The Disciplined Investor Podcast Series
April 29th, 2008 by Corey Rosenbloom
Not long ago, I discovered Andrew Horowitz’s website The Disciplined Investor which probably has become most known for its Podcasts.
So far, Andrew has hosted 54 episodes and has addressed a wide variety of topics, including many interviews with fellow bloggers and financial minds in the industry.
Most impressive to me, he recently interviewed former Labor Secretary Robert Reich on Super-Capitalism, which touched on a broad array of interesting economic topics.
He has also interviewed
Brian Shannon of Alpha Trends (ep. 40)
Adam Warner of Adam’s Daily Option Report (ep. 50)
Tim Knight of Slope of Hope (and founder of Prophet.net - ep. 47)
Barry Ritholtz of The Big Picture (ep. 46)
Gal Arav, creator of NewsFlashr (ep. 50)
And many other individuals.
The podcasts themselves pop-up in iTues via this Subscribe link but you can also go to his website and download them via mp3 or for Zune as well.
Podcasts offer an alternative to websites, because they can be downloaded and taken with you wherever you go, be it in the car on the way to work, on the subway, or while exercising at the gym.
Andrew’s podcasts are professionally produced, with top talent interviews, and he is becoming a leader in the emerging financial podcast world.
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Support Confluence
April 28th, 2008 by Corey Rosenbloom
There’s an interesting confluence of support coming in on the Dow Jones and S&P 500 Averages. Let’s look:
S&P 500:
On both charts, three proposed trendlines have all come together to a point, which sits just under the current index prices.
It’s interesting to have such a confluence. Also, the key 20 and 50 period moving averages also have set-up just beneath the price which could also provide key support to price. The 20 period has recently crossed above the 50 (which is bullish).
It’s just an observation, but it would fascinate me to see price shatter all these support levels.
Recall that price is still in somewhat of a downtrend, and is still beneath its key 200 day moving average, which is bearish.
The S&P needs to clear 1,400 and the Dow needs to clear 13,000. If bulls take these levels out, we could have a retest of the prior swing highs.
Failure at these levels will push price down to retest the prior lows, and could even precede further.
It may be better to wait until a move is underway before joining, rather than trying to anticipate which direction you think it will break.
The Fed’s upcoming decision could be enough to propel the indexes out of this range and into a direction with conviction. Until then, be safe!
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Moving Average Respect Example
April 28th, 2008 by Corey Rosenbloom
In my trading, I utilize moving averages to determine trend, support/resistance, and price structure.
The example today from the FOREX Australian Dollar / US Dollar cross (AUD/USD) showed an excellent example not only of how price can respect its key moving averages, but of momentum divergences as well:
This is a 5-minute chart of the cross, which shows price beginning the morning (5:00am) flat before crossing under its key moving averages and then each successive pullback was resisted by the key 20 period EMA.
A momentum divergence formed until 8:00am, at which a large volatility move pushed price to a new momentum high and crossing above its key averages.
The moving averages themselves crossed, and each successive retracement back to the key 20 period EMA was met with support (providing a simple trade set-up to play for a small target with a small stop/risk).
As price traveled higher, yet another momentum divergence formed, warning that the buyers were lacking power to push the cross higher, and that successive pullbacks had reduced odds of holding support at the key 20.
TradeStation now offers simulated trading, and I’ve been doing some work with FOREX and finding very satisfying and encouraging results. This example shows how key averages can support or even create low-risk trading decisions.
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Correlation Between Yields and Stocks
April 27th, 2008 by Corey Rosenbloom
Can the relationship between 10 Year Note Yields and US Stock Prices reveal risk seeking and risk averse behavior of funds and investors?
Earlier, I posted a few charts on the topic, so be sure to refresh with those for more information:
Stock Correlation with the 10 Year Yield
A Look at Bonds, Stocks, and the Fed Rate Cuts
The Bond Market and the Stock Market compete for investor capital, and when certain conditions apply, money will often flow directly from one market into the other, as investors perceive opportunity, or want to control their risk.
While there are a plethora of outside variables that affect these two markets, and there is virtually no way to explain price movements between the two markets perfectly, I did a correlation study between the two markets to see what the correlation resembled over the last few years.
For my test, I compared the weekly S&P 500 prices with the 10 Year Treasury Note Yield ($TNX).
The logic is as follows:
Yield prices are inversely related to bond (or note) prices, meaning when yields rise, bonds are falling. Conversely, when yields are falling, bonds are rising.
While there are many other variables, if investors see the future of the stock market as being ‘too risky,’ or they perceive bond yields high (or some combination thereof), then they will sell some stock and buy bonds (thus driving yields down).
When the stock market is falling, generally people will be exiting the market rapidly and buying bonds, thus seeking safety from falling equity prices. Again, this ‘defensive’ action drives up bond prices and thus decreases yields.
The opposite is true. After the market has fallen for some time and begins rising, and everything seems ’safe’ again, investors will exit bond positions (driving down prices and causing yields to rise) and buy equities (driving stock prices higher).
Now, for the quick and painless correlation study, I separated the prices and compared them by years and ran a simple correlation analysis in Excel for each year period. Let’s look at the results:
(click on image for larger picture)
What we see is that the correlation is only strong (at least in the last 8 years of price action) during down years in the market.
Here’s a chart of the two markets:
Quick Facts about Correlation:
An “r-value” or correlation is expressed from -1 to 1.
Two series with a correlation of 1 would be 100% correlated (or equal, such that both rise or fall together).
Two series with a correlation of -1 would be 100% negatively correlated (as one rises, the other falls).
Two series with a correlation value of 0 would be not correlated at all.
Typically, anything above 0.50 has a ’strong positive correlation’ and anything beneath -0.50 has a ’strong negative correlation.’
In 2002, the S&P and 10-Year Yields were almost fully correlated (they had a value of .91).
2001, another bad year for the market, showed a correlation of .71.
2008 (4 months only) has been a bad year for equity markets, and the correlation has risen to .62 (strong positive yet again).
2006, a relatively good year for the stock market, showed a slightly negative correlation, meaning - for a period - as stock prices rose, bond prices rose too (meaning yields fell). This correlation was not extremely strong, however.
While this is not enough data to draw meaningful conclusions, it does appear that on the surface, yields and stocks correlate in down markets where fearful investors sell their stock positions and buy bonds (driving yields down).
It’s an interesting topic, and one I plan to study more in depth. I’m learning enough about Excel functions to become slightly dangerous!
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