Ghost in the Machine

From Wikipedia:

The "ghost in the machine" is the British philosopher Gilbert Ryle's description of René Descartes' mind-body dualism. The phrase was introduced in Ryle's book The Concept of Mind (1949) to highlight the perceived absurdity of dualist systems like Descartes' where mental activity carries on in parallel to physical action, but where their means of interaction are unknown or, at best, speculative.

That sure looks like the stock market this week to me. One third of Wednesday's volume took place in the "clean up" bar after the close. That is where all the late data gets dumped and from the size of it we can surmise a lot of market on close orders.

I'd like to think of it as the smart money getting out while the getting is good.

Here is a chart of the NYSE composite with volume and that ghostly current day's volume spike. Looking at this as a snapshot of heavy volume on a big up-day belies the absurdity of the intraday action. It looks like it could be a follow-through day (FTD) too but again not when we dig deeper.

And speaking of FTDs, the three places on this chart where they could possibly appear are highlighted. Today's rally took place before the FTD window opened - 4-7 days into a rally attempt. That means is still qualifies as short-covering.

Ratio Ratio

I must be going crazy penned into my office for days writing story after story while it is 60 degrees and gorgeous outside here in the Northeast (yes, I saw the rain this morning).   The song Radio Radio by Elvis Costello comes to mind as I write this about Ratio Ratios.

Here is another one of those ratios derived from the markets and not from some analysts' guesswork. This one is the copper/gold ratio in the form of the JJC copper ETN divided buy the GLD gold ETF.

When the economy is hot, copper is in demand and gold is out of favor. The ratio should trend higher. And when the economy is not, copper is not in demand and gold is everyone's baby.   The big blue Landry arrow is pointing down.

Indicator Whackadoo

Twas the day after Thanksgiving break and all through the house,
Everyone was buying stocks......everyone.

A little stunted poetry by yours truly.  The stock market did one of its patented gap up go nowhere after that moves today as the Dow traded at about up 300 points until the final hour. What I found fascinating was that breadth indicators were completely and massively lopsided during the morning hours. Everything (almost) was up and all (almost) breadth indicators were pinned at extremes. 

A hat tip to RAI Bob Shohet for posting this stuff to the pro chat room we frequent. He pointed out that the Arms index (TRIN, for you indicator neanderthals) was at a level that was likely a multi-year if not all-time low. What that meant was the all the king's issues and all the king's volume were in the hands of the bulls. Green everywhere and a lot of it, at least on a relative basis.

The ratio of up to down volume was something like 150 to one in the early going. That's a stampede in my book.

But as I was writing my column for Barron's Online I noticed a lot of fading going on. Stocks that were up 5% were up 3%. Stocks that were up 2% were flat. I took that as a lot of people fading the rally.

As they say, the market does not like group think (actually, I just made that up but it is not a unique insight). When everybody is in a buying mood, you know it is something up with which the market will not put.(C'mon, where are the Winston Churchill fans?)

Another ratio

If you've been following me at all you know I look at a few ratios just like your favorite CFA. Only my ratios come from the market and not someone's subjectively inputted spreadsheet.  Does anyone really know what earnings will be next year and what the right discount rate is?

Anyway, this is the ratio of the junk bond ETF to the high grade corporate bond ETF.  Basically, when the ratio is going down, junk is underperforming quality and that suggests risk-off. And when the ratio is rising, invetors are getting more aggressive with junk as they chase yield - or throw caution into the wind.

With a hat tip to the Dave Landry big blue line, the trend is still down. This is one of the ratios I used in July to foreshadow the July breakdown in stocks.

And please do not call that an inverted head-and-shoulders. Things that do not actually trade need to be given a lot more rope than a tight pattern can offer.

LIBOR still rising

The 3-month London Interbank Offered Rate, a benchmark for global interest rates, is still rising and almost every single day.

While still a far cry from its 2008 financial crisis highs literally 10 times higher, this is still not a good sign. My take is banks are increasingly more nervous to lend to each other (duh!). What is probably more significant is the increasing pace of the gain.

This rate rose all through October as stocks rebounded. The pace increased into a parabolic shape in November. That is hard to see in the weekly chart but it is there.

Socionomics

A while back I was enamored with Socionomics - the study how the stock market affects social mood. While it is logical to think that it is the other way around - social mood affects stock prices - this group proved that the as goes the stock market so goes the mood.

