Showing posts with label Educational. Show all posts
Showing posts with label Educational. Show all posts
Saturday, August 20, 2011
In case you missed it...
Here an in article by Will Rahal on the economy, published when the S&P 500 was at 1345: The Economy: a Structural Problem.
Tuesday, June 14, 2011
Reaction to News
There are always expectations set on the results of a specific news event, whether economic or company specific, i.e., earnings. For the stock market, there is no such thing as good or bad news. There are three categories, actually. News can either meet, exceed, or fall short of expectations. The market can initially not react, react accordingly, under-react, or over-react. That initial reaction can reverse or continue. My permutation and combination knowledge is rusty, so correct me if I am wrong, but that makes for 24 combinations.(?)
Each of those 24 possibilities carries its own interpretative significance-- or insignificance. This is why it is vital even for a technical analyst to be very aware of the news.
Last week, I wrote that "I believe the market will react very strongly to any news that beats expectations and may even react strongly to in-line news, given the recent string of disappointments."
Above is a 5-minute bar chart of one day of after-hours trading on the September S&P futures contract. The most recent strong green bar with very high volume was a reaction to the scheduled retail sales economic news release. These were the results, courtesy of Econoday and Bloomberg:
One may consider today's news a beat because of the upward revisions to last month's figures, but more than anything, this is in-line news. However, the market reacted strongly, shooting up 5 points after already being up 9 points in after-hours. This is one piece of the puzzle. The final piece is whether sellers use this opportunity of higher prices to sell, reversing the reaction, or if buyers, including short-covering, dominate, continuing the reaction.
Each of those 24 possibilities carries its own interpretative significance-- or insignificance. This is why it is vital even for a technical analyst to be very aware of the news.
Last week, I wrote that "I believe the market will react very strongly to any news that beats expectations and may even react strongly to in-line news, given the recent string of disappointments."
Above is a 5-minute bar chart of one day of after-hours trading on the September S&P futures contract. The most recent strong green bar with very high volume was a reaction to the scheduled retail sales economic news release. These were the results, courtesy of Econoday and Bloomberg:
One may consider today's news a beat because of the upward revisions to last month's figures, but more than anything, this is in-line news. However, the market reacted strongly, shooting up 5 points after already being up 9 points in after-hours. This is one piece of the puzzle. The final piece is whether sellers use this opportunity of higher prices to sell, reversing the reaction, or if buyers, including short-covering, dominate, continuing the reaction.
Friday, June 10, 2011
Value Investing
This blog almost entirely focuses on short term technical analysis. To provide a change of pace and a real treat, for the weekend I present a lecture by Whitney Tilson, a value-based hedge fund manager. The lecture beings during the second minute, and the first 55 minutes comprise the introduction to the principles and strategies behind value investing that I would like to share.
To quote a friend of mine, who is a value investor, but worked as a prop trader,"[Technical] ideas typically lack scalability, tax advantages, and require high commission or leverage costs. Compounding using the value approach is extremely scalable (e.g. Berkshire Hathaway), has tax advantages due to long-term capital gains rates, and requires much lower total commission costs."
Enjoy.
To quote a friend of mine, who is a value investor, but worked as a prop trader,"[Technical] ideas typically lack scalability, tax advantages, and require high commission or leverage costs. Compounding using the value approach is extremely scalable (e.g. Berkshire Hathaway), has tax advantages due to long-term capital gains rates, and requires much lower total commission costs."
Enjoy.
Monday, April 18, 2011
How to Spot a Market Top
Mark Hulbert has written an excellent, concise article on four factors to consider in determining a topping market cycle. These are:
* Valuation
* Sentiment
* Market Breadth
* Interest Rates
Assessing these four factors, the conditions for a top have yet to be met. Here is a link to the article.
* Valuation
* Sentiment
* Market Breadth
* Interest Rates
Assessing these four factors, the conditions for a top have yet to be met. Here is a link to the article.
Thursday, April 14, 2011
Non-Trivial 17 Points; Elliott Wave Projection
[For all images, click to enlarge.] Please study the principles of the table below for a minute.
The present market structure reflects the principle stated in box 4 of the table above. Contrary to my expectations, yesterday's support line was broken, transforming--or, better said, revealing--the structure from an a-b-c correction to a 5-wave sub-structure of wave-a. The teal boxes in the chart below, encompassing waves i and v, are nearly identical in size and time, 17 points. Wave iii, as is typical, was the longest.
The significance of this structure is that the market correction has yet to complete its b and c waves. Below is one projection for the b and c targets, based on a .618 and 1.618 Fibonacci retracement and extension, respectively.
To get a big picture view of this wave structure, I present the chart below. There is a point in time at which the possible price projection bifurcates.
Finally, this picture fits in with a fractal comparison of the 2007 stock market top and the present period. A defining characteristic of this patter was the sharp V shaped bottom, indicating a lack of a sturdy basing period.
