Tuesday, November 25, 2008

Sample Linear Regression Charts

S&P 500 Index 50 day linear regression with 2 standard deviations(click to enlarge)

NDX 100 Index (click to enlarge)

Dow Jones Industrial Avg. (click to enlarge)

U.S. Dollar Index (Click to enlarge)

These charts are generic charts of the three major equity indexes and the U.S. Dollar Index. After the strong rally starting last Friday, equities in general are approaching the upper 2 standard deviation line. This does not mean that prices will stop there, it does mean that crossing that line will show how much momentum there is at that level. If it is weak volume, expect prices to retreat back to the linear regression line.

The U.S. Dollar Index is outside the 2 standard deviation line below the linear regression. This shows the extreme move over the past two days has reached an extreme. It is important to watch the next day or so and how prices act as they rally back to the 2 standard deviation line. A weak rally followed by a failure to re-establish prices inside the channel will point to a change in trend.

Monday, November 24, 2008

Linear Regressions 1

This discussion is meant to go over a functional elementary approach to using linear regressions and standard deviations off of linear regressions of variable time frames. Text book definitions will be avoided, and references to the math used will be kept to a minimum, google searches give enough resources on this.

One way to look at a linear regressions is to view it as a trend line. It is not a trend line connecting lows or other particular price data. It is best approached as a trend line that includes all price data. It does not connect various price points, but instead bisects all price points for a specified period in time. Below are three charts of Agilent Technologies Inc. The green line bisecting the bars on the chart is a 10 day linear regression. As the prices change, the slope(angle) of the linear regression line changes to fit the most current 10 days of data.

A - Agilent Technologies Inc. (click to enlarge)

A - Agilent Technologies Inc. (click to enlarge)

A - Agilent Technologies Inc. (click to enlarge)

These three charts show how the slope of these regressions changes and follows the most current 10 days of price data. While a 10 day linear regression might not be of much use, comparing the slope of the 10 day to a longer term, 50 day, might be incorporated into a larger data scan. Below is a chart of Agilent Technologies Inc. with a 50 day linear regression(Blue Line) and the 10 day linear regression(Green Line).

A - Agilent Technologies Inc. (click to enlarge)

This 50 day linear regression shows that prices over this time frame are moving lower in steady fashion. Looking at a linear regression line alone doesn't provide much help other than showing the general trend or slope of prices. One tool to apply to a linear regression is standard deviation lines. In the same chart above, the 50 day linear regression line will have two lines applied. One will be 2 standard deviations above and one 2 standard deviations below this linear regression. With 2 standard deviations above and below, 95% of prices should take place inside these limits.

A - Agilent Technologies Inc. (click to enlarge)

This chart shows how most prices are contained inside these two lines. Fighting the slope of the linear regression and entering trades at the upper standard deviation line can make life difficult. This is an introduction to provide a basis for the next series of articles to follow on how to incorporate these tools into any trading system or investment strategy. If there are ever any questions, feel free to send questions and comments using the button on the right side of the page above the blog archive.

Sunday, November 23, 2008

Citigroup Rescue....#*@&%bank

To boost investor confidence in Citigroup the government unveiled a bold plan Sunday, including taking a $20 billion stake in the firm as well as guaranteeing hundreds of billions($306,000,000,000) of dollars in risky assets. The move, announced jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already crippled financial system and the U.S. economy.

Does this shore up confidence? It sure makes in obvious that those in charge of putting band-aides on bullet-holes can't see past their own nose. What has happened between tonight and a few weeks back when the government invested the previous $25 billion in Citigroup? How many more weeks will it be before the government offers Citigroup another $25 billion or so. They all better go on an expensive retreat and think about it.

