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.

Format Change

In the near future, I plan on making a slight change to the format here. I plan on adding more value added data here in addition to my witty commentary. If anybody has any requests let me know.

Smoke and Mirrors (and why not throw in some magic)

Do you see this headline? What are they implying? Don't move a muscle, I'll take a swing at this question. I'm glad I read this article. I thought we might have ended lower because the market couldn't find enough money to throw into the fire since there wasn't enough news that the bulls could spin their way. I guess I was wrong. All that happened was "profit taking." That is reassuring I thought it had something to do with a slowing economy or the $2+ jump in oil! For record, I'm not a permabear or really even consider myself a bear.

With that said, I have been taking more short positions. I think the economy is slowing, but won't land into a recession. I don't think the Fed will have to raise rates because he can get the need effect where we are now without a cut or a raise. A raise will probably shock the economy too much and a cut will inflate inflation. Now what I don't understand is why the economy is slowing from a run to a walk, but the stock market is still running and sometimes sprinting. There seems to be a disconnect. An equity price is supposed to reflect future earnings and if these future earnings are lower, why pay more? Sure at some point down the road they will be higher, but how much are you willing to pay today to get higher earnings two years from now. I often hear that, on a P/E basis, the market isn't very expensive. That sounds great, but how will that argument work when prices rise and earnings shrink. Let me explain how math works, when you divide a larger number by a smaller number, the result gets larger. Now apply that to the P/E argument and things start to look more expensive. But, I'm just one man against the market.

U-turns Permitted

For a second, lets pretend that this market won't head up forever. If it happens to make a U-turn at some point, what stocks are ripe for a fall? At this point, you could pick a stock blindfolded and it would probably be at least a little overbought.

Pekin Elmer (PKI) looks to be ripe for a short. RSI and MACD are both showing divergences from the stock chart. Also, the retracements seem to be bouncing of their Fibonacci lines.


fundamentals such as less I'm a big time believe that Dell is going to take a fall soon. Apart from deteriorating market share and not SEC filings for the past year, we got a nice shooting star formed today. Beware for any new trades tomorrow since things could be volatile due to options expiration.



Gamestop looks to have another shooting star with a lift as of recent. I think it could drop a few points before it decides if it wants to change direct again.



That's all that I really have time for tonight. Plus with expiration tomorrow who knows what will happen. Even without that, the market has been tending to head up regardless of the news so that has made chart reading and being a bear difficult recently. I'd like to rant about gas prices (not the argument you might think), but I guess I'll have to save that for another day.

White Ninja

Pick the White Ninja:



Trick question. They are both white ninjas, however, Chris on the left may have been the more obvious choice. The white ninja on the right is the more sneaky ninja. The day started out with lukewarm overseas action and rather mixed data on the housing front. We moved sideways for most of the day and then something happened at around 1PM. We started to quietly drift north and then when the closing bell rang, we closed up a little over 100 points. Right now, the futures are just barely down. We get initial claims tomorrow morning.

The way the market has been heading lately, who knows where we'll go. Information gets twisted in so many ways (usually in favor of the bulls, I might add) it is hard to tell what way is up anymore. I don't really have much to say tonight since things were pretty boring today.

I just want to leave you with this article I read on SeekingAlpha.com regarding inflation and the CPI. Apparently, the author believes the CPI isn't really a true/good measure of inflation. It is an interesting article none the less. One point I definitely agree with him on is the fact that it is absurd that food and energy is always excluded when focusing on core inflation. What is the biggest problems that we face everyday? Food and energy. Never mind the fact that these two things are the biggest wallet thieves. If we exclude them we can feel better about price stability.

Ben Bernank-who?

Repeat after me, "Who is Ben"? Unfortunately there is only a small group of people that actually will say this along with me since it seems that everybody loooooves Mr Ben. I am starting to get frustrated by the markets obsession with getting a rate cut. Here is an extreme example. After we fall into a depression and are eating soup out of a dirty bowl, is that rate cut going to excite everyone? Probably not. I don't think we should be passing up current fundamentals in exchange for the hope of a rate cut down the road. We seem to be able to quickly forget about weak retail sales, housing problems, etc., but every time we get "benign" inflation data that is good for a 100 point bounce. Let's leave the word "benign" to the doctors treating tumors and start focusing on the underlying fundamentals of our economy. Too all of you who were disappointed to hear the housing news today, thank you for seeing the light. Everybody else, wake-up. Higher stock prices and lower earnings smells like overvalue.

