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The Edge of a Blade

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While folks are trading a market of stocks, there is precious little concern for the broader stock market.

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Soon the Gypsy Queen
In a glaze of Vaseline
Will perform on guillotine
What a scene, what a scene

(Emerson, Lake and Palmer)



Good morning and welcome back to the racing track. It's quite amazing how quickly 2006 is slipping by. In a blink of an eye, summer will have sailed and leaves on the trees will radiate with a magnificent array of colors. As we neatly fold our cotton tees and ready ourselves for some football, talk on the Street will invariably turn to seasonality and the caveats nestled therein. We spoke of those trends in Vail two weeks ago today and they'll likely get louder once traders return from their swanky summer homes.

Last night, while enjoying some tunes and 'tinis at our regularly scheduled Succofest, John and I touched on the tape as we typically do. We spoke about the misperceptions in the marketplace and the tenuous task of keeping our poise amidst the noise. I thought the Buzz was exceptional yesterday as we dove deep into cost-cutting initiatives and delved into the reasons that are so often assigned to the rhyme. And while the jury remains out on the toggle that is "asset class deflation vs. dollar devaluation" (and, ergo, the next leg of our equity journey), I believe we've identified the necessary blips to watch on our radar.

Perhaps the most eye-popping information I saw yesterday was delivered courtesy of Mr. Succo. He noted that the actual correlation between S&P stocks over the last 30 days has been 0.19 (as in "point one-nine"). That's on a scale of zero to one hundred and, in fact, it was as high as 98 in 1998. This means, as he explained to thy Minyan faithful, that when one stock goes down (or blows up), money has simply migrated into other stocks or sectors. Low correlation is in large part responsible for the compression in volatility and implies that the market believes there is little systemic.

What does that mean in English?

While folks are trading a market of stocks, there is precious little concern for the broader stock market.

What does that mean for the tape?

Little, predicatively, although it does paint a picture of complacency that should be factored into our collective conscious. I told John last night that my best case scenario for the tape is a rally led by the homebuilders (after their 50% one year haircut) and spurred by further dollar devaluation. That implies that our friendly CRB chart holds and perception ("things are better") once again trumps reality (the basis of our investments deteriorates). It is, or should I say it would be, the lesser of many evils.

Be that as it may, I enter today's fray with two legs in my metaphorical fur (50% conviction on the short side) with one eye on commodities and the other on the financials. Those frisky piggies wouldn't give an inch yesterday (talk about hiding spots!) and, given my mad respect for this sector as a tape tell, I'll be watching 'em closely. I slapped on the bear costume into S&P 1300 and, as discipline must always trump conviction, I plan to practice what I preach.

Good luck today.


R.P.

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