Saturday, November 11, 2006

IWM and Friends

When last we visted the three sisters and their ugly step sister it appeared as if a transition was in the making. Not so fast. It appears to me that the returns are still failing - in other words even though price (which you can't spend) is going up the returns (which you can) are coming down. This always bodes ill for the market at large because it is the returns that cause the market to go up. Hunh? Well if you buy low and sell high you make a profit and you take that profit (which is your return) and you put it back into the market - that, dear child, is what causes momentum. If the return, i.e. your profit is small, you can't put a lot of it back into the market so you don't cause the prices to go up as fast and thus your returns are less. Lesser returns cause people to go to other investments and stocks begin to fall. Eventually the price of the stocks becomes incredibly cheap (in the mind of the investor) and they begin buying stocks again.

This cycle generally takes 40 to 80 days and continues to repeat on a 40 to 80 day pattern forever and ever. Now I don't know why it is 40 to 80 days but that's just the way it is and it probably has to do with short term paper and arbitrage and lots of other nonsense but one thing I do know it doesn't have to do with - the election on last Tuesday. You see elections like earnings are one day events. One day stories. But the business cycle which is what buying and selling stocks is all about is continuous.

Here then are the 4 sisters through November 10 2006

If you count back 4 days (4 ticks on any line) that was election day - the next day there was a huge post Rumsfeld resignation party (although as I noted at the time I don't know why) and then the returns resumed their downward trajectory. This, naturally translates to a directionless market because it really wants to go up at this time of year.

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