Wish Upon a Shooting Star

It's been awhile since I've actually done a post. It's not my fault. I actually have a real job so I can support myself and it's been hectic over the past few months. If there has been one thing that has been consistent since my very first post, who knows what tomorrow will bring. However.....the difference now is that I am starting to see some bull wavering. Take a look at this chart. There a couple of things that strike me.

• Since the end up February the market is climbing at about 45 degrees. Clearly not a sustainable rate of change.
• The RSI is above the 70 mark so according to this technical indicator it is overbought and blah blah. As you can see we've hit this level two other times and we did see a hundred or two point drop. As anybody that knows anything about the RSI, being overbought doesn't mean it can't stay overbought and continue to climb. In short, it is overbought, but this doesn't exactly mean we should "go all" short.
• Recently we have been seeing some interesting candlesticks. First we have been seeing some small bodies indicating that the market pushed both up and down, but ended up about neutral. Given the incredible bull run we're in, any stall can be a good sign for the bears. Also, compared to the past few months, we have seen two days that high rather long upper shadows. Like before, this means that the bulls were shut down.
• Finally (and quickly), the MACD looks to be losing steam at a high level no less.

One other interesting trend I've noticed is that it looks like in the last, say third, of each month, we see a pause and a slight pullback. Interesting. I'm not sure it it can be profitably traded, but an interesting trend. Maybe related to options expiration?? Now after this analysis of the Dow, I would like to say, who cares about the Dow? Maybe 50 years ago or so it was a big deal, but now it doesn't mean much to be. It is 30 companies compared to the 500 in the S&P. It doesn't take a large stretch of the imagination to see how easy it is for a basket of huge companies to move together. It's like controlling a group of 30 kids compared to 500. Of course the group of 30 move more consistently with each other. But like they say, the bigger they are, the harder the fall. It maybe easier to move up, but it can fall down just as easy.

You are now leaving Dell

Well it has been awhile since we have an update for the stocks I said were "looking for love." I plan on giving you that update right now and then making an announcement.

Home Depot ---- Down .62%
Dell ---- Up 15.49%
Motorola ---- Down 4.32%

Considering all the buzz about this great bull run we are in, I don't exactly see these numbers buying me a new Bentley or even an old Bentley. But do you know what? I don't care. I don't expect these stocks to have landed anybody on easy street. These are long-term turnaround stocks. In each of them, management is going to have to work day and night to turn these companies around. If in a year from now, these stocks still aren't turning heads, I'll admit defeat.

Now on to more serious business, as I said up a few lines, I have an announcement to make. As the title of this post hints, I am saying goodbye to Dell. Ironically, the one stock that I am saying goodbye to, happens to be the only one that has worked itself into a gain position. But that is the way she goes sometimes. In further disclosure, I own puts on Dell.

After much thought, reading, etc., I have decided that Dell is a POS. Is Dell still a turnaround stock candidate? Of course, but I don't really want to be on their side at this point. From a speculative viewpoint, this is probably the best because it seems to be the biggest headache. From the early days of Dell, besides remember the tagline "Dude, it's a Dell," I remember the great customer service they were known for. Then for some reason, they decided to take one of their most valuable assets and ship it overseas to India. I have nothing against the people in India, but as popular opinion seems to state, outsourcing customer service/support functions is as frustrating as anything. I think this Motley Fool article speaks my point about poor customer service.

As for the other two, I have never owned a Motorola phone and i am disappointed/surprised that Icahn didn't make his way onto the board so I will be monitoring this. And for Home Depot, the place in had my first teenage job and spent a week in training, I hope that they aren't spending money on training anymore because it doesn't show. I also hope that they starting training again so that when I need help with something, I don't feel like I should be talking to the 2x4 in my hand. Only time with tell how these final two will pan out.