Knock Knock. What's up? The yield curve.

I was looking at the yield curve this morning on US Bonds and something looked odd. The yield on the 3 month is lower than the 10 year. In a normal economics class, nothing may seem wrong with this situation, but in the recent "magical inverted yield curve land" that we have been residing in, it is something different. With the exception of the 2-year, all the maturities seem to be lining up in an orderly rising fashion. Unfortunately, the un-inversion (normalization) has come at the expense of the 10 year increasing faster than the is 3 mo decreasing. Why do all good things come to an end? Because some good things can't defy the theories of economics forever.

In a perfect world, why would anyone want to risk having their money locked up for 10 years when they could only have to put up their money for 3 months PLUS get more change back in the end. Their is little incentive for long-term investment (except for sound financial planning). I think we are one step closer to finding out way out of interest rate mania. Hopefully we can start focusing on company fundamentals as opposed to moving the ENTIRE market based on interest rate hopes.

Three Strikes

Not much time for a post tonight. We've had three down days which looks like a record. We've given up 300+ points in the past three days. I wouldn't be surprised (and consensus seems to support this) if the Dow closes up between 30-40 points. However, I think it is most likely that the market will continue to follow the 10 year. The weekend has come at a good time since it gives everybody a chance to get away and come back with a fresh mind.

Uncle Ben

Can you believe that some people are blaming him for the recent drop in the market? Look at him. Can you really blame that face? He hasn't said anything new. People just seem to be getting a little sad that a rate cut might not be as close around the corner, treasury rates have inched up, and the ECB just raised rates. Once again we are addicted to interest rates. Granted they ARE important, but isn't there more to the economy?

Clear Channel's chart looks like it might be taking a fall downwards. It is starting to fall from overbought levels and the candlesticks are forming a top. Lastly, there is a crossover on the MACD.



Carnival is another stock that has dropped from overbought levels. There was a large gap down today and given the previous resistance level at $48.50, I think we could easily see a retracement at that level.


Since mid-March, Life Time has been trading in a channel. The CCI has done a good job at tracking the peaks and valleys of the channel and it look to be on its way back down. Look for it to remain between about $49.25-$52 or watch for a breakout/breakdown. This seems to be one of the few stocks moving sideways as opposed to shooting to the moon.



As of this writing, it looks like most of Asia is in the red, but the CME futures are glowing to the upside. It should be interesting to see what things look like in the morning.

X-Ray Vision

Don't you wish you could have X-ray vision? How great would that be to see through anything. Granted it wouldn't do anything for stock picking, but it would still be awesome. I would throw in some pictures, but I wouldn't want to get flagged for "inappropriate material." Plus, it just leaves more room for stock charts.

Before I start pasting up charts, I just want to reiterate why I think technical analysis is so important. In short, fundamental analysis along gives you a great rational picture of what is going on. Unfortunately, the market the market isn't always rational. Heck, it probably isn't rational half the time. The market is a mixture of fact and feeling. The feeling part is where technical analysis comes in. When you look at a chart, you have no idea if you are looking at a profitable company or not, but you can get a feel about how the investing public feels about the stock. Once you can work fact and feeling in together, you are set to starting making more rational decisions.

Now for some charts. Here's a look at the SP 500. I would show you the Dow, but I despise the Dow. (That was in another post.) Here's three observations, one per section of the chart. Once we passed south of the 70 RSI level we have risen and bounced back down off of 70. Next, there seems to be some resistance building around 1540. I know we are in uncharted territory and don't have any resistance above us, but it seems to be either stalling or pausing. Lastly, we have a divergence on the MACD, which signals a possible reversal.



Next - Dell. Dell has moved near overbought territory on the RSI chart so it will be interesting to see if it can break through 70 and move higher or bounce off and see the stock take a tumble. Looking at the last two candlesticks, we have very small bodies with a longer upper and lower shadow. 27.50 seems to be the upper boundary, but the candlesticks show some indecision. The MACD is essentially flat, with a slight downward bias. Given the chart, I would say that the upside is going to be limited for Dell in the coming weeks, unless, obviously, some great news is released (fundamentals!!).


Starting with the price chart, I don't see nice trend like in many of the other charts out there. It does look like it has been bunching at the bottom of a recent range so an upward movement wouldn't surprise me. The RSI has the overbought/oversold at about neutral.


Based on a previous post that I had, Honeywell has had an excellent correlation with the Dow over the past decade and shorter time frames. It spent some time overbought for a bit and now looks to have bounced off the 70 mark. Also, it looks like a double top is forming. The MACD is trending down and given the strength it has show over the past 6+ months, I would expect a bit of profit to around 54, if the broader market begins to soften.



