One Good Data Point

May 30, 2012

This just in. We are now back at 5/25 levels for the S&P 500. From Tobias Levkovich at Citigroup, as reported by Business Insider:

Last Friday our panic-euphoria model, one of our proprietary sentiment models went into panic, that gives us a very high probability, almost 90 percent probability that markets are up in 6 months, and 96 percent probability that they’re are up in 12 months.

I have no idea how they come up with those probabilities, but it would be nice if it’s true. More generally, other analysts have also found a correlation between very negative investor sentiment and higher markets 6-12 months later.

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Posted by Mike Moody

Guns and Monkeys

May 30, 2012

The National Rifle Association is well-known for its slogan “Guns don’t kill people; people kill people.” This sentiment has a long history and echoes the words of Seneca the Younger that “A sword never kills anybody; it is a tool in the killer’s hand.” I have often heard fans of financial modelling use a similar line of defence.

However, one of my favourite comedians, Eddie Izzard, has a rebuttal that I find most compelling. He points out that “Guns don’t kill people; people kill people, but so do monkeys if you give them guns.” This is akin to my view of financial models. Give a monkey a value at risk (VaR) model or the capital asset pricing model (CAPM) and you’ve got a potential financial disaster on your hands.

—-from James Montier, The Flaws of Finance

To read the whole article at Advisor Perspectives click here. It’s a nice summary of some of the problems in modern finance as practiced.

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Posted by Mike Moody

High RS Diffusion Index

May 30, 2012

The chart below measures the percentage of high relative strength stocks that are trading above their 50-day moving average (universe of mid and large cap stocks.) As of 5/29/12.

diffusion53012 High RS Diffusion Index

This index has snapped back after reaching a low of 15% on 5/18/2012. The 10-day moving average is now 33% and the one-day reading is 49%. Dips in this index have often provided good opportunities to add to relative strength strategies.

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Posted by Andy Hyer