ResearchLover (< 20)

Why would anyone try to time the market with no macroeconomic or other catalyst today?

January 19, 2012 – Comments (0) | RELATED TICKERS: FXY , INTC , VXX

What if there was an RSI-type indicator for the market at large that considered in the calculation of ticks towards "overbought" territory a ratio--of percentage increase in average share price for at least a basket of stocks--a ratio of price increase to flat or decreasing or mid-term unsustainable trends in average fundamental values of that stock basket?

First, let me state that I am asking this question with the negative spin because I have an intuition that the territory such an indicator would enter for the basket of stocks I have checked out today would indeed be in the realm of overbought. This is just intuition.  For a moment, taking it as an assumption and running with it a bit allows some clarity as to what might happen in coming days or weeks, pending the underlying intuition can be validated to some extent in the process.

As a thought experiment, let's do this and interpret what an "overbought" scenario could mean.  It could indicate 1) a paradigm shift (more likely if market volume has been average or high), that is, that the average investor (including all classes of investors) has turned a corner and is willing to assign a higher value to equity in general and due to a fundamental reevaluation.  This might(?) fit with the prospect for QE3 and MBS purchases by the fed increasing in liklihood. In which case, the overbought argument doesn't hold.  Or 2) the imbalance in current price/value might simply indicate an imbalance in liquidity flow; that is, money inflow into the equity markets chasing after momentum, not smart money, not institutional money, but a steady net inflow of the stuff nonetheless.  There has been a great thread of back-and-forth intelligent conversation on a recent blog titled "Get out of the market", which is really about imagined and real consequences of deleveraging assets, how leverage as we in the US take it for granted is not a given in every economy, how Europe and the US would, given a chance, possibly take the road that Japan has over the past 20 years, going forward to 2030 (in lieu of 1930s US or European austerity traps)  perhaps ending on the note that deleveraging of assets, at a national scale, when voluntary and deliberate, can lead to a certain predictable and not intractable outcome.  3) Regardless, the macroeconomic situation argues for fundamental values decreasing in general, based on US and European and China GDP growth decelerating and main street investor perceptions of increased risk for another recession.  Plus, savings rates are down, employment gains are tenuous at best, and earnings season overall is not looking like it is going to surprise on the upside, intc and ibm announcements today aside.  So we have a catalyst vacuum with momentum pointing stubbornly up, when perhaps it is past time that the trend should have moderated.  I would argue that this realization alone is enough for a given set of market players, or group of high liquidity investors to "wag the dog", enable a story to enter the news cycle as it were that could cast enough doubt as to the prospects of continued below-normal volatility, and through its own actions, become the reluctant buyer as the "overbought" shares fall back down and the low volume trend of the 2012 US equity market to date would be over. 

Alternatively, a real catalyst could emerge in the news.  And push stocks sharply in either direction.  But real or imagined, there are too many ghosts in the machine for volatility to continue its downward trend more than another week.  Just by my intuition, and a stock screen showing a recurring trend over the past 2 weeks in all kinds of stocks that represent companies with fundamentals for all to see that say their riding the trend has priced in a best case macroeconomic scenario.  Hence my most recent red thumbs on 20 or so companies and leveraged ETFs, except the shorts.

I would rename this entry "Why I went to 50% cash today."  But that would raise the question, "Why not 100%?"  I guess no news does count as some good news. Or an opportunity after enough of a dearth to take profits.