Carpenter Analytix

Carpenter Market Remarks
              Notes on Recent Statistics and Inference

                   
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Carpenter's Market Remarks--2008 Archive

December 29, 2008.  Holiday-shortened weeks are not great for generating meaningful market stats (especially when the holiday falls on Thursday...killing one day entirely and emasculating two adjacent days). So there's still not much new; the bear market endures, and the relief rally too.

Meanwhile, If you're among the many still looking to lighten up on stocks, consider this; Bear market rallies rarely let you get out of things the way you want. Either the rally doesn't go far enough (so you don't see the prices you think you deserve), or the rally gets so spirited that you imagine the bear must be dead...and so you overstay, expecting primary uptrend. So far, this rally looks like the former.

I've attached a picture of our NYSE Core Index. It's most recent few weeks are unremarkable (essentially paralleling the broad indexes like the S&P shown with it here). But note how the Core Index has not been able to rebound commensurate with the S&P (or others), as illustrated by the comparative red horizontals from the October low. That's just the kind of indication that has to get reversed before we can start thinking about big bottom opportunities. This is one of many metrics that simply have not given any signs of important bottom. Expect new lows.

Happy New Year!

RLC
Hanover NH

December 22, 2008.  Everything from last week's Remarks remains valid this week

"We're in a bear market rally. The bear market is not over (or, more precisely, there is no evidence the bear market is over), and so far as we can tell, the rally is also not over. But whether the rally has much more energy in it is quite unclear.

"I've attached two graphics, showing our NYSE and Nasdaq XUBerance indexes. The red path is an exponential smoothing of the daily series, and the blue line is a smoothing of the smoothing. Both versions show the red path retreated to the blue, and a good guess is that another upward bounce is at hand. Otherwise, a plunge down through the blue would likely end the rally."

I've attached updates here on the same two graphics from last week. As it happens, both XUB scenarios have played out this week. On the NYSE, the red path "bounced" up from the blue path; on the Nasdaq, the red path plunged down through the blue. So indications are notably mixed, and we just don't have a strong tactical grip on trend right here. The important thing to remember is that all evidence says that this is a correction in a bear market; enticing, but treacherous and transient.

RLC
Hanover NH

December 15, 2008. Not much new. We're in a bear market rally. The bear market is not over (or, more precisely, there is no evidence the bear market is over), and so far as we can tell, the rally is also not over. But whether the rally has much more energy in it is quite unclear.

I've attached two graphics, showing our NYSE and Nasdaq XUBerance indexes. The red path is an exponential smoothing of the daily series, and the blue line is a smoothing of the smoothing. Both versions show the red path retreated to the blue, and a good guess is that another upward bounce is at hand. Otherwise, a plunge down through the blue would likely end the rally.

Trading long side of this rally would be high-risk. Better to just wait for new selling opportunity, yet to develop.

RLC
Hanover NH

December 8, 2008. Prices are off to a good start this morning, so that upside trade we've called-on and called-off may be back on. If you've had the impression we've been driven from pillar to post of late, that's because we have indeed. And we continue to find conflicting indications. Encouraging metrics like the XUB smoothings that you've seen recently continue to encourage. Weaker metrics like the cumulative skew (CSQ), Median Returns Index and Core Indexes continue showing relative weakness.

Given all the cross-currents, we'll take a step back this morning for a longer-term look. I've attached here two graphics of the S&P 500 with its S&P Momentum path. One picture runs over 36 years from 1972, the other zooms a bit closer, spanning just the past decade. On either or both of these graphs note first how much clearer and longer-leading are the weakness indications approaching a top. Both 2000 and 2007 showed diminishing upward vigor for months prior to the actual tops. But the bottoms come in sharp and violent spasms.

Both charts include trace-back lines from current Momentum level, with vertical drop-lines showing how the S&P index stood at prior Momentum levels similar to today's. There have been nine occasions since 1972 of Momentum down at current levels (and rising). Of those nine occasions, all but two were extremely close to lows that held at least for intermediate rally, and often for bull market renewal. So that's strongly encouraging overall. But also note that even on "successful" occasions, it is (was) entirely possible to see yet another brief downward spasm before vindication. Bear markets are just that way.

Finally, in the second picture (closer look) note that at the 2002-03 bottom, the low prices of early 2003 were virtually as good as the 2002 literal lows, but with the Momentum path by then showing considerable strength, and the risk situation therefore far more favorable than the first (lowest) opportunity. Although the low and rising Momentum (and some other metrics) presents a pretty good chance of further advance --maybe even quite vigorous advance-- we're likely, at the very least, to have later, safer opportunities. That is, best to consider strength as just a bear market rally. Trade it, if you will, only with extreme caution and modest commitment.

RLC
Hanover NH

November 28, 2008. There's a reasonably good chance that this week's M-T-W rally is the beginning of a more sustained rally such as we've anticipated several times prematurely. Take a look, for instance, at the attached graphic showing EMA smoothings of our Nasdaq XUBerance series. (NYSE is similar.) Most often (but not always) when the red (short smoothing) punches up through the blue (long smoothing) from a low level, there's at least intermediate rally at hand. We've also seen some positive skew in cross-sectional returns distributions this week.

Even if a rally gets going --and maybe with great vigor and endurance-- we find no evidence at hand that the bear market is finished.

RLC
Hanover NH

November 24, 2008. What you really want to know, I can't discern: Will Friday afternoon's dramatic run-up continue? On the Yes side (a) the bounce arrived at a highly plausible level (relative to 2002 bottom); (b) both actual and implied volatility are immense; (c) portfolios are either way below normal exposures (mutual funds) or net short (hedge funds). On the No side (a2) Our Core Index response was feeble for a 5%-6% up-day; (b2) the skew of Friday's cross-sectional returns distributions was only neutral at best; (c2) our XUBerance metrics (NYSE and Nasdaq) remained slightly negative Friday; (d2) our Median Returns Index only advanced 3.3% Friday.

But regardless of how the Friday rally plays out, our stats continue to indicate no final bottom is at hand. One element of that position is illustrated in the attached graphic file. The picture shows a plot of our Net Tails and Net Limbs series, back through the 2000-2002 bear market. (The Tails metrics measure now "stretched out" are the upside and downside extremities of stock returns distributions; the Limbs series measure now extensive are the up-side and down-side halves overall.) At end of the bear market, in October 2002, both of these metrics (and various other metrics) had posted higher lows over several saw-tooth reversals.

