Financial history doesn't repeat itself, but it often rhymes. You can't be stupid enough to trade off anything I say.... I'm lucky they let me out of the straight-jacket long enough to trade.

J. P. Morgan

"Sell down to your sleeping point"

Sunday, August 17, 2008

The fundimentals are good AKA mean reversion.

this is the DJI over the past year. The white arrows point to the center of the different trends. Green line connects the Mean values. Red line roughly shows the Linear Regression.

Asked is "Why does fundamental analysis not work"

  • As TK says "everything I need to know is in the technicals". When I look at this, I realize. With Deference to santelli the market has been right fundamentally for roughly 2 days 6 times in the Down trend. When we are in the middle of the trend, one can say the market is Fair valued. Above, overvalued, below undervalued. When Teresa says "Why is it that half way down, the analysts come out and say "Fundamentals are good"... Well They are, but it's not "undervalued". And as the Rubber band, narrative. It gets stretched both ways.
  • Linear regression, something not talked about is that the Fundamentals of the market are obviously decaying. The Mean value is on the decline, so as time progresses, value goes down. This continues until expectations overshoot to the downside, and the market can Heal.
  • As we notice the Expectations for the economic data are coming in mixed. Sure they are bad, but as opposed to the expectations being Way too high, they are now fairly muddled. Not as bad as expected. So that should have a positive effect on the linear regression. Many of the economic metrics, have started to show a lack of Decay. Not that things are better, but that they may not be getting worse... as far as technicals are concerned, this is starting to indicate that the market is finding a "Bottom"
  • Had I extended the Linear regression to this trend(Red Line), we would realize that we have yet to shoot to the Upside of that mean reversion. Maybe the market is being Cautious, maybe we are Much more conservative than we have been in the past. Maybe the Volatility is becoming Less so. Months ago, I said that when they say "Volatility will continue" you could use that as a metric for "the market is going down"... so if the market is being maybe Too conservative to the Mean reversion, and volatility is Moderating.... What does that say?
So, when you hear about fundamentals, and how they are good.... Realize, that this indicates that we are more, in the middle of the Trend, than to either side of it... Top or bottom.

4 comments:

Tony said...

Interesting graph. So if you extend the green line down to the middle of the Dow line, you would get tot about where we are now, which means that the uptrend we are in now probably has a bit more to go.

TK says there are no Bull markets or Bear markets, only uptrends and downtrends and currently we are in an uptrend. "That's all you need to know."

I realize that we cannot help but try to look at the hard right edge and try to see where this will break down... we have to, it's human nature to attempt to predict the future.

Even your XBI graph... it's way overbought, fundies show that it should come back down, but you know that you have business shorting it until it shows something in the TA-- triangle pattern or a break below some suppawht. It might break down from here, but there are a lot of better bets at the moment, unless you are into top-ticking.

Thanks for the insight.

Tony said...

Should be "you have NO business shorting..."

Eric said...

Green line/Red line. the green line... Well we will only know when it hits the "Mean" after the fact... but if you use the red line.. it says we are half way there.

Be cautious though, Volitility will Decrease, at one point maybe for a quarter or 2, we will see no volatility... Probably.... so... Maybe the market Topps on mon-tuesday... maybe next friday monday.

The week after this week.... Remember that is "NFP.. Guaranteed we will go DOWN. Into the NFP.

and I'm going to draw you some triangles on the xbi

Eric said...

This is probably the best opportunity in the market to go short, Near term.

But what is my Rule.. no reason to chase. Lets watch for a Lower high. It could keep making new highs for a couple days.

New Economic Indicators and Releases

What does Blue Horse shoe love?- Blog search of "BHL"

cnbc