There is one thing that is striking and somewhat useful for predicting the stock market - even though I just said it is the stock market that comes first. What I mean is that if you can identify the prevailing social mood you can tell what kind of stock market we are in. Since trends persist, it is useful.

Did you notice how sometimes all the movies are happy Disney-esque comedies and love stories while other times action, adventure and monsters dominate? The former appear when stocks have been doing well. The latter appear when they have not been doing so well.  And wars happen near the end of roaring bear markets.

Here is a recent missive:

http://www.socionomics.net/2011/10/asian-markets-presage-the-frequency-and-severity-of-terrorist-attacks/

It suggests that we can have at least a little warning of Al Queda and its buddies terrorist attacks by following the Pakistan Stock Market. Check out their chart before you poo-poo it.

Interesting to say the least.

Fear and Greed

This is a chart of the ratio of two commodities, both priced in dollars. That means the dollar is taken out of the equation leaving just real market meaning behind.

The copper ETN divided by the gold ETF shows a solid decline all year. It's meaning is that the metal linked to economic growth is underperforming the metal linked to fear and hedging. And that is not a good thing for the economy down the road.

True, there is some rally room to the trendline but with ratios you should give them a little leeway when it comes to patterns and lines.  Just one more bit of evidence to put on the bearish side of the ledger.

More Songs about Buildings and Food

Well, I had two topics that I've covered before hence the Talking Heads album title from 1978. Now I lament about doing trade shows and flying to get there.

Not that I follow the fundamentals but here is some Peter Lynch get out there and see for yourself research on airlines. The conclusion is that they are in a horrible business.

I spoke at the AAII (American Association of Individual Investors) last week in Las Vegas. The attendance was huge (looked like 3000 to me) and I had 175-200 attendees in my presentation on using charts. Considering the heavy emphasis on fundamentals in the group and the fact that there were  maybe 10 presentations running at any one time I'd say I had a really good crowd. They asked lots of questions but in the end I can see perhaps three sign-ups to my free chart of the day email.  Three? Yes, three. And did I mention they were free? With a promise not to spam anyone?

Anyway, I took American Airlines from JFK airport in NY. The terminal is nice, as I've blogged before but this time the walk from the terminal through the corridors and jetway was so long that someone asked if we were walking to Vegas. Let's not forget that the terminal was 345 miles from the actual runway and theplane drove for a good 15 minutes to get there. I'd say taxi but we all know taxis drive fast.

They started to load the plane an hour before take-off.   Yes, that is where I want to spend all my free time - in an airplane sitting at the gate.

With hot panini in hand from a good food vendor in the terminal, I made my way to my seat. Up went my carry-on bag and down I went into my seat. Yes, a seat suitable for some Justin Bieber's size.

I measured the distance from my nose to the back of the seat in front of me - exactly twice the height of a paperback book (do you carry a ruler with you?). And that was before the seat was leaned back.  Well, at least mine would lean back, too.

Uh, not, not in front of the exit row. Needless to say, it was an unpleasant experience, not including the lady coughing and hocking up a loogie in the next seat.

They had an ancient mini-screen showing a movie I did not care to watch. Forget about getting the paper to read. Good thing I had that paperback - and my own headphones - and some food.

On the way back to NY I flew Virgin America. They were able to load us in 30 minutes, the plane was cleaner, had rather interesting mood lighting, a TV screen at every seat but unfortunately the same Bieber-width seats. At least this time I was next to a group of petite ladies who did not spill over the arm rest into my seat.

I'd love to do a pairs trade with American and Virgin. But short of that, I still hate flying, would take the train middle distances if available, really think twice about vacations requiring any flying at all and cannot see it getting any more pleasant for passengers. A ton of it has to do with security which usually stops just short of an anal probe. I noticed I had a slight tan after passing through the x-ray machine.

More crowds, more security, more TSA attititude, less services, more nickel and diming of fees and higher prices. A perfect recipe to attract more customers.  Count me out.