Here in 2008, we are nowhere near such development...and it appears we would need many months to get to such a stage. So a bottom here--if one were to emerge--is almost certainly only a reprieve. Perhaps a substantial and tradable reprieve (we'll wait for evidence)...but almost impossible to see it as a bear market termination.

RLC
Hanover NH

November 17, 2008. We've been speaking pretty firmly of a relief correction in a bear market. Maybe there's more notable rally yet in store, or maybe not. But it's getting late. We've also been speaking pretty firmly of likely new lows after a corrective rally. (And Thursday morning's putative and fleeting "new low" doesn't count for achieving that expectation.) Seeing consequential new lows is still a heavy "favorite" (if that's the word)...with or without further upside first.

I attach here a picture of our Nasdaq Core Skew. This index is one of our measures of whether the "upside tail" or the "downside tail" of Nasdaq returns distribution is greater. As you will see, this metric hasn't acknowledged any "correction" or "rally" or even a "pause" in the downtrend. (The NYSE version looks about the same.) Posting new lows doesn't necessarily mean there's no bottom at hand; back in 2002 these Core Skew paths made their lows simultaneously with the market, not in advance of it. But back in 2002, different from 2008, the Core Skew paths would at least register some lift on market up-days or weeks. Not these days, however.

RLC
Hanover NH

November 10, 2008. Friday's advance was not terribly impressive relative to the two prior declines...not only because it was smaller, but also in that Friday's cross-sectional distribution of returns failed to generate skewed positive.skew (and in some samples, actually showed notably negative skew).

Nevertheless, there is no reason to doubt we are still in bear market (upward) correction. We noted just last week how treacherous bear market corrections can be, and Wednesday-Thursday provided timely illustration.

One metric that can show when conditions are setting up for more consequential up-turn is the equity exposure path of Value Funds (mutual funds). When Value Funds begin to find values, they begin to increase their exposure. This isn't really "timing"...it's just that at some point, more stocks are at prices worth pursuing. (Quite different from the trend-following behavior of our Hedge Fund Analytix service.) But so far, such value discovery is not happening. Indeed, Value Fund net exposure is near its lows, as you can see in the attached graphic. Note how, back in 2000-2003, the less-than-unity equity exposure was working their way higher as prices worked lower in the bear market. Today exposure is still working lower. One sign of impending bottom (as opposed to mere correction) will be when these value-seekers show us that they're finding and buying more equity values.

RLC
Hanover NH

November 3, 2008. I have good confidence in two things; (1) the primary direction is still down, and (2) a probably substantial correction in that primary trend is underway. Alas, I am very unsure what "substantial" will turn out to mean. Perhaps something like a runup to July levels (S&P +20% to 1200 area?). Perhaps a choppy trading range (like within + 5% of current levels?). Perhaps some of each (trading range followed by a spurt?)

So I don't have statistical guidance that's confidently actionable. The presence of a corrective rally means long side trades is the place to be unless neutral, but with great caution, selectivity, and alacrity. Bear market rallies are enticing but notoriously treacherous.

I've attached a graphic of the NYSE Core Index Momentum. It's deeply negative, and in an extended rally might get back up to zero-ish levels without changing the broader outlook. Also attached is the NYSE Core Index Skew going back to its inception at year-end 1999. This is one of the metrics that will have to show some upward action before we can contemplate a primary trend reversal (although it's likely to give only contemporaneous indication, not advance warning).

RLC
Hanover NH

October 27, 2008. OK, now I really mean it; unless the entire investment world is going up in smoke, we are very close to a rally. Here's why (aside from just being very "oversold" and all that)

1. Implied volatility embodied in the VIX has now reached up to just about as high as it gets. You've probably been reading that the VIX has been posting record highs all month. That's true on a "raw" basis, but here we adjust VIX, to see it relative to actual volatility and relative to market dispersion. I've attached a graph here showing the VIX/DVAX ratio (i.e. relative to our DVAX dispersion index), and you can see that the ratio has only now reached into it's historical upper range. That fact won't cause a rally by itself, but does increase the odds significantly; VIX is now finally high on a "real" rather than "nominal" basis.

2. Both the NYSE and Nasdaq XUBerance metrics have been relatively strong of late. (That is, not as weak as the price trends would call for.) I've shown XUB graphs lots of times of late, so I've not repeated here. I'll send a graph if you like. Once we get a conventionally strong up-day, I expect these XUB paths to shoot positive pretty promptly...which would say a rally has begun.

3. The S&P is now less than 12% above its bear market low of October 2000 (closing basis). Given the recent volatility, dropping 12% could be a matter of just about three "normal" down days...or just one or two "large" down days. [The option market's current volatility "expectation" (VIX = 79.13) implies about 80% annualized standard deviation, which translates into about 5% daily standard deviation...or a median absolute daily change of about 4%. Indeed, actual median absolute percent change this month is 4.01%. Three more days like that on the downside, and we're at the lows of Oct 2000.] In such case, it's hard to believe the lows of 2000, if approached, won't attract huge attention. Between technical expectation for "support" at a prior bottom, and highly favorable value comparisons vis-a-vis eight years ago (and of course, that widely noted "oversold" condition), it's easy to imagine a rally of impressive dimensions.

Such a rally would have to be impressive in more than mere size, however, to imply it's more than just a rally. As noted here often, no statistics tracked here point to anything but bear market. That can change (which is why we keep tracking unfolding data), but until it does change, any upside bets are mere trades and carry substantial counter-trend risk.

RLC
Hanover NH

October 20, 2008. The rally that began a week ago (Monday) is probably not over. Indeed, there's probably a "bottom" of some magnitude being made. But the bear market is almost certainly not over...at least not by any market metrics here.

One such metric is our Nasdaq Core Skew. This is different in composition and construction from the S&P "Cumulative Skew" path you've sometimes seen here...but the concept is the same; the long end of cross-sectional returns distribution tends to point the direction of the primary trend. The Core Skew paths (both Nasdaq and NYSE) continue deeply negative.

RLC
Hanover NH

October 13, 2008. Everyone knows the market is way "oversold" and due for a rally...even if only a rally. But the market was already way "oversold" a week ago, and prices were 18% higher then. So it's dangerous (and unwise) to try to outfox the market here. As Jeffrey deGraaf of ISI noted at last week's Contrary Opinion Forum Don't be a hero; heroes go to zeroes. Besides, if a bottom of great consequence were forming here, there'd be buying opportunities later (although perhaps higher)...with much lower risk.

