Sunday, August 05, 2007

Ideas to Start Another Volatile Stock Market Week

* When Investors Seek Safety - Over the past three weeks, we've seen the S&P 500 Index (SPY) shed more than 7% of its value. At the same time, we've seen 10-year Treasury yields drop more than 7% in a flight to quality. I went back to 1997 (N = 509 trading weeks) and found 15 occasions in which both SPY and 10-year yields had dropped more than 5% in a three-week period. These periods included late August/early September, 1998; December, 2000; March, 2001; June-July, 2002; September, 2002; and December, 2002. Interestingly, when we look 20 weeks forward, SPY was up on 11 of the 15 occasions, by an average of 5.95%. That compares quite favorably to the average 20-week gain of 2.18% for the remainder of the sample. The June, 2002 occasions were the most dangerous, showing a further double-digit drop during the next twenty trading weeks. Eight of the 15 occasions were up more than 5% twenty weeks later. Clearly there has been opportunity as well as crisis when investors flee risk.

* Tracking the Indicators - Tonight I'll update the Trading Psychology Weblog with indicators and a few of the recent market weakness. We continue to see waning downside strength and momentum, but also continued bearish trading patterns among large market participants. The basic indicators--TICK and Money Flow--have done a fine job of staying on the right side of this market.

* Here's a Neglected Topic - The Trader Performance post for the week takes up the topic of execution. Not sexy, but surprisingly responsible for differences between making money and losing it among short-term traders.

* What's Your Stock *Really* Worth? - Money manager Todd Chalem, whose work is featured on the excellent VesTopia site, passed along this link to his fair value calculator. The calculator takes earnings, projected earnings growth, and volatility and arrives at a fair value estimate. It would be interesting to use this for a basket of stocks (like the S&P 500!) to gauge when markets are overvalued and undervalued. Registration is still free during VesTopia's beta period; you can register and see Todd's latest portfolio moves and blog entries. Great way to see portfolio managers in action.

* Another Resource Worth Registering For - Jim Dalton is offering weekly market commentary via a free newsletter that features Market Profile perspectives. His latest piece explains why traders should be skeptical of the late Friday market drop. Ask for the "Index Insights" article. Jim is the author of the recent and very practical book Markets in Profile; his Mind Over Markets is one of my favorite market texts of all time.

* Where Are We Most Likely to Find Stocks That Will Snap Back From Losses? - Check out James Altucher's weekend links for the surprising answer. See also his link re: an Asian market often forgotten: Malaysia. And, in line with my recent blog post, check out StockPickr's list of big-yielding bank stocks.