Saturday, October 31, 2009

Volatility Skyrockets As Stocks Sink

For our last post we noted that the S&P 500 was quickly nearing its 500 day moving average and posited that it was unlikely to rise above that level.

Today we have further technical evidence that the stock rally since March is likely over, at least for now. The VIX, or volatility index, broke out of its downtrend on Friday with a massive 23.95% rise on the day as the S&P 500 fell 2.81%. The breakout is obvious on the six month time scale as the VIX hit 30 to rise above the previous peaks hit over the last few months (click on images for larger views):

On a longer time scale, we can clearly see that the uptrend in volatility since the bear market began in late 2008 is still in tact:

If either the S&P500 breaks above its 500 day moving average or the VIX falls back down into the low 20s, we will re-evaluate our stance. For now, all signs point towards this stock correction continuing.

Sunday, October 25, 2009

S&P 500 Moves Towards Its 500 Day Moving Average

The S&P 500 is quickly approaching its 500 day moving average as seen below:

s&p500 approaching its 500 day moving averageIt is easy to see why this is an important technical level. Throughout the bull market of the 1990s and 2003-2007 bear, the market stayed above this level. The market also stayed below this level during the bear market of 2000-2002 and the current bear market. In the next month we should be able to tell if the market is able to break through its 500 day moving average, thus indicating a new bull market, or if it is rejected. A rejection could be harsh, with a drop below the 666 low reached in March a very real possibility.

Which way will it go? We think the markets have not hit their lows yet for this cycle so we expect the 500 day moving average to act as overhead resistance. Anything can happen, however, and with the massive government interventions taking place over the past year, technical and economic indicators that were reliable in the past need to be questioned. Market participants are watching these sort of momentum indicators so a breakthrough or rejection is likely to cause a big market move in either direction. We will keep a close eye on this indicator and post an update when a decisive move has been made.

Thursday, October 22, 2009

Commodity ETFs and ETNs III

Our first post on this blog was a Google docs spreadsheet containing a list of commodity Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs). These funds seek to track the performance of specified commodities and not commodity based stocks. I excluded 2x and more levered funds because I think they are lousy investments and borderline scams.

I have updated the spreadsheet so you can check it out here. Updates include the following:
  1. New average daily volume numbers for all funds
  2. Removal of PMY, the ELEMENTS precious metals fund, because it has been delisted
  3. Removal of GOE, the ELEMENTS gold fund, because it has been delisted
  4. Removal of LSO, the ELEMENTS livestock fund, because it has been delisted

Monday, October 19, 2009

Dividend Reinvestment Plans (DRIPs)

This past weekend I posted an article on my other site, Online Broker Review, about Dividend Reinvestment Plans (DRIPs). If you are in the market for a broker that will automatically reinvest your dividends then you might find this guide useful. You can read the article here.

Sunday, October 4, 2009

The Marshmallow Test

What is the marshmallow test? First, watch this adorable short video:

Now for some background. The marshmallow experiment is a famous test conducted by Walter Mischel at Stanford University. In the 1960s, a group of four-year olds were given a marshmallow and promised another but only if they could wait 20 minutes before eating the first one. Some children could wait and others could not. The researchers then followed the progress of each child into adolescence, and demonstrated that those with the ability to wait were better adjusted and more dependable (determined via surveys of their parents and teachers), and scored an average of 210 points higher on the SATs.

Here is another video with some background information provided by psychologist Dr David Walsh:

Psychologists refer to the ability to wait for what one wants as deferred gratification while economists have a different but related term: time preference. Time preference pertains to how large a premium a consumer will place on enjoyment nearer in time over more remote enjoyment. Someone with a high time preference is focused substantially on his well-being in the present and the immediate future relative to the average person, while someone with low time preference places more emphasis than average on their well-being in the further future.

For example, a person with a high time preference will charge a plasma TV that they cannot currently pay for on their credit card charging them 20% interest. A different person with low time preference will wait until they have saved the money for the TV before purchase.

Deferred gratification and time preference are important concepts to understand within the context of the economic problems sweeping the United States. Briefly stated, it's all about debt. This chart provided by Karl Denninger of The Market Ticker should get the point across:

The rise in household, corporate and government indebtedness over the past thirty years points towards a people whom in aggregate have an ever increasing time preference. As the marshmallow experiment showed, a low time preference is desirable over a high time preference in almost all aspects of life. Even disregarding the experiment, anyone should have enough anecdotal evidence of their own by observing friends and family to see the connection.

The Federal Reserve, with their ever decreasing interest rates and relaxation in lending standards, are directly responsible for our problems. These Fed policies shift time preferences higher and plain promote irresponsible behavior. Worst of all, the problem is not only debt, which in most forms can be purged relatively easily by such vehicles as bankruptcy, but psychological, which is much harder to reverse. The United States will continue to fall further behind other nations in competitiveness and quality of life as long as these disastrous policies are maintained. America is failing the marshmallow test.