Market Indicators E-Book

Richard Sipley

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Bloomberg Professional
• Sprache: Englisch

Seitenzahl: 331

Veröffentlichungsjahr: 2010

Beschreibung

A smart trader needs to know what other traders are thinking and doing. Professional traders and investors use a wide range of indicators--some well-known, some not so well-known--to gauge the state of the market. Market Indicators introduces the many key indicators used by professional traders and investors every day. Having stood the test of time, these indicators will alert the trader to market situations that offer the best chance to trade profitably. Richard Sipley is a portfolio manager for Boston Private Bank and Trust Company, responsible for trading millions of dollars of assets. Sipley uses these indicators every day in his trading and investing, and he draws on that experience to explain what they are, how they work, and how to use them.

Leseprobe

Table of Contents

Title Page

Copyright Page

Acknowledgements

Introduction

The Outline

A Few Warnings

About Me

Part I - Measuring Investor Actions

Chapter 1 - Clues from the Options Market

The Basics

What is the Volatility Index?

More Options: The Put/Call Ratio

Chapter 2 - Big Money on the Move

Volatility on the Rise

Lowry’s Examination of Market Tops

Chapter 3 - Fast Money on the Move

Exchange Traded Funds

Inverse ETFs

ETF Shares Outstanding

Rydex Funds

Over-the-Counter Volume

Fund Flows

Chapter 4 - Follow the Money: Cash, Debt, and Shorts

Cash

Something Borrowed, Something Sold—The Short Trade

Chapter 5 - Too Far, Too Fast

Percent of Stocks above the 10-, 40-, 50-and 200-Day Moving Averages

New High/New Low Index

The Arms Index—Adding Volume to the Equation

Chapter 6 - Relative Value

The Fed Model

The Alternative: BBB Corporate Bonds

Dividend Yield

Building a Better Mousetrap: Proprietary Models

Part II - Considering the Human Element

Chapter 7 - Sentiment Surveys

American Association of Individual Investors

Investors Intelligence

Market Vane

Hulbert Newsletter Survey

Merrill Lynch Fund Manager Survey

Yale Confidence Indexes

Ned Davis Crowd Sentiment

University of Michigan Consumer Sentiment Index

State Street Investor Confidence Index

Chapter 8 - Analyzing the Analysts

Smooth Performance in a Bumpy World—The Earnings Estimate

Buy Side versus Sell Side

S&P Analysts versus Wall Street Strategists

Chapter 9 - Reporting the Financial News, Gauging the Investor’s Psyche

Magazine Covers

The Big Weeklies

Reading the Paper

The Funny Pages

Late Night Talk Shows

CNBC Highlight

The Internet—Real Time Trackingé

Tracking What People Are Searching

Google Trends

Twitter

Chapter 10 - Sitting and Watching

Gone Fishing

Executive Departures

The Celebrity CEO’s Exit

You Can’t Shrink to Greatness

Help Wanted

Fighting with Short Sellers

Homes and Skyscrapers

Party Time

Building Castles in the Sky

Stadium Naming Rights: The Winner’s Curse

Jumping the Shark

A Profitable Shoe Shine

Part III - Following the Smart Money

Chapter 11 - The Insiders

Updated Insider Rules

Academic Review

Executive Buying

Conviction

Safety in Numbers

Buying into Strength

Meaningless Buys

Insider Selling

Selling into Weakness

10b5-1 Plans

Aggregating the Data

Chapter 12 - Looking to the Futures

Knowing Where Parties Stand

Commodity Links to Stocks (and Vice Versa)

Swaps and Index Funds

How to Interpret the Data

Riding the Wave—Watching the Large Traders

Tracking the Shifts—Using COT for Financial Futures

Chapter 13 - Giving Credit to the Bond Market

Libor and the TED Spread

Corporate Bonds

Junk But Not Trash

Lending Officers

Flight to Safety

From Spreads to Slopes—The Yield Curve

A Different Look

Liquidity and VIX

Forecasting Bankruptcy

Credit-Default Swaps—Bond Insurance

Chapter 14 - Money In, Money Out (IPOs, Secondaries, Mergers, Buybacks, and Dividends)

