it should in the near future. I think Indian stocks represent quite an opportunity at 8000 sensex levels.

Q&A

Folks..I strongly encourage you to send in questions even if they are very basic. After all, my goal here is to communicate my understanding of things to people who are not expected to be aware of financial terminology and the latest happenings in the market.I sent in a question to Trader Mark and he replied immediately and I liked his straightforward reply. I will attempt to do the same.

Q from me:

Hey Mark,

    Firstly, I've been impressed with your commentary - it's honest
and entertaining (and of course insightful). I'd like to know with
all the carnage going on, what are the markets pricing? In spite
of hedge fund blowups etc. and all the uncertainty, what earnings
for SnP are we anticipating? I mean...i don't think we expect
earnings to fall below $60 next year, do we? But still, if companies
have enough cash to weather this and corporate yields for
non-financial companies are still so high, I guess they are a safer
bet than stocks right now considering a lower probability of
defaults. But I can't state any of this in numbers, wondering if
you can.
Stimit

A from Mark:

I don't know what earnings will be next year - a lot of it will be based on availability of credit which we should know within 90 days. If we are stuck at this level it could be horrific simply because we have lending not near anywhere where it should be. We have to see what the new fed programs they are rolling out over next two weeks do to the market and if it opens the spigots

Trough PE ratio is generally 7 so thats why people are throwing around $60 x 7 = 420 which takes you back to mid 90s.

Generational imbalance

I've been studying for the CFA and was planning to post insights I picked up from the various chapters. For multiple reasons, one of which is that I have not read all that much material :) I've been lax in this regard. However, this just struck me as something I must write about since this dwarfs all our present problems!

The fiscal imbalance, which is the present value of the government's commitments to pay benefits minus the present value of its tax revenues stands at a staggering 54 trillion dollars. This is almost 4 years of the entire nations present GDP. Guess what..the only way to meet this gap is
- Raise income taxes
- Raise social security taxes
- Cut social security benefits
- Cut federal govt. discretionary spending

And to think that we are going to be running deficits for sure in the next few years to tackle the "financial crisis" leaves me wondering what the hell can be done. The dollar will get smashes over the span of the next 20 years. The US will have to increase exports like crazy to the rest of the world, exports of tangibles (including software :) and inflation will run rampant. As always though, there will first be a hint of deflation before inflation. Are we back into the 70's inflationary spiral?

A question on gold

I recently submitted a question to Marcus Grubb who is the Managing Director of Investment Research and Marketing at the World Gold Council and will answer readers’ questions on the outlook for the bullion market on Monday, October 27 in the Financial Times. Let's see if he considers my question worth answering

Gold is generally considered a hedge against inflation. However, my confusion is related to the different rates of inflation in Asian countries as opposed to developed economies. If the Indian Re were to appreciate back to 40/$, gold would be considered extremely cheap in India and demand would grow, more so with a 10% inflation. Am I correct in my thinking?

Brilliant..how to work the TARP

From the nytimes:

The Swiss National Bank said it had created a fund that would enable UBS to transfer $60 billion worth of toxic assets from its balance sheet. UBS said the fund would be capitalized with $6 billion of equity capital provided by UBS and $54 billion from the Swiss National Bank.

UBS said in a statement: “With this transaction, UBS caps future potential losses from these assets, secures their long-term funding, reduces its risk-weighted assets and materially de-risks and reduces its balance sheet.”

This drew a big aha from me. Now I have an idea of how to work the TARP (Troubled Asset Relief Program) with the remaining $500B. Set up a fund that will be capitalized with 10% from the bank (from the earlier govt. infusion of cash :o) that holds the asset and 90% from the govt. Move the toxic asset into the fund at the most recent mark to market value. That's it..the bank is done and they limit their losses and so get some certainty (which helps them calculate value-at-risk, etc.). And now the biggie...any losses < 10% will effectively be borne by the bank earlier held those assets. Sounds like something workable.

It will get better before it gets worse

Remember this...right now this is a financial crisis and not an economic collapse..yet. Hence there will be a rebound based on the unprecedented response from the governments of the world to rescue the system. Ben Bernanke in fact has an opinion piece today in the WSJ titled "We're laying the groundwork for recovery".

However, the problem is much much bigger. It's of the debt burden carried by individual Americans and the country itself. It's of unsustainable consumption in the US and the difficult in controlling commodity costs when welcoming billions of Indians and Chinese into the middle class. It's of the ridiculous leverage built up in the system which will not end until it is smoked out!

In short, my forecast is of a recovery to 1200 this year. This will be fueled by the fed cutting rates further, Obama being elected president and hope that the bottom in housing is in. In fact, we may even see a rise up to 1300 early next year. From there I strongly believe it will start getting worse, slowly at first and then faster as the effects ripple through the real economy. I think a real bottom for housing will not be until 2010 or 2011 followed by flat to modest increases thereafter. Right now, I think the best time to buy is end '09 to early '10. As always, watch this space for updates to all the forecasts :)

Way smarter

Haha..i'm sure you think I'm talking about myself but I'm not. And in fact, this is not even a post related to the markets or finance. It's my reaction to an interview with Peter Galbraith I just heard on NPR. Earlier, a few weeks ago, I'd heard a roundtable interview with 5 former secrataries of state..imagine the star power in that room. These people are really brilliant when it comes to foreign policy and whenever they speak, even if they don't intend to, they end up showcasing how fu#@$@ terrible the current administration has been. I wonder if there will be a witch hunt when W. packs his bags and leaves the white house. That is already been seen in the case of the firing of the 9 attorneys by Alberto Gonzales. I am waiting for Obama to be elected and take office and I strongly believe he will change the perception of the US on the global scene.

Causes of the downside acceleration in stocks

I'll just make a list. All I can say is if we fall below 800 on S&P, the market will crater to 600 very soon! Ouch. However I think the more likely scenario is crazy volatility but above today's levels.