Maybe they(WE) have to do this, maybe we don't, but why didn't these geniuses see this coming a few weeks back. They actually thought that $25billion was enough a few weeks back. After injecting nearly $300 billion of capital into financial institutions, federal officials now appear to be willing to absorb bad assets, on a targeted basis, from specific institutions. This will not be the last attempt to save sinking ships. In addition to $2 trillion in assets it has on its balance sheet, Citi has another $1.23 trillion in entities that aren't reflected there, according to reports. Some of those assets are tied to mortgages, and investors have worried they could cause heavy losses if they are brought back on the company's books. It doesn't only have fleas, it has ticks and the mange.

Citigroup(shitibank)---click to enlarge

If we as tax payers are going to fund a distressed equities hedge fund, how can we now not bail out the auto industry? This mess with Citi is going to cost a lot more than the money Detroit is asking for. If we are going to invest in failing banks and other troubled and burdened industries, where does it stop? Where do we draw the line? We sure better be investing in companies that offer some growth to offset the boat-anchors we own preferred stock in currently. We will not get preferred stock in solar and new fuel cell companies that the government is going to surely offer tax incentives to jump start that industry. We will not get preferred stock in the infrastructure companies that will most likely get business as the federal government attempts to restart the economy with spending. These last two will at least create jobs and give some people some benefit. Tying up $351 billion in Shitibank isn't the best investment. With the additional 1.2 trillion in assets currently off its books, we will be throwing more money into this fire in 6 weeks time.

Link to terms of the "deal".

Fed Pledges $7.4 Trillion To Ease Frozen Credit.
That is equal to $24,000 for every U.S. citizen and 9 times the Iraq war. Scary.

Thursday, November 20, 2008

Price Effects of Inflation and Deflation

Robert Prechter Explains the Price Effects of Inflation and Deflation
November 19, 2008

Editor’s Note: On Nov. 19, 2008, the U.S. Labor Department reported a 1 percent drop in the consumer price index for October 2008. The drop marked the largest decline in 61 years, and it was the first decline in that measure in nearly a quarter of a century. The 1 percent drop was twice as large as many mainstream analysts had forecast. Such a large decline in consumer prices is forcing U.S. policymakers to rethink the possibility of deflation in America. For more on deflation, we turn to Robert Prechter, the man who literally wrote a book on how to survive it. The following article, adapted from Prechter’s book Conquer the Crash – You Can Survive and Prosper in a Deflationary Depression, will help you understand exactly what to expect from deflation.

In addition to this article, visit Elliott Wave International to download the free 8-page report, Inflation vs. Deflation. It contains details on which threat you should prepare for and steps you can take to protect your money.

By Robert Prechter, CMT

Before explaining the price effects of inflation and deflation, we must define the terms inflation, deflation, money, credit and debt.

Webster's says, "Inflation is an increase in the volume of money and credit relative to available goods," and "Deflation is a contraction in the volume of money and credit relative to available goods."

Money is a socially accepted medium of exchange, value storage and final payment. A specified amount of that medium also serves as a unit of account.

According to its two financial definitions, credit may be summarized as a right to access money. Credit can be held by the owner of the money, in the form of a warehouse receipt for a money deposit, which today is a checking account at a bank. Credit can also be transferred by the owner or by the owner's custodial institution to a borrower in exchange for a fee or fees – called interest – as specified in a repayment contract called a bond, note, bill or just plain IOU, which is debt. In today's economy, most credit is lent, so people often use the terms "credit" and "debt" interchangeably, as money lent by one entity is simultaneously money borrowed by another.

When the volume of money and credit rises relative to the volume of goods available, the relative value of each unit of money falls, making prices for goods generally rise. When the volume of money and credit falls relative to the volume of goods available, the relative value of each unit of money rises, making prices of goods generally fall. Though many people find it difficult to do, the proper way to conceive of these changes is that the value of units of money are rising and falling, not the values of goods.

The most common misunderstanding about inflation and deflation – echoed even by some renowned economists – is the idea that inflation is rising prices and deflation is falling prices. General price changes, though, are simply effects of inflation and deflation.

