Problem With Comment Publish

For some reason I am unable to publish all the comments in Blogger.
But I want to acknowledge and say thanks to all of you for expressing your support.

51 Shades Of Red.

50 shades for the market, 1 for me.

In the morning call of Friday morning I wrote the following:

As I wrote last night, DOW has been down last 6 straight and 7 of the last 8. That should tell us that we should expect the market to close in red. How deep the colour of the Red is to be seen. It would be foolish to venture an opinion on OpEx day.

It now turns out that the shade of the Red was very deep indeed. It now seems that the indices are making a triple top, if there is something like that in the dictionary of TA. But fear not. It is not the start of the waterfall that we all are waiting for. It is just a symptom of a sick market. Sometime back I wrote that a complex topping process is going on. And because of these weekly ups and downs, it is impossible to trade let alone invest in this market. That is why my conclusion in Friday morning was; Trade Safe, Invest not.

I have done this hop on hop off trade in the past. This is not swing trade. For a swing trade we need somewhat longer term trend which is absent from June. If anyone tells you that s/he is making money in this market day trading or swing trading, s/he is either lying or lucky. My guess, it is the former.

Readers know that we were expecting a pull back since last two days but the degree of pull back surprised everyone, including me. Now we have to see if the low of last week holds. Today’s sell off was triggered by earnings or lack of it. (Although I would say Cycles) let us hope next week the earnings come out better.(because cycles are up till 25^th October). So far the DOW and SPX have stopped at 50 DMA as if that’s all the bears are allowed. The Fed has said that they will prop the market no matter what and $40 billion a month have just started coming in.

After the cycle top around 25^th October, the next short term low is around end of October. And the important cycles all go up from there. That also matches with the Bradley Date and the COT Euro dollar chart of Tom McClellan. I do not want to guess how low the market can or will go from here till 30^th October, but I may take a swing at some longs between end of October and Mid-November. If you remember, I am on the sideline, neither long nor short.  By the way, despite the sell-off, there is no confirmed sell signal from the major indices yet. It may change if we have more selling next week but we will cross the bridge when we come to it.

That made your 50 shades of red market. Now, my 1 shade of red.

In the morning Google very kindly notified that my Adsense account has been closed. Naturally I was very disappointed. But out of 1000s of readers, so far 10 have stood by me and have said that they will support me in every whichever way. Thank you ladies and gentlemen. I have never met you in person and yet you have extended your generosity to an unknown blogger. That I have 10 unknown souls by my side, makes me realize how lucky and blessed I am. I feel that I have achieved my goal.

But God has a funny of showing love. When s/he closes one door, s/he opens ten others. Blogging was never going to be my profession or livelihood. I do it because I love it and as I had some more time in hand, I started spending that here. Making my work of love a paid or subscriber model, will not give me sufficient money to justify my time yet it will alienate most of the readers. Charging $15 per month to 50 or even 100 readers will not allow me to live and yet that will tie me up with huge responsibility. So I have decided to let the blog be as it is. Free for all.

I have signed up with another company called BidVertiser who do the same thing as google but on a scale of 1 to 1000000. So I will do whatever I can to generate Ad revenue and then there is Amazon link which I hope readers will use during the holiday season.

I will be making my regular evening post and sharing my views on investments and market. The Weekly Market report (WOF+) is going for a premature death because readers don’t think it is worth any money. Let life continue as it was, without any bells and whistle.

That sums up the eventful week and the 51 shades of red. Have a great weekend folks.

Intra-Day Update:10/19/12: 12 Noon Eastern

Not looking good. let us see where it closes.  This can go up equally quickly. Don't panic or chase please.

Intra-Day Update. 10/19/12; 11AM Eastern

Personal disappointments aside,
Let the market action continue, SPX is not that bad. Nasdaq is testing its earlier low.
I would not chase it either way for now.
Patience folks.

Morning Call. October 19, 2012

First we had Apple sell off and now we have Google sell off. These two are the staples of most hedge funds. These funds will be under water for sure and what they will do to improve their monthly report is not very clear yet. Some may now try to get out the tech. stocks and chase small value beta. In short there will be instability in the market for whole of October.

Euro Summit decision has now been pushed to November. Everyone is waiting for the US Presidential election to get over to wash the dirty laundry. There is a fight between Germany and France about banking supervision. Spanish bailout issue is hanging and Greece debt fiasco is nearing its end. I do not see it being resolved in favour of the Greeks.

But the market seems to ignore all the above issues. In USA companies after companies (Chipotle, IBM, CAT, Nike, Intel, ……) report lower earnings and weak guidance. These are big names and yet DOW / S&P 500 marches on. This is the power of liquidity. I can only guess how long this will go on and I have given my best estimates of the timeline before. As of now we should be up till mid-next week.

Futures:  DOW futures are down about 40 points but Nasdaq does not look that bad. Down only about 5 points. SPX is down about 3 points and is well above any danger mark. Today is OpEx day. Any move is to be discounted as a part of the shenanigan of the big boyz who sell premium. As I wrote last night, DOWn has been down last 6 straight and 7 of the last 8. That should tell us that we should expect the market to close in red. How deep the colour of the Red is to be seen. It would be foolish to venture an opinion on OpEx day.