- Letting Lehman fail: This triggered a wave of panic from anyone who held Lehman debt (stockholders would have been wiped out anyways) and more so from the insurers of that debt (through Credit Default Swaps). Just today that debt was auctioned at 9 cents on the dollar meaning the insurers had to come up with the rest which in all is said to have totaled 270 Billion dollars. Additionally, this created confusion as to who would be allowed to fail and who would be rescued.
- Margin calls at large hedge funds: Even the big brokers like Goldman and Morgan Stanley increased margin requirements for hedgies. Since stocks were some of their most liquid assets, they blindly dumped these to raise cash.
- LIBOR widening and no one willing to lend to no one: This is more from a loss of faith in the counterparty. Since most rates in all sorts of contracts (even US mortgages) are tied to the London Inter Bank Offer Rate, this increased financing costs for everyone. In fact, ICICI is paying more than 20% interest for some short term loans to shore up liquidity
- Govt plan to buy equity stakes in banks: Interestingly, although in the intermediate term this will be positive for banks, investors bailed when they realized that their holdings would be diluted even further!
- Short selling ban in financials being lifted: This brought back rumor mongering strategies back into action. Also the etf's that engage in short strategies had short (or effectively short) a bunch of these shares.
- And finally, the back and forth on the bailout plan: If one thing markets do not like, it's uncertainty. The rejection of the plan in the congress was a shocker. Even if they had approved say a smaller bill I think it would have been fine. But first rejecting and then approving just created confusion followed by panic.

Shorts for slaughter

The ban on short selling of financial stocks was lifted today and immediately, banking stocks fell. Morgan Stanley (now a bank) collapsed over 15% on rumors that an equity injection from Mitsubishi bank will not go through. Paulson said they were willing to take equity stakes in banks. Tie it all up and to me, it seems like the treasury will announce an equity injection into banks that have the most short interest! What a brilliant idea to skewer those evil rumor mongers.

The fact that the market has been unable to rally inspite of being way way oversold is very scary. I saw a panel discussion on Cspan yesterday which was fascinating. There are very smart people out there with suggestions of what to do next. Some of the things possible are

- Another stimulus package
- Another 50bps Fed rate cut
- Nationalization of banks
- Buying up subprime mortgages using reverse auctions (the Moody's economist said this and I'm not too sure how it works)

But for sure, something significant will have to be done to shore up the confidence of international investors. A sure sign of this will be the Middle East weatlh funds putting capital into the system.

A picture worth...

10 yrs of words! Will we see a reaction low to 1050 followed by a sharp reversal to 1200, test for support and then vroom to 1300?

A weekend rate cut?

Is it possible that the markets are rallying today in anticipation of a fed rate cut over the weekend? The yield curve is certainly telling us one is due and today's job report makes it more likely. So why is a fed rate cut such a good thing? The simple answer is that it reduces borrowing cost. Another interesting thing is that it forcibly steepens the yield curve i.e. 10 yr interest rate > 2 year interest rate > 3 month interest rate. Banks and other lenders really like this since they can now borrow over the short term and lend over the long term thereby locking in the yield differential as profit. An interesting tidbit...the auction rate securities market that failed spectacularly earlier this year intended to allow everyone to borrow over the short term. These securities were then "auctioned" every so often to the lowest bidder. Unfortunately, the liquidity crunch meant no one was willing to buy these and so the interest rates skyrocketed!

This looks like rockbottom

From 200 day moving average of # of SnP500 stocks below 200DMA (surprised such an indicator exists!), it looks like we should have reached pretty close to a bottom for the year. Investor pessimism is at extremes, Buffett is investing in solid companies like GE and Goldman Sachs. For the risk averse, do consider a good corporate bond fund like LSBRX. It's sporting never before seen yields!

When fear feeds on itself

An interesting thing is happening in the markets recently which is almost a mirror opposite of how things were just a few years ago. Since most people understand things going up better, it's somewhat easier to imagine how the dot com boom transpired, or how the investment banks/hedge funds could leverage to 30x capital, etc. Unfortunately, the flip side i.e. the compression side of things happens much much faster and is way more painful to watch. A number of hedge funds have received redemption requests from their clients. In fact, the Lehman failure and the AIG near death experience have strained markets to an unimaginable extent, leading to severe margin calls and further forced liquidation!

The VIX ("fear" index) is very high which usually means that a lot of uncertainty is already built into valuations. However, this is the exact time for things to get from bad to worse. Do not be surprised to see another of those whopper down days in the near future. Although I think 3 months down we will be better than now, be very cautious of short term directional bets. Caveat emptor.

Lucky sevens

Last year, a friend of mine opined that Sun stock would hit 7 bucks within a year's time. It was going over 6 bucks at the time and headed higher to about 6.8 before calming down. But true to his word, yesterday it did pass the magical 7! The irony of the matter is that there was a 4 to 1 reverse split and a stock symbol change from SUNW to JAVA in between :(

I can almost hear the board's response..awesome! Let's pay the CEO 11 million.

"Canary in the coal mine" indicators

I wanted to bring to your notice these indicators I have had up for a while now (you would have noticed them on the right side of the blog). They were meant to warn us of an impending collapse in the markets, and from recent facts, they did!

• Oil losing $100!
• 10yr yield falling close to 3.5%
• SnP falling below 1200

So I'm going to state that these are the same numbers I will be looking at to see if we are headed for another near term gut-wrenching collapse. On the flip side, here are the levels for these very same indicators which will tell me we are seeing a healthy recovery

• Oil holding $100 but staying below $120
  
• 10yr yield rising above to 4%
• SnP rising above 1310

Let's see how true they are this time.