For full disclosure, I own short Dell and long Intel currently. It is hard to follow either fundamental or technical indicators in this market. The rally has had such a broad base, everything seems to be moving up regardless of the fundamental news or technical chart setup. Good luck.

i This and i That

Well after some time off, I guess it's time to jump back in. Luckily, this market is in autopilot. Until something big happens or the market starts to settle into a range, there isn't a whole lot to talk about. We've had two large drops in China followed by weakness in the European markets that have lead to a weak opening here. However, like a pitcher shaking off a bad sign, we have powered up and ended the day on strength. I could throw up some charts, but until this constant broad based rally ceases, the safest place to be looks like big to mega caps.

One topic that has been bothering me is this iPhone. The iPod is probably one of the most significant technological revolutions in history (not quite in same category as the wheel, seems just as popular). It has caught on to such a widespread audience it is amazing. I think Apple might be bitting off a little more than it is ready to chew.

Let's look at some of the Pros and Cons of the iPhone.

Pros

• It looks cool.
• It begins with "i"
• It has a nice, bright, sharp touchscreen
  
• Integrated audio player
  

Other than that, it is basically not that different than any of the other audio/cellphones on the market. Unfortunately, I can think of a lot more Cons that make me think twice about wanting to pick one up.

Cons

• Only control though a touch screen. (I've tried this before. Not the best in every circumstance.)
• No 3G service built in. (Like looking forward to dial-up.)
• Only available through AT&T. (Good for AT&T.)
• Price seems a little excessive for the average retail buyer. Not appropriate for business users.
• What happens when something malfunctions. You're not out your audio player and your cellphone.

Bottom line, the iPhone is a creative concept that is definitely visually appealing, but I don't think it is quite really for iPod like success. Once Apple works out the bugs, fix some of the above mentioned feature issues, and gets the price point down, I think we will really see this thing take off.

Despite all of the issues, don't expect to see many of these sitting on shelf without an owner. The hype is way to high for these to sit around. The only question now is to see how the reviews come out.

Back on the Fire

Well after a long weekend trip, not much to say. It looks like the market is starting to get tired. It is not exploding for no reason like we have seen in the near past. We have some decent news coming out this week. The GDP should be a big event since that will drive thoughts on future interest rates. If anything has proven to be able to move the market, it has been the market's feeling on interest rates. On that note, we have the minutes from the past FOMC meeting being released. That should give us a better idea about the true feeling of the FOMC. We seem to be at a pause. The only question is up or down from here. I think we'll be able to answer that question in the next week or two. I think whatever mood develops in the next two weeks could prevail througout the summer. I personally expect to see some time of correction to get prices back down and remain in a channel for the rest of the year unless something changes. That's all for today. Time to get some rest.

Correlate the Correlation

I don't know about anybody else, but I am constantly asking myself quantitative questions about the market. I like to use all kinds of analysis when looking at a stock. I'll usually first start by finding a chart that looks like it could make a move. Then, I'll check the news to see if anything could move the stock either with or against me. I don't think you can lock yourself in a room and just rely on one specific thing, although that would make investing much easier. I also like to think about patterns or relationships. This is usually when I bring quantitative analysis into the picture.

In this particular study, I was curious how the correlation worked out between stocks that were both in the Dow and the S&P 500. Let me lay down some quick groundwork. I got tired of hearing about the Dow constantly hitting new highs, while the S&P 500 seemed to be taking a much more sluggish more north. The Dow consists of 30 stocks, while the S&P 500 contains ___ (I'll let you fill in the blank). It seems obvious that the bag of 30 stocks should probably move easier than the bag of ___ (hope you still remember).

I picked the stocks listed below at somewhat random. Because the Dow is price weighted, I wanted to pick some of the highest, lowest, and middle priced. Then when I was done, I thought I would also make sure I have a decent industry showing. (A more dimensional study.)



As you can see there has been pretty good correlation over the long term, but as the time span shortens, the correlation tends to move around. Honeywell (HON) seems to maintain a consistent correlation with the Dow while Intel (INTC) has been lagging and by looking at the shortest time frame, is down right backwards.

Here are the same stocks only with the S&P 500 (damn I gave it away) instead of the Dow.



We get practically the same results when the S&P 500 is used. What are the exact differences you ask? Ahh, let me show you.



The bold numbers, by the way, represent either the high or low figure for that column. There are some larger numbers, but I don't know if this is statistically significant. You can figure that out if you are so inclined.

Also, one last chart. This shows the correlation between the Dow and the S&P 500. Nice isn't it. Seems pretty darn consistent.



Take what you want from this. My commentary may be way off, but the numbers don't lie (like Shakira's hips). If you're trying to ride the coat tails of the market, maybe picking a highly correlated stock will bring you along for the ride.