Carpenter Analytix

Carpenter Market Remarks
              Notes on Recent Statistics and Inference

                   
www.CarpenterAnalytix.com
                                


Carpenter's Market Remarks--2007 Archive

December 31, 2007. Not much is new. Short-term still favors upside, albeit with less confidence than last week (or the week before).

Among last week's several cautionary remarks, we said "The rally so far has failed to move the Core Momentums up away from of their threat of going significantly negative." That's still true, and the attachment here illustrates the point with a plot of the NYSE Core Momentum series. This index is still zero-ish and could go either way, but is seeming somewhat unresponsive to net upside market of recent weeks. Nasdaq Core Momentum looks about the same as NYSE.

Happy New Year!

RLC
Hanover NH

December 24, 2007. Last week's mixed-picture seems to be resolving to the upside for now. Friday's mini-surge was not terribly impressive overall, but it did produce another bulge in the implied/actual volatility ratio up above unity. That's usually pretty reliable for short-term upside follow-through. Also, VIX itself is at a level-and-change state associated with significant short-term upside. A three-year graph of the Sigma/VIX ratio is attached for you here.

Alas, other indications of more general weaknesses continue unabated. Our Median Returns index is still way off its highs; both the NYSE and Nasdaq Core Indexes have failed to maintain their uptrends. The rally so far has failed to move the Core Momentums up away from of their threat of going significantly negative. The implication is that any pursuit of the upside postulated above should be modest and temporary.

Our mutual fund processing is bogged down this week due to the large number of year-end distributions. One consequence is that posting is delayed this week for our Prime Timers web site page. Send a note if you wish to be alerted when that page is current.

RLC
Hanover NH

P.S. Hedge Fund Analytix service has converted to a broader hedge fund base, with extended history back through the 2000-2002 bear market. Every Friday we report Managed Futures funds asset exposures (equity, fixed income, dollar, commodities). If you're not yet a subscriber, get started now for 2008. Call me directly for inquiry, at (603) 643-6430 or email RobinC@CarpenterAnalytix.com.

December 17, 2007. Short-term indications are mixed. Our XUB indexes (both NYSE and Nasdaq) have turned downward, but not decisively. Same goes for the Core Indexes. The strong Sigma/VIX ratio we've cited for strength recently is now back below unity (as of Thursday close), so the upside implication there is weakened. ("Weakened," but not eliminated, as on-average that ratio has strong one-month outcomes.) Our Market States significance count is mixed (as it has been most of the time of late), with four positives and two negatives. Overall, we have mixed and unclear indications for what to expect right away.

Broader indications continue weak. The Median Returns index is still far weaker than mean returns. The Cumulative Skew index is off it's peak by almost two months (not deeply down, however). Hedge Fund Analytix shows CTA hedge funds are still long equity...but persistently reducing exposure. Of our five Prime Timer "guru" mutual fund managers, three are about at their median exposures, and two are deeply bearish (see Prime Timers page at web site for current data and graphics.)

Cross-sectional indexes are flirting with bear market conditions, as shown on attached graphic. This attachment is a picture of the "net NYSE Tails" path...which is to say, the difference between the "reach" of extreme upside returns, and "reach" of extreme downside returns, relative to the overall dispersion. What's notable on this series is that the net Tails tend to stay positive in bull market, and tend to stay negative in bear market. Right now we have just marginal negative balance, which is tentatively "OK"...but with risk that if we have a down-thrust here it would (presumably) push this series into clearly negative range.

RLC
Hanover NH


December 3, 2007. The expected rally materialized on schedule. The over-sold condition is now either mostly dissipated (as measured by the XUB metrics we've been citing) or entirely dissipated (as measured by Core Index deviations from their EMAs). That doesn't mean the rally is finished, however; only that the rapid back-fill phase is ending or ended.

Further upside is probably in store, nevertheless, as indicated by our Sigma/VIX ratio which now exceeds unity (since last Wednesday). Normally, implied volatility (VIX) exceeds actual volatility (Sigma), giving a ratio less than unity. Occasionally, this relationship is inverted, and actual volatility gets out ahead of implied. This inversion usually leads to further market gains...as is apparent on the attached graphic. So expect further gains, but likely with less vigor.

But don't get too comfy. None of this overrides the market's broader weaknesses, of course. Median returns continue weaker than Mean returns; the Core Indexes have failed to maintain their established trends; cross-sectional profiles have turned more negative than they've been since the bull market got underway in earnest back in 2003.

RLC
Hanover NH

November 26, 2007. Conditions this week are nearly identical to conditions last week. Thus, we repeat (in part) the message from last week

"Nevertheless, a soon rally does now seem likely...either as resumption of last Tuesday's run-up, or perhaps after a scary "new lows" day or two. The basis for this is primarily the action of our NYSE And Nasdaq "Xuberance" series. These metrics are part of our cross-sectional analyses, and basically measure the daily balance between those upside and downside "Tails" we keep citing. The attached graphic shows two years of Nasdaq XUB, and you will see (a) the recent levels were at low-end of range, (b) there's been a notable up-shift this past week, and (c) this situation has led to rally in the past.

"But even a high-energy rally won't likely undo the broader weaknesses. What it could accomplish, however, would be to give enough relief to permit a later down-leg without pushing various statistics into majorly bearish readings."

And for illustration, I have attached here both an update of our cumulative Median Index (showing how weak is the median stock action of recent months), and a graphic of our NYSE XUBerance (showing how ready for rally the near term market has become). The cumulative Median was way ahead of the market indexes back at the 2000 top, and ahead again at the 2002 bottom. The XUB is much shorter-term, and shows the downside energy has reached a about as far as it usually goes, and upside energy has begun to supplant it. One caveat here is that half-day data (such as Friday's) can be spurious; but the low and up-shifting XUB paths predate Friday, so appear to be credible. (The NYSE version is chosen here only because we showed the Nasdaq XUB just last week.)

RLC
Hanover NH

November 19, 2007. Last week we opined that a rally had to get under way quite promptly in order to save various metrics from slipping into longer-term-ish negativity. Tuesday delivered that 300-point (DJIA) up-day, which helped, but surely not enough to relieve the problem.

Meanwhile, the various underlying market weaknesses remain the dollar is seriously weak (even in last week's so-called rally); credit and liquidity problems almost certainly not played-out; median returns seriously lagging mean returns. And it's not hard to find vulnerabilities among our own metrics; four of our five guru "Prime Timer" funds remain defensively positioned; our Core Indexes are in clear downtrends; our cumulative cross-sectional skew path has turned downward (albeit mildly); the junk bond moving alpha went negative on Tuesday.

