Carpenter Analytix

Carpenter Market Remarks
              Notes on Recent Statistics and Inference

                   
www.CarpenterAnalytix.com
                                

Carpenter Market Remarks--2009. 

For referenced attachments, please request at Contact link.

For Remarks archives see links at foot of page.

December 21, 2009. Not much is new, yet again. We have an uptrend that may end at any time...but could push on yet a bit. But push on or not, risk is high and downturn can't be far off. The attached graphic shows an update of our NYSE Tail Skew path. It's plainly warning of weakness. As the next downtrend emerges, a key question will be whether this (and similar metrics) only retreat to zero range, or actually turn negative. That was our caveat in 2007, and that will be our caveat in 2010.

Robin C.
Hanover NH

Note:  Market Remarks for August-December 2009 available on request.

July 27, 2009. Nothing new now. The upside momentum prevails, while the underpinnings weaken. Last Wednesday I sent a picture of the VIX/DVAX path, showing how it is now well within reversible range. This week I'm attaching a picture of the VIX and DVAX paths individually. As you can see, it's no longer just a matter of relative change; DVAX (cross-sectional dispersion) is actually rising while VIX (option-implied volatility) is actually falling. This is a historically weak condition, as illustrated in several prior occasions on the chart.

It's very hard to calibrate such internal weakness versus the obvious upward vigor of plain old price charts. (And the weaknesses are not limited to dispersion and volatility.) All we can say with some confidence is that this is an extremely dangerous time for bets on the uptrend. "Danger" does not imply new direction; it's uncertainty of direction. Even with a further 10% possibly at hand (as some say in Barron's this week), risks here do not justify the bet.

RLC
Hanover NH

July 22, 2009. The one-more-dance has been pretty energetic. Energetic enough to suggest even one more round yet to come. But for right now, there are too many weaknesses appearing to expect much continuation at this point. Both NYSE and Nasdaq XUBerance were negative Tuesday (and weakening before that); cross-sectional dispersion is low (implying low energy); our Median Returns Index is not quite keeping up with mean returns; NY Core Skew is actually down over the past month. We also find our VIX/DVAX (volatility/dispersion ratio) is at a dangerously low level...definitely in the range where imminent downturn is highly plausible. A VIX/DVAX graphic is attached.

RLC
Hanover NH

July 15, 2009. Looks like my week-end guess that the aging rally has "one more dance" is proving out. There's more vigor than my own guess imagined. Even so, there are already signs that this dance is probably just one more turn around the floor. Skew and MRI are not strong, for example (at least no as strong as the major indexes). But for now, the new thrust looks like it will persist, for a bit.

RLC
Hanover NH

July 13, 2009. Market stats are conflicting and confusing. That's often true in general, and specifically true today. We have various metrics showing weakness accruing, and yet we also have metrics showing resistance to decline. Examples are attached. The Nasdaq XUB graphic shows definite negative and somewhat ominous progression. And the Nasdaq "S100" (a measure of daily Nasdaq returns dispersion) is just about as low as when the bottom fell out last fall. But our Core Indexes (NYSE shown here) are holding stronger than the published indexes, which often precedes market uptrend.

Sorry for the maybe-this-and-maybe-that message. But the way it is, is the way it is. I'm guessing the aging rally has one more dance left. But that's a guess--and guesses aren't worth much--and if wrong, a renewed downtrend could be quite vigorous. Neutrality is key for now.

RLC
Hanover NH

July 22, 2009. The one-more-dance has been pretty energetic. Energetic enough to suggest even one more round yet to come. But for right now, there are too many weaknesses appearing to expect much continuation at this point. Both NYSE and Nasdaq XUBerance were negative Tuesday (and weakening before that); cross-sectional dispersion is low (implying low energy); our Median Returns Index is not quite keeping up with mean returns; NY Core Skew is actually down over the past month. We also find our VIX/DVAX (volatility/dispersion ratio) is at a dangerously low level...definitely in the range where imminent downturn is highly plausible. A VIX/DVAX graphic is attached.

