Ticker Sense

S&P 500 Calculation Error

Unbeknownst to many traders and investors, this morning there was a street-wide quote delay that caused the S&P 500 to be calculated only twice in a period of about 20 minutes.  The index, usually calculated every fifteen seconds or so, is widely considered to be the best benchmark for US equities.  Despite our efforts, the only details we found regarding this delay were in a courtesy note flashed across our trading system.  The reason, "high volume" or fast moving stocks....or whatever, was added to a pile of explanations becoming almost commonplace in today's market.

This delay, illustrated by the chart and table below, is one of many incidents highlighted by Birinyi Associates in its long inquiry into changing market conditions and structure.

These changes are outlined in a publication distributed last August titled "the next CRASH."  The publication looks at the implications of removing the human element from trading, building a specialist-free electronic trading platform, and the increasing popularity of ETFs.

Topical studies such as this one are usually only available to Mini-Institutional subscribers.  We find that the market continues to exhibit many of the same phenomenon discussed in the study, and would like to make it more available. 

As a special for the rest of this week, "the next CRASH" will be available not only to Mini-Institutional subscribers but also to any new or existing annual newsletter subscribers.  Click here for more information about the newsletter, and if interested be sure to request your copy of "the next CRASH."

VIX Spike Calling a Bottom?

You be the judge, the chart below showed the VIX index versus the S&P 500 from 1995 through the present.  Although the chart is slightly noisy, unusually high spikes in the VIX do often indicate at least a short term bottom. 

This analysis is available with a deeper look at each spike and market activity thereafter.  For more information click here.

January 28th Blogger Sentiment Poll

The optimists were able to hang on for almost two months, but this difficult market now has even the bloggers turning bearish.

Blogger Sentiment Poll Participants:

24/7 Wall Street (-) Carl Futia (+) Crowder Blog (-) Crossing Wall Street  CXO Advisory (+) Daily Dose of Optimism (+) Dash of Insight (-) Elliot Wave Lives On (-) Fallond Stock Picks (+) Hedgefolios (-) In The Money Information Arbitrage (N) Knight Trader (N) Learning Curve (+) MaoXian  Millionair Now (N) Peridot Capitalist (N) Random Roger's Big Picture (-) Self Investors (+) Slope of Hope (-) Shark Report (N)  Stock Advisors.com  Traders-Talk (N) Wall Street Folly Wishing Wealth (-)

Analyst Coverage: Do They Really Know More?

Ambac Financial Group has been in the news plenty recently.  The stock was down 93.5% from its high close on 5/18 to its low on 1/18.  It closed up 120% from that low on Wednesday, January 23rd, but how significant is that really for a stock at $80 six months ago? 

The stock had been down about 35% between May and August of last year.  Holders of the stock were faced with a difficult decision: At what point do you cut your losses? or can you afford to hang on and wait?  In many cases investors find it useful to look at analyst ratings for guidance and ideas.  The chart below highlights Citigroup's recommendations for ABK since they began coverage of the stock in August of 2006.  The blue line represents the price target, and the red dots highlight each reiteration of the rating and changes in the price target.

As shown, the analyst maintained a "Buy" rating on the stock throughout the 90% decline.  Throughout the decline the price target was reduced from $103 to $18 (-82.5%), and yet the "Buy" rating was maintained.  The stock was downgraded to "Hold" on 1/18, at the low close.

Our intent here is not to harp on Citigroup, or implicate them as bad analysts, this is only one example of a host of bad calls made by many firms.  The point we make is that even professionals get it wrong.

Short Covering (Profit Taking)

Yesterday's strong turnaround was attributed to several factors: Fed cut, bond insurers, dead cat bounce...  Based on one measure it seems like some of the bigger players in the game were re-balancing their portfolios.  The chart below divides the S&P 500 in ten groups based on short interest as a percentage of shares outstanding.  As shown, the fifty stocks with the largest short interest rose 8.80% on average yesterday, while those with the fewest shares sold short rose only 1.35%.

Birinyi Associates has pointed out on many occasions that the implications of short selling are now very significant.  Since the regulatory change on 7/6/07, volatility by several measures has increased, and money flows for many issues have turned negative highlighting the negative impact of short selling.

If you are interested in more information on this subject you may also be interested in the Birinyi Mini-Institutional service; click here for more.

No Bear Yet

The recent market decline has many analysts and traders alike calling for a bear market.  Birinyi Associates analyzed the current market correction (it will not be a defined bear market unless the S&P closes at or below 1252.12) and using the intra-day price of 1277.15 the market was 18.4% below its high close.  Looking at all 10%+ corrections since 1962, the average decline was -18% and lasted 136 days.  The average decline since the 1982 rally is 17% (16% ex '87).

1 Note that some corrections did result in a bear market.

Special Offer From Birinyi Associates

Investors will be inundated with commentary, opinions, and predictions regarding current events.  Our concern goes beyond many of these issues.  We have discussed this in depth and a piece we wrote last August entitled, the next CRASH.

While this is ordinarily not available to newsletter subscribers, as a special we will send a copy to any annual subscriber who requests the 25 page piece.

Information about the newsletter and subscriptions are available both here at Ticker Sense and at www.birinyi.com.  Click here to subscribe through PayPal.  If you do not have a PayPal account click here to subscribe directly through Birinyi Associates.

(This offer is also available to current annual newsletter subscribers.)

January 22nd Blogger Sentiment Poll

The views are still mostly split, although the bulls come out on top again.  In all fairness, the poll WAS sent out last Friday.

Blogger Sentiment Poll Participants:

24/7 Wall Street (-) Carl Futia (+) Controlled Greed (N) Crossing Wall Street  CXO Advisory (+) Daily Dose of Optimism (-) Dash of Insight (-)  Fallond Stock Picks (+) Hedgefolios (-) In The Money  Knight Trader (N) Learning Curve (+) MaoXian  Millionair Now (N) Peridot Capitalist (+) Quant Investor (+) Random Roger's Big Picture (-) Self Investors (+) Shark Report (-) Traders-Talk (+) Wind River Blog  Wishing Wealth (-) Word On the Street (N)

Market and Sectors at Extremes: Look For a Bounce

With the market and six of the ten sectors closing within 1% of their extreme lows, we are reminded of the extreme highs calculated on October 9th, 2007.  This is not to say that the market will not post lower closes further down the road, but in the short term expect a bounce to the 50-day.

2008 Popular Outlook

Recently Ticker Sense submitted a poll to anyone interested in participating; thank you to all who did.  After the institutional outlooks, and the first few trading days of the year we asked our readers how they feel about 2008.  Readers were most bullish on the Dow 30, and most bearish on the S&P 500 Consumer Discretionary sector, although results for the indices as a whole were split.  The indecision reflects the current state of financial markets.  We think it explains the volatility and most likely the reason why we will remain trendless until an extreme is reached.