Tuesday, April 30, 2013

Technical Tuesdays: Market Tops - A Seasonal Affair?

Why do market tops tend to be distributional/rolling affairs? Could it be due, in part, to seasonal factors? Let's consider the two most recent market tops - 1998 through 2001; 2006 through 2008.

As both accompanying charts show (click images to enlarge), the seasonally weak period for stocks - May to November - was the point at which US large cap stocks stalled in their existing bull markets. The rate of change slowed as the multi-month sideways action enabled the moving averages (50 and 200 day*) to catch up to price. When price and the moving averages converge, the potential for a Mega Trend reversal exists. Should price break to the downside AND both moving averages go from sideways to down AND the 50 day crosses the 200 day AND both moving averages point downward, the distributional/rolling top is now complete and a trend reversal - from bull to bear - has occurred.

From a fundamental perspective, the distributional/rolling market action makes considerable sense as first and fourth quarter earnings periods tend to be more dramatic, while second and third quarter periods are more subdued. Moreover, from a market structure perspective, this also makes considerable sense as the first quarter is a strong funds flow period followed by a less robust new money flow in the second and third quarter. The fourth quarter has many cross currents (tax considerations being among them) and is more limited in providing meaningful insight.

Accordingly, and as noted in an earlier blog posting, market tops are distinct from market bottoms due to the psychological factors that come into play as opportunity cost is different than real cost. Opportunity cost produces a sense of comfort due to the wealth effect combined with a delusional state of mind regarding one's investment acumen as well as a delusional state of mind regarding the accuracy of equity analysts and economists in predicting the future, which begets a dismissive attitude among many an investor class as stocks rollover and change trends. Real cost, on the other hand, produces a distorted perspective among many an investor class regarding the cycles of markets and economies as the negative wealth effect from declining equity prices impacts both real economy behavior as well as many deflated egos. Hence the underpinnings for why one - tops - are rolling while the other - bottoms - are panicky.

Investment Strategy Implications

"Sell in May and go away" may be more than just some old Wall Street axiom. It may be an important clue as to why - and how - market tops are formed in their preferred distributional/rolling fashion. Therefore, for those fretting over an impending market decline (as in something beyond a pullback (5 to 10%) or a correction (10 to 20%)), recent history strongly implies that the current market environment is months away (at the earliest) from forming a top and a trend reversal. Therefore, Sell in May? Okay. Stay away? Sure. But make sure to check back in and see if 2013 produces yet another rolling market top.

*The charts are noted in weeks for clarity. Therefore, 50 days - 10 weeks; 200 days = 40 weeks.


Technical Tuesdays is a product of Blue Marble Research Advisory and illustrates selected elements of market intelligence analysis. Market intelligence analysis - along with fundamental and thematic analyses - form the three-legged stool of the analytical approach employed by Blue Marble Research Advisory.

To learn more about Blue Marble Research Advisory services and its integrated approach to investment strategy and decision-making, click here!

Thursday, April 25, 2013

Thematic Thursdays: Austerity Hysteria

The past week has not been an especially good one for those advocating austerity as the path to sustainable growth.

The big blow up occurred when a University of Massachusetts Ph.D. student, Thomas Herndon, and two associates, Professor Michael Ash and Professor Robert Pollin, identified three errors in the tome published by Rogoff and Reinhart "Growth in a Time of Debt" and its 90% debt to GDP outcome. The Rogoff/Reinhard research paper and its subsequent book, "This Time is Different", along with other research publications, quickly became the foundation upon which austerity programs in Europe and the US were embraced and implemented.

The Herndon/Ash/Pollin rebuttal threatens the very core of the newly advocated economic policy known by the oxymoron "expansionary austerity". Before we get to the implications of this fiasco, let's recognize a key item that FT chief economics commentator, Martin Wolf, notes in his most recent commentary: (a)"...slower growth is associated with higher debt. But an association is definitely not a cause." and (b) "...they (Herndon/Ash/Pollin) argue, average annual growth since 1945 in advanced countries with debt above 90 per cent of GDP is 2.2 per cent. This contrasts with 4.2 per cent when debt is below 30 per cent, 3.1 per cent when debt stands between 30 per cent and 60 per cent, and 3.2 per cent if debt is between 60 per cent and 90 per cent."

Therefore, although correlation is not causation, higher debt to GDP does coincide with slower growth but not to the point where the 90% threshold results in the virtually zero growth rate Rogoff/Reinhart stated. So, other than egg on the face for Rogoff/Reinhart and their austerity advocates what does this all mean to investors?