RLC
Hanover NH

July 6, 2009. Last week's closing drop (Thursday) was a manifestation of weakness we've noted. Nevertheless, the behavior was not as bad "internally" as the -3% loss would seem. Our Core Indexes were only down a little Thursday, and cross-sectional skew was nearly neutral. I've attached here a picture of the NYSE Core Index, and of the Cumulative Skew (CSQ) path. Note that although the NYSE Core penetrated its EMA to the downside back in June, it hasn't really developed any downside momentum. Similarly, although the CSQ is generally weak (failing to make a new high along with the market in early June), it has so far resisted joining seriously in decline.

These indexes have already shown weakness, and do not have to break down before the market (although they are often leaders). But until they do head south, there remains a real possibility of reprieve.

RLC
Hanover NH

June 29, 2009. Last week I cited a number of accumulating weaknesses, including the Cumulative Skew (CSQ) path that looked like it was "maybe/probably turning lower." This week I think I take it back. The CSQ is updated in this week's attached graphic. It's now seems it could easily resolve on the upside. And other metrics are doing better than expected.

This is not an all-clear (indeed, it's a sort of all un-clear). Some defensive positioning is still prudent. But a try at new highs seems quite plausible now, and a bit of foot-dragging in moving toward the defense may be good.

RLC
Hanover NH

June 22, 2009. Nothing new; waiting for this mature rally to show that it's ended. Here (attached) is an update on our Cumulative Skew path. It looks like it's maybe/probably turning lower, but not quite clear. Volatilities (actual and implied) are way down (into their 2007 range), as is cross-sectional dispersion. XUBerance indexes are falling. These all imply vulnerability. The Core Indexes have fallen below their EMAs, which also has negative near term implication, but also not definitive.

Even given a soon downturn, another try at renewed rally seems likely. (So many folks wish they'd bought a few weeks or a couple of months ago.) But with so many signs of vulnerability, some defensive positioning is in order.

RLC
Hanover NH

June 15, 2009. Current market stats are only emphasizing what we already know; the rally is getting tired, but has given no clear sign it's ready to end quite yet.

I've attached a graphic showing S&P cumulative skew (CSQ) over the past year, and three divergences are marked. First, there is the relative (and absolute) strength of February-March, when the CSQ was up while the market was down. Then there is further relative strength in May, marked by the CSQ peak that poked above it's January high while market prices did not. But now we have a third divergence, which is negative. Prices in June are up from May levels, but the CSQ has so far failed to match.

Cross-sectional skew (and our cumulative CSQ path) measures whether the daily outliers are biased toward the upside end or downside end of the returns distribution. In an uptrend, the upside skews should outnumber and outweigh the downside skews. When that fails to continue, the uptrend is vulnerable.

RLC
Hanover NH

June 8, 2009. Friday's data were somewhat better than the "no change" impression of the price indexes. In fact, our XUBerance paths showed a bit of an upward bulge. (A picture of the NYSE XUB is attached.)

A couple of weeks ago we were expecting the rally correction was unfinished, the rally itself was unfinished, and the bear market was unfinished. The correction did not go on to correct lower from that point, the rally pause lasted a bit (the market ran up that Monday, then gave it back the rest of the week). Now (last week) we've seen new rally highs, and it seems that rally renewal is still not finished. (It's not just the XUBs--NYSE and Nasdaq---but also the Core Indexes and volatility measures.) The vigor of the past few months is unlikely, but probably further advance with considerably less energy.

RLC
Hanover NH

P.S. This week's Prime Timers page has fresh equity exposure graphics of our six timing gurus.

June 1, 2009.  We've been saying nothing's finished; the minor correction (to the rally) unfinished, and the rally (from March 9) unfinished, and the bear market unfinished.

Friday's late-day run-up threw the first of those unfinished expectations into question, with a number of sectors posting new rally highs that look sincere. (See, for instance, the Health Sector spdr XLV.) And stock futures are reported higher this morning following gains in Asia and Europe.