Nevertheless, a soon rally does now seem likely...either as resumption of last Tuesday's run-up, or perhaps after a scary "new lows" day or two. The basis for this is primarily the action of our NYSE And Nasdaq "Xuberance" series. These metrics are part of our cross-sectional analyses, and basically measure the daily balance between those upside and downside "Tails" we keep citing. The attached graphic shows two years of Nasdaq XUB, and you will see (a) the recent levels were at low-end of range, (b) there's been a notable up-shift this past week, and (c) this situation has led to rally in the past.

But even a high-energy rally won't likely undo the broader weaknesses. What it could accomplish, however, would be to give enough relief to permit a later down-leg without pushing various statistics into majorly bearish readings.

RLC
Hanover NH

November 12, 2007. "It's different this time." That's usually an expression meaning the normal rules of market behavior have been suspended; that normal relationships doesn't count. That common meaning is often just a rationalization, and usually doesn't hold up.

But today in a notably different sense--referring to the recent market weakness--I say it really is demonstrably different. Different from prior corrections along the way, that is. Take a look at the attached graphic showing NYSE Tails from the end of 1999 to date. Our Tails paths measure the degree "reach" out in the upper and lower ends of daily cross-sectional returns distributions. (This graphic shows exponential smoothings.) What's immediately obvious from the Tails graphic is that the normal range of recent years is broken. Market statistical behavior is plainly different now. Alas, the new behavior (size of the Tails) is reminiscent of behavior back in 2000-2002...although we won't quite draw the inference yet.

The second attached graphic shows the Net Tails....that is, a path of the difference between the positive and negative Tail sizes. What's plain in this picture is that the Net Tail path stayed almost always negative in the bear market (with transient interruptions) in the bear market, and then stayed almost always positive (with transient interruptions) in the bull market. The Net Tail path is currently negative, but only marginally negative. So a market advance, starting very very promptly, could make current readings appear as just another passing negative incursion. But it wouldn't take much negative Tail expansion to make this net path seem to have switched back to negative dominance era. It's kind of now-or-never. (Various other metrics are in similar knife-edge state.)

The third graphic here is just an update of the cumulative median returns that you saw here last week. The median returns peaked back in February, and has been plainly indicating weakness since. The median weakness continues exceeding the mean last week, as you can see.

RLC
Hanover NH

P.S. Our Hedge Fund Analytix coverage is expanding and deepening in coming weeks. We'll be sending around revised and updated performance analysis (with longer history!).

November 5, 2007. Market stats are about as fluid and fickle as we can remember. Risks are high. Great energy and volatility are apparent in various measures. Short term direction is unclear (that is, even more unclear than usual) as evident in our reversals and re-reversals.

Last week we "tossed out" a final note that underlying weaknesses remain. Given all the current fits and starts, perhaps that message is the one that warrants most attention. By way of reminder of underlying weakness, I've attached here an update of our median returns index. Median returns differ from means, of course, in that they are not biased by outliers (and in our median index, they also ignore capitalization). The chart shows clearly that the typical S&P stock has been far weaker than the average stock, for months. This kind of median weakness occurred in 2000 (and through the bear market). That's not a prediction (and index can't predict), but an indication of weak condition.

Our Core Indexes are also now weaker in recent days. Both NYSE and Nasdaq Cores closed on Friday below their minor lows of October 19. The Core Indexes ignore huge outliers and ignore the mere "noise" of stocks that really aren't "doing" anything. They are far more "trendy" (directionally persistent) than the popular indexes.

RLC
Hanover NH

October 29, 2007. Having offered presumption for advance and then presumption for decline in the past two weeks, it's uncomfortable to reverse again. But reverse we do. Our cross-sectional "Tails" analysis is a key element (graphic attached).

The Tails paths, frequent readers will recall, track the reach (or perhaps we should say "stretch") of the upside and downside ends of daily returns distributions (NYSE and Nasdaq). Assessing these data is not always straightforward. One thing that is fairly consistent, however, is that extended Tails imply increased volatility. Almost as consistent is that high readings (extended Tails), especially of the downside tail, generally imply upside impetus...unless in midst of actual or very soon downtrend.

The recent Tails condition has been ambiguous (with both positive and negative Tails at local highs but globally middling) . In fact, implied direction is still is not quite clear. But the very recent renewal of upward (extending) Tail length suggests that we should view the readings as "high." So unless Friday's buoyancy is cancelled immediately this week, short term trend is likely to continue up, and with energy.

That's all near-term, and underlying weaknesses remain. So restraint is still in order.

RLC
Hanover NH

October 15, 2007. Market conditions not much changed from a week ago. Various measures (which we've cited often enough) point to danger, but the presumption is for advance just because presumption almost always favors trend continuation. Most stocks have not hit new highs, by the way...regardless of all the attention to some of the popular indexes. The best single overall measure (Value Line Index) is still 4% below its July high, and breadth is behind, too. (Our NYSE and Nasdaq Core Indexes, reflecting "more than noise but less than extraordinary" stock returns, are now almost exactly parallel with their July highs.)

We all know about the market shift from Value stocks to Growth stocks in recent months. Simple returns comparisons or ratios don't capture this shift terribly well, due to volatility differences. For more objective comparison (and, indeed, for most relative strength assessment) the "moving alpha" is superior. It strips out the volatility-driven differences and focuses on the net non-market-driven drift. I've attached here a graphic showing "moving alpha" for Growth Funds and for Value Funds. The Growth dynamic is really quite impressive. That Growth Fund alpha hasn't been this high since 2000.

RLC
Hanover NH

October 8, 2007. Last week we said "Presumption of upward continuation is still alive...but now somewhat enfeebled." Perhaps the "enfeebled" part was premature, given the ensuing week's 2% to 5% advance (large and small caps). Enfeebled or not, conditions are little changed from last week; presumption is still upward, but in spite of good percentages we're not seeing really strong undertone.

One indication of weak undertone is our index of cumulative cross-sectional median S&P returns. We showed this index not too long ago, but it's worth repeating now, as one means-based index after another has been positing new highs. The graphic attached here compares the median vs mean, and shows plain divergence. When median series falls behind as now, it implies that fewer stocks (outliers) are doing most of the work in pushing the means-based index ahead. That's a sign of weakness...but is not a precipitant. (In 2000 the median declined for months before the overall market.)

Meanwhile, Hedge Fund Analytix shows CTA hedge fund equity exposure high but not extreme (enquire for subscription), and our Prime Timers still show historically low exposures among managers who generally get things right (free at the web site).