Moreover, so long as the bear market is intact, the best opportunities are for selling, not buying. I've attached an update graphic showing our Nasdaq Core Index Momentum path. Recall that the Core Momentums (NYSE and Nasdaq) tend to remain almost entirely positive though bull market, and negative through bear market. Obviously, this metric is nowhere near approaching a positive crossover at this point. (Same goes for the NYSE version.) Also, our hedge funds equity exposure is nowhere near showing over-done pessimism in context of bear market readings, as shown and calibrated in the current HFA Weekly. If you're not a subscriber to Hedge Fund Analytix, you're missing a key strategy resource.

RLC
Hanover NH

October 6, 2008. Several signs point to soon rally. Most broadly, any number of measures are shouting "oversold"...i.e., at levels as low or lower than they can remain for long. In addition, we have two of our top Prime Timers adding equity exposure about as rapidly as ever; volatility and dispersion are at or near record highs; and XUBerance paths have been diverging upward in the recent slide. (The XUBerance metrics track the net balance of upside and downside Tails extension in cross-sectional returns distribution. A recent graphic of the Nasdaq XUB path is attached here.)

The danger , of course, is that we may yet have a downside convulsion to face. Indeed, Friday's deadening weakness all afternoon, after the market's morning celebration of the Congressional bail-out, looks a bit ominous from here. So maybe we finally get a real convulsion, in which case it presents a neat buying opportunity...if you have the courage and the cash.

But let's not forget, this is a bear market, with no signs of ending here. Several metrics of deeper underlying condition (which, unlike an oversold rally, is very slow to turn) are still pointing down.

RLC
Hanover NH

September 29, 2008. The current Barron's quotes Charles Wright of Fall River Capital 'It's very difficult to invest when governments intervene...." He's referring to specific models used at Fall River, but the point is generally sound regardless of your market model. We are in the midst of a historic intervention, and distortions will abound.

We have to suppose (based on market reaction to last week-end's "initial" bail-out proposal) that the market will stage a renewed celebration of Congressional approval of the renewed bail-out. If the market does not celebrate (or if a celebration is initiated by can't hold), then it's every man for himself and the Devil take the hindmost. But if we get a strong positive response that doesn't fizzle, then we're half way home, but still need to see some much more constructive market data than has been forthcoming so far. For now, our metrics of broad market undertone (such as the Cumulative Skew, Core Momentum, and Cross-Sectional Tails) are still showing bear market characteristics. So we wait to se how the rally (the presumed rally) develops.

Meanwhile, you may find interesting the attached graphic showing "Autograf" analysis of lead/lag correlations between oil price and retailing stocks. This analysis was inspired by the chart presented by Gene Epstein (Economic Beat) in last week's Barrons. The Epstein chart shows that changes in national retail sales follow changes in oil prices (inversely) quite consistently with a one-month lag. Makes sense gas goes up, we travel less and buy less, a short while after the change "sinks in." So I tried the Autograf lead/lag correlations model on returns of the USO oil etf and the DJ Retailing price index. Specifically, I correlated 10-day USO returns vs 10-day Retailing over past five years, then shifted the returns series forward and backward by 1 day, 2 days, 3 days...etc.

The resulting correlations are shown as vertical bars in the attached graphic. At horizontal center is the simultaneous correlation. To the left are correlations (positive) of USO returns following DJ Retail returns (for 1 to 30 days successive lag); to the right are correlations (negative) of DJ Retail returns following USO returns (from 1 to 30 days successive lag). These market correlations reflect similar relationship as described by Epstein; oil leads retail, inversely, out to about 20 days (which is one month of trading days). The Autograf model is an efficient tool for quickly testing and profiling objective sequential relationships.

RLC
Hanover NH

September 22, 2008. Will the Grand Bailout(s) work? Don't know. What we can fairly assert is that the bets are immense and volatility is already near record levels. (We only have four prior occasions since 1990 of actual volatility near current levels. One such occasion, of course, was at the very bottom of 2002.) Expect continuing volatility, and maybe greater volatility.

Both high volatility itself, and the fact that S&P actual volatility (45.69) now exceeds implied volatility (32.07) are associated with emerging intermediate uptrends. We have written of this relationship often. Also on the positive side (near term), we have both NYSE and Nasdaq XUBerance paths heading upward from negative positions, and the Core Index Momentums still have room to advance (up to neutral) without even calling for an end to the bear market. I've attached two graphics, of the Nasdaq Core Index and its related Momentum series.

But we're not out of the woods yet. I wrote a piece in early August ("Bear Evidence"; copy available on request) citing five key measures indicating we're probably in an ongoing down-trend. First item was the deepening equity short among CTA hedge funds, as published in our HFA hedge tracking service. This past week that short position was a bit relieved (as of Wednesday; i.e. before the Thursday-Friday rally), but we still have strong likelihood of prevailing bear market exposure ranges. The other bear factors cited were (2) Core Index Momentums negative, (3) Median Index still declining, after having peaked well before the market, (4) our Cumulative Skew path is in decline, and (5) both NYSE and Nasdaq cross-sectional Tails are way up in bear market range. (A sixth factor was/is that a 20% drop has historically led to another 24% on average.) All those conditions still hold today.

Although I've never been terribly fond of era analogies, here is one that may be apt We may be in condition somewhat like post-9/11. Great fear and volatility, in oversold status, with hope of relief, but no evidence...prompting a notable multi-week rally, but no sustained upward reversal yet, and plenty of downside still to emerge.

RLC
Hanover NH

September 8, 2008.  Everyone knows the weekend takeover of Fannie and Freddie will dominate Monday trading...but it's unclear what that will mean. After-hours trading on Friday (when the takeover news published but not yet official) saw better than 1% gains in SPY (S&P 500 ETF), and a +2.7% gain in the XLF (financial sector ETF). Those are only "pretty big" changes for daytime trading, but quite remarkable for after-hours trading. So it's reasonable to expect strong follow-through Monday, at least initially.

But we'll wait to see the "real" market data before forming a judgment. Market rallies based on bail-outs are dubious at best. Our Core Indexes have been a bit stronger than published indexes this past week (graphic attached), so the timing of the government move may be favorable for positive reaction. But that's a near-term consideration ( a day? a week? a month?), and we find no evidence of relief or reversal of broader bear market condition (e.g. Core Momentum, graphic attached).