But we also have metrics that make the apparent strength look unconvincing. The attached graphic of our NYSE XUBerance path is among the nay-sayers. This metric first showed weakness a couple of weeks ago...and the market only hesitated. So maybe it won't have much traction again (or still). But it's not saying nothing; if the rally has in fact resumed, XUB is still warning of problems brewing, unless or until it joins the party. (Nasdaq version is similar, but less dramatic.)

RLC
Hanover NH

May 26, 2009. Last week we wrote that nearly all the trends currently in play have more to run the recent minor correction had more to go, but the rally from March also had more to go, and the bear market likely had more to go. Then immediately on Monday the market ran up 3% (S&P) to 4% (Russell 2k), challenging the first proposition.

But by this weekend it looked more like the proposition was on-track...both as to more minor correction and another upward push for the March-April-May rally. I've attached here both the same XUB chart shown last week and a separate chart showing an update through this past Friday. You can see that the former negative in the red line had no downside follow-through, even though it's still on the downside of the longer smoothing. I think this supports the "more minor correction, but more upside to come" thesis.

RLC
Hanover NH

May 18, 2009. Unfinished trends abound. The minor correction that set in this past week seems unfinished; the remarkable rally from March 9 seems unfinished; the bear market of 2007-2009 seems unfinished.

As evidence that the minor correction seems unfinished, I've attached a graphic of NYSE XUBerance paths. When the longer smoothing (blue) gets "reasonably high" in its range, then the short smoothing (red) plunges negative, the market usually has some correcting still to do. The Nasdaq picture is similar, and other metrics like low dispersion and the low VIX/DVAX ratio cited here last week concur. We also see current weakness in the Median Returns Index (MRI).

The intermediate rally from March 9 also has evidence of more to come. One such evidence is the surprisingly strong Cumulative Skew (CSQ) that I presented here last week. (Other measures of cross-sectional skew have also been stronger than I have been inclined to recognize.) More generally, it seems unlikely for such a productive rally to "just end" without at least another round of buying from those who worry that the bottom has passed them by.

The unfinished bear market is of course a much bigger issue...and murkier. As you know, we think there's more to come. If the administration's ministrations "work," then activity and earnings will rebound. But the inflation (from all the monetary influx) and dislocations (from increased political control of businesses) will eventually do their work, too. On the other hand, if the ministrations "don't work"....

RLC
Hanover NH

May 11, 2009. The remarkably persistent rally from March 9 is finally giving sign of ending soon. I'm referring to VIX/DVAX ratio, which is the CBOE VIX we all know so well, adjusted for market dispersion as measured by our DVAX index.

VIX has been declining in the market advance, as it generally does. But it's really difficult to gauge when VIX is really high or low, because it goes through changing eras of normalcy. That is, the mean VIX is non-stationary. The major factor driving the eras is market volatility...which is closely related to dispersion. When dispersion is high (i.e., when the cross-sectional range of returns is large), volatility and expected volatility should be proportionally high. So VIX level can be assessed relative to dispersion. I have attached here a graph of the VIX/DVAX ratio. It shows that VIX is now getting low relative to dispersion, suggesting the current trend is near an end.

On the other hand (and in broader scope), it's become pretty clear that cross-sectional skew has turned positive in the rally. Positive skew is generally positive for longer trends. I've attached a second graphic showing the path of cumulative skew (CSQ). I've been discounting this skew factor, because it hasn't had a chance to show its stuff in a pull-back. But it's now way ahead of the market averages and deserves an outing here. I'm still waiting to see how it does when prices retreat. If CSQ stays relatively strong in a pull-back, that would be quite encouraging for renewal of the rally.

RLC
Hanover NH

May 4, 2009.  As everyone knows, the March-April rally has gone very far very fast. Is it ready for correction here? Yes. But it was ready for correction a week ago, and two weeks ago. Being "ready" is insufficient. My particular interest here is watching for our XUB metrics to turn negative. They're weakening, but still positive so far.

