Friday, September 28, 2007

Measuring Speculation and Pricing Risk

With the end of the quarter, it is helpful to look at where the market has been. This could be helpful next week when the quarter is over and it will be time to analyze the money flows coming into the market with the new quarter. The trend of the Russell 2000 Index can be helpful in measuring the appetite for speculation in the market. The index is made up of smaller companies that often hold the growth stories of tomorrow. This index has struggled while the S&P 500 and the Nasdaq 100 indexes have recovered. Below is a chart of the Russell 2000 and the S&P 500.

Russell 2000 Index

S&P 500 Index

Another chart which points to some signs that the economy and not all the stocks are having a party with the recent interest rate cut is the Dow Jones Transportation Index. This is a good barometer for the expectations of the economy in the future.

Dow Jones Transportation Index

An important ratio to watch is the difference between the Federal Funds Rate and the 3month Libor rate. The Libor rate is the rate that more closely reflects loans between banks. When this rate doesn't drop in step with the Federal Funds Rate, it is a sign that there is still risk aversion and fear is governing business decisions. A Bloomberg page that covers these rates and changes can be accessed HERE. This difference in rates needs to narrow before the market will be out of the woods.

Canadian Dollar

U.S.Dollar / Canadian Dollar

No comments: