Tag Archives: Technical Analysis

technical analysis: the Super Bowl indicator

February 2, 2012 By in Current Market Thoughts, Portfolio management, Technical Analysis Tags: , , , Leave a comment

what it is

It’s a joke   …literally.

The Super Bowl indicator was invented during the 1980s by Robert Stovall, then a prominent Wall Street investment strategist.  He wanted to satirize technical analysts and mathematical economists, both of whom were trying to find simple–but infallible–leading indicators of future stock market performance,  and the customers who were willing to believe whatever these gurus told them.

What could be more preposterous, he thought, than claiming that the results of a football game were the key to stock market performance during that year?  Not much.  So that’s what he decided to assert.

the Super bowl indicator has two rules

The Super Bowl is, of course, the contest for the overall NFL championship between the winners of the National Conference (NFC) and American Conference (AFC) titles.  Stovall’s first Super Bowl rule is:

–the stock market makes gains for any calendar year in which the NFC team wins; it makes losses when the AFC team is the victor.

The only problem with this rule is that it didn’t fit the facts when it was promulgated.  The Pittsburgh Steelers of the AFC won the Super Bowl in 1974, 1975, 1978 and 1979.  The S&P had gains during last three of these years.

This prompted Stovall to add a nuance, through a second rule:

–the Baltimore (now Indianapolis) Colts, Cleveland Browns, and Pittsburgh Steelers all count as NFC teams, even though they are in the AFC.

Why is that?  It’s obvious   …to explain away 1975, 1978 and 1979.

Stovall’s rationale?    The present NFL is the product of the 1966 merger of the larger “old” NFL and its smaller rival, the American Football League.  The “old” NFL became the NFC; the AFL became the AFC.  But the AFC was smaller.  To make the two conferences equal in size, three “old” NFC teams–the Colts, the Browns and the Steelers–were transferred into the AFC in 1970.  What counts, Stovall said, is where the teams started out, not where they’re playing now.  That got him the results he needed.

(Another effect of this tweak is to classify 60%/40% in favor of “up-market” teams, bringing the league composition more in line with the rhythms of the inventory cycle–and consequently with the percentage of time Wall Street typically spends rising or falling.  I’m pretty sure Stovall didn’t care.)

my thoughts

Two things strike me as strange about the “indicator.”

First, 80% of the time the Super Bowl and Wall Street have been in alignment.

The second is that Wall Street appears to have lost its sense of humor where football is concerned.  No one seems to remember that this is a spoof of technical analysis and mathematical economics, not a serious tool.  Google “Super Bowl indicator” and see for yourself.

I know professional investors are deeply superstitious, but really…  This is almost as bad as investing based on the winner of the Emperor’s annual poetry contest (another weird story).

 


technical analysis: golden cross and dead cross

February 1, 2012 By in golden cross/dead cross, Recent Market Action, Technical Analysis Tags: , , , , , , Leave a comment

what golden crosses and dead crosses are

They’re cool-sounding names.

They should probably have their own tee-shirts.

But…

…what they are is technical indicators.

They’re descriptions of behavior of short-term vs. long-term moving averages.

In both cases, two moving averages, one short-term, one long-term, for the same index or security are being charted on the same graph–usually values on the vertical scale, time on the horizontal.

A golden cross occurs when the short-term moving average, which has been below the long-term moving average on the chart, crosses and moves above the long-term average.  The claim is that this signals a significant upturn.

A dead cross (or death cross) occurs when the short-term moving average has been trading above the long-term average but crosses and breaks down below the long-term average.  This supposedly signals a significant downturn.

They’re called crosses because in both cases the two lines cross one another.

different moving averages for different indices, different markets

The short-term and long-term moving averages used to determine the crosses differ both by country and with the index being analyzed.  In the case of the S&P 500, for example, technical analysts typically use 50-day and 200-day moving averages.

If the 50-day moving average for the S&P is below the 200-day, this means that more price action over the past 2 1/2 months (assuming 20 trading days per month) has been weaker than the average over the past ten-month period.  If the 50-day moving average subsequently turns up sharply enough to break through the 200-day line, proponents of the indicator believe the weakness has ended and a significant rally has started.