Increasing Supply—The IPO Process

Secondary Offerings

Mergers and Buyouts

Buybacks

Dividends—The Other Use of Cash

Chapter 15 - Tracking the Trailblazers

A Random Walk

All-Time High List

Buyer Beware

Conclusion

Notes

Index

About the Author

About Bloomberg

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A complete list of our titles is available at www.bloomberg.com/books

Attention Corporations

This book is available for bulk purchase at special discount. Special editions or chapter reprints can also be customized to specifications. For information, please e-mail Bloomberg Press, [email protected], Attention: Director of Special Markets, or phone [phone].

© 2009 by Richard Sipley. All rights reserved. Protected under the Berne Convention. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews. For information, please write: Permissions Department, Bloomberg Press, 731 Lexington Avenue, New York, NY 10022 or send an e-mail to [email protected].

BLOOMBERG, BLOOMBERG ANYWHERE, BLOOMBERG.COM, BLOOMBERG MARKET ESSENTIALS, Bloomberg Markets, BLOOMBERG NEWS, BLOOMBERG PRESS, BLOOMBERG PROFESSIONAL, BLOOMBERG RADIO, BLOOMBERG TELEVISION, and BLOOMBERG TRADEBOOK are trademarks and service marks of Bloomberg Finance L.P. (“BFLP”), a Delaware limited partnership, or its subsidiaries. The BLOOMBERG PROFESSIONAL service (the “BPS”) is owned and distributed locally by BFLP and its subsidiaries in all jurisdictions other than Argentina, Bermuda, China, India, Japan, and Korea (the “BLP Countries”). BFLP is a wholly-owned subsidiary of Bloomberg L.P. (“BLP”). BLP provides BFLP with all global marketing and operational support and service for these products and distributes the BPS either directly or through a non-BFLP subsidiary in the BLP Countries. All rights reserved.

This publication contains the author’s opinions, who takes sole responsibility for them, and is designed to provide accurate and authoritative information. It is sold with the understanding that the author, publisher, and Bloomberg L.P. are not engaged in rendering legal, accounting, investment-planning, or other professional advice. The reader should seek the services of a qualified professional for such advice; the author, publisher, and Bloomberg L.P. cannot be held responsible for any loss incurred as a result of specific investments or planning decisions made by the reader.

Library of Congress Cataloging-in-Publication Data

Sipley, Richard.

Market indicators : the best-kept secret to more effective trading and investing / Richard Sipley. p. cm.

Includes bibliographical references and index.

Summary: “A proprietary trader provides an overview of the most popular market metrics developed and used by professionals. The author synthesizes these market signals and provides a running commentary on why they work, and how to use them to trade better and more profitably”--Provided by publisher.

ISBN 978-1-57660-331-4 (alk. paper)

1. Investment analysis. 2. Investments. 3. Stock price forecasting. 4. Speculation. I. Title.

HG4529.S52 2009 332.63’2042--dc22

2009033055

Acknowledgments

Now for the page that’s least likely to be read in any book, and yet most important to its author. After this project, I promise that I will actually read other writers’ tributes.

Thanks to all the bloggers who share their ideas, insights, and opinions. They have helped me shape my own. Thanks also to all the writers and editors who find good stories and angles and go to the trouble of vigorously fact-checking their material.

Thank you to my colleagues at Boston Private Bank for camaraderie and intellectual debate. And thank you to my clients for the trust they place in me and for our conversations, which remind me of the world beyond my computer screen.

My sincere appreciation to Stephen Isaacs, Ingrid Case, and the rest of the Bloomberg production crew for giving me the opportunity to put my thoughts to paper and for then seeing the project to completion.

