a little economics primer and dow 10k

[paulsby]

a lot has been made about the dow's huge run up recently

it's gone from 6500 to 10000 in less than 6 months

that is well over a 50% gain.

and recall when the dow was 6500 and around there, most of the posts were all doom and gloom. historically, the BEST time to buy most assets (not just stocks) is when there is (to borrow a term) blood in the streets, panic, etc. NOT when there is euphoria.

anyway, while the 3500 pt gain is impressive, it's not really that impressive when one looks at the dollar index.

remember, when the dollar loses value (and i was pimping shorting the dollar a couple of months ago here as a great no brainer trade/currency hedge, the US stock index can easily gain value just based on the fact that it becomes cheaper to those who trade in EURO's etc and because of the utility of the dollar as a carry trade) then the US indexes, which are referenced in dollars terms become cheaper.

iow, many people here are saying "how can the dow be at 10k when the economy has such mass suckitude?"

the answer is staring you in the face.

also remember, rallies are sharpest in the context of bear markets.

[bbinacan]

1. I was buying and

continue to buy. You are no sage. I have a BA in Economics from UNC-CH and was an AVP at Morgan Stanley.

Hey genius, it's all about time horizon.

[paulsby]

9. i'm not saying im a sage

i'm saying it was a no brainer trade, i made a recommendation, and i hope some people took it for easy money

hth

[bbinacan]

24. Good point

I stand corrected.

[paulsby]

27. np

for what it's worth anytime anybody says they are a sage, or you can't lose money in a trade/investment, etc. ... run the other way imo :)

[OHdem10]

2. Does not this represent the business be done in Asia, China etc

rather than here????

[FreakinDJ]

3. I moved from CDs to Market Funds at 6700

When Obama said "there are some really good values out there"

About 30% gain in my retirement savings in the last 6 months

[bbinacan]

5. You have got to be shit'n me?

You take advice on what a politician says?:rofl:

[paulsby]

11. you can laugh all you want

but he made a nice profit, instead of running around yelling "the sky is falling".

props to him.

[FreakinDJ]

40. Ya tell that to my Retirement Fund +$60K later

Jokes on you friend - Obama was stating the obvious

[TexasObserver]

4. The DOW has gained 250 points for each 1 point the dollar has lost since March.

The dollar has lost 14 points since March, and the DOW has gained 14x250 = 3500 points.

There's definitely a correlation, but other factors come into play as well. Stability and optimism are the two things the market most seeks.

Edited to provide the math some find necessary:

You see class, when the dollar drops by 14% and the DOW goes up 3500 points, we could ask ourselves "by what percentage is the DOW increasing in this same period, and how does that compare to the dollar's drop?" Since we know that the DOW has increased from a low of 6500 points to almost 10,000 points, we know it has increased by 3500/6500 = 54%. We can also calculate for every 1 percentage drop in the value of the dollar, we saw a 250 point increase in the DOW, on average. We perform this operation by dividing the increase in points (3500) in DOW by the 14 percentage points, arriving at the 250 DOW points per 1 percent drop in the value of the dollar, as seen in line one of this post.

Happy now?

[Statistical]

8. Look at the two on % basis.

You can't compare points to points. But still you are right the dollar slide can only account for some of the DOW rise.

[paulsby]

13. of course

nobody (NOBODY with a brain) is saying that the move in the dollar is the only factor in the dow's rise.

i am saying it IS a major factor that many non-traders don't see.

[TexasObserver]

14. Of course you can compare points to points.

The dollar has dropped about 14% while the DOW has risen about 50%. That's a correlation of 3.6 points increase for the DOW for every 1 point drop in the value of the dollar.

Given the carping about not showing the math, I have amended my prior post, to explain how I arrived at my numbers and why they're sound.

[Statistical]

20. But that isn't what you said when you compared it at 250:1

[TexasObserver]

28. No, I made an accurate statement.

That you couldn't process. Since you can't do that math, I went back and explained it so that even a middle schooler could understand it. Try it again.

[Selatius]

10. The Dollar will continue its slide given the amount of borrowing the gov't is doing.

With the amount of borrowing it's doing, it has got to push out quite a huge number of government bonds to come up with the cash to maintain its machinations. Otherwise, it would be forced to cut spending or raise taxes, and the rich won't tolerate tax hikes on them.

[paulsby]

15. are you willing to put money on that

if not, it's worth nuttin :)

fwiw, i have taken almost all my profits in my long euro short dollar trade.

and i have a trailing stop

i have NO idea what the dollar will do.

trading is not about (imo) making predictions. it is about assessing risk/reward of various positions and trading accordingly, with disciplined exits.

some of the best traders are wrong more than 50% of the time. they just make much more on their wins, then they lose on their losses.

i made the recommendation on the trade (shorting the dollar) a few months ago because it had compelling risk/reward. not because i was predicting anything.