RLC
Hanover NH

October 1, 2007. Presumption of upward continuation is still alive...but now somewhat enfeebled. Neither NYSE Core nor Nasdaq Core index is not quite keeping up with the major published indexes (a weakness apparent both in the raw indexes and in the Core Momentum paths). NYSE XUBerance is now falling (although Nasdaq is not).

Our cross-sectional Tails analysis shows an interesting tension. (Graphic attached.) Subscribers will recall from last summer how consistently the low Tails paths warned of underlying weakness...culminating in the July-August turmoil. An atrophied negative Tail is especially dangerous. Today, both the positive and negative Tails are up 50% from their summer lows. So maybe they're now "high"? Well, maybe, but compared to the magnitudes back in the bear market, they're still pretty modest. So today's levels may be high (leading to long draw-down of the energy as prices advance), or may be low (leading to further expansion as prices tumble). Adding to the ambiguity, the Pos and Neg Tails are holding just about equal, with slightest margin of positive balance (.285 and .280). Back in the 2000-2002 bear market, the Neg Tail exceeded the Pos Tail consistently, except just at rally peaks; the reverse pattern prevails in the in the bull market since then. So whichever way the Pos-Neg balance goes will likely announce our next prevailing direction.

Meanwhile, for sentiment context, our guru managers are still conservative-to-bearish (for data, see the Prime Timers page at web site), while last week's HFA 4th Friday showed Managed Futures hedge funds now approaching (but not quite at) long-side over-exposure in equities (enquire for subscription).

RLC
Hanover NH

September 24, 2007. In spite of all the huffing and puffing about the Bernanke and the Fed, there's really not much new in market condition this week. Except, of course, we're now within 1%-3% (depending on benchmark) of the July highs. We still have both Core Indexes rising; we still have above-average cross-sectional dispersion and volatility; actual volatility remains high relative to implied volatility (and was actually higher than implied volatility two days last week). All that implies the upward momentum is not yet spent. On the other hand, we still have all five of our Prime Timers at very low exposures...and in particular showing no visible response at all to the Fed action. So that's one small but expert sample not persuaded that the situation is all that constructive.

I've attached here a graphic of our Junk Bond Moving Alpha. It turned vigorously positive on September 4. Junk bonds are reliably trendy, and when the moving alpha turns positive it usually continues for some months. Given the recent attention to credit problems, one would suppose that junk bond action would be extra sensitive to credit concerns or relief from concern. If so (and it's only a hypothesis), this series seems to be saying that problem is believed to be resolved. In any event, it's plain from the chart that the junk market is acting not at all like it was leading up to the tumble. Back then the alpha was weakening while prices were rising; today it's rising briskly.

RLC
Hanover NH

September 16, 2007. The presumption for upside progress still holds. The Core Indexes are still rising (albeit with less vigor than major published indexes). Both NYSE and Nasdaq Tails or cross-sectional returns distributions are quite extended (relative to recent years). And both NYSE and Nasdaq Core Momentums have bounced at zero. Well, these Momentum paths have risen from zero and are positive; subjectively, however, they seem to show less upside vigor than on prior bounces from zero. (And separately, we still have all five of our Prime Timer funds at historically low equity exposures--as posted at the web site--which says almost nothing about immediate trend, but is a serious warning about underlying tone.) Graphics of both momentum paths are attached here so you can see and judge for yourself their current vigor.

RLC
Hanover NH

September 10, 2007. Market direction is always uncertain, but more uncertain just now than usual. In brief, indications are conflicting. A number of market metrics here seem to be quite comfortably consistent with continuation of the upward movement since mid-August. (And some, like the Core Index Momentums that we've featured here recently, are even consistent with a whole new up-trend.) But others (like having all five of our Guru fund timers positioned in deeply conservative exposures) are decidedly negative. (Updated Prime Timers graphics now posted at the web site.)

Even our NYSE and Nasdaq Core Indexes are conflicted, with the NYSE version seeming to have broken its minor uptrend on Friday, but the Nasdaq minor uptrend still intact.

The one thing that's pretty certain is continuing volatility. (That means large price moves; not the journalists' euphemism for declining prices.) It's not only that volatility is highly persistent in general; cross-sectional dispersion remains fairly high, and the extent of cross-sectional Tails (both upside and downside Tails) remains very high. Both of these measures are strongly associated with aggregate price volatility, both theoretically and empirically.

RLC
Hanover NH

September 3, 2007. The rally from the August lows looks less attractive as it progresses. But we find no statistical "case" against it yet, and some evidence at least for presumption of upward continuation. Last week you saw our Nasdaq Core Index Momentum, and I've attached the NYSE Core Index Momentum path as a companion piece. The point of this picture (as with the recent Nasdaq version) is that the August tumult brought the Mom paths down to zero levels--where new uptrends have initiated many times--and seem to have begun upturns from there. Those new upturns may persist or fail, but we have to give them the benefit of the doubt for now.

RLC
Hanover NH

August 27, 2007. Last week we wrote of data indicating "...possible renewal of that good old longer term uptrend." But then also "...that looks like not a good bet, at least for now." That's all still true, but with the past week adding a bit of confidence for the upside.

I've attached two graphics. The first is of our Nasdaq Core Index, with its EMA. The core Indexes, recall capture the movement of stocks of significant but not extraordinary magnitude. Both the NYSE (not shown) and Nasdaq Core are plainly stronger than the Composite in recent weeks, and now crossed upward through its EMA. The second attachment is of the "Momentum" path of the Nasdaq Core Index. (Last week we showed the NYSE Core Momentum, and this one is exactly analogous.) Since the end of the bear market, the Mom has surged positive a number of times, retreating to zero in corrections. Such a retreat to zero is exactly what we see in the recent tumult, and now it seems like another bounce may be developing in both NY and NQ Moms..

Finally, a note on our cross-sectional Tails analyses. Recall that the Tails measure how extensive are the positive and negative outliers of daily returns distributions. Both NYSE and Nasdaq Tails have extended dramatically since mid-July (NYSE more so). Extensive Tails denote high-energy markets, and extensive negative Tails usually mean the energy will be upward.

If all this sounds terribly bullish, I will remind that our Who's-Doing-What measures are indicating great risk of decline. The five guru mutual fund timers remain bearishly positioned (see Prime Timers page at the web site), and that our contrary hedge fund exposures (subscribe Hedge Fund Analytix) remain too heavily committed on the long side. These measures can (CAN) take a while to play out, however, whereas the more constructive indications above are likely more imminent.

