Monday, June 30, 2008

Index Thinking


Gossamer
by Vicky Brago-Mitchell

I was reflecting on the indices yesterday. First, I've had this particular perturbation regarding the DOW given the number of new entries, exits and extants. Due to the changing composition of this small indices, can it really mean anything on a technical basis for this reason? I'm concluding no; however, it does represent an emotional bellweather.

Second, the S&P which was heavily weighted toward financials has now lightened up considerably. I think the percentage was above 30%, and I saw an article (Bloomberg--in fact it was this article that clicked the gear in my head), that stated that it might go down to 12% weighting. If that is indeed the case (and I believe that it is), then how can historical views of indices (v. sectors) be very telling with respect to tops, bottoms and the big fat middle?

It's a bit of a rhetorical question, but one worth asking. While we had a bust in 2000/2001 with the internet stocks--our so-called dotcom bubble--the banking system had not been bitch stomped (yes, that is an ugly term, but I'll keep it). As NG notes in comments, we are in unchartered waters. And perhaps overall the market, regardless of sectors that have been causal in a market debacle, still behaves the same way. However, as a reasonable person, I have to believe that there are differences. I'm going to continue hold sector activity ahead of indices activity for my own market thinking.

I'm always leery of wholesale analysis of this crash v. that crash. I do believe that we are seeing the "credit event" of our lifetime. And I'm reminded of Armstrong's work on the subject of the 1929 crash. Specifically he notes that off-index debt in the form of bonds--from many countries--was a large cause. When I read that for the first time last year (and posted about it here), I was struck by the currently unfolding credit derivative market.

But....I'm straying too far from my point which is simply to be a little suspect of wholesale technical analysis of indices.

I did want to leave you with a chart on AXA--If the 200DMA falls.....

2 comments:

nice said...

Is it possible that the markets are 'forever changed?'

Paulson just made a speech about changing the way governments intervene in financial markets.

Everyone other day, China or Korea or some other country is talking about 'stabilizing' their stock market.

Oddly enough Japan tried the same in the 1990's and when investors found out that the Japanese government was buying - everyone ran for the hills.

None of this seems healthy to me - it is essentially an acknowledgement that no one really wants to buy these little pieces of paper (stocks and bonds) any more - and intervention merely means that all these pieces of paper will begin to trade at 'fictitious' prices...

...sad

If they really wanted to intervene in something they could easily take down the commodity markets and oil - as these markets are small...

After all - the elephants are always controlling the currency markets - and they are massive trillion dollar beasts.

I imagine before all is said and done, that just like 2002, various people targeted as being 'resposible' for the credit crisis - will be hauled before some court to satisfy the publics anger over their declining wealth... and that this will occur after the bottom of the market.

... will anyone show up this afternoon to buy?

Real back and forth action here - trying to hold ground...
--haven't hit a lower TICK since Thursday...

Oil still being sold every time it hits the top of its trendline...

nice

nice said...

w e a k

Everyone was glad to put that month behind them...

Leisa isn't it true that of all the original DOW components that one is still in it today - GE?

One other interesting point (to those short term trading the market anyways) is that the DOW can be used to your advantage because it always moves in 25 or 50 point chunks - this knowledge can be used to help predict whether a support level will hold or not (often in conjunction with DOW buy programs)

Notice the Chrysler denied any problems today - notice the recovery in GM/F

F was near penny stock status today...

Is anyone buying into any of these beaten down DOW stocks?

I've found it useful to buy them at long term fib points or at the monthly support from the bear market in 2002/2003 - often we bounce at these levels...

For instance if we fall further later this year AIG looks interesting at 22.5 and C at 13.8& GE at 24.5

and notice how MRK bounced off monthly support today

and BA has retraced 50% of its bull move from 2003 - again looks interesting...

nice