[Selatius]

23. Actually, I have.

I started shorting after the TARP bill passed in late 2008. It was only a matter of time before the amount of bonds the government was pushing out would start saturating the market thus driving down the value.

[paulsby]

26. nice trade

i have found the currencies to be very good traders, as long as you expand the timeline. for example, most of my futures trades last less than 3 minutes. with currencies, i prefer a swing timeline of days to weeks.

[paulsby]

12. you realize the points aren't equal right?

the dow btw is a price weighted index (the S&P is cap weighted).

you have to look at PERCENTAGES.

15 dollar index points is thus a huge move, whereas 15 dow index points is intraday noise

[TexasObserver]

17. Do I really have to explain that?

Do I have to explain that the DOW has increased 50% while the dollar has dropped 14%?

Do I have to do the math, so you'll have that, too, or can you do it yourself?



Never mind. I went back to the original post and explained the math, so that no one has to ... shutter ... actually do math in their head.

[paulsby]

21. you are missing one point about the math

but, no you don't have to explain it.

if the dow rises 50%, it need only drop 33% to get back to the same level.

if an index rises 100%, it needs only drop 50% from that level to get back to where it started.

14% is also a very large move for the dollar index, if you look at historical volatility (either implied or actual).

again, nobody claimed (certainly not me) that the move was 1:1 nor did anybody claim that the dow moved solely because of the dollar move.

both would be ludicrous claims. i was simply saying that in order to properly contextualize this recent rally, you need to consider the dollar, both from its decline, and its utility in carry trades (i don't trade much forex, but i do a little, i usually just use currencies as hedges, not as outrights)

[TexasObserver]

29. whatever

[paulsby]

32. ad hominems

how quaint.

i don't care what you do or don't take seriously. i make my calls as i see fit, and the ONLY thing that matters is my P&L.

that's verification of my skillz, not some anonymous wankage on da internets.

i simply said that imo shorting the dollar (by going long FXE or short EURUSD) was a very compelling trade, and i was taking it.

it happened to be very profitable.

[Statistical]

19. Just for fun I looked at the %.

Dow low 6547 on March 9th & peak of 10,062 on Oct 15th.

Dollar Index on March 9th 65
Dollar Index on Oct 15th 55

Dollar fell 15%
DOW gained 53%

The dollar made a substantial % of the DOW gained (rougly a 1/3rd) but the DOW would still be > 9000 even if Dollar remained flat.

[paulsby]

22. there is no 1:1

correlation.

iow, if the dollar drops x%, we would not expect the dow to rise X%

they are measures of very different things, with different implied and actual volatilities etc.

i am merely pointing out that the move in the dollar has HELPED the dow rally.

as an intraday futures trader, you can be DAMN sure i am watching the EURUSD when i am trading the dow.

[Statistical]

6. "Be greedy when others are fearful, be fearful when others are greedy".

Worked for Warren Buffet, worked for me.

I almost sold some assets at around DOW 7200 then I caught myself. I realized I was afraid and so was the majority of people. The selling was fear driven. I looked at some of my stocks like Walmart and said. Is Walmart worth half of what it was last year? Sure sales are down but not cut in half. Sure profit is down but not cut in half. Despite slower growth for next couple years do I really want to sell my shares to someone else at half off.

"Be greedy when others are fearful, be fearful when others are greedy".

I doubled down by moving money out of investment grade bonds into more equities at DOW 7200. Of course DOW is a near useless metric to me. To small to be meaningful. S&P 500 much better indicator IMHO. DOW just get attention because 10,000 sounds more impressive then 1080.

[paulsby]

16. what most people don't understand

is that dow is price weighted, but the S&P 500 is CAPITALIZATION weighted. that means that despite the fact that it is made up of 500 stocks, a small %age of those stocks account for most of the moves in the index, since it's CAP WEIGHTED.

also, it's not a matter of which is a better indicator for me. i happen to TRADE dow futures, so i think in DOW terms. the S&P is a fine proxy. the dow and S&P are over 95% correlated.

if you want a true broad metric, you don't look at the S&p 500 (the standard one) that is cap weighted.

you look at the EQUAL weighted S&P. also called the "spewi"

the S&P performance is heavily weighted towards the highest capitalization stocks. the equal weighted index isn't

[OutNow]

38. Walmart???????

You're a Democrat and you own stock in Walmart?

I know that my mutual funds have small positions in some companies that I dislike, but to acquire individual company stock of a corporation that, IMHO, is the destroyer of small town retail, and buyer of massive amounts of Chinese plastic crap, is pathetic.

I suggest you read Barbara Ehrenreich's book Nickel and Dimed for another perspective.