RLC
Hanover NH

August 20, 2007. Some market measures have reached extreme negativity and started up. Various other market measures are positioned much like the NYSE Core Index Momentum path pictured in the attached graphic; pulled back to neutral. Both the negative extremes and the retreated-to-neutral measures are consistent with possible renewal of that good old longer term uptrend.

But that looks like not a good bet, at least for now. In event of uptrend NOT renewing here, the downside could be far too costly. Moreover, Friday's supposedly spirited rally didn't look as robust as it might. Volume was high, but not as high as Thursday. And a 200-point DJIA day just isn't as big as it sounds now that the average is at 13,000...especially with daily standard deviations now running at 1.30% so Friday was merely a 1.4 sigma rally. Well above average, but not so newsworthy. And we still have sentiment issues expressed in the Hedge Fund Analytix.

If that Core Momentum path pictured in the attachment turns back upward in earnest, there will be safer opportunities to join in. And if it ends up down on the negative side, it may stay on that side for a while as it has previously.

RLC
Hanover NH

August 13, 2007. The market is teetering on the very edge of collapse...as it seems everybody knows. Whether that will actually happen at this point is something nobody knows. Our own guess is that this is not the moment for the end of the world. That guess (and believe me, it's a guess) is based partly on the fact that end-of-the-world collapses just don't come along very often, and partly on the fact that the possibility is so widely acknowledged. On the widely-acknowledged score, one quarter where the possibility is acknowledged quite seriously is the Fed. And the Fed is not without resources, both financial and suasive. Although central bank actions last week were interpreted with some alarm, there are also plenty of fund managers who are unlikely to get themselves selling into any very determined central bank policy...unless/until such policy seems to be failing.

Meanwhile, what about our numbers? The most extraordinary numbers are emerging from volatility and dispersion analysis. The VIX index of implied volatility (28.30) is at its highest since April 7 2003. That's a hard number to draw a strong inference from, because ranges for "normal" VIX vary so widely over time, and also because the index has shot up at a nearly unprecedented rate. (Moreover, back in spring of 2003 the VIX at these levels was on its way down, not up). We also track "actual" volatility, which has also rocketed up...only more so. In fact, the ratio of actual/implied volatility is now up to .87. As noted here often, when actual/implied volatility gets to exceed unity, strong rallies and uptrends are often in the works. There was a teensy tick above unity last week, and the current ratio of .87 is within striking distance still.

Our cross-sectional Tails analysis is also notable. The Tails (both NYSE and Nasdaq) measure the positive and negative "reach" of extremities of daily returns distributions. The downside Tails of both exchanges were extremely compressed in mid-July, which was one basis for our continual vulnerability warnings. But they sure aren't compressed now; the downside Tail series on the NYSE is up 52% since mid-July. Remarkably, the upside Tail is also up since then (by 19%). Together, the expansions at both ends of the distribution mean that dispersion is just going crazy. We have some measures showing even higher dispersion levels now than back at the bear market bottom. Dispersion is often positive for the market, but even more than that it represents high level of energy. That means continuing extreme volatility.

Our Core Indexes (NYSE and Nasdaq) track the cumulative returns of stocks not at the outside tails, and not in the Brownian motion at center of the distribution; at the core of market dynamics. They are of course down from July (having broken trend almost at market top). Indeed, the Core Index deviations from their EMAs have reached down to normal extremes (well, somewhat abnormal extremes) whence rallies and uptrends often emerge. I've attached a graphic so you can judge for yourself. I've also attached a graphic of the NYSE Core Index Momentum. What's notable is that this path tends to stay positive through the bull market and negative through the bear market...and is now almost down to zero. (Well, almost almost.) So it's in the neighborhood where it could soon get some renewed lift.

If all this sounds loaded with upbeat possibilities, don't get too enthusiastic. We have Managed Futures hedge funds still showing over-optimism (and there are new developments emerging there, as subscribers to Hedge Fund Analytix have seen). And we have all five of our best guru fund managers way down at their bottom ranges of exposure and still reducing (with data and graphics posted at the Prime Timers page of the www.CarpenterAnalytix.com web site). So the big vulnerability remains quite real and is not likely to dissipate any time soon.

RLC
Hanover NH

August 6, 2007. The long-heralded vulnerability continues. We do not find evidence that it is abated...and of course plunging prices always raise the chance of even more plunging prices. Volatility is running high, both in the "implied" measure (VIX), and in the actual measure (standard deviation), and also in our DVAX dispersion index. So large percent changes are to be expected. (At current volatility, daily standard deviation is at 1.26%, so last Friday's drop is "only" a 2-sigma day, and occasions of 3%-to-4% S&P changes would not be terribly surprising.)

One volatility facet to watch for is when actual volatility gets out ahead of implied volatility (Sigma/VIX > 1.00). As noted here before, such occasions have usually signaled intermediate rallies. Current ratio is 0.81, which is above-average, but not really "close" to breaking up through unity.

I've attached a graphic of our Momentum path of the Nasdaq Core Index. Note that it typically reaches down to zero in corrections, and it has not yet done so. There is no "rule" saying it must get to zero before a correction is over, but typically it has. Of course, even if/when it does find zero, it will only present us the question of whether it is entering a negative phase (as in the bear market).

But first things first. For right now, we have falling prices in a vulnerable market, with no present indication of rebound. Our five "Guru" fund managers are all in bearish exposure position (two of whom retreated notably just this past week), as tabulated at the Prime Timers page of our web site. That's a formula for very great risk.

RLC
Hanover NH

July 30, 2007. Vulnerable? Did someone say vulnerable? Well, yes, it was said here for many weeks. Of course, we also said (just last week-end) that "the evidence is not yet in" for emergent sell-off. Well, the evidence followed shortly, but (seemingly) just moments before the sell-off.

On Tuesday our Nasdaq Core Index failed its trendline (barely), and on Wednesday the break was significant (even on a putative up-day by most stock indexes). By Thursday morning everything was falling apart. A update graphic of our Nasdaq Core Index is attached here, with that up-trend drawn in as in previous transmittals (but now broken).

Of course, everyone knows what hit the fan last week; the question is; What's next? Although some metrics have reached plausible bounce-points, the preponderance of evidence favors further weakness. Here's a quick run-down

Median Returns are now WAY weaker than average returns. I've attached a graphic, and you will see the divergence is unmistakable. You will remember that our Median returns path was consistently weaker than average returns through the bear market, and consistently positive since March 2003. I've attached a graphic. (You may be hearing more of median analysis soon from more prominent source; we sometimes receive copy-cat queries from institutions that would rather mimic than do their own creatives...and a biggy swooped by recently seeking median info.)