The present market structure reflects the principle stated in box 4 of the table above. Contrary to my expectations, yesterday's support line was broken, transforming--or, better said, revealing--the structure from an a-b-c correction to a 5-wave sub-structure of wave-a. The teal boxes in the chart below, encompassing waves i and v, are nearly identical in size and time, 17 points. Wave iii, as is typical, was the longest.
The significance of this structure is that the market correction has yet to complete its b and c waves. Below is one projection for the b and c targets, based on a .618 and 1.618 Fibonacci retracement and extension, respectively.
To get a big picture view of this wave structure, I present the chart below. There is a point in time at which the possible price projection bifurcates.
Finally, this picture fits in with a fractal comparison of the 2007 stock market top and the present period. A defining characteristic of this patter was the sharp V shaped bottom, indicating a lack of a sturdy basing period.
Sunday, April 3, 2011
PE Multiples, Part 1: Calculating the PE
Any participant in the financial markets can benefit from an awareness of the price-to-earnings ratio, commonly referred to as the PE ratio or multiple. Even passive viewers of CNBC will hear this term frequently. PE is the first financial concept my father introduced to me. I plan to provide a thorough understanding of this ratio through a series of posts. Trust me, there is a lot one must write in order to fully explore this concept. Also, beyond explaining what it is, I will also add some of my own insights, particularly, how it is both a fundamental and a partially technical figure.
To derive the PE of a stock, simply look up its price and its earnings and divide the two. (Yahoo Finance provided all of the data used in this post.) On Friday, April 1st Exxon Mobil, ticker XOM, closed at 84.72. Its previously reported earnings per share (EPS) was $6.22. Its PE is thus 13.62 [=84.72/6.22]. An investor may want derive this multiple based on the company’s future earnings, which are expected to be $8.37 per share, yielding a PE of 10.12. So, 13.62 and 10.12 are the trailing PE and the forward PE, respectively.
The earnings used in the calculations above was the net income, which is affected by balance sheet asset depreciation, stock compensations, interest paid on debt, taxes and other factors. One may consider those factors not as relevant to the long term profitability of a company, so instead of using net income to calculate the PE, one can use what’s known as operating income. Operating income, which does not take into account the factors mentioned above, is the earnings net of various expenses, like research and development, production costs, marketing and sales, all of which are essential elements of the company’s operations. Exxon’s most recent operating income was 8.42. Its trailing PE based on operating income is 10.05.
To summarize, the PE is the ratio of a stocks price to some measure of its earnings. This measure can be current earnings, future earnings, or operating earnings. Each of those three provides a slightly different perspective on the company so it is worthwhile to inspect all of them when researching a stock. Since the trailing PE is based on historical data, it is a factual measure that requires no estimates. A forward PE, on the other hand, requires an estimate of future earnings, which can be inaccurate. However, the forward PE is more important because markets price stocks based on forward earnings and future expectations in general. Lastly, using operating income instead of net income may better represent the company's fundamentals.
This is a good place to stop this first post. To those for whom this post is elementary, I promise more advanced concepts are to come.
The next topic will be the significance of the PE ratio.
To derive the PE of a stock, simply look up its price and its earnings and divide the two. (Yahoo Finance provided all of the data used in this post.) On Friday, April 1st Exxon Mobil, ticker XOM, closed at 84.72. Its previously reported earnings per share (EPS) was $6.22. Its PE is thus 13.62 [=84.72/6.22]. An investor may want derive this multiple based on the company’s future earnings, which are expected to be $8.37 per share, yielding a PE of 10.12. So, 13.62 and 10.12 are the trailing PE and the forward PE, respectively.
The earnings used in the calculations above was the net income, which is affected by balance sheet asset depreciation, stock compensations, interest paid on debt, taxes and other factors. One may consider those factors not as relevant to the long term profitability of a company, so instead of using net income to calculate the PE, one can use what’s known as operating income. Operating income, which does not take into account the factors mentioned above, is the earnings net of various expenses, like research and development, production costs, marketing and sales, all of which are essential elements of the company’s operations. Exxon’s most recent operating income was 8.42. Its trailing PE based on operating income is 10.05.
To summarize, the PE is the ratio of a stocks price to some measure of its earnings. This measure can be current earnings, future earnings, or operating earnings. Each of those three provides a slightly different perspective on the company so it is worthwhile to inspect all of them when researching a stock. Since the trailing PE is based on historical data, it is a factual measure that requires no estimates. A forward PE, on the other hand, requires an estimate of future earnings, which can be inaccurate. However, the forward PE is more important because markets price stocks based on forward earnings and future expectations in general. Lastly, using operating income instead of net income may better represent the company's fundamentals.
This is a good place to stop this first post. To those for whom this post is elementary, I promise more advanced concepts are to come.
The next topic will be the significance of the PE ratio.
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