If you're looking for original ideas, then maybe this isn't the place. Why? Because if I had the 'Rosetta Stone' of investment ideas, would I post it here? Actually, I think mean reversion has the best risk ratio of the 'Method Man' journey I've followed.
History tells us that market 'excess' subsequently results in mean reversion. Jeremy Grantham has the data...I'm just repeating. Excess returns are followed by mean reversion, just as excess volatility is followed by diminished volatility. What 'they' want us to believe is that 'this time it's different'. What is different is that our economy runs on debt, furious, frenetic, ferocious debt. That matters. Amidst global liquidity excess and efforts at currency debasement, we witness the inevitable concomitant, a migration to 'hard assets', gold, silver, and collectibles.
"Tout TV". The 'Batman' had a bit of a Freudian Slip on 'Tout TV' talking about 'late stage expansion'. What he means to say is 'glorious, irresistable expansion.' And Abby Joseph Cohen came out with her nth bullish call, a broken record. I think she said S&P500 1400 by the end of next year. Wasn't her last call something like S&P500 1500 by 'like' years ago? Yeah, so I'm negative about every citizen owing over 25 grand.
KY or VP? Michael Kahn had an interesting piece in Barrons Online within the past week comparing the ratio of the product of Tech and Consumer Discretionary to HealthCare and Consumer Staples.
(XLK x XLY)/(XLV x XLP)
It's intuitive that under speculative conditions, tech and discretionary buys outperform the 'safety' of healthcare and staples. Earlier in the day today, XLK and XLY were both up about a percent, while XLV and XLP were both up about a third of a percent. How did it close?
(21.94 x 33.49)/ (31.18 x 23.42) = 1.006 (the higher the ratio, the more speculative the fervor...
You can get a flavor for the sentiment by keeping the four on your screen. So is it KY or VP?
Dynamics
I'm a firm believer that market dynamics are the breadcrumbs to follow to market success. There's a lot to digest, from breadth, 'beta', to action of key 'tells' like the financials, brokers, and semiconductors, to measures of volatility, sentiment, and 'extension'.
I like to monitor breadth intraday (5 minute charts) using both absolute numbers and moving averages. I also like to follow tick oscillation. On the five minute tick charts, the ten period average hit 665, which is extreme "panic buying" about 127.65, which was close to the daily high. I also have calculated the 1, 1.5, and 2 standard deviation volatility bands before the open, looking for areas where the market might reverse by 'probability' based on the implied volatility of at-the-money options. http://investorsobserver.com/contributor38.asp
For what it's worth, we're still overbought, by the 10 and 30 period averages of breadth (I call it the Meisler-Mamis chart)
7% of SPX stocks are oversold by stochastics and 9% of NDX stocks.
The SPX/VXO ratio also looks to be turning down.
That's the early report. I'll probably have a bit more later. Hope you find it educational.