The price effects of inflation can occur in goods, which most people recognize as relating to inflation, or in investment assets, which people do not generally recognize as relating to inflation. The inflation of the 1970s induced dramatic price rises in gold, silver and commodities. The inflation of the 1980s and 1990s induced dramatic price rises in stock certificates and real estate. This difference in effect is due to differences in the social psychology that accompanies inflation and disinflation, respectively.

The price effects of deflation are simpler. They tend to occur across the board, in goods and investment assets simultaneously.


For more information on deflation and inflation, including money-saving steps for protecting your wealth, download Elliott Wave International’s free 8-page report, Inflation vs. Deflation.

Robert Prechter, Certified Market Technician, is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

Monday, November 17, 2008

Time Out From Trading....

Every four years the Olympics remind us of some of the greatest athletes in our country. Once the Olympics end, many of these incredible people fade from the headlines and go back to training in the sports they love. One of the greatest stories of the Beijing Summer Olympics was that of Dara Torres. She exhibited uncommon and incredible sportsmanship while swimming a personal best and winning a silver medal in the 50 meter women's freestyle. She did this at the age of 41, competing against swimmers more than half her age. She was competing her 5th Olympics and won her 12th medal. This was all accomplished while swimming with a heavy heart because her coach could not make the trip to Beijing. Weeks before the Olympics, Coach Michael Lohberg was diagnosed with aplastic anemia, a rare and life-threatening blood disorder.

While many of Coach Lohberg's swimmers were in Beijing swimming for gold, he was at the National Institutes of Health, NIH, in Bethesda Maryland fighting for his life. Aplastic anemia is a condition where bone marrow does not produce sufficient new cells to replenish blood cells. The term 'aplastic' means the marrow suffers from an aplasia that renders it unable to function properly. Anemia is the condition of having reduced hemoglobin or red cell concentration in the blood. Typically, anemia refers to low red blood cell counts, but aplastic anemia patients have lower counts of all three blood cell types: red blood cells, white blood cells, and platelets. This not an easy or inexpensive medical condition to fight. I encourage people to read about the disease and help Coach Lohberg cover the costs in fighting this condition. Many of the coaches and teachers in society are our the most valuable commodity, yet the also the most under appreciated. Below is the information for helping Coach Michael Lohberg.

Donate Now to Swim Coach Michael Lohberg

Those interested in donating money to help defray the medical expenses for Michael Lohberg, USA Olympic Coach and Coral Springs Swim Club Coach, may mail contributions to:


4695 N University Drive
Coral Springs, FL 33067

Payable to: Michael Lohberg

Account # 0066065580
Routing # 267083763

For additional information:
Please call Dorie Vega at BankAtlantic 954-344-2488 Ext. 7000

We all cheer for the athletes, so lets support those who help make things happen for them!

Revenue generated by this blog for the remainder of November and the month of December will be forwarded to Michael Lohberg. Let's see how much we can raise for a great cause.

Tuesday, November 11, 2008

Top 100 Safest U.S. Banks

Why Your FDIC-Backed Bank Could Fail
November 11, 2008

With big bank bailouts dominating the news, there’s no better time to get the truth about bank safety.

This informative article has been excerpted from Bob Prechter’s New York Times bestseller Conquer the Crash. Unlike recent news articles that are responding to the banking crisis, it was published in 2002 before anyone was even talking about bank safety. However, you may find the information even more valuable today than ever before.

For even more information on bank safety, visit Elliott Wave International to download the free 10-page report, Discover the Top 100 Safest U.S. Banks. It contains details on how you can protect your money from the current financial crisis, updated for 2008.

Risks in Banking

Between 1929 and 1933, 9000 banks in the United States closed their doors. President Roosevelt shut down all banks for a short time after his inauguration. In December 2001, the government of Argentina froze virtually all bank deposits, barring customers from withdrawing the money they thought they had. Sometimes such restrictions happen naturally, when banks fail; sometimes they are imposed. Sometimes the restrictions are temporary; sometimes they remain for a long time.

