Fundamental Trading Diary

Fundamental analysis of the capital markets

Answer Unclear; Try Again

Building upon my arguments on Saturday, global markets have become even more opaque for me.  Despite cash gaining against assets all around the board yesterday, the number of global indices with a positive 2-week return has turned positive (the first time since the 15th).  That said, this is not a short-term timing indicator — rather, it is measure of momentum globally.  It also does a much better job of predicting high-beta markets than US stocks.

Volatility indicators outright are telling us to buy.  I discount the VIX for past movement, however, and the reality is that we still have a very large risk overhanging priced into options.  Additionally, as I mentioned in my previous article, the VIX is at the same level it was just before the Lehman and Bear collapses.  No-one knew what was going to happen, and volatility measured at tops is always massively understated.

S&P 500, VIX & Birinyi OB/OS

S&P 500, VIX & Birinyi OB/OS

The Birinyi OB/OS indicator, which measures how many S&P 500 stocks are more than one standard deviation above or below their 50-day moving average, started June at +413.  In the past few days, it’s gotten as low as +5, but it snapped back yesterday to +275.

Charles Biderman, the founder of Trimtabs, had a great interview on NBC on June 18.  His statement was that insider selling and corporate actions were all adding a glut of new supply to the market.  At the same time, sideline cash seems to be close to exhausted.

That we have had a pause in the market is no real surprise, as a consequence.  Reggie Jackson wrote this morning in his fantastic newsletter about the growing influence of programme trading.  The people left holding the bag are almost always retail investors, and the market seems to have been given enough bid support to be kept high to get them in on the action.  Now that they are committed, add in the new supply, and we are trading on very thin bid support.

Prices are set at the margin, but when the bid depth at the margin is very thin — which it is — things can move very quickly.  Momentum has dried up on the upside, and the bid support seems largely maintained by — as Zero Hedge likes to put it — some SPARCstations in the closet of some investment banks.

I leave you with some Oscar Peterson.


July 1, 2009 - Posted by | Uncategorized

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