The good news is that the senseless pain and suffering incurred by those who were (are) unfortunate enough to be caught in the austerity crosshairs may be reduced and, potentially, reversed (assuming, of course, that irreparable damage has not been done). And with that comes the potential for a justification for governments to respond to any economic downturn that is virtually guaranteed to be a pro-cyclical disaster. For when economies are in a zero bound interest rate environment AND have embraced a zero tolerance for new fiscal debt, the counter force for such an experience DOES NOT EXIST. Now, use your imagination and consider what are the likely socio-economic and political outcomes of that.

The bad news is that egos and agendas are fairly well established and slow to reverse. Will the Eurocrats and American austerians admit they were wrong? And then there are the agendas that conservatives and libertarians advocate that using the Rogoff/Reinhart thesis has served them well. Will that be surrendered in the face of the facts? Doubtful.

Investment Strategy Implications

At present, bean counting (err, excuse me) earnings season is underway and macro issues are tempests in teapots for virtually all bottom-up analyst and investor types. Besides, macro issues are for economists and they will sort it out and advise on the impacts. And herein lies the problem.

When it comes to today's globalized economy and markets where interconnectedness is deep and transmission mechanisms are fast, silo thinking leaves one exposed to the very nature of a changed economic and market structure. Unfortunately, though, for many - jobs and careers (a/k/a "keeping my house in Greenwich") matter more. And like the austerians, ignorance is bliss.


Thematic Thursdays is a product of Blue Marble Research Advisory and focuses on important global trends and themes impacting the global economy and markets.

On average, thematic issues are longer term in nature, transcending the business cycle in time and economic sector categorizations. However, many shorter term players in the financial markets use trends and themes as a staple of their investment strategy.

Understanding how to incorporate thematic analysis - along with fundamental and technical analyses - is an integral part of the process that forms the three-legged stool of the analytical approach employed by Blue Marble Research Advisory.

To learn about Blue Marble Research Advisory and its integrated approach to investment strategy and decision-making, click here!

Wednesday, April 24, 2013

Robo Trades Distort Markets: Impact on Investor Confidence

Just posted a commentary on The Innovation Files blog re yesterday's robo trades and its potential impact on investor confidence.

To read the post, click here.

Tuesday, April 23, 2013

Technical Tuesdays: Moving Averages

One of the staples of technical analysis is the moving average. However, there is a considerable amount confusion and misinformation re how to use moving averages. Therefore, let's take a moment to dispel some of the static re moving averages and consider their real predictive value.

To begin, there is virtually no consistently predictive value in price touching and/or crossing its moving averages, be it 50 day or 200 day, be it simple or exponentially calculated. To illustrate, look at the two charts posted.

As the accompanying charts show quite clearly, for every time price touched its moving average and then bounced off of it there is another time when it went right through. And for every time it went right through its moving average it either subsequently reversed itself and crossed back over it again or continued its trend (up or down). In other words, price touching or crossing its moving averages in and of itself has little predictive value. However, price in conjunction with both moving averages AND both moving averages to each other AND the slope of each moving average DOES HAVE a high predictive value. This is the Mega Trend noted two weeks ago (see April 9 blog posting below).

Investment Strategy Implications

Every media talking head (yours truly, included) knows that whenever price touches or crosses either of its moving averages a call or email from someone in the financial media is certain to follow. My advice? Ignore moving averages except when used in conjunction with other factors. That's the real predictive value in them, not the wiggles and squiggles - they should just make you giggle.

About Technical Tuesdays

Technical Tuesdays illustrates selected elements of market intelligence analysis. It - along with fundamental and thematic analyses - is an integral part of an overall macro strategy analytical approach employed by Blue Marble Research Advisory.

To learn about Blue Marble Research Advisory services and its integrated and macro/holistic approach to investment strategy, click here!

Thursday, April 18, 2013

Thematic Thursdays: The Quest For Sustainable Growth

The following is an excerpt from this week's "The Effective Investor" report:

"(The title for this blog posting) could easily be the title and the rationale for what is widely recognized as a grand experiment in monetary and fiscal policy.

On the monetary policy side, central banks around the world are engaged in cheap money regimes and their corollary, financial repression, in an effort to avert an economic contraction and its corollary: social unrest. On the fiscal side, most governments embrace a zero tolerance for more debt-provided spending and are engaged in austerity programs of varying sorts in the hope of bringing down their aggregate debts levels*.

In the end, both experiments must produce the desired result of a sustainable – and organically driven by the private sector – growth phase. In such a phase, government programs can move toward normality as the private sector takes over and is capable of sustaining the economy without massive government intervention. But will we get there?

