Fundamental Trading Diary

Fundamental analysis of the capital markets

Another Bounce To Buy

Top: S&P 500.  Upper-mid:  Birinyi OB/OS with linear regression slope.  Bottom-mid: VIX.  Bottom: Global indices with 2-week gain (+1) or loss (-1)

Top: S&P 500. Upper-mid: Birinyi OB/OS with linear regression slope. Bottom-mid: VIX. Bottom: Global indices with 2-week gain (+1) or loss (-1)


There were plenty of mixed signals to end the holiday-shortened trading week.  The most important, however, was the somehow unexpected non-farm payroll decrease of -465k and new unemployment claims of 614k.

Unemployment Rate NF Payroll Net Change New Unemployment Claims
Forecast 9.6% -360k 612k
Actual 9.5% -467k 614k
Non-Farm Payroll:  Actual, Forecast & Adjusted (from

Non-Farm Payroll: Actual, Forecast & Adjusted (from

There is a serious cognitive dissonance in modeling and reporting of employment statistics.  Reality lost 107,000 more jobs than predicted, yet the unemployment rate was 0.1% better than expected, all while the new unemployment claims were essentially as forecasted.  Seriously?  The numbers are essentially meaningless on their own.  The forecasting bias has more economic and trading value.

Global Indices

10-day global index returns have turned positive.  Most markets were open on Friday.  European equities were mixed, but in Asia, they were mostly up.  The winners were the developing world, and the losers were the developed world.  Expect this trend to persist.

China continues its torrid pace of growth and recovery.  It is up +85% since its October low.  We’re going to need China to perform like this to drag us out of the abyss.

Still, since June the 1st, only 9 of 22 major global indices have posted positive results.  The results are top heavy, though:  the big gainers were a lot larger than the big losers (+15.74%, +8.23%, +3.14% vs -5.69%, -5.23%, -4.11%).  This is decoupling.  That said, decoupling won’t occur if the entire world is in the toilet – everyone will suffer in that case.   The process will be most evident when you compare performance over a long stretch of time.  Daily beta is still typically 1.0-1.5.

I will continue to not argue with China.  Its price has been riding at the edge of 2 stdevs, and it has now closed twice in a row above its 2 stdev bollinger band.  This means that China’s gains in the past few days are even more rapid than what is normal in the contemporary.  The question is:  can we expect China to maintain this?  I suspect not, but the answer likely is in liquidity theory.  It probably explains the performance difference between China (+15.74%) and the Dow Industrials (-2.91%) since June 1.  I cannot easily verify this, as I can’t find Chinese equity supply on a cursory search.   Think about it like this:  money base globally has been skyrocketing.  As all of the dollars, yen, yuan and euros try to find homes for themselves, if they went into global equities equally — ignoring everything else — prices would go up as a function of supply.  Equities world-wide boomed.  As the developed world banks needed to raise cash, they added a tremendous amount of new supply with new stock issuance and competed with the demand by new bond issuance.

Trimtabs founder & CEO Charles Biderman says that sideline cash seems to be nearly exhausted.  What about in Asia?  The massive saving rates in China and Japan, they theoretically could maintain very significant demand on their equities.  This trifecta of extreme savings, rapidly developing economy and favourable supply conditions make China the place you want to park your money while it is on the up-swing (which will likely be the majority of the next 10 years).  On the same token, I really doubt the Chinese economy and stock market will continue to boom if the developed world is completely falling off a cliff.

My prognostication is that China is a great momentum play on both sides, and right now, they’ve got upward momentum.  Maybe they’ve got a little too much for the moment given that nobody else does.  Watch this carefully, and be ready to jump off the train.


Implied volatility as measured by the VIX is now 27.95 while the S&P 500 is at 896.42.  Consider that it was 32.68 while 911.97.  Options participants clearly think that equities pose less of a risk than they did on June 16th.  They’re usually right.  Max pain on SPY is at $92.00.  These things make me modestly bullish about the very near-term.


July 4, 2009 - Posted by | Uncategorized

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