A couple of weeks ago I attached a graphic showing our S&P Momentum path. It had recovered from deeply negative to neutral, meaning that the "rebound" component of the rally, for the S&P, was pretty much finished. Prices have proceeded higher since then, but with much diminished vigor. The thrill is gone. Now other metrics are beginning to reach their neutral zones similar to the S&P Momentum earlier. I've attached pictures of the NYSE Core Momentum and NYSE Core Skew. Also the Nasdaq Core Momentum and Nasdaq Core Skew. None of these series gives a "signal" by crossing positive or negative, but they do generally stay positive in bull market and stay negative in bear. So their behavior as they approach neutrality can be significant.

RLC
Hanover NH

April 27, 2009. Several Analytix metrics have the useful property of fluctuating in mostly positive territory in bull market and mostly negative territory in bear market. The Core Skew paths (NYSE and Nasdaq) often share this property. (Our Core Skew metrics track the positive-or-negative balance of daily market outliers.) Back in early 2008, these (and other) metrics kept us, for a while, from acknowledging the new bear market...even while sounding caution alarms for months. By the time these metrics had negative values predominating, prices were well off their peaks, but had plenty further to go. (See graphics attached.)

Now we are in analogous inverse position. Various such metrics here remain negative (or neutral, as shown in the S&P Momentum in last week's Market Remarks). But so far, no metrics here (aside from short-term items like the XUBs) have posted significant positives in major directional scale, in spite of 25%-35% market advance. This is one basis for our contention that the bear market is still quite with us. But we're now approaching some critical areas. The NYSE Core Skew is almost up to zero. The Nasdaq version still has room on the negative side. The next market pull-back should reveal a lot (depending on whether measures like the Core Skew paths renew prior negativity or hover in striking distance of positive territory). So it's wait-and-see for now.

RLC
Hanover NH

April 20, 2009. Several metrics are now entering a critical area. Various Momentum and related paths have now recovered up to, or nearly to, neutral. That means three things. First, it means that the "rebound" phase is about over. That is, further market advance from here has to earn its own way; no more recovery from oversold. Second, it means that if we had a meaningful advance from here, various metrics would probably go positive, raising likelihood of sustained uptrend. (I can't get myself to say "raising likelihood of new bull market"...but that would be one possibility.) Third, under continuing bear conditions, Momentums up to neutral increases substantially the likelihood that the rally is just about done.

That third possibility is illustrated in the attached graphic showing five years of S&P Momentum path. I've marked the last two bear market occasions when S&P Momentum reached up to zero-zone. On those occasions the path rose almost exactly to zero and turned; that's neither predictable nor necessary. But if independent short-term metrics (such as our XUB series) turn negative with Momentums in this area, then a new down-leg becomes highly likely.

RLC
Hanover NH

April 13, 2009.  I wrote weeks ago that there are two kinds of bear rallies; One kind never runs high enough or hot enough to fetch the recovery prices would-be sellers think justified. The other kind runs so hot that it feels like a new bull market and would-be sellers overstay the rally. For now, this rally looks more like the latter.

I've attached an updated graphic of the NYSE Core Index Momentum. This path is rising rapidly with the market, and has a positive divergence vs market indexes (November and March lows). But it's still well into negative territory. Until this (and other similar metrics) turn positive, our presumption is that the bear market lives. (And just for the record, the Nasdaq Core Index Momentum is far more negative than this NYSE version.)

On more positive note, I've also attached a graphic of our S&P cumulative skew. It's looking a good bit more bottom-ey than any time since 2007. Now waiting to see how it responds when the rally faces a pull-back.

RLC
Hanover NH

April 6, 2009. We could build a case for almost anything based on current market data. We still have those positive divergences from November lows to March lows (e.g. Core Momentum, attached). But shorter-term we see evidence of underlying weakness (e.g., Nasdaq XUB, attached). Our cumulative S&P skew path (CSQ) is looking more constructive than it has for many months, but not actually buoyant (attached). Core Skew paths remain decidedly negative (attached). Meanwhile, many individual stock and index charts look like they're just getting started in new up-trends.