The untold story of Goldman, Morgan Stanley

I'm beginning to tie things together and think that the reason for Goldman/Morgan Stanley suddenly choking has more to do with the bursting of commodities rather than just their mortgage crap gone bad. Wasn't it these two firms that scared us with their hand-waved projections of $150 to 200-a-barrel oil? Now, peruse the picture below. This shows the Var (Value at Risk) for various firms from their commodities trading.

Doesn't it strike you suddenly that just as oil craters, the top investment banking firms lose loads of market value. So interestingly, it's a chicken and egg where the very reason commodities imploded was these companies or their hedgie buddies unwinding massive long positions.

What next? In comes the magician Paulson, a former head at Goldman, with his relief package. How much do you think is the market cap of the entire financial sector in the S&P 500? A back-of-the-envelope calculation says that it was about 15% of 30 trillion dollars when the financials were at their peak, so now it would be worth about half that or about 2 trillion dollars. So the govt. could actually buy up little less than half the US financial companies with their 700 billion dollar piggy bank! Hmm. Instead, by buying the toxic waste these companies hold, whom exactly are they helping out? One wonders.

Carte Blanche to the PPT

For almost the entire time that I have been following the financial markets, I have heard conspiracy theorists posit that there was a Plunge Protection Team that stepped in everytime the markets were in freefall and bought up everything in sight in order to prevent disaster. While such stories are great for the movies, I am still a skeptic at heart and am aware that manipulation of markets by the authorities themselves is very difficult. Not exactly the process of it but keeping such intervention under the wraps. However, we now have such a PPT and it will have powers explicitly authorized by the US congress!

Trust. How much do we, the people, have in our government, the congress, the treasury, the SEC? They certainly failed to prevent this crisis and maybe even led to it in the first place! Now they want the authority to buy 700 billion dollars of mortgage backed securities! OMG!! While I have been a supporter of recent efforts to shore up the financial system from armageddon, I am amazed at the audacity of this effort. I think though that the combo of Bernanke, Paulson and Geithner (one an academic, one with a career in the financial services industry and one a longtime treasury official) is one of the best to tackle this situation. Yes things could have been done all along to avert this scenario but as Bush said (puke...i agree with him on something), we need to confront this situation first and then make sure we never ever get here again. Something still unclear to me however is on what basis and price they will buy these securities since there exists no regulated market for them. And if they are picked up at depressed prices as I hope they are, banks will have to mark down their other holdings to market immediately thereby further weakening their balance sheets in the process. Unprecedented times for sure.

AIG, markets

I just saw Charlie Rose's interview with Hank Greenberg, AIG's former CEO. I think the critical differences between LEH and AIG are

• Assets: LEH was not just illiquid, it was insolvent. There was a hazard with rescuing it in that it was throwing good money after bad. With AIG, most of its trillion dollars in assets are really good. So a loan can be considered as a calculated bet. The loan is supposed to be a bridge loan until AIG can secure loans from elsewhere (SWF's, private equity) and sell off assets at non-firesale prices.

• Too big to fail: A failure would have caused other institutions to immediately write off all their assets that were insured by AIG creating a ripple effect and seizing up markets across the board.

As far as market technicals, a rally from here would not be just about short covering. This is a way pessimistic permabear view of things. I think getting through this time brings more clarity in the financial markets. Institutions that were the most levered have already failed and FNM, FRE have been nationalized. Excessive risk is being punished severely. And for those waiting for GS, MS to fail...i think it's going to be a long wait. This is how bear market rallies are supposed to happen.

Define ViXeN

Google search define: vixen

• a malicious woman with a fierce temper
• a female fox

We have an analogue in the financial world too! Can you guess? It is
^VXN or ^VIX depending on your taste :)

I just wanted to present a recent graph of the VXN and explain what it means.

See the recent spike and compare it to prior spikes. Does it tell you anything? Now you may wonder why volatility is a good measure of fear in the system. I mean, even if the market is jumping upwards in leaps and bounds, it should be volatile...right? But essentially, volatility represents risk in the pricing of options and other derivative contracts. So a higher volatility essentially means that the sellers of these contracts expect large price moves to occur in the near future. At market tops however, what sets in is complacency and not volatility..funny eh (reminds of an obese fat man living life large without worrying of the future risk he's creating for himself). So there. A volatility spike either ways means that we are most likely at a turning point in the markets when there is immense fear or complacency in the financial system.

Terror strikes again

Serial blasts in Delhi now. What you can do to educate yourself and fight terrorism. Articles specific to terror in India. Did you know that Dawood Ibrahim is a son of a police constable and is of Konkani origin, and that his son married Javed Miandad's daughter! Any idea how we can find out which businesses he deals with and boycott them? Recent BBC news article on Bollywood taking ideas from real life.

Detailed article coming soon...

A quick list of funds I track

Most of us are confounded on how to choose quality funds and how the hell do we decide that? Let me state at the outset that I do not personally believe in indexing in this market and in the future (just see where you'd have been with a SnP 500 index tracking fund). My rule of thumb while choosing funds for my 401K has been no-load, no transaction fee, low expense ratio, minimal to low early redemption fees, <=5K initial purchase requirement, and then performance going from 3 year, 1 year, 1 month. So I present a list of funds for your consideration. I will not post all such funds I track restricting myself to 5 right now with a short commentary on the risk/rewards, volatility and anything else I see fit. Here goes.
RYVNX : Rydex double inverse Nasdaq 100. What a way to start right...an index fund :) The reason I like this is it's one of the few ways to hedge your portfolio in a down market. Note..shorting is not a good long term strategy so use it judiciously and mostly to protect potential losses in other funds
GAAEX : Guinness Atkinson Alternative energy fund. It got whipped 7.4% yesterday so definitely a volatile fund. And very very focused! But I like the sector a lot although it sports high P/E's.
LSBRX : Loomis Sayles Bond Fund. It's not a "safe" bond fund since it's mostly in corporates and not all are investment grade bonds. But the management is almost the best around so definitely something to think about for high interest income while tolerating some risk.
CGMFX : Ken Heebner's CGM Focus Fund. This has also got smashed recently and that's because Heebner makes big bets and holds only 25 stocks at most! But I'd argue he's the best manager around and he has delivered before.
UNWPX : A very focused precious metals fund, investing in miners and the like. I really like this sector especially after the way it's been pummelled recently.