Since the 1930’s, the operative way to achieve this goal of a (largely) private sector driven organically sustainable growth phase was when monetary and fiscal policy worked in tandem (in the same direction) with one another via easing. This was known as, of course, Keynesianism. For a variety reasons, however, that approach is not possible today as fiscal and monetary policy are pulling in the opposite direction.

So, central banks have taken upon themselves (via their mandates and for other economic – and political? – reasons) to help avoid what will be a near certain, pro cyclical economic and societal death trap as a result of a global economic decline. But will monetary policy alone (no matter how extraordinary the measures might be – as in QE to infinity) do the job?

There is no certainty that what central banks and governments are doing will work. Nor is there any certainty that the grand experiment going on the second largest and vitally important global economy (that being China), where managing the economic and cultural migration of its population to avoid social unrest via fixed capital investments transitioning to a more balanced (as in more domestic demand) economy, will work without major disruptions in the process.

Taken together, along with the myriad of complicating and interconnecting and dynamic factors on the geo political and business front, it’s hard not to wonder how all this is going to work out in the end.

Put simply, the grand experiment must result in an organically (non governmental driven) sustainable growth economic expansion (expansion, not recovery) – one that feeds upon itself and produces that wondrous experience of a virtuous circle of more private sector spending anchored in higher wages and, therefrom, higher corporate earnings. At that point, a reduction in government intervention can begin, primarily via central banks rebalancing their balance sheets. From that, financial repression will begin to wind down and interest rates will gravitate toward their more normal and natural levels. If not, then who knows what the public policy options are in a zero bound interest rate/zero tolerance for public debt environment?

*Some would argue that many austerity driven programs are designed to change the social compact between government and its citizens. This is a topic for another report at a later date."


Thematic Thursdays features important global macro trends and themes impacting the global economy and markets. It - along with fundmental and technical analyses - is an integral part of the overall global macro strategy analytical approach employed by Blue Marble Research Advisory.

To learn about Blue Marble Research Advisory and integrated approach to investment strategy and asset management, click here!

Tuesday, April 16, 2013

Technical Tuesdays: Weekly MACD

So, yesterday markets produced quite the taxing experience for investors for a variety of offered reasons by the "cause and effect" financial media. Is there any meaningful significance to yesterday's swoon? From a technical analysis perspective, not much and here are the reasons why.

As noted in last week's Technical Tuesday's post, the Mega Trend for US equities is solidly in bull mode (see post below). What we can add to this discussion is another useful momentum indicator, the weekly MACD*. As the accompanying charts illustrate (click images to enlarge), the weekly MACD works beautifully in tandem with the Mega Trend as an (a) early trend change indicator and (b) as a confirming indicator.

As an early trend change indicator, I refer you to the period in the summer of 2007 and the winter into early spring of 2008/09. Here you see the weekly MACD NOT confirming the established trend at the time (bullish in the first case, bearish in the second). This is an indication that the power of the established trend is faltering.

As a trend confirming indicator, throughout the bear market of 2007-09 the weekly MACD was firmly in a confirming downtrend. The counter move within that bear trend took place within the established bear Mega Trend call of December 2007 and was little more than a bounce within an established trend. On the flip side, the bull market that began in the spring of 2009 (and was confirmed by the Mega Trend later that spring**) experienced the usual weekly MACD counter trend moves with ONE EXCEPTION: the summer into early fall of 2011, which, you may recall, required the latest intervention by the US Fed to stem what was emerging as an economic and market reflecting reversal.

Investment Strategy Implications

Market tops tend to be rolling affairs where complacency is reflected in the dismissive manner more fundamentally oriented investors buy the idea that economists and equity analysts possess a near flawless capability of predicting the future during uncertain times. Market bottoms, on the other hand, tend to be panicky affairs where fear produces plunging markets that become overbought and overwrought. History is pretty clear on this. And the predictive value of such history is whole lot better than dreamy eyed fundamentally oriented optimists proclaiming "Nirvana Forever!" and the counterpart, the doomsday preppers.

Conclusion: At present, the data supports the bull case from both a Mega Trend and weekly MACD perspective.

*Investopedia defines MACD as "A trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals."

To learn about MACD, click here and click here.

**Reminder: As noted, market bottoms are different animals, which produce a delayed Mega Trend signal.

About Technical Tuesdays

Technical Tuesdays illustrates selected elements of market intelligence analysis. It - along with fundamental and thematic analyses - is an integral part of an overall macro strategy analytical approach employed by Blue Marble Research Advisory.