As noted recently, we can no longer say there is NO evidence for bull market (witness those four-month divergences). But we can still say the preponderance of evidence is that we are in a bear market rally. Here is the basic case, quoted from our Market Remarks of Jan 5

"Recall that back in mid-2007, before the big unpleasantness, we were writing repeatedly that the Core Moms can oscillate above zero and preserve the bull market, but crossing negative would change all that. Today is the same in reverse; the Moms can recover all the way to zero--and even marginally across zero--without changing the primary direction." (Positive or negative Core Skew implicates similarly.)

One implication of this dictum is that when ever the bear market finally is over, the best evidence will present itself at least somewhat after the actual lowest prices have gone by.

RLC
Hanover NH

March 30, 2009. The market rally of the last three weeks is not as robust as is widely believed. In spite of 20%-to-25% gains in broad indexes (and a whopping 41% in DJ Financial Services index!), our NYSE and Nasdaq Core Indexes are failing to keep up. I've attached a picture of the Nasdaq Core Index with the Nasdaq Composite, marked to highlight the disparity between the two. The Nasdaq Core Index has been weaker-than-Composite prior to every rally failure of this bear market. (The analogous NYSE Core version is also relatively weak, although not quite so plainly as seen on the Nasdaq.)

We cannot pinpoint a specific end to the rally. Maybe Friday's 2%-to-3% drop was it. Or maybe there's another microburst to be had first. But indications here are that the rally is weak and weakening, and many indexes are at or near plausible reversal points.

RLC
Hanover NH

March 23, 2009. I've been pretty insistent, for months, on the prospect for the market to post still lower lows. Some weeks ago I even wrote that we don't yet have ANY evidence for significant bottoming. That's no longer true. Several Analytix metrics are now developing positive divergence from the market; with March lows higher than their November lows in spite of the market's lower lows.. I've attached here two graphic examples; the NYSE Core Skew and the Nasdaq Core Skew. The positive divergence is highlighted in red rectangles.

A developing divergence is no "buy signal." For one thing, the divergences are not complete. For another thing, both of these Core Skew levels are still quite notably negative. Moreover, we have other metrics that are, shall we say, uncooperative. But the point is, we can no longer say we find no evidence of bottoming behavior.

One really terrific outcome from here would be for market indexes to post still lower lows, while various underlying metrics (such as the Core Skew paths, and others) again diverge positively. That may be too tidy a development to hope for, but it really would present a notable and confident buying opportunity. For right now, it still feels good to be watching from the sidelines.

RLC
Hanover NH

March 16, 2009.  Our data on this past week's rally are not showing great market strength. The NYSE and Nasdaq Core Indexes are lagging the published indexes (marginally lagging...but still, lagging). Our S&P MRI (Median Returns Index) is lagging the published S&P a bit. Although the VIX still looks high in its popular raw measure, in ratio to market dispersion it is actually getting a bit low. None of that means the rally is over (nor can we say it continues). It just says all the chatter about calling a bottom is unsupported.

I've attached a pair of graphics showing moving betas among Growth funds and among Value funds. You will see that the Growth exposure has been falling in the last few weeks while the Value exposure has been rising. Over the two weeks ending Thursday, the Growth beta was down < -.0150 while the Value beta was up > +.0200. Such changes (or greater) have occurred together just 116 times since the turn of the century (2,281 days since 12/31/99). One month forward from those 116 divergence days, the S&P averaged +2.3%, compared with -0.8% one month forward from all the other 2,165 days. Three months forward, however, the gains had been lost (and a little more).

RLC
Hanover NH

March 9, 2009. Barron's cover story this week says the market looks like a bargain here. My friend and technical expert Walter Deemer says the market looks like it's heading for another selling climax. Our data tends to support the Deemer position. Moreover, a selling climax generally occurs (almost by definition occurs) precisely when stocks are already a "bargain."

I've attached two graphics showing our cross-sectional "Tails" paths; one for NYSE, and one for Nasdaq. The Tails measure how extended are the upside and downside extremes (ptail and ntail) of daily returns distributions. Extended Tails imply lots of volatility, and current Tails are as high or higher than ever. But what I want to point out in particular is this At the launch of the bull market in 2003, downside Tails (ntail path) had already been in retreat for about 5 months (indicated by yellow vertical on each chart). In fact, on Nasdaq the Tails had been making lower peaks all along since 2000. The point is that we don't seem to be seeing such subsidence at this time. (One could argue that the NYSE Tails are showing some subsidence...but for less time than back in 2003, and most recently the Tails have ticked upward again, not down.)