RLC
Hanover NH

September 1, 2008. Our statistics show no substantial change from a week ago. Both NYSE and Nasdaq XUB paths still look like more upside progress is likely; the Core Momentum paths still have room to rise up to neutral (but need not get there); the bigger picture metrics still look like the advance from July lows is just a bear market rally. So the tactical conclusion remains a selling opportunity is close at hand...but just how imminent we cannot say.

One thing that is a bit different from a week ago is that cross-sectional dispersion has been narrowing and is now in range from which recent downturns emerged. Shrinking dispersion is a bit unusual in a week with 3 days of 5 delivering greater-than-average percent change. Low dispersion is significantly associated with minor and intermediate downturns, as you can see in the attached graphic. But you can also see there is no fixed threshold below which a downturn is announced. So current reading is not itself actionable; just another metric saying get your selling done while you can.

RLC
Hanover NH

August 25 2008. Last week I had thought the July-August rally was just nearly expired, but it now looks like there's farther to go. Our Sigma/VIX ratio is greater than unity again, both NYSE and Nasdaq XUBerance paths have turned upward through their EMAs, and downside "Tails" of cross-sectional returns remain very extended.

But the bigger picture remains negative. The Core Index Momentum paths are still negative, of course, and have room to move up somewhat without changing positive. Our Median Returns Index has not shown any signs of bottoming, and most days the Cumulative Skew (CSQ) has been posting new lows. Our Managed Futures and Macro hedge fund indexes remain net short.

I'm attaching two graphics to illustrate these near-term and longer-term crosscurrents. The XUB-NY chart shows how the short-EMA smoothing has shot upward through the longer-EMA. Note the prior instances of that occurrence. The Core-Skew-NYSE chart (distinct fro the CSQ cited above--also negative) shows how deeply negative is the bigger picture. No sign yet of comparative strength as shown in early 2003.

So the evidence says we're still in a bear market rally. More selling opportunities ahead.

RLC
Hanover NH

August 11 2008. Last week we wondered whether the expected selling opportunity was "practically here" or "still brewing." Friday's 300-point DJIA runup was not terribly impressive (our XUBerance readings were marginally negative, both for NYSE and Nasdaq), but it got enough attention to give encouragement for more upside to come. So the view from Hanover is that the selling opportunity is "still brewing."

As to why the rally should be seen as a selling opportunity at all, I've attached here a brief catalog of market metrics indicating that "down" remains the likely primary direction. Sharp rallies (even extended rallies) are still feasible, but treacherous for long trading.

RLC
Hanover NH

August 4, 2008. Last week we said an opportunity is shaping up...but we just couldn't tell whether to expect the buying type or selling type. Further data,analysis and consideration suggests the selling opportunity is more likely. What's still unclear is whether to expect it's practically here, or still brewing.

The "still brewing" hypothesis seem the more likely, in part because so many metrics are in conflict. The allegedly high VIX levels are actually very low in relation to market dispersion,which is weak; but the actual/implied volatility ratio has exceeded unity most of the past week (W-Th-F), which is a good indication for near term strength. Our NYSE XUBerance index is shooting upward; but Nasdaq XUBerance is weak. The Core Indexes show some relative weakness; but the Core Index Momentum paths leave lots of room for further advance even in bear market context. And so on.

[One contrary factor--favoring the "selling opportunity practically here" hypothesis--is the weakness in many overseas markets. Take a look through the various iShares Country ETFs. The worst is EWJ (Japan), which is much like the others but already posting lows.]

I've attached a graphic showing 18 years of Upper and Lower Bounds of NYSE cross sectional returns. (The Bounds are related to the "Tails" analyses you've often seen here, but these measure the overall positive and negative reach, not just the stretch of the outermost limbs.) The general point of this graph is simply to show how plainly bear-market-like is the current profile. Note how rapidly both red and blue paths drop immediately after the 2002 bottom. Nothing like that is even faintly apparent now.

RLC
Hanover NH

 

July 21 2008. Last week's rally will likely play out to more than an oversold bounce. Aside from simply being "oversold," our cross-sectional Tails and Dispersion had reached high enough at midweek to warrant a decent correction to the downtrend, and now we have punchy upside "XUBerance" series (NYSE and Nasdaq), a picture of which is attached. The red path is a "short" exponential smoothing of the daily XUB, and the blue path is a "long" exponential smoothing. When the red bursts up through the blue from depressed levels, at least some reasonable follow-through usually ensues.

None of this changes our view that bear market conditions prevail. Moreover, one near-term trouble lies in our dispersion-adjusted VIX (ratio of VIX/DVAX). Although various commentary finds comfort in CBOE VIX having finally reached up to 30 area (28.54 closing level Tuesday), it is actually rather low when adjusted for current high levels of dispersion (DVAX). Low VIX/DVAX is not always a sign of direct weakness, but it does preclude the VIX level as a measure of strength. A graphic of the ratio path is also attached here.

Bottom line is that the rally is probably still tradable, or at least usable for exits, but dangerous (as are all counter-trend movements.)

RLC
Hanover NH

July 14 2008. It's been two weeks since we posted Remarks noting the NYSE AND Nasdaq Core Index Deviations from EMA were extremely negative and due for soon reversal. Prices have fallen since then (S&P -3%), but on average not so badly as most news stories portray. Some analysts still waiting for a "climax," and some are saying Friday was it (based largely on huge volume and the action in the Financial sector.). We're beginning to doubt both scenarios. More likely (it seems here) is a rally--possibly substantial) without benefit of climax, which eventually fades and then evolves into a decline that can finally generate a good old-fashioned bone-shaking climax.

That's a more speculative envisioning than we generally allow ourselves. What we actually know is far more limited. We know background conditions favor bear market. We know the current market is "oversold." We know there are many signs of great anxiety but not of panic. We know Treasury and the Fed are actively groping to come up with some actions or decisions to bolster the Financial sector...and are likely to come up with something soon but hard to imagine it can be some dispositive fix.

Regarding those "signs of great anxiety but not of panic," the graphic attached here shows the path of "Downside Tails" for the Nasdaq. Our Tails metrics track the upside or downside "reach" of the outliers of cross-sectional returns distributions. The Downside Tails in particular capture a unique measure of investor anxiety...showing how far below the norm (even below an already negative norm) sellers are willing to dump shares. The point of this graphic is this Although the Nasdaq Downside Tail is elevated, it is nowhere near extreme...at least by 2000-2002 standards. So there is still room for authentic panic. But it seems unlikely to arrive right in this wave, and thus the speculative fancy above. (The NYSE Downside Tail path is relatively more elevated; closer to authentic panic, but not quite compelling. Graphic on request.)