Bike ride calorie burn contrasted with car driving costs

View Larger Map

This was a really nice 12.7 mile bike ride I did today in little less than an hour. There was one climb on Stevens Creek that I just could not surmount and had to walk my bike. I think I burnt 500+ calories atleast.

So now, how much do you think it costs to drive one roundtrip mile. Included in this depreciation of the car due to that one extra mile driven, insurance cost, etc. My back of the envelope calculation gives me about $1 per "roundtrip" mile which means that if you decide to spice up your life and live in the city instead of the insipid south bay, you'd be spending 35 bucks to just drive once to and from work! Much better to take public transport then, even if Caltrain starts costing a little more.

Personal risk and "limited liability"

Finally there's someone smarter than a 5th grader. At the same time that she became the first person to ever win a million dollars on the TV show, she exemplified fruitful risk taking. Interestingly however, she had gallantly decided in advance to donate the money she made towards education programs at Georgia's school, she being their benevolent superintendent or something (need to fact check this). Now you may be wondering how I plan to segue from this into the title of my posting and whether I am chiding her (which I am not). Here it is. I think that if she was playing for keeps, she would have thought much harder than she did about gong for the million dollar question and would have chosen to walk away with the 500K instead (the reward drops to 25K if you get the last one wrong). She made a statement to the effect that she was exemplifying risk taking to the youngsters watching her and was setting an example for them. In fact, I say that had she taken the 500K and walked away, I'd think of her as way way smarter than a 5th grader!

The point I'm trying to make is that it's easier to take bigger risks when you're playing with someone else's money and your personal risk is limited. Remember the guy at Societe Generale who was the prime cause of the emergency Fed funds rate cut in January. Or even better, Brian Hunter, who single handedly forced a big commodity hedge fund to go belly up...apparently this guy is now making big bucks for some other fund. (I want to give an honorary mention to Nick Leeson who brought down Barings Bank....honorary since he did it through really crooked means so that doesn't count for the particular case I'm trying to make).

I extend this analogy to the folks at Freddie and Fanny, Lehman, Bear Stearns and the many mortgage lenders who made a quick buck for themselves and got out relatively scot free, while leaving us the taxpayers to foot the bill. The one solace I find though is in the newsletter from Third Avenue Value Fund in which Whitman (the lead manager) talks about the substantial amount of his own money he's put in, thereby taking a personal hit from the big losses to his shareholders (reminder to self...that does not mean his fund will do well so pull money out of this one as well).

Btw..sorry for one more post with only text. I will try to include a picture or two every now and then to spice things up :)

Interpreting market action

The latest trend in the market is sell all "stuff" stocks (commodities, agri, shipping, etc.) and buy financials, housing and consumer discretionary. Isn't this insanely counterintuitive? If the market is pricing in a downturn, there is no reason why the most toxic sectors are up. An interesting thing to note is the massive run to safe treasuries (as seen by the decrease in the 10 year bond yield).

My take on all this is that it is not news related but the news does exacerbate the action. Gustav was a dud and that put more pressure on hedgies that were tied to their commodity longs, and incidentally and also short financials, housing and consumer discretionary! So I think this is the classic unwinding of positions trade with some hedge funds blowing up, having to sell their long commodity holdings and cover their shorts, and money is being put exclusively into safe treasuries. I do think the dollar strength has something to do with this but come on..if the dollar is up, our exports are going to be crappy which means crappy economy leading to more weakness (this explains some of the tech weakness though).

Hence, to conclude, I believe if we go down now, it will not stop for a while and will include all sectors under the sun! But my money is on all boats rising (due to a falling dollar as well) and breaking through 1300 on S&P pretty soon. Let's see.

Idea factory: TV show chat room

So the idea is to have a discussion portal while you are watching a TV show. For eg. you were seeing the Democratic convention and wanted to discuss what Mrs. Obama was wearing. What better way to get on a forum discussing the convention and maybe join a subset room (there may be a political room, a fashion room) and you post your thoughts, get feedback, maybe find out where she got that dress and get one for yourself! Make a note, save it, or go online and shop for it right then and there! I'm looking at this as a potential Apple Iphone app.

Idea factory: Cubicles effect exercise machine

How many hours do we spend in front of the comp at work, where are fingers are definitely doing their bit but the rest of our body is at rest. Hence i thought of this simple exercise machine..it could be like 2 pedals that you push down on (not like cycle pedals but more like paddle boat pedals). And you can keep track of your progress in many ways. One way i envision is a reward system. On the rowing machine, this usually takes the form of you blowing air on yourself. At work, it could be a meter showing you your current speed and calories burnt, power spent or even better, you let it know how many calories you'd like to burn to earn your next treat like a bag of chips and it lets you know how much further you have! Maybe such a machine exists? If so, add what you know in the comments section. As always, I have too many ideas but not enough motivation to start working on them and take them through to fruition. So if you are really interested in something and would like to collaborate, give me a holler and we can sit down to discuss about it. Remember..1% inspiration, 99% perspiration.