Special note--new ETF hedging strategy

Four weeks ago, Market Remarks carried the following note

"Finally, it's worth noting that on January 29 our moving alpha for Growth stocks surpassed the moving alpha for Value. On average over the years, the higher alpha of the two outperforms the lower alpha over the ensuing month, at an 8 percentage point annual rate."

From that January 29 alpha crossover, the our Growth index has beaten Value index by 6.4%! (Both down; Growth down 14% and Value down 20.4%.) The five-week spread is far larger than usual, but illustrates how powerful moving alpha persistence can sometimes be.

On a more general level, we find that monthly hedging of six "style box" ETFs (large/growth, small/value, etc) based on current moving alpha can generate remarkably consistent pro forma returns on the order of 12%-15% a year using ProShares leveraged funds. Positions are fully hedged, with below-market volatility and showing no correlation to market trends. I've attached a two-page pdf file summarizing the analysis. Your comment and questions are welcome, and you'll be seeing more bout these alpha applications soon.

RLC
Hanover NH

March 2, 2009. Market state this week is almost indistinguishable from the situation last week. So here is an extract from last week's Market Remarks. Aside from the absence of 4%-5% drop and downside gap this just past week, that text remains entirely applicable

"As for this week, I'm quite unsure what to expect. All the presumption should be for further decline. It's still a bear market, and the immediate trend-at-hand has been clearly down. On the other hand, last Tuesday's 4%-5% drop (with downside gap on many charts) did not precipitate great volatility. Also, although the DJIA has posted new lows (and got lots of press in doing so), a great many indexes are still holding at or above November. And a number of short-term metrics are down at plausibly reversible levels. As an example (of plausible reversibility), I've attached a picture of our Nasdaq XUBerance.

"But in a bear market, with most recent identifiable trend also downward, "plausibly reversible" is nowhere near actionable."

I've attached a fresh graphic of that Nasdaq XUB, which supports the notion that a rally may be close at hand. But just to underline the ambivalence, I also attach a graphic of our Nasdaq Core Index, which has posted new lows in spite of the fact that the Composite has not. So further developments are needed.

RLC
Hanover NH

February 23, 2009. I've been chided for not having acknowledged my turnabout in last week's sudden note to expect next "meaty" direction to be down...after having expected gainful upside continuation just one week earlier (Feb 9). Valid point.

As for this week, I'm quite unsure what to expect. All the presumption should be for further decline. It's still a bear market, and the immediate trend-at-hand has been clearly down. On the other hand, last Tuesday's 4%-5% drop (with downside gap on many charts) did not precipitate great volatility. Also, although the DJIA has posted new lows (and got lots of press in doing so), a great many indexes are still holding at or above November. And a number of short-term metrics are down at plausibly reversible levels. As an example (of plausible reversibility), I've attached a picture of our Nasdaq XUBerance.

But in a bear market, with most recent identifiable trend also downward, "plausibly reversible" is nowhere near actionable. So we're all just sitting in comfortably bearish, or neutral (or at least "defensive") positions. (Aren't we?) So if recent weakness snowballs into a real tumble now, that's fine. Or if we get actual evidence of emerging (tradable) upturn, that's fine, too. But remember there is no evidence in our data--none--that the bear market is over, or even nearly over.

RLC
Hanover NH

February 16, 2009. When we next get some meaty market direction, it seems likely to be down. This is not merely a bear market presumption (which is reason enough for great caution), but based on several near-term metrics. As examples, I've attached here two Core Skew graphics; one for the NYSE, and one for Nasdaq. On each I have marked instances where the Core Skew has failed to advance along with rising market prices. That is the situation today--much more plainly on Nasdaq than on NYSE, but apparent on both. These divergences could continue for a bit (as in the prior instances), so there's no imminent prediction; but next trend, fairly soon, looks like a good bet to be down.