In any case, the bear market conditions we've been citing are all still active and relevant.

RLC
Hanover NH

July 7 2008. The market is way oversold, as everyone knows. Soon relief is therefore likely, as everyone also knows. But the likelihood of a rally is balanced (maybe more than balanced) by the smaller probability of a convulsive washout first. Overall, a good time to be watching and waiting from the sidelines.

Rally or no, and washout or no, our stats are increasing looking like the current decline--whenever it ends--is not likely the end of it. Setting aside the "bull' and "bear" terminology, we're simply saying the vigor and persistence of the present down thrust is likely to come back around for another (lower) round before all is done. In addition to the various "bear conditions" we've cited from time to time over recent months (and summarized again last week), we now see data suggesting any hopes that a "bottoming" process started last March are fading fast. Our NYSE and Nasdaq Core Indexes have posted all new lows; Core Index Momentum paths have posted new lows; neither volatility nor dispersion have spiked as they normally would approaching an upturn of consequence.

I've attached a graphic of the Nasdaq Core Momentum path. You will recall this is an exponential-weighted log return series based on our Nasdaq Core Index. As note here often, the Core Momentum paths tend to stay (almost) all positive in bull market and (almost) all negative in bear market. At the market top in 4th quarter of '07, the Nasdaq Core Momentum path was positive but clearly non-confirming of the new highs; since then it's Core Momentum's been virtually all negative in '08. With new Momentum lows at hand, the oversold condition (and presumed rally) is unlikely to precipitate more than a respite.

RLC
Hanover NH

June 30 2008. Our Core Index deviations from EMAs have now reached an area of downside distension. (NYSE deviation graphic attached.) That means relief from decline is very near in time. Various longer momentum measures are not terribly over-negative, however, so such "relief" may well prove transient...or even if somewhat durable, are nevertheless likely to be followed by lower lows anon.

As to the current fret over whether/when the DJIA or S&P will provide an "official" bear headline (by closing down 20% or more from the 2007 highs), we say...pay no attention! Not because there is no danger. Rather, because the 20% threshold means little, and comes way too late. It is bear market conditions that matter; conditions that engender weakness. And indications of bear market conditions have been showing and growing for months, as chronicled here and elsewhere. Recall that our Median Returns Index peaked in February last year (and is now down 26%); that our Cumulative Skew index is in greater decline than any time since 2000-2002 bear market; that the Momentum paths of our Core Indexes (NY & Nasdaq) which had held consistently positive through the 2003-2007 bull market, went negative in November '07 and have remained predominantly negative since then. These are all indications of bear market conditions. Bear conditions warrant defensive positions. Watching or waiting for 20% declines makes a good story but bad strategy.

With last week's Remarks, I attached a graphic showing the NYSE Tails paths. I've attached here the current posting of the Nasdaq Tails paths. These metrics track the upside and downside "stretch" of the outermost limbs of daily cross-sectional returns. Market bottoms generally show notable extension of the downside Tails. Such extension is only beginning to emerge at this time, which is one basis for saying soon relief from downside distension would likely be transient.

RLC
Hanover NH

June 23 2008. End-of-week activity notwithstanding, we fund not much new on the statistical front. Dispersion remains high, cross-sectional skew remains downward-biased, Core Indexes breached their uptrends many weeks ago and seem (probably) to be building downtrends. The one potentially constructive datum would be the significantly net short position we see in the Managed Futures hedge funds...but the inference from even that observation is now in question as described in our recent Bull & Bear analysis.

I've attached here a graphic of the NYSE cross-sectional upper and lower "Tails" paths. These two paths show how stretched out are the upper end and lower end of daily cross-sectional returns distributions. Two observations (a) Both the upper and lower tails are currently up in their 2000-2002 range; and (b) the market downturn of recent weeks has only just barely begun to expand the downside returns (Lower Tail). It would be unusual for a downtrend to finish without producing at least something of a Lower Tail upward spike.

RLC
Hanover NH

June 16 2008. Friday's run-up looked good, but not terribly impressive by the numbers. Volume was mediocre, and much of the gain came late, as close of trading approached. More importantly, in spite of the averages, neither NYSE nor Nasdaq cross-sectional return distributions had positive skew. Lack of skew for a given day is no death warrant, but it's also not very robust.

Among our Prime Timer mutual funds, Ken Heebner's CGM Capital Development fund has been reducing equity exposure pretty regularly. The fund's exposure is now down to the 6th percentile of its past six years. That's notably defensive, as you will see in the attached graphic showing a ten year plot of the CGM exposure path. The position isn't shared all around, however, as our Prime Timers are split two aggressively positioned and three defensively positioned. Current exposures data and graphics are posted at the Prime Timers link at the web site.

RLC
Hanover NH

June 9 2008. Friday's sell-off (about -3% for most every sector) was troubling. My friend Walter Deemer notes this morning that Friday was a "90% down day"...meaning that more than 90% of the NYSE volume was in declining stocks. History shows that 90% days tend to come (loosely) in clusters, so we can expect more soon.

Whether Friday's drop will spill over to today or generate a snap-back, I can't say. (Reports are that futures are higher before the opening. But that's often a fickle indication.) Regardless of Monday's specific outcome, data here suggest the rally-from-March is probably over. As one item of evidence, I've attached here a graphic showing a plot of our Nasdaq Core Index.

The Core Indexes track the daily market returns excluding wild outliers (too idiosyncratic) and excluding trivial returns (meaningless noise). The resulting indexes (both NYSE and Nasdaq) are extremely trendy; i.e., deviations from dominant direction are significantly smaller than they are for other indexes. (You can see this visually in the attachment, and it's also significant statistically.) The significant trendiness, in turn, makes it easier to identify changes in trend. In the attached Nasdaq Core Index graphic, I have drawn-in a trend boundary from the March lows. As of Friday's close, the Core Index was technically below that up-trend, but by such a small margin that we have to say they're really effectively equal.

