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Volatility Begets Volatility

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Many people have the mistaken idea that high volatility (VIX) means falling markets. They’ve been trained by financial news outlets to associate volatility with fear. This notion is only half right. Volatility is also connected to greed. In reality, volatility is a reflection of the size of a price movement regardless of the direction. Take a look at the chart below and you’ll see that during the late 1990s price was rising, but in wide daily ranges. This caused VIX to rise substantially while the market was going up. VIX went up from about 10 to 27 (170%) while the S&P 500 index (SPX) almost doubled from late 1995 to just before the Russian financial crisis of 1998. So without much “fear” in the market VIX nearly tripled. After the Russian financial crisis VIX stayed elevated in a range between roughly 19 and 30 as SPX climbed 38%. Large range days while the market was rising created an elevated VIX. SIDE NOTE: I’m using VIX to show the price move

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Group Think

150731DowTheory

During May of this year a meme spread through the financial world about the under performance of the Dow Jones Transportation Index (DJTA) in relation to the Dow Jones Industrial Index (DJIA). Everyone was talking about the Dow Theory non-confirmation and what it meant for the markets. Today DJTA is still under performing, but the crowd isn’t talking about it. They’ve moved on. It doesn’t matter anymore. Why? Group think. Group think is common in the financial markets (and society in general). An idea that seems reasonable often finds wide support regardless of its merit due to market participants repeating the meme without taking the time to do some independent research or even think about it. When dealing with stock market memes it doesn’t matter if it’s correct it only matters how many other people think it’s correct. Group think moves markets. An example of group think came in early 2013 when a study stating low volatility stocks out perform high beta stocks was widely circulated. This study was repeated

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Why Dow Theory Still Works

Published on May 22, 2015 by in Dow Theory, Eating Cat
Dow Theory

There has been an increase in news stories about Dow Theory lately. Most of the discussion has been focused on the divergence between the transports (DJTA) and the industrials (DJIA). As you know I’ve added to the news flow by highlighting the break in opposite directions of Dow Theory lines by the averages. What almost everyone is talking about is the non-confirmation and its implication for the market. The opinions range from “the sky is falling” to “non-confirmations don’t mean anything” or even “Dow Theory is useless so this non-confirmation is nothing more than fodder for idiots”. I’ve been asked by one of the readers of Downside Hedge to share my thoughts on a recent blog post by a popular market commentator. His article was of the “useless fodder for idiots” variety. I’m happy to respond, but rather than call someone out I’ll focus on the general arguments I usually see against Dow Theory (which the “fodder for idiots” article touched on). The arguments against Dow Theory generally fall into

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Dow Theory Still Confirming Bullish Trend

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After seeing our core portfolios taking the most cautious stance they can last Friday I’m guessing you’re surprised that I’m writing a post telling you that according to Dow Theory the long term bullish trend is still intact. I’m also guessing that somewhere in the next few days you’ll read or hear people saying a Dow Theory sell signal has just been triggered. Those misinformed people will cite the fact that today both the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) have closed below their previous lows. There are two problems with people calling a Dow Theory sell signal today. The first is that there is no such thing as a Dow Theory sell signal. The second problem (which is moot because the first problem negates it…but I’ll keep writing for those of you who still aren’t convinced) is that although both averages closed below their previous lows today, they didn’t close below their previous secondary low points. One of the major requirements for a

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Market Health Continues to Rise

Over the past week all of our core health indicators improved even as the market consolidated.  The worst that can be said about this market is that some of our indicators are starting to show over bought readings.  However, over bought conditions can persist for a long time so all we can do is watch for them to turn back down. Another interesting point is that perceptions of risk are very low.  This is positive for the market.  This is one of the things most market participants get wrong.  They believe that if everyone is bullish and measures of risk like the Volatility index (VIX) are low the market should fall.  The problem with this belief is that those signals are almost never timely.  Sentiment can stay high and VIX can stay low for a long period of time before the market corrects.  I look for dramatic changes in those types of indicators, not a specific value to warn that the market may fall. Below is a chart of our