Oh,did you notice AMR's dividend yield at zero and earnings below zero?  Yeah, back up the truck

Distractions

Blame it on Cain.
Don't blame it on me.
Oh, oh, it's nobody's fault,
but we need somebody to burn.
- Elvis Costello ( 1977) - hat tip Imus in the Morning

Without diminishing the seriousness of sexual or any type of harassment in the workplace, we have let the current charges against Herman Cain distract us from the bigger picture - again. Certainly, we have to vet our potential leaders but this is not the issue I want deciding who will mold tax law, military strategy and the look of government. All of the candidates now and in the future have this sort of crap in their histories. Don't they laugh at us overseas when we get our panties in a bunch over what seems to be the norm everywhere else?  Honestly, I'd rather have a flawed yet competent man (or woman) in the White House than a goody two shoes.

I remember back when Gary Hart was bounced from the 1988 presidential race for having an affair. Even back then, people were talking about how they'd rather have a guy like that rather than a frustrated priss with his finger on the button.

This is not an endorsement for Herman Cain or any candidate. But when it comes down to who and what is best for me and my money I'd rather know who will have the right plan for the economy.

Greco goes to Roman

Getting nothing but static, getting nothing but static
Static in my attic from Channel Z
- B-52s (1989)

No confidence in Greece over the weekend. No confidence in Italy today.

It's all Europe all the time and nothing else seems to matter.  Curious how gold has been on the move higher right after the naysayers got smug.

Tough Times for Long-Term Investors

Johnson & Johnson is a widely held stock and an institutional favorite. It pays a nice dividend and likely will be around for a long, long time. So investors should be comfortable with it, right?

Take a look at this chart. Over the past few months is has traveled quite far yet it made no progress. Buy it and you get stopped out. Sell it and you get stopped out.

My thesis is that until this sort of behavior ends, small investors will not be back. Of course, that is one of many reasons why Joe Mainstreet is missing.

Using RSI

The following was featured in the "Today's Lesson" section of Quick Takes Pro yesterday. This is where we take a look at a topic in technical analysis relevant to what is happening in the market right now. What is truly oversold and overbought depends on the trend and we used Amazon below to address the condition of the major indices this week.

This chart of Amazon shows how momentum indicators act slightly different depending on the trend. For example, if you believe that the normal range for RSI is between 30 and 70 then in a bull market, oversold really is roughly 40 for RSI and overbought can be up by 80.  In a bear market, oversold can be down by 20 and overbought only as high as 60.

Admittedly, this is far from a standalone analysis as it is not completely cut and dry in the real world. Also, we cannot tell if an RSI peak or trough is actual until after it happens and that means being late to the trade.

But armed with this information, when RSI peaked at 64 in February of last year, we were only a day or two away from the warning. Toss in the potential double top and trend break 9not shown) and we would have been ready when the January low was broken to the downside.

Personality Still Split

Whole Foods disappoints and craters after hours while Qualcomm delivers and soars. This condition has been in place all earnings season so far and like the Hindenburg Omen it smells of a fractured market. Fractured markets, or frackin's markets, if that's the way you roll, are inherently not stable. Unless the ouzo keeps flowing from Greece, something is giving me that sinking feeling.

Poll results

There is still some time left on the poll - mainly because blogger won't let me cut it off early - but the results are obvious. The overwhelming majority of respondents do not think the October rally was the start of something bigger. And almost 2/3 of them are in the bear market rally camp.

While far from a scientific survey, we still can draw a few things from it. First, we start with the bias of the survey towards the bear side. Why do I say that? Because I have doubted this rally and fought the bull market before it. It is safe to assume that the majority of the readers who continue to come back to this blog and to my other writings share my views or at least are sympathetic to them. I am pretty sure Cramer and Kudlow do not read me (for many reasons, I am sure).

That leaves us with what I think is a good read on the sentiment of people who actually know what they are doing and are not just toeing the company line to push stocks. (Note, it is not towing the line, as in pulling it. It is more like keeping in order with ones toes on a straight line drawn on the floor - conforming).

This is not a media survey where 50% bears means the public is panicking. It is closer to a smart money read, in my view. And I back that up with similar results on the Intrade system where they trade futures on all sorts of things as politics - and where the market will be next year.

So, fellow market enthusiasts, as a group we did not drink the kool aid. We did not believe Greece would play ball and they didn't.

Of course, we are only two days removed from the peak of a massive market rally and I am not foolish enough to say that it is down, down, down from here. One news story that Greece is behaving and up we go. One report that QE4 is here and up we go. Or that we got bin Laden. 

Oh wait, we did - on May 2. And what was special about that in the market? Oh yeah, it was the very day the Dow scored it 2011 high.

In other words, don't take anything for granted.