If equal, then the up-trend is still intact, right? Yes, but...! But the 90% down day raises the probability of another. But the Core Index itself has failed to keep up with the Composite rally (shown by the comparative horizontals drawn on the attachment). But the NYSE Core Index (not shown) has already violated its comparable March uptrend. And But our more general metrics like cumulative daily skew has been in decline since October, not showing any positive response in the March rally. (Negative cross-sectional skew simply means that the downside outliers are more outlying than are the upside outliers.)

This leaves our hedge fund equity exposures (showing net short and down in 5th percentile) as the "only" constructive indication around this shop. (Well, not the ONLY, but kind of on its own.) However, as our Hedge Fund Analytix subscribers know while the 5th percentile is "too low" to sustain as long as we're in a bull market context, it is not necessarily too extreme if we find ourselves in a bear market context.

RLC
Hanover NH

 

June 2, 2008. Near-term direction remains unclear; we still see a mild probability for downside to emerge, but prices have been working higher nevertheless. So we await further developments, in particular watching for possible XUB upside or a Core Index downturn.

Meanwhile, take a look at the attached graphic showing ten years of our bond-stock moving beta. The series simply tracks bond price fluctuation relative to stock price fluctuation. As is apparent from the plot, times when the relationship is generally more positive have been good for stocks, and times when the relationship is more negative have been weak for stocks. We do not have a theory for this, but the relationship seems plain.

The current bond-stock beta is deeply negative. Recent lows are the lowest since inception of this measure in 1991. This is one factor in our concern for possible bear market renewal.

Robin C.
Hanover NH

May 26, 2008. Friday's market data was blandly ambiguous, as it often is on the day before a holiday. Our Core Indexes (both NYSE and Nasdaq) continued lower from their breach of uptrend early in the week. Cross sectional dispersion declined, by several measures, from an already low-ish range. Those signs generally presage price weakness. On the other hand, both NYSE And Nasdaq XUBerance were positive Friday, which is unusual for a day when most broad indexes were down more than a percent. So Friday's trading was not very revealing.

In broader context, we have growing signs that the rally since March is only that; signs that the current dominant trend may be down. One such sign is our cumulative skew index (CSQ). This index measures the shape of cross-sectional returns distribution for upward or downward skew. The daily skew readings are accumulated into a cumulative skew path. That path has been in mild decline since October. That may not seem unsurprising, as the market overall is down from October. But the CSQ is quite capable of resisting the gross market direction (and usually does). As shown on the graphic attached here. But instead we are seeing the first persistent CSQ decline since the bear market ended.

RLC
Hanover NH

May 19, 2008. The "soon" decline we've written of for the past two weeks is obviously not as soon as we thought. But conditions still haven't changed. Basically, we just have to see what kind of pull-back emerges when it does. Subjectively, I have to note that the delay (in emergence of pull-back) adds some concern that it may be more extended when it does arrive. I have "observed" this relationship often, but find it almost impossible to count or quantify (due to definitional difficulty).

Our five "Prime Timer" fund managers remain deeply split on their equity exposures, with two in their top quintiles and three in their bottom quintiles. Their timing scores are up for real change based on forthcoming outcomes. Click on Prime Timers link at the website for current individual fund data.

RLC
Hanover NH

May 12, 2008. The market's past week has changed almost nothing. So our summary view remains just as stated in our Bottom line last week

"Net net; next decline (soon) will be important. Whether it's just a pull-back or renewed downtrend we can't see yet. Hopefully, we'll pick up more evidence before too much transpires."

One of the metrics that is tilting expectation toward soon downside is our VIX/DVAX ratio (CBOE VIX normalized for cross-sectional market dispersion). At .45, this ratio is at its 35th percentile (of past ten years). That's not terribly low, but average one-week outcomes from the 3rd decile are negative, averaging -0.50%. The overall average one-week percent change over these ten years was +0.09%.

I've attached here a table generated by our DejaVu model. It compares one-week outcomes from all days when the ratio was between .44 and ,46 (177 days) vs all other days (2,334). Note that the difference in mean outcomes is statistically significant (meaning the relationship is stronger than would plausibly arise by chance if there were no actual relationship). Also, that the probability of advance (up-weeks divided by all weeks) when the ratio is in this .44-.46 range is only 41%, compared with 51% probability for all other weeks (when the ratio was not in this range).

RLC
Hanover NH

May 5, 2008. Last week we expressed ambivalence as to imminent direction, but with suggestion that the "next big thing" would be indeed a big thing. Thursday's advance was enough to sort-of qualify (mainly due to the Nasdaq's 2.8% gain), but only a single day and other indexes were good but less thrilling (e.g. the DJIA's mere +1.5%).

Ambivalence prevails again (or still) this week. Most data indications are either conflicting or middling. Take a look, for instance, at the attached graphic of our NYSE Core Index (tracking cumulative returns among stocks with big-but-not-extraordinary market action). The white horizontals show impressive relative strength in the 07-08 decline (when the Core Index retraced about half of the 06-07 advance, while the S&P retraced about 85%). The red horizontals show more recent relative weakness (as the Core Index has not yet re-taken the January and February rally highs, while the S&P and other indexes have surpassed both).

The second attachment here shows NYSE Core Index Momentum. This path is an exponential smoothing of the daily Core Index returns. It oscillated below zero through the 2000-2002 bear market; it oscillated above zero from 2003-2007; it went negative at the end of '07 and now has recovered to neutral. It would be perfectly normal behavior for it to turn down from about here...if we are in a new negative oscillation period.

Meanwhile, as our HFA subscribers have been seeing since March, CTA hedge funds are short, which for years has been a consistently reliable indication for market advance (and has already been rewarding in the present occasion).

Net net; next decline (soon) will be important. Whether it's just a pull-back or renewed downtrend we can't see yet. Hopefully, we'll pick up more evidence before too much transpires.

RLC
Hanover NH

April 28, 2008. Conflicting signs are all about. Our weekend stats check with the Deja Vu model finds three metrics in zones with statistically significant short term upside, and four showing significant downside. ("Significant" here means statistically meaningful; no implication of magnitude.) More subjective appraisal of various metrics is similarly divided. Our hedge fund exposures remain net short and extremely low (with upside implication), but cross-sectional dispersion of returns (our DVAX index) is high and rising (with downside implication). And so on....

The high and rising dispersion is interesting for two reasons. First, because it's running counter to the CBOE VIX, which is unusual. I've attached a graphic, and you can see plainly that they generally move together, but not now The declining VIX is generally a portent of weakness. The rising DVAX is ambivalent as to direction; it's usually a positive, unless it's a premature symptom of impending downturn, in which case it's a real downer. So dispersion isn't doesn't help much yet...except the next big thing (so to speak) will likely be a noticeable big thing.