RLC
Hanover NH

February 9, 2009.  Last week's Thursday-Friday rally looked pretty good. There's lots of commentary now about recent microbursts being quickly reversed, but this one may have some resilience. Cross-sectional skew was extremely positive in the S&P Friday, and although that's largely due to rebound in financials, it's often unproductive "explain away" the stats; there's always some reason for this or that occurrence. Moreover, there was good strength abroad (note EEM Emerging Markets, EWT Taiwan and EWZ Brazil), and economy-sensitive commodities picked up too (note copper, Nickel, energy).

Last week we passed along a graphic and comment on cross-sectional skew in our NYSE Core Index. (The comment was "In spite of a remarkable up-surge since November lows (to near zero), this metric remains negative and seems to have begun a fresh retreat.") Now here's a graphic (attached) of Core Index Skew on the Nasdaq. It's recent look is almost opposite the NYSE version weak in rebounding from November, but showing pretty good relative strength in the past few weeks. Like the Core Momentum of late, this Skew path is saying (a) strength is gaining; (b) lots of room for advance, and (c) still clearly in bear market.

Finally, it's worth noting that on January 29 our moving alpha for Growth stocks surpassed the moving alpha for Value. On average over the years, the higher alpha of the two outperforms the lower alpha over the ensuing month, at an 8 percentage point annual rate. A moving alpha graphic is attached.

RLC
Hanover NH

February 2, 2009. The bear market continues. Last week I sent a picture of cross-sectional returns dispersion (DVAX), noting that current level (in highest decile) is wholly consistent with ongoing bear market. This week I've attached a picture of the "lower tail" (downside extreme deviations) of cross-sectional NYSE returns. Note that this path of the lower tail remained high throughout the 2000-2002 bear market; remained low throughout the 2003-2007 bull market; is high again since summer 2007. Although there has been a sizeable retreat from the November peak (which coincided with market lows), the magnitudes remain remarkably high. A similar inference emerges from the Lower Tail as from the DVAX dispersion posted last week; nowhere near subsided enough to consider a new bull market likely from here.

I've also attached a graphic of NYSE Core Index Skew. In spite of a remarkable up-surge since November lows (to near zero), this metric remains negative and seems to have begun a fresh retreat.

RLC
Hanover NH

January 26, 2009. Near-term direction remains just as indeterminate as it was last week. We still have presumption for decline, both from some short-term indicators, and from the underlying fact of being in a bear market. But "presumption" is a thin reed for action. And the possibility remains (to which I've gone hot-and-cold for many weeks) that this so-far indecisive bear rally may yet produce a final vigorous up-leg to suck in new-bull-market aspiration. I wish I knew today whether such a runup will emerge...but I don't. I'll be happy if I can know it at the time.

I've attached here a graphic showing an 18-year plot of our DVAX index of cross-sectional dispersion. Dispersion is essentially a measure of volatility; what I sometimes refer to as "internal volatility" because it shows not whether the averages are posting big percent change, but whether the stocks within the averages are posting big change. (If half the DJ 30 went up 50% one day, while the other half went down 50%, that would clearly be a volatile day...even though the DJIA itself might well be little changed.) Internal volatility is obviously strongly associated with aggregated index volatility, but they are not the same.

I've marked a white horizontal across the DVAX plot, at the 60th percentile of daily postings. With occasional brief exceptions, dispersion has remained below this level in bull market, and has remained above this level in bear market. As you will see, current DVAX level is way up into the top decile...not anywhere near the 60th percentile partition. This is one of our various metrics saying the bear market is unfinished.

RLC
Hanover NH

January 20, 2009. Crosscurrents abound, and few sectors are showing much trendiness. So market stats are somewhat indeterminate state. Two graphics attached here illustrate the dichotomy. Our CSQ Index of cumulative cross-sectional skew nearly posted a new low on Friday (70.49 vs November low of 70.33), continuing to suggest no bear market end-point developing yet. Meanwhile, however, measures like the NYSE Core Index has been stronger than the published indexes in the past several weeks. A rundown of additional key metrics would show additional diverging indications. So the best we can do is repeat that we are still in the bear market, and presumably still in a rally within that bear market. But we don't know whether the rally has more to show us, or not.