Our Prime Timer mutual fund gurus are still showing very conservative exposures (through Thursday). Ok, not just conservative, but bearish. (This least bearish fund of the five is at 33rd percentile of his equity exposure.) Current data and graphics are posted at the Prime Timers page of the web site.

The cross-sectional Tails analyses show sharply rising downside Tails along with less sharply rising upside tails. The rise of downside Tails is itself enough to possibly justify uptrend...but the raw levels are not impressive (having started from record low levels).

Option-implied volatility (VIX) is up at 24, whence rallies have begun in recent few years. But implied volatility varies mostly in response to actual volatility...and relative to actual, the implied (VIX) is just in normal range.

CTA hedge fund exposures still near record highs, a key element in market vulnerability. See HFA 4th Friday.

The Core Indexes, aside from breaking trends (as noted above), are in deep deviation from their EMAs. Indeed, the DejaVu model indicates statistically significant positive 1-week returns from current NYSE deviations (+1.26% S&P, significant at .010)

Items like that last can make a prompt bounce-back quite plausible. But not anywhere near bettable. All the other measures (and some not mentioned) suggest the downside potential is not yet realized. Bounce or no bounce, further weakness seems likely.

RLC

P.S. For a clear illustration of credit problems spreading across the Junk Bond market, check the web site graphic at the "Junk Bond Alpha" link near center of the home page. Our "moving alpha" crossed negative on June 26, and the index has fallen steadily since then.

 

July 23, 2007. Prior week's 284-point up-day failed to change our readings here, and this past week's final 149-point down day also changed little. All the weaknesses persist. (Dollar weakness alone could turn out badly...and our hedge fund exposures analysis shows it not likely ending here. See Hedge Fund Analytix HFA Weekly.) And yet the apparent trend is not yet turned down...or at least has not yet given evidence of it.

We do now have both NYSE and Nasdaq Core indexes below their EMAs, but that Nasdaq Core, which has been so very linear for the past 12 months, is still well in its trend. We also have remarkable positive "XUBerance" on the Nasdaq (even on Friday). And two volatility indicators (VIX and DVAX dispersion) are in state-and-rate condition for upside.

As tempting as it is to think the Friday sell-off is emergence of the vulnerability we've been highlighting (and warning), the evidence is not yet in hand for that conclusion.

RLC
Hanover NH

July 16, 2007. You might think a 284 point up-day (DJIA Thursday) would finally generate some new data status in the market. You might think it...but that would not make it so. Uptrend is still with us (obviously), and is presumed to continue until there's evidence to the contrary. That Core Index graphic we've been showing from time to time is still climbing and maintaining its trend, and one tangible evidence of change will be when that's no longer so.

Meanwhile, vulnerability continues, too....and for all the same reasons as before. High equity exposure among CTA funds tracked in Hedge Fund Analytix, extremely low downside Tails in cross-sectional distributions; median returns still falling behind mean returns; and our five guru fund managers now in full retreat.

Speaking of guru managers in retreat, I've attached a graphic showing the updated equity exposure path for Vanguard Asset Allocation Fund. This is one of the best timing allocators; not given to active timing, but canny in picking opportune times to position against trend (upside or downside). This picture is worth a good look. Two of our other tactical gurus' (Leuthold Core Fund, and Bill Miller's Legg Mason Value Trust) are also showing pretty deliberate retreat. Those two exposure path graphics are posted at www.CarpenterAnalytix.com, at the Prime Timers link.

RLC
Hanover NH

uly 9, 2007. Several weeks ago we showed the persistent uptrend in our Nasdaq Core Index. The point being that the market's buoyancy, even in the face of deep vulnerability, would not likely end until this series' nearly linear ascent were to end. That view is still valid today--maybe more so--with the Nasdaq Core continuing to crawl right along the same path. I've attached an updated graphic showing this Core condition.

Upward persistence does not negate the ongoing (growing) market vulnerability, however. Both NYSE and Nasdaq cross-sectional Tails are contracting, with the downside Tails path posting new lows almost daily. Cross-sectional dispersion is extremely low (even disallowing the portion reflected in the Tails shrinkage). Daily median returns continue weaker than daily means. Four of our five fund gurus have current equity exposures well below median (see Prime Timers at the web site). And our hedge funds equity exposure index has now begun to retreat from record high levels (while still in top quintile), as Hedge Fund Analytix subscribers have seen this week.

RLC
Hanover NH

July 2, 2007. See-sawing indexes around recent highs have not given any clear sign the uptrend is quite over yet. Our Core Indexes are still holding up, but the Nasdaq Core (shown here recently) continues right on the edge of showing end-of-trend. Meanwhile, all those indications of vulnerability also continue. The Managed Futures hedge funds continue highly exposed in equity; OEX Median index continues notably weaker than its conventional means-based cousin; our cross-sectional Tails analysis continues showing extremely small downside tails of returns distributions; our Prime Timer funds are all at below-median exposures.

One new development this week is the downside crossover of our junk bond moving alpha. This moving alpha has been notably weak for many weeks, and crossing negative has statistically been not good for the class. In recent years, even the "not good" periods have ended up working out OK; periods of negative alpha have generated +0.4% annual rate of gain. (That's a forward annual rate...not including the period that generated the negative alpha.) But compare this +0.4% with the +14.3% annual rate ensuing in periods with positive alpha, and it's clear the negative alpha implies a strong tide running against the class. The outstanding (and useful) thing about junk bonds is that they are trendy; fluctuation is extremely limited, and once in motion they tend to continue. I've attached a graphic showing the past five years of moving alpha and junk index.

RLC
Hanover NH

June 25, 2007. Uptrend has NOT yet shown itself finished. That Nasdaq Core Index trend that we highlighted last week is still intact, and our cross-sectional analyses continue to show generally positive skew. The downside Tails series, both NYSE and Nasdaq, are not yet showing any sign of anxious selling.

I've attached a picture of Friday's cross-sectional returns distribution of the S&P 100 (OEX components). Almost every major index was down a percent or more on Friday (including the OEX), yet the skew of the distribution is most assuredly positive!  Because of action like that (on Friday and other days) the Cumulative Skew index (not shown) is posting new highs. Now, Cumulative Skew is not generally a "leading" indicator of market trend; like the Core Indexes, it's useful just in that it tends to "keep going" once it gets going, until a new trend is emplaced. So new highs in the CSQ does not mean the market isn't topping. It simply means market psychology has not been damped by the recent choppiness. Trend and expectation have not yet shifted.