In similar fashion, if the 50-day moving average dives below the 200-day, then a period of strength has come to an end and significant weakness lies ahead.

my thoughts

I’m not a fan.

I first encountered people actually using the two crosses in Tokyo and Hong Kong.  That was mostly, In think, because they had nothing better.  They didn’t have professional securities analysts forecasting earnings; they didn’t apply any macroeconomic data to help figure out the general market direction, either.  So they were left with either the entrails of chickens, which would have been pretty messy, or stuff like the cross twins.

important in Asia

The crosses did then, and still do, have a significant effect in Asian markets because people use them–not that they have any particularly important objective significance..

making a comeback in the US

In the US, technical analysis, including the idea of the two types of crosses, seems to me to be making a comeback after over a half-century of neglect.  How so?

–I think some hedge fund managers who cut their teeth trading commodities are trying to use the same technical tools on stocks

–brokers fired most of their experienced analysts during the Great Recession, so there isn’t as much easily available, reliable fundamental information around as before

–discount brokers can supply technical indicators to their active retail traders at low cost.  They’re cheap; they require little effort to learn; it seems to make the customers feel good to spout obscure jargon (who doesn’t like showing off this way?); and, since the clients “read” the charts themselves, brokers don’t incur the legal liability they would if they were supplying actual stock analysis.

Why write about this now?  The Dow made a golden cross a few weeks ago and short-term traders have been making a fuss since.

two investor sentiment surveys: straws in the wind or contrary indicators?

January 25, 2012 By in Current Market Thoughts, Recent Market Action, Strategy, Technical Analysis Tags: , , , , , , , , , , Leave a comment

investor sentiment

Investor sentiment is a funny indicator.  Outside the US, investors try to figure out what way the tide of sentiment is flowing so they can set their portfolios to benefit from the prevailing direction.  Inside the US, on the other hand, professional investors try to determine the direction of sentiment so they can bet against it.

Surveys, of course, have the limitation that they tell you what the respondents have to say.  Normally secretive professionals may simply not respond, so you may end up surveying interns rather than senior managers; or they may not give their true opinions, for fear their views will be incorporated into the consensus before they are able to exploit them to the fullest.

Once you’ve set your portfolio, whether you then seek publicity for your largest holdings is a matter of personal preference or taste.  I would prefer not to do so, although I don’t regard the practice as border-line unethical, as some do.

two surveys

Anyway, I’ve come across two peculiar investor sentiment surveys recently.

–The first comes from the Chartered Financial Analyst Institute.  The Institute conducts a series of exams on academic portfolio theory, passing all of which results in the test-taker qualifying for a CFA charter (suitable for framing) that attests to the holder’s knowledge of the concepts. Once the province solely of professional portfolio managers and securities analysts, the current 90,000+ holders of the CFA designation are much more widely distributed through the various functions of investment-related organizations and the academic world.

Conclusions from the Global Market Sentiment Survey:

–Almost two-thirds of the 58,000 respondents to the survey expect the world economy will show no growth in 2012.  34% expect economic contraction; 29% think the world will tread water this year.

–About 60% expect that equities won’t be the highest return investment asset this year.  Among the competing alternatives, precious metals gets the most votes for top-performing asset, followed by commodities, bonds and cash.  Sentiment on this topic is split geographically, as well.  Of investors in the Americas, 45% think equities will have the best returns in 2012;  elsewhere, the proportion is only about a third.

The second survey is one conducted by a popular small-cap service I recently subscribed to.   Asked what they thought the probable returns for the S&P 500 this year might be, the most frequently given answer was a loss of 20%.

the respondents

As to the second survey, I was very surprised at how negative subscriber sentiment appeared to be.  I also looked at a couple of other surveys, one of which had some respondents saying small caps were too risky to invest in–yet, as subscribers, they were paying for information about small-cap stocks.  I don’t know what to make of that.