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Another Week…Same Story

Another week has passed, but the same conditions persist.  We’re now going into the third week of the same story.  Underlying conditions are strengthening while perceptions of risk are rising.  Market participants are simply waiting.  A few show nervousness and cause some price deterioration, then others see lower prices as a great short term opportunity and buy almost every intra-day dip.  I won’t go into the details of every indicator this week, but for those of you interested you can read this post since the conditions are the same. There seems to be a general consensus that this budget battle should be compared with July/August 2011.  I believe that comparison is incorrect. Everyone seems to have picked up the narrative without taking time to think about conditions in 2011 (so this post falls into the category of eating cat). I believe that the fiscal cliff debacle of December 2012 is a much better guide for the current market.  August 2011 had the overhang of bond rates all across Europe skyrocketing

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Drowned My Phone

Published on May 23, 2013 by in Eating Cat, Random
Phone worked after falling in a glass of water

A couple of days ago I fumbled my phone and it fell right into a 24 ounce glass of water.  It was completely submerged. I snatched it out as fast as possible and immediately dried off the outside with a paper towel.  I figured that it would be dead, but didn’t want to lose hope so easily so I opened it up and took out the battery and memory cards. After drying the inside I left it over night under a ceiling fan. The next morning I told my youngest what I’d done and he said he’d heard that putting it in rice would draw out water that might have seeped into the internal bowels of the phone.  Since he’d got the information from the internet I figured it must be true. ;)  Or at the least it couldn’t hurt…so the phone went into a sealed bag of rice for another day.  Then came the moment of truth.  I put the phone back together and turned on. It worked!! My

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Market Tops Give You Plenty of Time

Recently I’ve seen a lot of people mention on Twitter and various blogs that the market doesn’t give you time to get out at tops.  I have to politely disagree.  If you’re an intermediate or long term investor the market will almost always give you warning that it is preparing to consolidate.  As an example, here is one of our early warning posts from last October. Often the first warning signs are well ahead of the actual top, so the key to successful investing is in waiting for the weight of evidence to turn before making major changes to your portfolio.  Here at Downside Hedge we move money slowly as market conditions change.  From mid February we’ve been seeing signs of deteriorating market conditions.  Our canaries in a coal mine post on 2/19 highlighted some of the deterioration that we’ve been seeing.  The S&P 500 Index (SPX) was trading near 1520 at the time.  SPX is now near 1565 and most of those conditions are still in place. For a

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Happy Easter!

Published on March 31, 2013 by in Eating Cat, Random

I like salt and fat more than I like sweets so the wife got me Cheetos for Easter. I use chopsticks to eat them…which I believed was original thought until I Googled it…original thought isn’t the subject of this post so back to the Easter treat. Since she’s a woman and it’s a holiday the gift had to have a theme. Cute, huh? One more note, I’m married so I don’t get a whole bag…just that tiny box.

 
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Understanding Sentiment

Everyday, as the market continues to grind higher, I see sentiment on Twitter and various blogs get more and more incredulous.  Almost everyone is talking about the correction that never came or the reasons why the market has to correct…and correct now.  The reasons vary, but are almost always a multiple choice grab bag of the following: China’s economy is slowing Europe is already in a recession US GDP is falling Greece’s bond rates…I mean Spain’s bond rates…I mean Italy’s bond rates…well somebody’s bond rates  are rising The US is going to be downgraded by Moody’s (today’s new rumor…and it has to be true…I read it on Twitter) Oh yeah, Japan.  I know I’ve been talking about Japan for 25 years now, but… The VIX is too low US budget negotiations are coming up soon…and you know that won’t end well We’ve been at the top of the Bollinger bands for several days now AAII investor sentiment is way to bullish Margin debt is at record highs Equity, ETF, and

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