But the various ingredients of vulnerability remain. Tails are at or near record lows. CTA funds are over-committed long. Four of five guru fund timers have moved to below-median exposures (see Prime Timers at the web site), etc.

RLC
Hanover NH

June 18, 2007. Market condition unchanged; uptrend vulnerable, but still intact. I've attached a picture of our Nasdaq Core Index, which tracks aggregate performance of stocks that are neither headliners nor snorers; the "core" of market movement. As we're noted so often, a key attribute of the Core Indexes is that they tend to be very "linear"...plugging away at a trend with little deviation so long as the trend persists. I've drawn-in the boundary of the present uptrend, highlighting this useful feature.

Meanwhile, the NYSE and Nasdaq Tails continue showing great vulnerability, our Hedge Fund Analytix shows near-record overexposure, and now the junk bond alpha is rapidly falling toward zero. One naturally wonders whether continuing focus on vulnerability is worthwhile as prices keep adding a few percent here and a few percent there. The answer, of course, won't be apparent until the vulnerability emerges into reality. The Nasdaq Core Index cited above may well give a first indication when it's no longer crawling up that line, but breaking through it.

On other hand, here's an upbeat possibility, just to keep things interesting I've attached a graphic plot of our Sigma/VIX ratio. As noted often, this ratio is almost always less than unity (actual S&P volatility less than option-implied volatility). But when the ratio pokes above unity, it's usually indicating at least a short-term (or maybe longer) buying opportunity. It did exactly that (above unity) at the close of Thursday June14. Alas, it penetrated by the barest of margins, and held only that teensy moment, and is below unity again at Friday's close. (The 1.00 threshold is not "magic" of course, and prior upsides have involved much more substantive penetration, as you will see on the graphic.) This Sigma/VIX ratio will bear watching here.

RLC
Hanover NH

P.S. One thing new this week is that four of our five our Prime Timer managers (Heebner, Hussman, Leuthold, Miller, Sauter) now show equity exposure reduced below their median exposures. Most notable (subjectively speaking) is Sauter's Vanguard Asset Allocation Fund, which is now at its 13th percentile of five-year daily exposures. The specific exposures and percentiles are posted at the Prime Timers link at the site.

    June 11, 2007. The question du jour is whether the weakness of Tuesday-Wednesday-Thursday (-3.15% S&P) was the start of a larger correction, or was correction checked by the strength of Friday's rally (+1.14%). The former (weakness) seems more likely. In addition to background vulnerability like the near-record long equity exposure of hedge funds, we also find evidence like the NYSE downside "Tail" index has matched it's prior (last year) low. Meaningful rallies do not get started from low-low downside Tails readings. (Nasdaq downside tail is not quite at new lows, but also weak). Some upside follow-through from Friday? OK. Try to touch new highs again? Maybe. A new meaningful uptrend? Very doubtful until some negativity emerges in data such as cited here.

On the other hand, the recent uptrend(s) have shown such remarkable resilience that it seems quite unlikely that a correction or downtrend now would turn into a deep rout unless/until another (weaker) rally develops first.

RLC
Hanover NH

June 04, 2007. Not much has changed from last week when we wrote "...market conditions are remarkably unchanging; downside vulnerability is substantial, but uptrend seems to be still intact." With little for new developments, there is little to add.

One note of interest is the recent reduction of exposure in the Vanguard Asset Allocation Fund. As an asset allocator, this fund varies exposure deliberately...and successfully. This fund is one of the funds we track weekly at the Prime Timers page of the web site, and its timing score over a rolling five-year period is almost always #1 or #2. I've attached a graphic here showing an exposure path over seven years. The fund carried presciently low exposure back in 2000, continued well-below market exposure right through the bear market, and cam back in strongly just about at bottom. Then after months of mistaken caution in late 2003 and into 2004, it's been back to full exposure up to February when it down-shifted from about 100% almost to 90%. In just the past couple of weeks it appears to be reducing further. It's currently at the 27th percentile of daily readings over past five years...which is very cautious, but not really "bearish" as in 2000-2002.

RLC
Hanover NH

May 28, 2007. Repetition of same old mantra can be tiring (both in sending and receiving), but we find market conditions are remarkably unchanging; downside vulnerability is substantial, but uptrend seems to be still intact.

I've attached two graphics here. The first is an update of our Nasdaq "Tails" paths. The Tails series track the size (extent) of the upside and downside extremities of daily cross-sectional returns distributions. What's key in the Tails graph is the low reading (shortness) of the downside tail. Although it has risen a bit in recent weeks, the path is still below the lows of the past three years (as indicated by the back-drawn horizontal ). Low readings for the downside tail are associated with downturns, as evident from the graph. It would be quite remarkable for the little bulge of recent weeks to engender a meaningful upward "kick," but not at all remarkable to provide a few percent lift.

The second attachment is a graph of our Nasdaq Core Index. The Core Indexes focus on "important" stock fluctuation, by ignoring both extraordinary returns and unimportant noise returns. I've drawn a trendline both on the Core Index and on the Composite below it. What's evident is (a) the uptrend remains intact and the index nearly posted a new high Friday, but (b) for the Nasdaq Core the trend is only barely intact. Almost any few down-days would change it. [Note, however, the NYSE sister index is more buoyant than Nasdaq...both higher off its trend, and instead of an almost new high on Friday, the NYSE Core posted an actual new high.]

RLC
Hanover NH

May 21, 2007.   Last week's Remarks showed a Momentum path on the NYSE Core Index, noting "...this Momentum path is about at it's normal (and fairly regular) upper range," implying downside danger.  Those observations are still applicable this week.  Various other measures are also at/near their normal upside limits.

         In addition to the vulnerability of reaching normal upper range, some other metrics are showing actual negativity.  I've attached here a graphic of cumulative median daily returns on the S&P 100 (OEX) components.  What's notable is that median returns have not kept up with average returns in the market's present rally from the March lows.  Like almost all broad indexes, the OEX index (lower frame) has been posting new highs, but the median path (upper frame) has not.

         Almost all published indexes represent some form of "average" return.  Alas, averages are greatly affected by outliers and extremes.  But median return is not.  Median return is the point at which half the stocks were stronger, and half were weaker...no matter how much stronger or how much weaker.  So the median often gives a better indication of where is the center of mass.

         When the median path differs from the mean path, the median behavior is often likely to win out.  In the three years shown on the attachment we find two prior examples  where median diverges from average...and both cases end up with the average trend conforming to the median.  This finding is demonstrable over time.   (In fact, the market top in 2000 was preceded by more than 12 months of slumping median index.  Email me for a graphic of that remarkable divergence.)