My love and gratitude to my parents for their guidance and encouragement through the years.

And finally, my love and thanks to my wife, Stephanie and my children Jack, Ava, and Lila. Yes, the book is done. No, the Cubs haven’t won the World Series. We moved to Boston to save you from your father’s fate.

Introduction

Beware of geeks bearing formulas.

—WARREN BUFFETT, in his 2008 annual letter to shareholders

SOME PEOPLE SUGGEST that investing is a form of gambling, complaining that they can do as well playing the Pick-3 lotto or betting on roulette. Nothing could be further from the truth. In Las Vegas, the house always has the edge. In the stock market, you can have the edge, if you wait until conditions are right.

Only poker, in which individuals compete to outwit each other, really compares to investing. At its most basic, poker is about making decisions based on imperfect and incomplete information. Players each hold a few cards that only they can see. Every other player must make educated guesses about who holds what. No one knows which card will be dealt next.

An ability to read other players is the skill that sets master poker players apart. The best poker players notice that the man with the loud shirt plays conservatively; if he bets aggressively, it’s likely he has a really good hand. They see that the player in the corner plays with her chips when she’s bluffing. In poker, these are known as tells, signals that give observant competitors slightly better odds and help them win more often over the course of many games.

That’s the goal of this book. The following pages will describe a variety of signs, or tells, that many market professionals consider. These signs don’t replace good, old-fashioned homework—but they will enhance your ability to make better stock decisions over time.

You can observe a lot by just watching.

—YOGI BERRA

If you approach the market solely by doing fundamental research, this book probably won’t be of much interest. If you have found your investing niche by concentrating only on technical analysis, this book is not for you. But if you agree that you can learn a lot just by looking around, then you’ll likely find some useful nuggets here.

Economist John Maynard Keynes has compared the stock market to a beauty contest, but with a twist. Rather than voting for the prettiest girl, the goal is to pick the contestant the judges believe is prettiest. Keynes, who was a very successful stock investor in his own right, read newspapers to learn what others were reading and thinking. He believed that market success requires looking around and observing how other market participants feel and act.

This insight is not unique to Keynes. Professional investors of every era have developed indicators and other rules of thumb that help them navigate naturally chaotic markets. You’ll see some of these indicators when excessive fear or greed enters the marketplace. Others arise when well-informed insiders tip their hands and hint at their views of the future. These signals are largely numerical, can be charted, and lend themselves to deep study.

The best and brightest are constantly trying to develop more complex and sophisticated indicators. Careers can be focused on just one signal. Sometimes, however, simple is best. Many of the most reliable indicators have been around for many years, and have stood the test of time. In this book, we’ll cover a wide range of indicators, offering the reader a handbook of market “tells.”

The Outline

I understand now that the financial future is a closed book, that prophecy is usually profitless, and that the best an investor can generally hope to do is identify extremes of sentiment and valuation as they periodically present themselves.

—JAMES GRANT, in his final Forbes column, February 25, 2008

At its core, of course, the future is unknowable. But as long-time market commentator Jim Grant said, investors can better their odds by identifying extremes of sentiment in groups of real people with real foibles and emotions, who buy and sell stocks in the world markets every day.

There are three sets of indicators that may signal opportunity. We will first focus on data that reveals what market participants are doing. Normally, there is an ebb and flow in the price and volume of specific securities, and in the market as a whole. A significant, measurable activity spike may suggest market panic or euphoria and, therefore, potential opportunity.

The second section will explore the ways investors, as a group, signal their areas of focus, feelings, and general outlook. At market tops and bottoms, surveys and media coverage reflect investor sentiment. When the media universally portray an issue in a certain way, or when commentators portray the (unknowable) future as clear, it suggests that emotion has trumped rational analysis—and that securities are incorrectly priced as a result.