One very short-term uncertainty is the Obama inauguration factor. There's a really remarkable enthusiasm for this change, and a lot of high-energy anticipation. Whether this positive sentiment may convert into a political relief buying spree is anyone's guess. But even if it does do so, such a spurt would have to generate some awfully remarkable numbers to alter the underlying rally-in-bear-market condition.

RLC
Hanover NH

January 12, 2009. Bear market rally is probably still intact, Friday's sell-off notwithstanding. Most of our underlying Friday data wasn't too bad. (For instance, both the NYSE and Nasdaq XUBerance indexes were marginally positive for the day.)

But the rally is getting older, and therefore riskier. I've attached here a plot of the "Lower Tail" of cross-sectional daily returns distribution, going back to its inception at year-end 1999. As we've discussed from time to time, the Lower Tail (magnitude of deepest daily declines) is essentially an anxiety measure, because it tracks how much price the market is willing to give up to get out of weakest stocks. Like any anxiety measure, it expands (rises) as the market declines, and vice versa.

The NYSE Lower Tail has now retreated 37% from its peak in November. By comparison, back at turn-of-year 2002-2003, the Lower Tail retreated 43% before prices collapsed nearly to match the October lows. There's no threshold of retreat that signifies end-of-rally (and as noted, other measures seem to say the rally isn't done yet), but we're clearly in the neighborhood where an end is plausible. (If this seems counter to our recent mention of possibly another 24%...it's not exactly "counter," but reflects a much diminished likelihood.)

RLC
Hanover NH

January 5, 2009. Bear market; still intact. Bear market rally; also still intact.

The upside vigor of the past few days is not likely to be finished. In fact, we may be seeing the beginning of the more vigorous rally I was picturing back in November. That does not, however, change our expectation that this is a bear market rally...meaning lower lows are likely later.

Both the S&P 500 and the Nasdaq Composite are 24% above their November lows. Meanwhile, our NYSE and Nasdaq Core Momentum paths are about half way back up (toward zero) from their November lows. Although there is no specific calculus to calibrate price trends relative to Momentums, if the Moms are to work back up again as much as so far (to neutral) it is plausible to think the averages might (in such case) add something like another 24%. (Recall that back in mid-2007, before the big unpleasantness, we were writing repeatedly that the Core Moms can oscillate above zero and preserve the bull market, but crossing negative would change all that. Today is the same in reverse; the Moms can recover all the way to zero--and even marginally across zero--without changing the primary direction.) None of it straight line, of course. I've attached a graphic of the Nasdaq Core Mom with the Nasdaq Composite index.

A Barron's article by Andrew Bary this weekend noted that corporate bonds, junk bonds, and munies may be safer bets than Treasuries here, essentially because the yield premiums are at record highs. Junk bonds, he says, are averaging 20% yields (and he claims the default rates would have to skyrocket unbelievably to warrant such rates). I won't assess the yield comparisons, but do note that our junk bond Moving Alpha crossed positive on Friday. The junk bond Moving Alpha has remarkable prescience and persistence. It went negative back on June 23. Most of the time outcomes are not as dramatic as the result since then, but the Alpha record is nonetheless quite good. I've attached a graphic. If you hold junk bonds, or sometimes trade in them, you ought to be seeing this key metric every week. Enquire for subscription.

RLC
Hanover NH

 Market Remarks Archives:

2006        2007      2008       2009

 

 

Carpenter Analytix offers data and analysis, not advice. Comment is limited, so the data can speak for itself.  Market inference requires objectively significant relationships. Absent significance, there is no inference. 

Market Remarks are posted Monday mornings, with emphasis or explanation to the outline of current Daily States.

If you are not yet receiving e-mail delivery of Market Remarks  please open the Services page to send in your request.

Nothing at this site is offered as advice or recommendation.
All site content is subject to full Disclaimer statement and Terms of Use.
Copyright© CarpenterAnalytix.com 2009. All rights reserved.