Why do banks fail? For nearly 200 years, the courts have sanctioned an interpretation of the term “deposits” to mean not funds that you deliver for safekeeping but a loan to your bank. Your bank balance, then, is an IOU from the bank to you, even though there is no loan contract and no required interest payment. Thus, legally speaking, you have a claim on your money deposited in a bank, but practically speaking, you have a claim only on the loans that the bank makes with your money.

If a large portion of those loans is tied up or becomes worthless, your money claim is compromised. A bank failure simply means that the bank has reneged on its promise to pay you back. The bottom line is that your money is only as safe as the bank’s loans. In boom times, banks become imprudent and lend to almost anyone. In busts, they can’t get much of that money back due to widespread defaults. If the bank’s portfolio collapses in value, say, like those of the Savings & Loan institutions in the U.S. in the late 1980s and early 1990s, the bank is broke, and its depositors’ savings are gone.

Because U.S. banks are no longer required to hold any of their deposits in reserve, many banks keep on hand just the bare minimum amount of cash needed for everyday transactions. Others keep a bit more. According to the latest Fed figures, the net loan-to-deposit ratio at U.S. commercial banks is 90 percent. This figure omits loans considered “securities” such as corporate, municipal and mortgage-backed bonds, which from my point of view are just as dangerous as everyday bank loans. The true loan-to-deposit ratio, then, is 125 percent and rising. Banks are not just lent to the hilt; they’re past it.

Some bank loans, at least in the current benign environment, could be liquidated quickly, but in a fearful market, liquidity even on these so-called “securities” will dry up. If just a few more depositors than normal were to withdraw money, banks would have to sell some of these assets, depressing prices and depleting the value of the securities remaining in their portfolios. If enough depositors were to attempt simultaneous withdrawals, banks would have to refuse. Banks with the lowest liquidity ratios will be particularly susceptible to runs in a depression. They may not be technically broke, but you still couldn’t get your money, at least until the banks’ loans were paid off.

You would think that banks would learn to behave differently with centuries of history to guide them, but for the most part, they don’t. The pressure to show good earnings to stockholders and to offer competitive interest rates to depositors induces them to make risky loans. The Federal Reserve’s monopoly powers have allowed U.S. banks to lend aggressively, so far without repercussion. For bankers to educate depositors about safety would be to disturb their main source of profits. The U.S. government’s Federal Deposit Insurance Corporation guarantees to refund depositors’ losses up to $100,000, which seems to make safety a moot point. Actually, this guarantee just makes things far worse, for two reasons. First, it removes a major motivation for banks to be conservative with your money. Depositors feel safe, so who cares what’s going on behind closed doors? Second, did you know that most of the FDIC’s money comes from other banks? This funding scheme makes prudent banks pay to save the imprudent ones, imparting weak banks’ frailty to the strong ones. When the FDIC rescues weak banks by charging healthier ones higher “premiums,” overall bank deposits are depleted, causing the net loan-to-deposit ratio to rise.

This result, in turn, means that in times of bank stress, it will take a progressively smaller percentage of depositors to cause unmanageable bank runs. If banks collapse in great enough quantity, the FDIC will be unable to rescue them all, and the more it charges surviving banks in “premiums,” the more banks it will endanger. Thus, this form of insurance compromises the entire system. Ultimately, the federal government guarantees the FDIC’s deposit insurance, which sounds like a sure thing. But if tax receipts fall, the government will be hard pressed to save a large number of banks with its own diminishing supply of capital. The FDIC calls its sticker “a symbol of confidence,” and that’s exactly what it is.

For more information on bank safety, including how to choose a safe bank during the current financial crisis, download EWI’s free 10-page report, Discover the Top 100 Safest U.S. Banks.

Thursday, November 6, 2008

Election Year End Of Year Market Results

The spreadsheet below covers the year end results for the market following November presidential elections. This information covers 1912-2004.