The third and final section will explore the dynamic between “smart money” and “dumb money.” Because of their roles, some people know more than others about specific market sectors. A global grain conglomerate executive knows more about corn crops than does a dentist, for instance. Most of the time, insiders and the general public take similar actions. When their opinions diverge, however, it’s wise to follow the insiders. We’ll discuss how to find and interpret that moment of divergence.

A Few Warnings

Take what you can use and let the rest go by.

—KEN KESEY

These indicators don’t replace economic analysis, or save you the trouble of reading a company’s financial statements. In fact, they work best for investors who already endeavor to understand companies, sectors, markets, and their real-world contexts. These indicators are a supplement to the hard work of knowing the stocks you own.

Many of these indicators have been tested for their predictive value, and all fall short in some way. No single or combined indicator will give you a foolproof route to riches.

Instead, I emphasize the importance of considering a broad cross-section of indicators and information to get a sense of what market signals might mean, deciding for yourself how much weight to give any single factor. Take what you can use and let the rest go by.

About Me

Whoever undertakes to set himself up as a judge to Truth andKnowledge is shipwrecked by the laughter of the gods.

—ALBERT EINSTEIN

No book can escape its author’s natural leanings. I graduated with degrees in finance and computer science from Miami University in Oxford, Ohio, in 1988, received my MBA at Kellogg School of Management at Northwestern University in 1997, and became a CFA charter holder in 1998.

In nearly fifteen years, I’ve held positions for ten seconds (once or twice) and ten years (once or twice). I’ve done paired spreads, warrant spreads, preferred spreads, merger arbitrage, straight longs, and unhedged shorts. I’ve ridden a stock from fifty cents to sixty dollars and from five dollars to zero. I’ve sat on cash while everyone around me was minting money. I’ve gotten into a cab to see a former coworker, who was minting money a year earlier, sitting in the driver’s seat.

I’m currently a portfolio manager at Boston Private Bank, where my colleagues and I work with both individual and institutional investors, doing our best to help clients navigate the market.

I’ve looked at most every indicator out there, considered every nuance I could find, but I also recognize the karmic danger of portraying myself as an expert. I urge you to consider other voices and opinions. Many of the charts in this book come from people who have made interpreting market signals their life’s labor. In many ways, this book is an introduction to their work.

Entrepreneur and now-billionaire Mark Cuban wrote that, while he was starting out, he slept on the floor of a shared apartment and ate mustard and ketchup sandwiches. But he figured the more he learned, the better chance he had of beating the competition. Cuban has said that just one good idea from a three-dollar magazine or a twenty-dollar book is a bargain. I hope you find at least one actionable indicator or intriguing concept in the pages that follow. And that you’re not eating mustard and ketchup sandwiches. Thanks for reading.

Part I

Measuring Investor Actions

As a general rule, the most successful man in life is the man who has the best information.

—BENJAMIN DISRAELI

MONEY DOESN’T FLOW—it sloshes. Like water in an overfull bathtub money moves in waves, as investors process information and balance the competing desires to grow wealth and protect capital. Traders use connections and quick thinking to react to new information, deciding how it may (or may not) affect capital returns. Thoughtful investors try to proactively position portfolios, rather than reacting impulsively to each new data point and market development.

As it sloshes, money creates a variety of measurable results, which signal how investors currently view risk and where they are placing bets. This first section reviews a variety of real-time indicators that point to capital allocation and reveal traders’ general levels of risk tolerance. Our first stop: the options market.

Chapter 1

Clues from the Options Market

Successful investing is anticipating the anticipations of others.

—JOHN MAYNARD KEYNES

IT CAN BE TOUGH ENOUGH to do well in the stock market. The options market, with its additional layers of complexity, might appear to be an even more challenging place to gain an advantage. Some of the smartest, quickest pros operate in the options market where, like traditional chess grand masters, they are slowly being outsmarted by computer algorithms. But there’s no need to battle the options pros or the computers to glean useful information from the options market.