The end of the beginning and the beginning of the end

What an eye catching phrase! I picked it from this article in the Independent. In it the author posits many bear case scenarios for banks as they try to raise capital to shore up liquidity. If right now is the end of the beginning, I think (post-Gustav) we are set for a relief rally...that would be something! But alas, it would be a head-fake and things should begin to unravel soon after. When will it all end? I do think the last bailout will be the fourth option (from the Independent article), direct state intervention to support lending! Levels to watch for upside bear market rally targets..1350 on SnP, 12250 on Dow, 75 on the BKX. And the breakdown..I think it should take us to 1100 or even a little below (on SnP). Ain't I papa bear :)

A Phelps like comeback for gold

If this article in TOI is to be believed, Indian gold demand has been surging recently. It says demand increased 10 fold from the start of the year which is a little hard to believe but I don't know the numbers that well anyways. However, I think if it's seasonal factors that affect demand, wouldn't there be an arbitrage opportunity in storing gold using a low interest rate currency (after hedging for some other price movements like exchange rate, interest rates, etc.) and selling it in peak season?

Coming back to my thoughts on inflation in India running at a 12% clip and the POG, I'm beginning to wonder if the gold price can decouple from the price of oil and the US $ and continue to hold steady or rise in spite of a fall in those. Well, I'm going to sell some longs into strength at the 50dma and maybe let the rest ride (or set a downside stop).

Business idea: Mobile search coupons

You're in a neighborhood and looking for a Thai restaurant, you run a google search by distance from current location (known via gps) and it brings up a list of restaurants - and you have to make a choice. You like one that's a little farther away but you're not sure. Now how about if the restaurant had a 10% coupon redeemable within the next 1 hour? Wouldn't that affect your decision? So the business idea is essentially being the provider that interfaces between these local businesses and the customer. Think about it,and get back to me if interested in delving deeper into this. The reason i need help is that I have ideas but ideas are a dime a dozen - I don't have good follow through. I know this weakness and hence want to compensate for it by teaming up.

An idea from my bike+VTA commute

I got an idea from personal experience and doing some reading. How about a mix of personal and public transportation? I rode my bike to the train station, got on it with the bike, got off and biked to the destination. So why not have some cheap electric bikes to do the last legs, and then have trains for the long haul. You can either buy your own bike and pay more for carrying it on, or there can be a ride-share service at each station. Sounds like a great idea to me. I wonder how the economics of something like this would work. Probably have to start seeing what an electric bike can/cannot do - you'd need approx. 5 miles of charge and be able to recharge at home and at the station. Whatsay?

Cram time

I just registered for the CFA Level I exam to be held in Dec! Wish me luck guys...I believe there's more than 5 books to chow down!

The bigger and maybe smarter market

They're not quite as sexy as stocks, but bonds are a much much bigger market than stocks. And when bond market participants see something different from the stock market, it is important to take notice. That leads me to a couple of articles, one from an investment manager and another in a more popular publication.
Something is about to give
Bond market jitters return

I won't go into details as both those pieces are pretty well written. But I will include a graph which sits at a critical juncture. The yield falling below 3.8% indicates severe flight to safety, and the spread from other rates like mortgage, investment grade bonds, etc. show extreme strain.

More theories on gold

To me, the recent rapid decline in the POG (price of gold) has not only been surprising, it's been mindboggling! Pretty much every reason ascertained for gravitating to gold has been shown the door. Cases in point...flight to safety (russia/georgia, pakistan), inflation (in china, india and now 5% yoy in US). Now simultaneously, it's interesting to see that US treasuries are getting bought at a rabid pace. However, yield spreads on the 3 month to 10 yr have decreased suggesting more pricing in of a recessionary scenario.

What I think is that many people, esp. those who got in on the trade this year, wear caught in a wave of panic selling. Price is almost always determined by supply and demand, and that's more so in the case of commodities like gold. Sources of supply are the trigger happy hedgies and others who got long recently like many etfs as well (+ maybe some central banks?). As for demand, it is supposed to be the slow season esp. in India. Another reason about Indian demand I believe is that the $/Re has recently appreciated by almost 10%, making the impact of the $ price decrease that much lesser. Also, with rampant inflation and the RBI raising interest rates, I think there's an incentive to lock in higher rates through CD's and the like. Interestingly, I think that when inflation begins to stabilize and even subside a little, and/or the RBI stops cutting rates, we should see a solid pickup in interest. Add to it the seasonal factors as mentioned by the commenter in the previous post and you have what I think makes for a great case of POG going up over the next 6 months or so. I certainly hope it does since I'm doubly long gold! (DGP)

Hot metal

Check out this news story...Man buys Chevy with small change. Amazing!

In fact, it's possible that the metal in the coins was worth more than the value of the coins themselves! Interestingly, this can't happen with paper money. Interesting analogy for a hyperinflating world?

Gold demand from India

This is question...does anyone have an idea of the factors affecting gold demand from India? I mean what affects the marginal increase or decrease in consumption? And what are the seasonal factors? The reason I ask is that is that with inflation running at almost 10%, when gold prices don't rise as much relatively, does that affect demand positively? On the other hand, if demand is coming from poorer sections of society, they may not have the money to buy the gold. So it's a complicated issue. Post your replies in the comments section if you have any thoughts. BTW, i think gold is a good buy for the 1 year timeframe. I like to play with leverage so I bought DGP, a double long gold ETN (exchange traded note) that's leveraged 2x to the POG (price of gold)

The mighty dollar

I'm sure the keen ones (:-) have been noticing how certain things have been moving in unision...dollar strength, euro weakening, oil and gold weakening, US equity strength, etc. Well, I think we are on the verge of the ending of that phase. Check out these graphs and see how they are stretched at the extremes of their bollinger bands and/or at major resistance/support. I expect dollar index finds major resistance at 74.31 and high rsi, euro macd moves back to normal, gold find support at 200dma low rsi, and moves back up to atleast test 50DMA. In short, I think long commodities soon. Here are the graphs...as always, for any questions pls post comments on the blog itself and i'll answer them to the best of my knowledge.