         Lots of statistics here indicate high risk of downturn quite soon; but we don't know just how soon.  Soon enough.

         RLC
         Hanover NH

May 07, 2007. Uptrend continues, and so does vulnerability. This may sound like simply more of the same, but not quite. We find one bit of emerging new development; cross-sectional dispersion is up over the past few weeks, and the expansion is occurring in both the upper limb and lower limb of the returns distribution. This change shows up in expansion of our cross-sectional Tails, with both paths (positive and negative) now rising. A picture of the Nasdaq Tails paths is attached here, with the recent changes highlighted. (The NYSE Tails are similar, but with both positive and negative notably more vigorous.)

As evident in the chart, Tails expansion from low levels is often associated closely (albeit imperfectly) with market downturns. (Note, for example, the 2006 top.) Also evident, however, is that a spike in the Tails paths can sometimes inject new upside energy that plays out for months of renewed market advance. So rising Tails paths are at least somewhat ambiguous. More often than not, however, the outcome is downturn when freshly rising Tails emerge from a low (small-dispersion) condition after extended market advance (as today).

RLC
Hanover NH

April 23, 2007.  Uptrend intact; market vulnerability, too. This week I have attached two graphics of our cross-sectional Tails. One is from NYSE data and the other from Nasdaq. I include them both because the comparison is instructive.

In both graphics, the negative Tail series (light blue) is at or approaching historic lows. The NYSE negative Tail is not quite there, and looks like it's maybe a week away from the low levels posted over three years...from which the market turned down. But in the Nasdaq series we see that such a series of past lows are NOT a floor, and can be surpassed to post brand new lows. So we can't infer any "this low and then it's over" rule. But we can compile data to assess likelihoods.

Over the three years shown, the average 3-month forward return when the negative Tail was at or below today's levels was negative (-0.78%), compared with +2.55% forward from all other times. Probability 3-month of advance 40% vs 76%. (Difference in 1-month outcomes was also negative, but non-significant.)

RLC
Hanover NH

April 16, 2007.  Uptrend continues, but so does vulnerability. Two graphics are attached. One is an update on the daily EMA path of the downside "Tail" of NYSE cross-sectional returns. The path is very low (small downside), in a range that has been associated with market downturns. Prior occasions of levels at-or-below current levels are highlighted, and it is apparent that when the Tail-path is this low and turns back up, market downtrend is an odds-on bet. (Nasdaq Tails are similar, but even weaker.) We find no turn-back-up yet...but could at any time.

The second attachment is reproduced from our current Hedge Fund Analytix issue. It shows our statistical equity exposure path of Managed Futures hedge funds, which is essentially as extreme as it has ever been. We usually present this series from 2003 inception, showing how high readings precede market decline. But you've seen that, so this picture zooms a little to show the behavior since the Feb 27 market plunge. The point is that the leap to high exposure is quite stable...not merely an instant response to the brief price drop.

RLC
Hanover NH

April 09, 2007. Last week's scenario is this week's scenario the minor uptrend has given no evidence of ending, but gives lots of evidence that it's too tired to develop into anything big. Moreover, our cross-sectional Tails analysis shows the Nasdaq downside Tail is really quite truncated, meaning that even stocks that get hit are not being dumped really badly. That's a measure of market complacency, and we have shown here many times how that complacency equates to vulnerability. (The NYSE downside Tail is not quite so weak yet.) Add to that the very high current CTA hedge funds equity exposure, and the relatively low equity exposure of Vanguard Asset Allocation, and we see an uptrend to stand aside from.

The graphic attached here is a time series of our Sigma/VIX ratio. We cited this ratio in March 19 Remarks, and again last week, as it had been running at levels greater than 1.00 ...from which point history expects higher prices to emerge. The S&P is up 4% from the first mention, so good. But we mis-spoke last week in citing the then-current standing of .86 as a continuing positive. Outcomes from values in the mid-80s are statistically indistinguishable from all other. So that particular positive is dissipated. The ratio at Friday's close was at 0.83, as shown on the attachment.

RLC
Hanover NH

April 02, 2007. Underpinnings of this market remain weak, but we are hopeful the immediate short-term may remain positive just a bit longer. This hope is supported (e.g.) by the Sigma/VIX ratio of actual/implied volatility having exceeded unity lately (as recently as last Tuesday, and now at 0.86), and ongoing positive readings in our XUBerance indexes.

On the negative side, we have the extraordinarily high CTA equity exposure as reported and assessed in our Hedge Fund Analytix series, and very small size of downside "Tails" of cross-sectional distributions. Nasdaq's downside Tail is quite dangerously atrophied, while the NYSE Tail is merely quite low.

We also find a quite low level of overall dispersion, and we've added a new index of it. The graphic attached here shows a plot of DX200 for the NYSE. It is an exponential moving average (EMA) of daily cross-sectional distance from biggest advances to biggest declines, excluding the 200 most extreme stocks. As with our original dispersion index, low readings indicate very little "internal volatility," and price vulnerability. Several low-dispersion points, corresponding with intermediate price peaks, are indicated by rectangles on the chart. As there are no inherent thresholds for this index, a low reading (small dispersion) can always go lower still. So there is no "signal" capability. Current levels, however, have to be deemed extremely low by any standard.

RLC
Hanover NH

 

March 13, 2007. Most notable in the past week (and the week before) was the sharp jump in equity exposure among Managed Futures (CTA) hedge funds, as reported Friday in our Hedge Fund Analytix, and cited this week in Barron's. This expansion first appeared in the February 27 sell-off, which we discounted heavily as a statistical anomaly. But even after suppressing the outlier effects of Feb 27, the CTA exposure path has risen doggedly in ensuing days. So our initial skepticism about the run-up has been overcome by its daily persistence.

In the past, high exposure (at or above the 80th percentile) has led to subsequent market weakness, as we have demonstrated graphically and statistically in various analyses and writings. The exposure path now stands at a record high (100th percentile), which may stand as a "hyper" indicator of immediate over-bullishness...or may need to cool off somewhat before negative implications emerge. Either way, the indication is a negative.

Meanwhile, equity exposure among mutual funds had already reached new highs in late 2006, peaked, and has been declining since then. Both Growth and Value funds exposures are still very high, however, at 1.32x and 1.12x market (their 82nd and 78th percentiles over five years). So absent fresh inflows, there's clearly more room for further selling than for renewed buying. I've attached a graph showing the Growth Funds exposure path.

Exposure extremes only set directional context. Specific timing is a different matter.