Commodities:  Overnight gold and silver sold off. Silver was worst hit, down 1.35% but gold is holding an important level. I expect a rebound here. Let us see how far the rebound goes till next week. Crude was higher with a gain of 0.25% and so did Nat. Gas. Therefore it would be wrong to say that the market is in “Risk-off” mode. It is just the manipulators switching money from one sector to another.

Earnings & Economic data: Today we have release of existing home sales. Additionally, General Electric (GE), McDonald's (MCD), Baker Hughes (BHI), Edwards Lifesciences (EW), Honeywell International (HON), Ingersoll-Rand (IR), McMoRan Exploration (MMR), and Schlumberger (SLB) are scheduled to release their quarterly reports.

In fact GE has already come out with the numbers and has reported an increased earnings of 8.3% while revenues are down. GE shares are down 2% in pre-market.

Conclusion:  I am standing aside. Expect a roller coaster ride throughout the day. Trade safe. Invest not.

Note: Starting today, all intra-day updates will be released through the blog posting and link tweeted. No more direct twitter.  

Why diversification doesn't work

You're standing in your canoe, on a beautiful Canadian lake, taking photos of the wildlife, occasionally fishing. Why standing, not sitting? Well, you've read about those disturbing studies that show how sitting is really bad for your long term health; how every hour of television viewing, for example, takes about 20 minutes off your life expectancy, and why the same is probably true for sitting at the computer, sitting reading a book, whatever. So you're standing and that's OK because you're balanced and stable, with your weight distributed uniformly.

Of course, anyone with even a few minutes of experience in a canoe knows this isn't as safe as it seems. What really matters isn't how well-balanced you are when the canoe rests peacefully, but what happens when a few waves come along, kicked up by rednecks passing in a souped-up bass trawler (I lived in rural Virginia for several years, so I know the experience). As you shift your stance to stay upright, and the boat shifts, that balanced distribution vanishes and you can easily tip. Stability demands balance in the midst of the boat's dynamics, not only in the static peace beforehand.

As it turns out, this same lesson applies to investment portfolios -- a new paper in Nature Scientific Reports shows just how important this insight may be.

Famously, of course, Harry Markowitz introduced the idea of diversification into investing back in the 1950s (at least he formalized the idea, which was probably around long before). Using information on the mathematical correlations between the returns of the different stocks in a portfolio, you can choose a weighted portfolio to minimize the overall portfolio of volatility for any expected return. This is maybe the most basic of all results in mathematical finance.

But it doesn't work; it suffers from the same problem as the balanced man in the canoe. This is clear from any number of studies over the past decade which show that the correlations between stocks change when markets move up or down. If the market suddenly plunges downward, you would hope that your well-diversified portfolio, invested as it is in stocks that tend to move unlike one another, would be OK. But when markets move significantly down (or up), it turns out, the correlations are no longer what they were. Trending markets induce strong correlations among stocks that aren't there beforehand, and aren't obvious from long-term averages. So the risks to a portfolio are actually much larger than the simple diversification analysis suggests -- just as the risk of a canoe tipping is much more than it seems to a man standing balanced on a peaceful lake.

The new paper by physicist Tobias Preis and colleagues makes this point with probably the largest data set used so far, looking at the stocks in the DJIA over about 70 years. It's a fairly simple analysis (modulo some nitty gritty details). Roughly, they look at the correlations between different stocks in the DJIA and see how these correlations depend on the recent average return of the DJIA. Are the correlations stable? Or do they go up as the market begins to move? The figure below showing the average correlation coefficient versus the return indicates that the result is clearly the latter: a trending market, in either direction, induces significant correlations among the DJIA stocks.

One of the interesting things here is that this link holds on many different timescales, from 10 days up through two months. The worrying thing for an investor, of course, is that these correlations make the risks of large losses significantly larger than they would appear to be on the basis of long-term correlations alone. As the authors conclude:

... a “diversification breakdown” tends to occur when stable correlations are most needed for portfolio protection. Our findings, which are qualitatively consistent with earlier findings^{42, 44} but quantitatively different, could be used to anticipate changes in mean correlation of portfolios when financial markets are suffering significant losses. This would enable a more accurate assessment of the risk of losses.

 As any canoeist knows, dynamics really matter.

Possibly The Best Indian Mamak Rojak

Trying not to say this or that is the best anymore ... taste is so subjective. However, many of you would swear that this ROJAK place is the tops. No need to argue, the queue says it all. Be early (3pm) and the queue will always be at least 5-6 people deep, be late and you will enjoy an even longer line.

Rojak is rojak, it all comes down to the "fried stuff", how crunchy and flavoursome, and their keropok is something else ... its thin and when you dip into the sauce, its magic. The other main ingredient for a good rojak is the sauce, not too sweet with the right chilli kick.