Dubya's parting gift

A failed administration that entered just as one bubble was about to burst, inflated another bigger one and leaves with a terrible economy, a sordid housing market, a record budget deficit, an unsuccessful campaign in Iraq, absolutely no achievements on the environment, broken ties with erstwhile allies. They screwed up with Guantanamo, appointment of justices, landed a lot of senior Republicans in the dog house, lost the Congress soon to lose the senate and the presidency. But to top it all off, Osama is still at large. George will certainly want to salvage his reputation but he can't do anything about it. Or can he? How about Osama's head on a platter? Wouldn't that be nice for a parting gift....to himself?

1984

From BBC news

A Chinese teacher has been detained for posting images on the internet of schools that collapsed in the Sichuan earthquake, a rights group has said.

Human Rights in China said Liu Shaokun had been ordered to serve a year of "re-education through labour".

Mr Liu was detained for "disseminating rumours and destroying social order", the group said.

Communist and pseudo-Communist countries (China and Russia respectively) have gained a lot from the capitalist system, but refuse to give up their old ways. Many years ago, in my days as a rebellious youth, I used to think that a benevolent dictatorship was what would do India a ton of good but I am now convinced that nothing can be more putrid and worthy of contempt.

Why bring this up in an investment forum? To highlight the fact that when things get testy, especially with regard to international agreements and natural resources, the future holds quite a bit of tumult. BRIC may have worked out well so far but I urge caution when dealing with the commies.

The false bottom and other predictions for the future

Making predictions is a fool's game. But a rational fool can make some guesses as to where things can go based on the current data in hand. So with that, I shall present what I think is the likely course of US housing prices, and with that, the stock market.

Housing is the central theme with the current market dislocation. That's because it is the only instrument where such massive amounts of leverage can be had (the entire market is worth about 20 trillion dollars of which half is still to be paid off and held as mortgage investments of various forms). Now, let me present a graph of futures contracts for housing prices. I will not try to rationalize or counter this (since it's just a current futures graph) of this but it does seem to match with my current thinking that I shall explain below.

It will get worse before it gets better. At present, the belief is that later this year the fed will start raising interest rates. I think the $ is presently responding to this, and stands at a critical juncture.


This nascent strength in the $ is what has been hemorrhaging commodities recently and most of them are currently at strong support levels. I do think though that we have one more leg down in the $, when the conviction steps in that the fed will not raise interest rates (leading to one more leg up in the commodities). See the action from late last year to earlier this year. My thinking is that we should see another break down to about the 67 level by October or so. This will mark the top for commodities and the bottom for equities, and the big one coming 6 months later, the false bottom for housing.

(to be continued....below are just notes for my reference)

The actions by the government and the fed, treasury will definitely help with the stabilization of the housing market. Why 6 months? New president, new hope. But more ARM resets leading to final bottom in early 2010. Then flat prices for a year or two. Next real estate bull will reach its peak in 2018 or so!

The reason a bounce will be violent

I can't predict when it will happen, but I do think that when it does, it will be stunning, sharp and solid. Prior to that, there will be basing action, testing of support and retracing to prior lows. An important factor is that the lows are tested on low volume and hold. I think a close for multiple days above 1280 will be the harbinger of things to come (note that I'm not saying this is THE bottom for the bear market. We have a long long way to fall in the 1 yr timeframe. This is a forecast in the range of 2 weeks to 2 months timeframe). Now, the reason why I think equities will move up nicely are

• The usual ones: A negativity bubble, massive short interest, news media screaming armageddon, investment forums crowded with doomsdayers
  
• Long only mutual funds: This is the way most funds are positioned, especially of course the index funds which draw a constant stream of investment money.
  
• Takeovers of US corporations, buying of US property by foreign entities (throw in some ideas of takeover targets)
  
• Sentiment shift due to the olympic games and a positive reaction to the potential US election outcome
• Fed and treasury guarentees, bailouts, establishment of a highly liquid covered bond market
  

OMG

What a nutty market! Long commodities, short financials has been turned on its head in the last week! If it gets insane, I think ^BKX (banking index) > 75 will be very very difficult. Looks like India China are getting back into the game. But I still think fertilizer, agri, metals and resource stocks are going to get back into the action soon. And the financials trade should be done with BKX 75, XLF 24.

2% more

I'd give the indices about 2% more until this bear market rally exhausts or tries to atleast test the downtrend. 11800 on the DOW, 1305 on the S&P and 726 on the Russell. Other levels to watch are 33 for Wells Fargo, 22.2 for XLF (financials spider). Well, oil has seen that mighty fall and if buying doesn't pick up now, we could soon see 100 but I very much doubt that will happen before November.

Horrorshow

What a scary trading day today has been. I have been up following the markets since I saw the asian markets taking yday. Is the carnage over? I swear I have no idea! There are strong support areas in the dow close but still almost 500 points below current levels. See the oil drop? But it's still being supported by the dollar drop and we are entering the hurricane season. When those are gone, then what?

Till now, it's mostly been a financials led story. The consumer recession has not even started yet! That will be the real tale, which should happen sometime next year. I keep trying to tell myself to take a longer term perspective but it's very difficult to do with trader fingers. Hope this info helps some of you stable minds out there.

A month later

Been a while since I last posted. This post is specifically dedicated to the person who encouraged me to continue posting in spite of the poor blog comment activity :)

The central issue confronting capital markets right now is the financials. I have tried bottom picking these and been burnt but at some point you have to wonder how low they can go. Sure FNM and FRE may not be the best of breed but believe me, IBN and HDB are not in the same boat as these.