Robin Carpenter
Hanover NH

February 26, 2007. The uptrend has turned listless. It's still an uptrend, however (as best we can tell), as most short-term indications are still positive. But the trend is clearly extended about as far as can be expected, as illustrated in the attached graphic showing the Russell 2000 and its "Momentum" and "Trend" series. These are exponential smoothings of logarithmic rates of change. The red and blue horizontals trace back through prior occasions of having been at today's level and direction. The vertical drops show the R2000 index position at those times. Points where the red and blue vertical drops are paired-up are times when both series were positioned like today. Similar analysis on other major indexes are similar (but showing fewer red-blue match-ups).

Historical match-ups like these can neither cause nor predict trend change, but do show when internal conditions are ready for change. When readiness meets external events (news), change can be energetic.

Meanwhile, here's a factoid for those who watch for index thresholds The Value Line geometric index (484.20) is just 5% shy of it's all-time closing high of 508.39 in 1998. (The VL arithmetic index, with upward bias, made new all-time highs long ago.) The VL indexes are not widely followed these days, but we find them more consistently representative of overall market than all with more popular broad-based series.

RLC
Hanover NH

February 20, 2007. The overextended uptrend is probably still with us. There's lots of justification for correction, but absent specific evidence, likelihood is almost always (slightly) in favor of continuation rather than reversal. Our "Tails" analysis, exhibited here so often, shows both positive and negative tails now rising, with implication for renewed vigor (up or down) soon.

Just to keep from getting seduced by present buoyancy, I've attached a graphic showing the "HyperSkew" path for the NYSE. This series is related to the Tails, and measures cross-sectional skew among outliers, focusing on extreme daily returns (biggest positives and negatives). Extreme returns are usually company-news-driven, so the positive or negative balance among extremes shows whether good news or bad news is generating the greater urgency in the market.

As evident on the attachment, HyperSkew is somewhat like an "oscillator" but maintains a positive or negative bias through intermediate ups and down. That is, it tends to oscillate in positive territory or oscillate in negative territory depending on the macro trend. For the last several years it has been oscillating in positive territory, of course, and still is. But it is also at (very near) the top range of those oscillations. In the past, at these levels, upside is limited and correction is near.

RLC
Hanover NH

January 29, 2007. This market isn't showing much by way of directional clues. Our 23 daily "state scans" (searching for statistically parallel states in the past) have been bobbing between 1-or-2 significant positives and 1-2 significant negatives for many weeks. At Friday's close, as it happens, there were no significant positives at all, and no significant negatives.

Our last week's 4th Friday issue reported equity exposure among CTA hedge funds is still well above average; high enough to imply below-average ensuing returns, but not high enough to imply outright downturn. Not implying downturn is not the same as implying no downturn, of course, and we continue to have metrics like the cross-sectional Tails pretty much in end-of-trend position.

On the other other hand, our NYSE and Nasdaq Core Indexes continue on their merry upward way. There is no need for the Core Indexes to lead the market in a turn, but usually they would give some indication incipient change...at least by failure to advance. They're clearly not failing to advance at this time. (On the other other other hand, nevertheless, the Nasdaq Core was posting new highs right up to and into the downturn last May.) A graphic of the Nasdaq Core is attached here.

Overall, nothing is very clear. I wish we knew more, but we don't. There is weak presumption for more upside.

RLC
Hanover NH

January 22, 2007. Market conditions remain generally "ready" for a correction momentum is stalled, Core Indexes are below their EMAs (barely); cross-sectional Tails are flat (positive tail) and low (negative tail). But readiness is only readiness; prices can levitate for a bit pending some new trigger.

One metric that some say is showing great weakness--but which we say is not--is the low levels of option-implied volatility in the CBOE VIX. Although VIX, at 10.40 Friday, is down at its 2nd percentile over the past three years, it stands at a quite normal 31st percentile as adjusted for market dispersion. And it is up at it's 98th percentile relative to actual daily volatility. I've attached a graphic of the raw VIX and dispersion-adjusted VIX for your own visual comparison.

RLC
Hanover NH

January 16, 2007. The relative strength noted two weeks ago (January 2) in our Core Indexes and XUB exuberance index is playing out into broad market. An update picture of the Nasdaq Core with its EMA is attached.

For a new uptrend to have energy and persistence, however, we would expect a new surge in the positive and negative cross-sectional Tails. We had such a surge back at the bottom in July ,and again in mid-trend in November. No such surge this time...at least not yet. While the present upward renewal seems likely to have at least a little continuation, it's not a safe bet unless there's some new energy evident in those Tails. Update graphic of the Nasdaq Tails series is attached. (NYSE Tails very similar.)

(Side note Investigating a strange data anomaly in our hedge fund exposures tracking led to discovery of significant long positions in gold among CTA funds in recent weeks. Apparently still building, too.)

RLC
Hanover NH

January 8, 2007. Last week we noted that recent market data has been "thin and mixed," largely due to year-end and holiday factors. We're getting past that, but slowly. The emergence seems to be resolving toward downside. The vulnerability implied by the record-low downside Tails of cross-sectional distribution remains. The strength implied by the high XUB seems now to have played out (meaning the XUB paths are still high, but now falling).

In mid-December we pointed to the Nasdaq Core Index deviations from EMA, pointing to developing weakness similar to before the May correction, and saying "A new negative deviation below the recent negatives (of early November) would be objective evidence the correction has actually arrived." I've attached here two update graphics, showing (a) the Nasdaq Core with its EMA, and (b) the path of the deviations. The months of erosion are highlighted on the deviations graph. Remarkably, however, the deviations path has so far not exceeded that November low. It wouldn't take much of a push to do so. (NYSE Core is weaker, and deviation has exceeded those prior lows.)

RLC
Hanover NH

January 2, 2007. Cross currents persist, and the holiday inactivity with year-end positioning makes it hard to know what data to trust. The downside Tails of cross-sectional returns that have been approaching new lows, now have posted actual all-time lows both on NYSE and Nasdaq. That usually means the market's energy is dissipated, with implications for weakness. But the holiday inactivity and in-volatility makes it hard to make a strong case on that.

Meanwhile, our XUB (exuberance) metrics are showing remarkable positivity. The Nasdaq XUB smoothings have posted new local highs. It is quite rare for downturns to emerge from XUB highs without first seeing a lower high (or even two lower highs) first. And our Nasdaq Core Index was actually up on Friday while all major indexes were down. But as with the weakness of the Tails, these apparent strengths could be merely reflecting thin trading and year-end positioning.

So the data are thin and mixed, and we're flying a little blind right here. I've attached a picture of the Nasdaq Tails (weak) and XUB (strong). Take your pick.

RLC
Hanover NH

 

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