Quote of the Week

September 18, 2012

The cult of equity may be dying, but the cult of inflation may only have just begun—-Bill Gross

I don’t know if Mr. Gross will be correct with this forecast—he certainly isn’t always—but it’s worth paying attention to his thinking.

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The Problem With Fundamental Data

September 18, 2012

A pointed rant from The Zikomo Letter on the value of fundamental data:

All fundamental data is wrong in some way. Some of it is incorrect, some of it is published by people with a vested interest, and some of it is lies. I am not angry about it, but I think we should face the sometimes harsh reality provided by the Red Pill.

Let us start with company-provided information. If the history of public corporations tells you anything, it is that anything a corporation tells you should be treated as a lie. Sometimes it is deliberately misleading, sometimes it obscures the truth, and sometimes it just lies to your face. If you do not believe me, then I point you to some of those who were caught: Enron and Lehman Bros stick in the mind, but the list is long.

Do not kid yourself that these are the rogues in an otherwise healthy bunch: every public corporation twists and tortures their information to meet their objectives. In a previous life I was a company auditor, and I can attest that there is plenty of scope for maneuver within the law.

Technicians have long looked at fundamental data with healthy suspicion.  To be clear, I am not saying that fundamental data is useless.  I am sure some are able to use it to their benefit.  However, the risk of the “garbage in garbage out” problem with fundamental data is high.  One of the great things about relative strength is that it largely avoids this problem by simply reacting to what is happening in the market as opposed to what we are being told is happening.  

HT: Abnormal Returns

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Relative Strength Spread

September 18, 2012

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 9/17/2012:

The RS Spread has declined in recent weeks as the laggards have had the upper hand.

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