Last week we showed the Nasdaq Core Index. This week we enclose the NYSE Core Index. The Cores, remember, are designed to capture the "core" of non-trivial (but also non-extraordinary) returns. The Cores are currently lagging the major published indexes somewhat. They are also (still) on the verge of maybe breaking their downtrend, as illustrated on the graphic here. So this is another reason to expect some market vigor; either we demolish that downtrend (which would likely bring upside vigor), or renew the descent (which would likely bring downside vigor). Sometimes we just don't know what we most want to know.

RLC
Hanover NH

April 21, 2008. Last week we wrote...

"There's a good chance the rally that began in March (the day before that Market Remarks-Extra) is alive and well...just shaking off some doubters. In that case, a tidy trading opportunity may emerge soon. (Remember, Managed Futures hedge funds are too bearish here, as Hedge Fund Analytix subscribers have been seeing.) But this is now, and more pull-back seems likely."

That expected "more pull-back" lasted just a day, so the "tidy trading opportunity" developed faster than expected. And it's probably not over yet. I've attached two graphics here; the Nasdaq Core Index (tracking average non-extreme and non-trivial returns, and which is extremely trendy), and its "Momentum" path (and EMA of the Core Index daily returns). What's notable is that (a) with any further advance, the Core Index will escape it's recent downtrend; (b) the Momentum path is nevertheless a bit laggard in recent days (minor horizontal rather than up); (c) the Momentum path remains into negative territory. In the past, significant negative Momentum has only happened in bear market.

Our summary inference is that the rally has more to run, but in the end will nevertheless turn out to still be only a rally.

RLC
Hanover NH

April 14, 2008. Last week we opined that some market pull-back was in order, and along it came starting Tuesday, almost made-to-order. That pull-back included Friday's big drop, which attracted lots of attention with GE's slowing business. With all that attention, some further pull-back--perhaps with continuing volatility--is likely.

That subjective likelihood is supported in stats from the NYSE XUBerance metrics. Our Market Remarks-Extra of March 19--heralding the rally--was somewhat prompted by the negative-and-rising XUBerance series, which then were pretty closely replicating the shape of last August's upturn. Attached here is an update of that graphic, and you will see that the short smoothing has dropped down through the longer smoothing.

What's really interesting and unusual is the Nasdaq XUBerance paths were actually quite positive on Friday (and recently). That graphic is also attached here. The NY-Nq divergence is not to suggest the NYSE and Nasdaq trends will actually diverge, but does show that we are still very much in midst of crosscurrents. There's a good chance the rally that began in March (the day before that Market Remarks-Extra) is alive and well...just shaking off some doubters. In that case, a tidy trading opportunity may emerge soon. (Remember, Managed Futures hedge funds are too bearish here, as Hedge Fund Analytix subscribers have been seeing.) But this is now, and more pull-back seems likely.

RLC
Hanover NH

April 7, 2008. From our Market Remarks "Extra" of March 19

All of this is NOT to say or predict a new bull market, or even necessarily new index highs. Statistical analysis of market data cannot discern those possibilities. What we do say is that statistical conditions seem right for a beginning advance that will have some (further) notable vigor.

The market is up since then (S&P about 3%, Nasdaq about 7%), but it's been a stop-and-go affair and difficult to assess. Some short-term measures (like Core Index deviations from EMAs) are up to their normal high range, suggesting soon pull-back now in store. And the Core Indexes themselves, after a bit of relative strength in January-February, are now tilting more toward relative weakness. (Graphics attached.)

RLC
Hanover NH

March 31, 2008. Coming market direction is always uncertain, and is more uncertain than usual just here. Any number of rather short-term indications seem to call for emerging upside. Among these indications are high dispersion, high volatility, extended cross-sectional Tails, and actual volatility greater than implied volatility. A update graphic of the latter (ratio) is attached here.

Various other indications--more general longer-term measures in general--are saying the major trend is down. Among those are a clear decline in cross-sectional skew (in our CSQ cumulative skew index), relative weakness in our Median Returns Index, and negatives in the Core Index Momentum paths. This latter metric generally oscillates in negative range in bear markets and in positive range in bull markets...and is currently negative enough to imply bear condition. A graphic of the NYSE Core Index Momentum is also attached.

(Note, however, there are also some general and longer-term positives, like the fact that the top two of our Guru Fund Timers---viz, Vanguard and Legg Mason---are at their 84th and 90th equity exposure percentiles. And CTA hedge fund exposure is within it's bottom quintile, as subscribers to Hedge Fund Analytix have seen.)

So we have more cross-currents than usual. What I'm "expecting" is further rally before new lows emerge, but the downside risk is too great to bet on rally in anything more than trivial degree.

RLC
Hanover NH

March 24, 2008. Conditions cited in our March 19 Market Remarks "Extra" remain intact. So the upside expectation remains intact. Indeed, somewhat strengthened, in that (a) Wednesday's sharp drop did not cascade into Thursday, and (b) We now find CTA hedge funds to have reduced equity exposures down into their bottom quintile, as noted in today's Barron's. They're not deeply into that quintile (19th percentile, to be more precise), but the odds have shifted.

We've noted from time to time that the growth-value balance has shifted back to favoring value stocks. That judgment is based on the growth and value "moving alphas." I've attached an update graphic showing that the value shift continues.

RLC
Hanover NH

March 19, 2008.  ExtraOver the weekend we spoke of possible soon rebound. Specifically

a) "...an approaching bottom is likely not far off in time."

b) "...the market is quite "oversold," but Wall Street fragility could easily produce a convulsion before relief.

c) "...[XUB has] already posted a recent low, (with bounce and ) a prompt repeat down-thrust, reaching to not-quite-so-low XUB level would be a persuasive go-ahead for long side...as it was back in August on the graph."

Although Monday was quite weak, we have not had a downside "washout." But we do have the NYSE XUB showing a down-thrust to not-quite-so-low low, then rebounding (graphic attached). Also, our ratio of Sigma/VIX ratio has shot above unity (Actual/implied volatility 1.29 > 1.00, graphic attached), and the downside Tails are at high levels as previously noted. All of this occurs in context of broadly oversold conditions, and so all of this implies emerging price advance.