To learn about Blue Marble Research Advisory services and its integrated and macro/holistic approach to investment strategy, click here!

Thursday, April 11, 2013

Financial Innovation: It's Not Your Grandfather's Stock Market Anymore

For those interested in taking a break from the study of investment trees (a/k/a bottom-up stock analyses) and step into the realm of a forest manager, my two recent postings re the changed market structure via "The Innovation Files" blog might be of interest.

To read the post titled "Swimming with Sharks - Part 1", click here!

To read the post titled "Financial Innovation: An Essential Part of the Innovation Process", click here!

Tuesday, April 9, 2013

Technical Tuesdays: The Mega Trend

The Mega Trend is the title I gave several years ago to a price pattern that identifies the momentum of an index. It works by taking an index's price and its moving averages* and seeing how they act in a mutually supportive manner that helps predict its future price action.

To work, all three conditions of the following conditions must be met:

* Price above or below its two key moving averages - 50 day and 200 day
* The shorter term (50 day) above or below the longer term (200 day) moving average
* Both moving averages pointed in the direction of the existing move (upwardly sloped for a bullish environment, downwardly sloped for the bear case)

Now, let's look at where we are today.

As the above chart illustrates (click chart to enlarge), price is above its moving averages, the 50 day is above the 200 day, and both are upwardly sloped. The justification for why this works is rather simple (as are most core concepts): the momentum of a market move tends to be a self reinforcing process in which the large sums of money available for equities are applied as the performance needs of this institutionally dominated market drive professional investors to not lose too much alpha (relative performance). I referred to this in my book, "Sectors and Styles", as "keeping my house in Greenwich" (that wealthy enclave in Connecticut where many a well heeled fund manager resides), which is to say that a consistent loss of alpha can be hazardous to one's financial well-being (let alone access to the country club and other accoutrements).

Re using the Mega Trend, a few points need to be noted:

1 - Once a trend is established, it tends to remain in force for a considerable period of time (as the above chart makes amply clear).
2 - Identifying the major turning points (trend reversals from the established trend - bull to bear, and vice versa) works best during market tops than bottoms.
3 - The indicator works best for broad markets, economic sectors, and industries. It is not so useful for individual stocks or other markets (e.g. Gold, Bonds, Currencies)

Re the second point - trend reversals: due to the nature of how market tops are formed (confidence and rationalizations) versus market bottoms (panicky affairs), the rolling action of market tops enable one using the Mega Trend with a sufficient amount of time to note the trend change and to act accordingly. In other words, stock declines are merely corrections supported by the rationalization that the forever, overly optimistic bottom up equity analysts and the forever, overly clueless economists actually know what they are doing.

Whereas, market bottoms are more of panicky phase (losing real money versus incurring an opportunity cost tends to change behaviors) and, therefore, are far less useful is spotting the trend change (as in many months later and at a significantly higher price).

Why Does This Work?

Technical analysis does not receive its just due among many traditionally oriented investors and those firmly ensconced in their tenured academia dominions mainly due to the fact that it is observationally based versus theoretically based research. Or as Dr. Andrew Lo once stated in a podcast interview he did with me several years, when it comes to pipe smoking ivory tower crowd, "It takes a theory to beat a theory". So, academia will forever be dismissive of observationally based research since it is not rooted in some theory first. Of course, what should be but isn't debated is whether a social science (e.g. financial markets and the economy) which involve people who are sentient beings that are both interactive and highly dynamic should even be held to the same standard that physical sciences are (which are not sentient). Medieval thinking at its best!

However, from a more 21st century perspective, consider the following:

In many ways, the Mega Trend is the personification of behavioral finance as it is observational research that identifies the momentum of the market and the nature of its participants (those pesky and often irrational human beings). For what is behavioral finance but the study of how people do what they do? And isn't one manifestation of that the ability to track how people do what they do with their money and how such behavior can be used to predict future such behaviors? Or am I just blowing smoke out my backside?

Is it 100% accurate? Of course not. What is?

No, it is not a 100% perfect indicator but its history of accuracy is undeniable. And the bonus is the fact that those who do not subscribe to using such observationally based market analysis tools due to the reasons noted above (and for other reasons, as well) is all the more better in serving as a highly predictive tool of future market action. (For when everyone follows the same methodology it tends to distort that approach. Hedge fund clones, anyone?)

One Final Item

No one tool should be used to determine the future direction of such a highly volatile investment as stocks. The Mega Trend is an important one and very useful. So is the Divergences Principle (see last week's Tuesday posting). However, used in conjunction with these and others tools (including valuation models and thematic analyses) tends to increase the odds of doing what all active investors seek to do: outperform the market.