The CFA survey had one remarkable characteristic.  Half of the respondents had either not yet passed all the exams or had held their charter for two years or less.  Another 19% had been CFAs for five years or less.  These are not portfolio managers or senior analysts actually making investment decisions.   They’re much closer to being the man in the street.

my thoughts

I think the relative inexperience of the CFA survey respondents means that they’re much more indicative of what the man in the street thinks than of what the “smart money” is doing. In a section about employment opportunities, over half the respondents from Europe said that the job situation has deteriorated.  39% of those in Asia Pacific said the same.  So it’s also possible that the respondents have been unable to distinguish between their own career outlook and prospects for world equities.  My guess is that their macroeconomic and asset market answers are contrary indicators.

The (potentially oddball) respondents to the small-cap survey?  Clearly a contrary indicator, in my opinion.

All in all,  two small reasons to want to be bullish.

buying a “hot” IPO stock

December 16, 2011 By in Constructing a Portfolio, Industry Analysis, Investment firms, Strategy, Trading Tags: , , , , , , , , Leave a comment

recent new issues

There are three recent or current IPOs that I find potentially interesting:

–Chow Tai Fook Jewelry  (1929: HK), a  Hong Kong-based jewelry chain that specializes in chuk kam (pure gold) gold jewelry, but which is expanding its offerings to include Western-style fine jewelry as well,

–Nexon (3659: JP), the Korean company that started the casual gaming craze with Kart Rider–and who, oddly enough, just listed in Tokyo, and

–Zynga (ZNGA), the creator of the Facebook game Farmville (although my interest is mostly in the fact that it’s going public at close to 100x historic earnings).

how to buy them

Suppose you want to buy one of these–or shares in any “hot” IPO.  How do you go about it?

Let’s take it as given that no ordinary retail investor is going to get an allocation of stock in the IPO itself.

Those shares normally go to the most important customers of the brokers who take the company public, not to retail investors or small institutions.  In fact, unless you’re very close relatives or friends of the top management of the company going public–and they use their influence to direct shares your way (how likely is that?)–being offered shares in an IPO in the US as a retail investor is probably a red flag.  It suggests no one higher up in the food chain wants them.  So, to mix metaphors a bit, the underwriters are forced to reach down to the bottom of the barrel to get the deal sold.  In other markets, Hong Kong, for example, there can be special tranches of stock reserved for retail investors.  But the amount of stock you will receive in a “hot” IPO is likely to be very small.

So, to participate we have to buy shares on the open market.

my rules

While every situation is a little different, I’ve found that the rules I developed for myself while I was running a tiny mutual fund in the 1980s (too tiny to get many IPO allocations) have served me well over the years.  They are:

1.  Read the offering documents carefully and try to calculate the rate of growth of future profits.  this is how you decide what price is reasonable to pay. Like any other kind of investment, understanding valuation is by far the most important factor in success.  For a US investor trying to buy a foreign stock this can be a problem, since the documents won’t be available to you (even on the internet) until after the IPO.

2.  If the stock goes down on day 1 (as ZNGA is doing while I’m writing this), that’s a very bad sign.

3.  First day trading can be very volatile.  Use limit orders, not market orders.

4.  Don’t buy the entire position on day 1.  Three reasons, two relating to attempts by institutions to game the IPO system to get better allocations of future issues:

–retail investors may place market orders, driving up the stock price

–some institutions want to be seen by the underwriters as buying stock on the first day.  They think this establishes them as serious long-term shareholders and not “flippers” (people who only want to make a quick profit on getting an IPO allocation and who dump the stock on the market as fast as they can).  Underwriters generally hate flippers, since a large amount of flipping threatens to depress the stock price on day 1, making the issue seem less successful.  So, rightly or wrongly, buying institutions hope they’ll get larger allocations of future issues as a reward.

—institutions that want to be seen as regular supports of an underwriters IPOs (i.e., they’ll take anything) and as long-term holders of everything may start to sell after a week or two, when they think underwriters won’t notice, thus preserving their A-list status.

3.  A week or two after the initial trading day, after the IPO hoopla is over and when the institutions I describe in my last point above begin to sell, there may well be a chance to buy the stock at a lower price than on day 1.

4.  Keep a list of interesting stocks you might like to buy but think are too expensive now.  Every so often–too often nowadays, in my opinion–stock markets get frightened and sell off in a crazy way.  Everything goes down; small stocks can go down a lot.

I’ve found these to be excellent times to buy the formerly hot IPO stocks.