Wednesday, October 31, 2007

Do We Have A Quorum?

The recent rage among commentators (including this one) is the limited participation of individual stocks in recent index runups and, seeing as there is a strong element of 'common sense' in the bearish take on this kind of analysis, we decided to take a quick and dirty look at what this might have really meant in the history of the IBEX 35.

The indicator pane below the weekly chart (click on it to see some detail) of the index shows two calculations. For data, we have chosen the eighteen stocks currently on the index that have traded (as index components or not) since 1992, scoring 1 point for each that is positive over the last 20 weeks and -1 for each that is negative. That is the black line. The red is the same calculation made only in periods that included an intraweek all-time high.

Interestingly, for those to whom this kind of thing appeals, the reading currently stands at -7 and is the third successive negative week. But what it portends we hesitate to surmise because on only four occasions prior to the current moment in the 14 years we have on display have we ever witnessed a number below zero as the IBEX reached historic maxima. On the other hand, they all took place between late November, 1999 and early February of 2000.

Wednesday, October 24, 2007

While You Were Out...Part II

Amazing stuff invariably happens when one is absent from the scene in which it plays itself out, be it your home turf. Witness Alonso-manic TeleCinco managing to put in an ad break in last Sunday's G.P. of Brazil just seconds before arch-enemy/anti-Christ, Lewis Hamilton, hit the wrong button on his McLaren's steering wheel and promptly lost ten or eleven places on the track. (With all due respect, TV5 did not interfere with the viewing of Hamilton's idiot antics after the light went green. He did, after all, only have to finish fifth to eliminate all challengers for the title).In the case of the current writer, all it took was a two-week motor trip to permit the IBEX 35 to graze record territory and threaten to hurl into action this blog's mechanical trading strategy. And threaten is the word, because we can think of few places where we'd rather less be than long three dozen mountain goats in the middle of the rut.

But it was not to be - at least for now. The weekly chart on the left shows the situation at the end of last week, with the index closing a few points into record territory and above the trigger line. Had it proceeded to open Monday above 15,363, we would have been put on alert. Two weeks in a row and it's a buy. By way of contrast to all this dangerous optimism, a look at the list of percent losers/gainers on the week shows us that twenty six of them failed to appreciate more than one percent, with nineteen of these ending the period negative or unchanged. However, the group of +1% gainers, nine strong, includes four of the top five weights on the IBEX. By weightings they are: TEF (20%), SAN (17%), IBE (10%) and REP (6%). That sums up to a nifty 53% of the market and among which stands out widow-and-orphan special Telefónica, which has been on a tear of late. This is not what we would call a low-risk entry point.

Among the other doubts that make us tremble at the thought of being sent long by the system is the fact that, despite the index's remarkable 1,000 point move in our absence, the defensive spreads that had been making healthy sums during the August/September rout continued to do so during the recovery. More specifically, they would be long income generators like gas pipeline, GAS, and electricity transmitter, REE, and short, uhhh, banks - having singled out BBVA in this regard. Long ENG/short BBVA would have turn a net 6.5%, for example, and substituting REE on the long side, 9%. Not the stuff of bull markets, say we.

This, naturally, brings us to the subject of whether the stock market is the 'place to be' right now - and the question, 'Exactly what is this stock market of which we speak?'. Anyone purely playing indexes, perhaps understanding them to be the market, would more than gladly accept the 12% the IBEX has handed over since mid-September and wouldn't give a cat's ass how many components actually participated. That's the magic of cap-weighting at work. However, during the week that Madrid hit the record close on a 2% gain, throwing a dart at the newspaper stock charts had a good chance of turning up a dud. So, when we speak of the generic investable, 'stocks', we should not always confuse them with the indexes that they make up. At this point in time it is a bad proxy, regardless of results.

Tuesday, October 23, 2007

While You Were Out

Ibex Salad's friend, Macro Man (prone being to put up blog polls, as he is), last August solicited the opinion of his readers about the general form that that month's stock market correction would take, giving the options of 'W' - retest of lows before recovering, 'V' - direct bounce up off lows, or 'lambda' - generally being the continued making of new minima. But what got us thinking the most was his insistence that voters identify themselves as either 'professional' or 'retail' players, there typically being a behavioural difference between the two, if not in the level of expertise brought to bear on the task. To cut it short, the light came on during this writer's recent trip to various historic and prehistoric places on both sides of the Pyrenees - which also explains his protracted absence from the keyboard.

Did we find illumination in the cave paintings of Les Eysies, inspiration in the dolmens of Britanny, or even salvation in the Romanesque churches of the Pyrenees of Aragon? No. The answer was found in the ease with which he folded up his tent before leaving so as not be bothered by irrelevancies like the progress of the euro from the $1.43 mark, gold from 740, or Spanish market stock spreads - let alone whether the IBEX 35 would (unlikely) kick out a mechanical buy signal. And that's the difference. The pro has to be in the market. And he must get it right, or at least less wrong than the competition. After all, no one is going to pay him to shepherd his money into bank a savings account, even though it may be the most appropriate course. To make it worse, not everyone will pay him to lose money. What a bind. On the other hand, the retail punter gets to opine without having to plunge and is allowed the privilege of pissing off in his spouse's car for a couple of weeks, unencumbered with worries, the only risk being that he or she might have made a bit of scratch in the meantime.

For The Record...

The final result of the pool, participated in by 251 readers, was:

Pro: V-10%, W-25%, lambda-24%
Retail: V-5%, W-16%, lambda-20%

The market, by the way, voted 'V' - the poll results being one of those contrarian signals that we wish we had heeded.