[Statistical]

41. Walmart sells the same stuff as Sears, or Target, or Amazon or Kmart or JC Penny.

The idea that Walmart is the sole bastion of chinese crap is simply stupid.

If you box a box for fruit loops at Walmart it is the exact same box sold in any other store.

Walmart average wage for hourly workers is $10.86. While $10.86 is low it is much better than the minimum wage offered by most Grocery stores and many big box retailers (Home Depot, Best Buy, etc). Walmart has actually lobbied FOR raising min wage. Why? Not to be nice, simply put they pay more than competitors so raising min wage would require competitors to pay more and help Walmart's bottom line.

[Ruby the Liberal]

7. Hard to buy "assets" when you are on unemployment. Just sayin '

[TexasObserver]

18. I got out at 13,000 and back in at 6700.

Equities, that is.

In January of 2008 I got out of equities and encouraged others to do so. By September, when the DOW was down to 11,000, I was fairly yell it to others to get out of equities, and there are posts to that effect from 13-14 months ago somewhere here.

I also suggested to those who are sophisticated investors to get back in when the DOW fell below 7000 in March. I said then it was undervalued by at least ten percent and the market was in a post inaugural panic.

[paulsby]

25. that's a phenomenal

market timing skill you have (or just very good luck).

i don't ever try to catch absolute tops or bottoms. too many traders get slaughtered trying to do that. it's certainly not necesasry to do that to make $$$.

but props to you!

[TexasObserver]

33. Thanks. I bet on the DOW through funds.

Every investor has to find their own approach, their own niche. Many kinds of investors make money in the markets. I'm focused on the major market movements and long term trends.

When the DOW hit 14K two years ago, I knew soon after we were in a decline, so I unloaded in January of 2008. When Obama took office, I felt there would be a panic and it would send the markets falling, far below real values, and would rebound once the hand wringing wore itself out. That's what happened in March.

I know guys who mainly invest in bonds, but I've never been into them. Some like currencies. Some like metals. Some look for dividends. Each person has to figure out something they can use as their approach, and then craft it for their objectives for this moment in time. My objectives now are far different than they were in 1979, when I first entered the markets.

[MajorChode]

30. I got out of all American equities when Bush got elected

I transferred to international stocks which did better initially, but still lost in the long run. Eventually I went with government securities for the most part before too much of the bottom fell out. I'm back with US equity investments again after Obama got elected.

[MajorChode]

31. Don't forget that US stocks are still 40% off what they were just 2 years ago

Even with the recent big gains.

[paulsby]

34. of course

there was one thing that was abundantly clear when the dow was 14k. that is was overbought and overvalued. however, markets can remain irrational longer than a stubborn trader can remain solvent :)

[MajorChode]

35. I wouldn't say it was abundantly clear

Many people put entirely too much faith in so-called market experts. You're really just as well off to consult a palm reader or buy yourself some darts and throw them at the WSJ. There might have been some that said the market was overvalued, but there's ALWAYS someone who says the market is overvalued. Most of those guys simply check which way the wind is blowing before making a prediction, or pull some half-fast reasoning out of their ass. If their advice was actually worth anything they would be making money doing their own trading, not selling their advice. There simply wasn't a chorus of anyone saying the bottom was going to drop out and when it happened, it didn't happen because the stock market was overvalued, it happened because the real estate market was overvalued. Even if the market had been grossly undervalued 2 years ago, it wouldn't have stopped the fall once the real estate market sucked all the capital out of the economy.

[Extend a Hand]

36. at this point in time

I still think the stock market is not much better than gambling. The real economy is in shambles. I'm not risking my retirement for a few extra bucks.

[paulsby]

37. some points

1) if you are near retirement, you should not BE fully invested in stocks. as one gets older, more and more should be exposed to cash instruments. that's investing 101.
2) it may be gambling (that's a pure semantic wank i don't want to get into), but it's gambling where YOU have an edge. why? because the overall bias of the market is up, and there has NEVER been a 20 yr period in history where simply dollar cost averaging every month did not yield positive returns. in most 20 yr period - quite good returns.

but i'm not trying to convince you. if you don't want to invest, don't. every trader and investor has complete power in that regards. it's one of the most democratic institutions on earth.

it worked well for my grandfather, my dad, and me.

it's a way to OWN pieces of different companies, and for those that supply dividends, you get paid to own them.

fwiw, as i said, i am SHORT (in one of my trading accounts) the market from dow 10,000 day, but i don't recommend shorting ANYTHING except for those with experience.

[depakid]

39. People wise enough to have gotten into the Aussie from October - March last year

would have done quite well, without a lot of risk. Low of 59 and likely close to parity by New Year. Nice yield as well, comparatively. People into equities could have done even better if they'd chosen the right Australian stocks.