And then there's oil. It's a scare trade right now. The only thing i can see is some near term weakness followed by another run up and then a collapse later in the year. Bubbles are meant to burst and don't believe anyone who tells you oil is not a bubble. Sure it's a supply demand problem more than speculation, but the supply is getting destroyed and more so, longer term perceptions are changing which will afftect the future curve of the oil price. So when oil again gets into backwardation (future price lower than near term price), there will be tremendous incentive for companies to dump oil. Other factors to consider

• Congress acting against speculators
• Iran/US reaching a deal on their nukes, Israel/Syria coming to a peace treaty, Nigerian rebels getting more oil profit share causing them to halt attacks
• Demand destruction
• $ appreciation

On the flip side, we have exactly opposites of the above and

• Hurricanes
• More fields going offline for other reasons

That's all for now folks. Now, please comment. Ask questions, post ideas, make this interactive instead of a monologue.

Squeeze, satisfy, scrap

I have a bad feeling about this market. I think it's all set to make a fool out of most of us. My belief is that in the next couple of weeks, there are going to be a number of winds blowing and the direction is going to change rapidly. You have many things happening..options expiration, end of quarter, hedge fund redemptions, momentum stocks going nuts, financials getting taken to the woodshed, energy, materials, fertilizer on a roll. Well, things are going to change. As for direction, my guess is a near term short squeeze followed by institutions taking profits and then a selloff that ends at around 1300. Upside target...about 1375 which should happen tomorrow (Wed) if the crude inventory report is good (buildup of supplies). For all I know, maybe the biggest fool will be me!

Near term bottom?

Atleast that's what the CBOE options equity put/call ratio seems to be telling us. See the last few times when it spiked. Well, it's doing to same right now. So generally, the tendency of market players is to buy equity calls and then hedge using index puts (see, they think they are smarter than the general market so their picks will do better). But when things get inverted, which happens quite rarely, it shows there is an inordinate amount of pessimism out there.

$199 only

I posted a comment Matt Trivisonno's blog on an iPhone post he put up regarding the underpricing of the iPhone. Here it is...

I respectfully disagree with your take on the price of the iPhone. I was surprised to see the phone being priced at 199. My main concern was that if many phones were bought and unlocked, then there would be no recurring shared revenue for Apple. However, I can think of a few big reasons for why this price makes sense:
- The component prices have dropped substantially. I'm sure Apple has struck agreements with suppliers to drop costs promising exclusivity and volumes
- They are not coming from a position of dominance. I think Nokia, Samsung, etc. are hot on their trail and they want to have a captive audience. The phone is THE device of tomorrow. PC's are so last gen.
- See this post in Nytimes blogs. Looks like Apple will still be making a decent buck from the phone. Now I need to figure out how they will make sure it cannot be unlocked, or make it unworkable if it is.

I'm going to give it more thought and add a couple of more points to this. Note that although AAPL dropped yesterday, it recovered pretty nicely today and is mightily outperforming GOOG, etc. from the lows. I think yesterday was sell the news, force buyout of the callers (there P/C ratio for AAPL was heavily skewed to the call side)

PS: Ppl..i need this to be more collaborative if I'm going to have the enthu to keep it going. Please comment and/or publicize.

Bouncing checks to bouncing banks

Time and time again, I have had it proven to me that picking bottoms is never a good idea. And the contrarian at heart that I am, I refuse to give up. So I thought a couple of days ago we would see a ^BKX bounce back to 75. Nope. (I lost decent money on this trade and hence the bouncing check reference).

But at some point, things get so oversold that calling a short term bounce (given no extraneous black swan factors) is a safe bet. Consider this...the banking index is challenging lows going all the way back to 1999! Its RSI shows it's way oversold and it's at the bottom of the Bollinger Band! And then consider this Minyanville article (which also btw was early). So taking all this into account, I would think that a bounce back to test the underbelly of that 75 line is a strong possibility.

A near term scenario

A scenario I see unfolding over the next week (until next turnaround Tuesday) is that we could get a great shift out of commodities into tech! The VXN (Nasdaq 100 volatility index) seems to have hit the top end of its recent downtrending channel. Monday is iPhone 3G day. If the job report on Friday comes out good, we could see the $ rise and crude pull back violently and that money move into the tech arena...maybe taking the NAS even upto that 2600 or so level in a short span! Moreover, banks look set for atleast a small bounce...BKX back upto 75? (Note: I really think IBN/HDB are overdue for a good bounce anytime now).

From there though I think we will drop, and drop hard! See....hard for me to get too optimistic :)

Risks

"The three biggest risks to the market, in my most humble view? A sustained rally in the greenback, sharply lower commodities and a breach of BKX 75"

I picked up the above comments from this Minyanville article.

Well guess what...BKX fell below the 75 level today! While that's not a recipe for disaster, it does raise caution flags. In addition, I am seeing many more news stories dedicated to

• Crude oil: Iran's storing crude in tankers, gas consumption reducing in face of rising prices, Asian countries passing on fuel price increases to the people, etc.
• $$: Pension funds are bullish on the $. A lot of hedge funds are apparently still short the dollar. Now just imagine how that trade would unwind further pressuring commodity prices.
  
• Banking stocks: We are fast approaching another wave of bank balance sheet issues. When that shit really hits the fan is not known but XLF is also challenging march lows, so it makes sense to be cautious. It's very important to remember that a liquidity crisis can cause tremendous short term price volatility (declines) as in early March.
  

Well, Apple is soon to release the 3G iPhone, so that's a near term +ve. The stimulus checks should have started kicking in to abet consumer spending. But what happens when all this dries up?

Slick oil or oil slick?