All of this is NOT to say or predict a new bull market, or even necessarily new index highs. Statistical analysis of market data cannot discern those possibilities. What we do say is that statistical conditions seem right for a beginning advance that will have some (further) notable vigor.

RLC
Hanover NH

March 17, 2008. As anticipated last week, the path of the NYSE downside Tail did reach new highs. (Not all-time highs, but highs for the current market descent.) That means an approaching bottom is likely not far off in time. It also implies continuing high volatility however (indeed, probably still higher volatility), so "not far off in time" does not protect from sharp decline.

This finding is not "news" to anyone on this Remarks list. Not news first because it's just as we anticipated, and second because it's just a statistics-based version of what the whole world knows from the headlines; the market is quite "oversold," but Wall Street fragility could easily produce a convulsion before relief.

Nevertheless, we do have indications that if we can get a good old-fashioned washout soon, it really could produce a quite prom

Hanover NH

March 10, 2008. Last week we noted that cross-sectional downside Tails had not yet surpassed their August extreme, opining that the downtrend would not likely end at least until some more-extreme extremes are posted. Well. the NYSE downside Tail is approaching a new high closely. Another down day or two will almost surely post new high for this series. I've attached an update picture. (The Nasdaq downside Tail is not quite so energetic, but it's also a bit less reliable. Nasdaq graphic available on request.)

Alas, because there is no threshold level of "too-high" for the Tails, posting a new extreme does not permit strong inference for upturn; it will merely remove our prior confidence that we "couldn't" yet be at upturn. It also implies continuing volatility.

RLC
Hanover NH

March 3 2008. Friday's 316-point plunge (DJIA) seems likely the beginning fruition of last week's parting remark, that "...the market needs one more down-thrust of some energy." Not that Friday's plunge fills the bill in itself; we're expecting a drop that drives the path of downside cross-sectional Tails to new highs. Such a plunge doesn't have to be a catastrophic, but would have a good bit more energy than was apparent Friday.

The Tails paths measure the "stretch" at the far ends of the daily returns distribution. In high-energy market trends, overall returns dispersion grows, and the outermost returns grow disproportionately. In high-energy decline, naturally, the downside (negative) Tail expands the most, as weaklings get clobbered the hardest. Downside Tails expanded to a higher range promptly in the initial market drop of July-August 2007 (one of the first indications anywhere that market behavior was already changing substantially). They have remained in higher range consistently since then.

Neither NYSE nor Nasdaq Tails path has any target or threshold level that would signal it's gone far enough. But it would be most remarkable for the present downtrend to terminate without first seeing the downside Tails posting levels equal or higher than what they achieved at the market's August low. A graphic of the NYSE Lower (downside) Tail path is attached here, showing the daily history since 2000. (Nasdaq path is generally similar.)

RLC
Hanover NH

February 25, 2008. Friday's end-of-day run-up should generate some follow-through, even though it was news-prompted (or rather, rumor-prompted). The graphic attached here shows our NYSE Core Index, with its clear relative strength since the end of 2007 highlighted in red rectangles. Relative strength (or weakness) in the Core Indexes normally ends up spreading to the market generally. The Nasdaq Core Index (not shown) is not quite so resilient, but nevertheless strong relative to the Nasdaq Composite.

None of this is to contradict our remark quoted in today's Barron's; that "...the market needs one more down-thrust of some energy." Of course the market never truly "needs" to do anything, but based on cross-sectional returns analysis, the downtrend from last year seems unlikely to be finally finished until we see a real spike in dispersion, kurtosis, and negative skew. But that can come later.

RLC
Hanover NH

February 18, 2008. Core Indexes have begun to show some relative strength, as noted here recently. More on NYSE than Nasdaq. Now also our S&P Median Returns Index has also begun to show some relative strength (slightly). So the market seems to be laying some foundation for advance.

But I suspect there's more downside to be had first. The attached graphic shows the NYSE Tails paths from year-end 1999 to date. These paths track the "stretch" of upside and downside "tails" of the daily returns distributions. Obvious at a glance is that the decline from last summer generated returns distributions very different from the previous corrections since 2002. Basically, current Tails are more like the Tails of the last bear market. And it's not just because this correction has gone further than prior corrections...this time was different right from the outset of correction.

But the Tails still have not quite spiked to really scary levels. Downside Tails path in particular is a unique measure of stocks being "dumped." Having already risen into the range of 2000-2002, I expect we shall see the downside Tail path spike to new highs before the correction is finished. When that happens (if it happens) the prior relative strength of Core and Median indexes should provide good confidence for sustained upturn.

RLC
Hanover NH

January 28, 2008. There is not really much one can usefully say about forthcoming market action. We all know an "oversold" condition still exists; we all know that "oversold" usually implied rebound...but can sometimes cascade into "hyper oversold" instead. So it's a pretty good time to be pretty neutral and await further developments.

As somewhat of an aside ("aside" because I can't draw a strong inference; perhaps you can), you may find interesting the following excerpt from a note I wrote regarding hedge fund activity for the week ending January 18.

"Among eighteen hedge strategy indexes I follow, seven had instances of 1-day returns greater than 2 standard deviations. (That is, as measured individually in terms of their respective volatilities.) In fact, most of them had multiple occasions exceeding 2 standard deviations (some Monday-Tuesday, some Tuesday-Wednesday, several Wednesday and/or Thursday). Altogether there were 14 occasions last week exceeding 2 sigma, of which 9 exceeded 3 sigma and 4 exceeded 4 sigma! Even allowing for the well-known "fat tail" returns phenomenon, 4 sigma is a quite substantial one-day volatility. All but one of the 14 outlier occasions was negative.

"Although the week was volatile for the market overall, the broad market did not approach anywhere near this level of volatile downside. Not one of the major equity indexes (DJIA S&P, Nasdaq, Russell 2000) exceeded 2 sigma even once, nor did long bonds or commodities. (S&P 500 came close, with a loss of 1.99 standard deviations on Thursday.)

"The point is that some non-negligible number of hedge funds must be mis-positioned in some substantial way."

Quite separately, I've attached a graphic comparing Moving Alphas as between Growth and Value sectors. It is widely held that we've experienced a secular and long-lasting shift from Value to Growth since mid-2007. But our Moving Alphas look to me like the Growth advantage has essentially dissipated. Prior occasions of such dissipation have led to Value preference for months or more. Take a look.

RLC
Hanover NH

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