Investment Strategy Implications

It's a bull until it ain't. The Mega Trend for the US says that's the case here. This, however, is becoming worrisome elsewhere in the world, most notably in that high growth segment known as emerging markets. This will be subject of next Tuesday's posting.

*I have found that the exponential moving average (in which the most recent price receives a higher weighting than the more distant) works better than the simple moving average.

Thursday, April 4, 2013

Thematic Thursdays

With this post, I begin a series of commentaries that are more thematic in nature.

If you look for a definition of thematic investing you will be hard pressed to find one definitive answer. But, rest assured, it is an integral part of the changed market structure of today - be it longer term (trends and themes that stretch out over years, even decades) or short term (hot money flows from the short term oriented crowd).

Let's begin with a look at an important thematic issue: the changed market structure.

To say the financial markets have changed significantly over the past several decades is an understatement. And a failure to recognize this reality and to seek to understand its impact on the dynamic, interactive, interconnected global market place is to submerge one's self into the depths of ignorance.

Where once stocks and bonds and buy and hold ruled the roost, derivatives and nanoseconds trading are now king. For alongside traditional institutional investors - pensions, mutual funds, insurance companies, and endowments - are the new kids on the block, with their new toys, and new ways of playing. The consultancy, McKinsey, calls them the New Power Brokers. I classify them as the 3 Ps:

* New Players
* New Products
* New Processes

The justification for their existence rests in the claim that they facilitate price discovery and improve spreads. The reality is closer to the profit potential they provide for those engaged in this financial new world order. To illustrate, when you have a NASDAQ representative tell a private dinner gathering in Phoenix this past December that NASDAQ is an index company that happens to be an exchange, it's hard to argue against a changed market structure.

Whatever the reason, the fact is change has occurred and its impact via "reflexivity" (feedback to the real economy) is undeniable. Moreover, its impact to that core constituency that most of the big money boys and girls and the fast/hot money crowd could care less about - the average, individual investor - is also undeniable: Elvis has left the building!

Investment Strategy Implications

What and how a changed market structure impacts the primary function of the capital markets - to raise capital for businesses - remains to be fully understood. But to deny its existence and the fact that impacts have and will continue to be felt is to accept that once in a century Black Swan events that occur every seven years have nothing to do with a changed market structure. And to deny its existence and the fact that impacts have and will continue to be felt is to accept that individual investors have left what appears to many as a casino (a/k/a the stock market) solely for personal financial reasons (e.g., aftermath of the great debacle of 2008-09).

In other words, this isn't your grandfather's stock market anymore. And what it means is worthy of acknowledgement, understanding, and more.

Tuesday, April 2, 2013

Technical Tuesdays

As the bulls pop the champagne bottles at new highs courtesy robust corporate profits and profit margins (both at historically high levels) and abundant liquidity (central bank as well as investor (a/k/a financial market liquidity) largess), it seems worthwhile to take into consideration how the equity market's action matches the headline rhetoric. Hence, this newly installed weekly segment - Technical Tuesdays.

Let's begin with 3 metrics - all centered around what I call the Divergences Principle - that can serve to illuminate the scene.

An important measure of the strength in a market's move is its rate of change. Another is whether the move is being joined (confirmed) by other markets.

The first chart illustrates the fact that we are solidly in a bull market with the long-term Mega Trend (a relationship between price and its moving averages) in bullish mode while the intermediate-term weekly MACD (a measure of momentum) also in bullish mode (shorter-term average above its longer-term cousin). Within this longer-term bullish picture are 2 more concerning shorter-term issues.

The second chart shows a marked deceleration in the upward thrust of stocks via its rate of change (ROC). Confirming moves are always much better served when price is matched with power.

The third chart features another, more serious, concerning factor - the divergence in performance between markets. Here we see the general (that's the US) marching ahead while the infantry (that would be everybody else) trailing. And while the granddaddy of all external divergence indicators, the Dow Theory, is in solid bull mode, it could be argued that in a globalized world (a world where currency factors, for example, play an important role), country markets may act more in tandem than they have in the past.

Investment Strategy Implications

When properly applied, technical analysis (what I prefer calling Market Intelligence) can provide meaningful analysis of what the financial economy thinks (and acts) about what happens in the real economy. At present, the longer-term indicators are in bullish mode with the prospects of a trend reversal months (if not longer) away. Shorter-term, however, there are sufficient data to suggest that stocks are poised digest the banquet it has enjoyed thus far this year.