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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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Dow Theory Buy Signals Do Not Exist

When the Dow Jones Industrial Average (DJIA) is making new highs and the Dow Jones Transportation Average (DJTA) follows to new highs as well you often seen news reports exclaiming a “Dow Theory Buy Signal”.  If you use those reports to make investment decisions you’re being misled by a writer who doesn’t understand Dow Theory.  There are no buy signals or sell signals in Dow Theory that indicate a specific date where you should go long or short.  Robert Rhea in his book “The Dow Theory” went so far as to warn about buying or selling just after a confirmation of a trend change due to the risk of an abrupt correction near those points. Whenever prices have pushed through into new low ground in bear markets or to new highs in bull markets, it is usually safe to assume the primary direction will be maintained for a considerable time; but every trader should remember that from such new peaks or valleys secondary reactions can occur with amazing rapidity. (emphasis

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Home For the Holidays

Published on December 16, 2012 by in Eating Cat
No Need to Pack

My youngest got home from Berkeley yesterday for Christmas break. By planning ahead he saved himself the trouble of packing. Two weeks ago he started wearing the clothes he would need for the holidays then used his duffel bag as a laundry bag.  His college education is finally starting to pay off.  Maybe he can become an efficiency expert when he graduates.  

 
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Would You Buy From a Store that Can’t Add?

Published on December 13, 2012 by in Eating Cat

My wife was doing some Christmas shopping online last night and got the results in the screenshot below. If you haven’t picked up the problem, the total should be $37.25. Instead of going to another site to make the purchase, she took the time to call their customer support line and have the five bucks credited back to her. I would have run from the site and avoided it in the future. She has a lot more experience in shopping than I do so all I can figure is she’s right and I’m wrong. What would you have done?   Another interesting thing she ran into last night was when she  tried to buy a gift card online.  The website had the card on the site, but when she tried to add it to her cart she got a message stating that item must be purchased in a brick and mortar store.  She was shocked…and so was I.  How much money are retailers losing because they have a poor online

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How Tops are Made

S&P 500 Index 2006 Hedging

Today we find ourselves watching a market that is in no man’s land.  After topping in mid September the S&P 500 Index (SPX) suffered a mild correction falling from about 1475 to near 1350.  Now it is attempting to rally and is caught between its 50 and 200 day moving averages.  Everyone seems to be asking the same questions.  Have we topped? Is the bottom in place?  Where does the market go next? With that in mind, we thought it would be a good time to talk about a few of our most important observations about market tops over the last 30 years. The first thing we’ve noticed is that tops take a long time to form.  They’re brutal to an investor who makes big bets using put options because of the time decay in their options while the market chops around, puts in marginal new highs, then chops around some more.  Fortunately they’re a bit less painful for an investor using put options, volatility, or other aggressive financial instruments

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Emerging Markets and Financials Holding Up – Not Always Good

SPX vs EEM

Over the past six weeks emerging market stocks (EEM) and financial stocks (XLF) have shown surprising relative strength against the S&P 500 Index (SPX). Both of these indexes have been able to hold their 50 day moving averages even as SPX has clearly broken below its own. In addition, while SPX has broken several levels of support including its recent uptrend line, both EEM and XLF have held theirs.  EEM in particular looks to be consolidating just above a breakout of a down trend line.  This should be a very positive sign.  EEM and XLF are generally leading sectors.  We often see them create positive divergences with SPX at the tail end of major corrections. The problem we have now is that these two sectors are showing strength near the end of a rally (rather than the first of one).  When leading sectors lag it tends to cause confusion…and confusion leads to consolidation or a down trend. These two sectors are trying to tell us something about the market.  One

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Another Sign of Our Times

Published on October 7, 2012 by in Eating Cat, Random

On Thursday I posted a couple of signs I saw that are starting to paint a picture of the economic conditions in my area (and probably the rest of the United States).  We’ll here’s another sign that made me laugh at first, then gave me pause.  I’m not sure what it means.  It is most likely a simple commentary on this retailer’s experience with crime.  Regardless of the meaning, this is another sign of our times. As a side note, I’m not sure if he really has a gun.  Take a look at the picture he drew.  The trigger is backwards.  Nevertheless, I won’t be testing him.        

 
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Signs of Our Times

While out and about today I saw these two signs just across the street from each other.  It made me wonder if there is a relationship between high gas prices and a retail store offering cash for gold.  The cash for gold store wasn’t a jeweler who’s offering to buy gold, but an actual retail outlet set up for the express purpose of buying gold (and I assume turning around and selling it for cash).  Is gold inflated to the point that it is profitable to trade it at a strip mall? Or is it that people are in such bad economic shape that they’re willing to sell their jewelery for much less than its worth? I can understand buying gold as an add on to a core business.  To me it’s completely reasonable for a collectible coin shop or jeweler to buy junk gold as an extra source of income (since their core business pays their fixed costs) .  But, a cash for gold retail outlet must pay only

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Double Tops are Meaningless for Intermediate Term Investors in an Uptrend

Published on August 16, 2012 by in Eating Cat

I keep seeing talk about a double and triple top forming in the S&P 500.  These market prognosticators are foretelling doom for the stock market because it is approaching a double top.  They often cite all the problems in Europe, a slowing economy, and even the US debt problems as to why the market is going to fail right here.  Although I agree that all of the fore mentioned items are problems, I don’t agree that reaching a previous price point will bring those problems to a crisis point. Double tops (and double bottoms) are simply places of short term support or resistance.  I’m always amazed to hear technicians pointing to a double top as a great place to get short over the intermediate term.  If you’re not eating cat then a cursory glance at a medium to long term chart will tell you that double tops and bottoms should only be used for a trade with the trend or for a very short term trade against the trend. Take

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QE3 or Not

There is a lot of talk (actually hopes and dreams) of QE3 coming soon due to the signs of a weakening economy.  I’m of the opinion that the economy isn’t what the fed is trying to help.  The fed (and the European Central Bank) is trying to keep financial institutions solvent and sure up confidence in financial markets.  Their actions over the past 3 years have not been targeting the economy and won’t be over the next few years. The economy is simply their justification for action.  What the fed fears most is a loss of confidence that results in falling markets that destroy the balance sheets of financial institutions and even governments (can you say Greece, Italy, and Spain).  While they’re standing back and watching the ECB and EU participants try to save European banks and countries, they are also implementing policies that make it easy for banks in the US to recapitalize through high earnings (ZIRP).  They’re not implementing policies that help consumers…that would then strengthening the economy. 

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