I've been following oil and it looks like the price is finally getting out of the contango it has been in for the last few weeks thereby reducing the incentive to hoard the commodity. For futures prices, see
http://online.wsj.com/mdc/public/page/2_3028.html?category=Energy&subcategory=Petroleum&contract=Crude%252520Light%252520Oil%252520Comp.%252520-%252520nymex&catandsubcat=Energy%257CPetroleum&contractset=Crude%252520Light%252520Oil%252520Comp.%252520-%252520nymex

A couple of other things that can break the oil market are
- US inventories: The demand side is equally important as the supply, and from what I see, it should be getting weaker. Now when the hell will that show up in inventories? Tomorrow??
- US dollar rising since 10 yr yields are now approaching 4+ %: There are very important levels in the 10 yr yield at around 4.06%. A rise above that, and we should start seeing some real $ strength as money flows to capture that yield.

However, I don't think a fall below 100 will happen anytime soon. It's true folks...the demand has been really strong from Asian countries and the Fed is flooding the system with $$. But $200 oil within this year? I think not!!

NOTE: Be very concerned. 130 oil sucks but even 110 oil is a significant tax on the consumer! So expect to start seeing real weakness in the consumer side of the economy sometime later this year. I hate to be a bear but that's the way I see it right now.

Nice S&P 500 trading range plot

I find this very interesting. Make your own conclusions. Mine is...we will see a bounce now and I don't think we get as far as the upper trending channel but hit the downtrending line, and then break down hard!

GE

An investment recommendation..I was not going to post about individual stocks, since I think (and know) that they can be extremely volatile, and its hard to know the right valuation of a company - even the pros mess up big time. But with GE, a company that always met its earnings estimates to the penny, except for last quarter, i think the time to buy is NOW! It's had such a massive pullback that it's at 5 year lows! Now this is a pure play on the health of the global economy. GE owns a very diversified business portfolio, be it nuclear power plants, NBC, manufacturing turbines, medical imaging etc. etc. It comes with a sweet dividend of almost 4%. And this stock has tumbled dramatically in the last 2 months to now trade at a measly 14 times trailing earnings! I say BUY BUY BUY, with the stock now at 30.4.

A neat plot to show how overbought we are, with explanation

Ok people. Here it is. Now this is a plot that will need some explaining. Of course all of you know the S&P 500 index which is plotted on the right axis. The other graph plotted using the left axis is the ratio of the VIX to its 50 DMA (50 day moving average).

VIX (use ^vix is yahoo finance) measures volatility, or in simple terms, the fear factor in the market. When it gets really low, it means that there is not much fear out there. By itself, the volatility going low would not be an issue, but what is a big concern is that it has gone so much lower than the mean to the extent that it's not outside its 1 sigma std. deviation! This is serious optimism on the part of investors! An moreover, this doesn't even include today's datapoint!!!

Close to pulling the trigger..

For the impatient ones (like me), I'd say go ahead and buy some QID/TWM/MZZ. If you want to really wait and pick the top, and 1% move from here (Nas currently at 2520, S&P at 1415) is possible.

Getting there

We are getting close to the near term top. My estimate says that it will be between 1430-1440 on S&P and close to 2535 on Nas. Check this post from one of the people whom i respect. Although we should be headed for a serious decline in 1 or 2 weeks, I see a big pump and dump happening here where the retail crowd gets really suckered in. In the link, you'll see a graph with a decline in the VIX:VXN ratio between Dec 17th to Dec 25th. That corresponded to the Nas rising from 2580 to 2720! So I encourage selling longs into strength, urge caution while going short and be patient!

When will oil finally cool down?

I just can't believe the run crude oil has had in the last few weeks. Granted that 70 to 100 had its reasons but this latest push is simply nuts.

The one indicator to watch in my view is the dollar index. Notice it broke above it 50dma and is now consolidating. When it resumes its next run, which i think is up, it should quickly move to about 76 and that should atleast pause the oil run short term. Another thing to watch is a tightening of margin limits for speculators that is surely in the cards.

Further down the line, it's going to be supply demand fundamentals doing their work. Recession is going to reduce demand, prices themselves are going to eat into demand, more investment will come in alternate sources of energy.

Technical and fundamental analysis

Two analytical models

When the objective of the analysis is to determine what stock to buy and at what price, there are two basic methodologies.

1. Fundamental analysis maintains that markets may misprice a security in the short run but that the "correct" price will eventually be reached. Profits can be made by trading the mispriced security and then waiting for the market to recognize its "mistake" and reprice the security.
2. Technical analysis maintains that all information is reflected already in the stock price, so fundamental analysis is a waste of time. Trends 'are your friend' and sentiment changes predate and predict trend changes. Investors' emotional responses to price movements lead to recognizable price chart patterns. Technical analysis does not care what the 'value' of a stock is. Their price predictions are only extrapolations from historical price patterns.

Investors can use both these different but somewhat complementary methods for stock picking. Many fundamental investors use technicals for deciding entry and exit points. Many technical investors use fundamentals to limit their universe of possible stock to 'good' companies.

The choice of stock analysis is determined by the investor's belief in the different paradigms for "how the stock market works".

As for me, I trade using both of these in different accounts. In my trading account, I rely more on technical analysis and in the medium to long term account, I rely more on fundamental analysis. Both are very powerful and at the same time deficient in their own ways!

Time to play some qidditch, make some quid

Get it? QID, ultrashort QQQQ. I'm waiting for that final burst of energy from the QQQQ, looking for them to come closer to the 50 target before dipping into QID. I'm doing this more for speculation but it would be a good idea for other to hedge their positions right now. I see only about a 2 to 3% upside move in QQQQ before we go back down atleast 5 to 10%. Then what? Well, we shall see when we come to it.

Some thoughts for today

CSCO will make or break this recent leg, but i think that when oil starts weakening and money pours out from commodities and into financials, tech will this rally really falter. What could cause the commodity collapse? USD? Opening of the SPR? OPEC saying they will increase supply? I am really concerned how the USO has rallied to almost 99! I think the QQQQ gap at 50.26 is a real target, and more so if I remember right, 2535 was an important point for the nasdaq last year.

Welcome

Hi everyone.