Why Did That Company Go Down? Part 2 - CAPM

The Capital Asset Pricing Model (CAPM) is used in finance to determine a theoretically appropriate required rate of return (and thus the price if expected cash flows can be estimated) of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk. The CAPM formula takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), in a number often referred to as beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset.

Again from Wikipedia. All of us B-School Majors learn about this in school and some of us take it into the real world and use it to build funds and funds of funds or even to invest our own money.

It is what is used to model the expected performance of an asset against the totality of a portfolio. Thus a stock can be bought or sold in quantities that optimize its presence within the portfolio.

In other words a stock's price can go up or down based on the way it fits within a large fund.

For example some months ago Kirk Kirkorian sold off his shares in GM because he was in a snit about the fact that they weren't listening to him (he's just made an offer for Chrysler - apparently he believes there is a future in the auto business). More than his shares were sold though because by selling he changed the beta of the stock and a lot of funds had to rebalance as a result. Thus the share price declined more than if it had just been Kirkorian's sales.

Here's the chart -


There's so much going on in this chart it becomes a clinic in its own right. First we have Kirk's snit (KK sells). Then, because the CAPM gets disturbed everyone else sells (EE sells) (disclosure - I sold with Kirk).

This culminated in a short squeeze and a BOB which I bought and closed the very next day for a small profit. This was followed by a tweezer bottom plus a BOB. I was done with GM at the moment so I didn't buy this one.

The ATR then finally settled and if you look at this chart over a period of time you will see that it is a good time to buy when the ATR is below 60 cents. And generally a good time to sell when it gets above 90 cents.

I didn't know about Philip's set-up at that time but it too is on this chart.

So the next time you are wondering why a stock dropped it can drop for any number of reasons - but the reason why it goes up again - an attractive stock becomes more attractive when you don't have to pay as much for it. Notice that within two and a half months of Kirk's snit the stock was higher than when it started.

Wednesday's Wrap

Wrap me up - after I found out that NTRI was reporting after hours it took every bit of my strength to not buy it to the extent of my trading account at the close - I mean who wouldn't want a 12% loss on their book three days in a row? Of course NTRI will go up at least 10% tomorrow morning. That you can bank on. (Update - up 16% after hours).

Flat - in cash - no stocks in my trading account - no holdings - nada - I'm clear. As I mentioned I sold everything including CRI before noon. I reasoned for CRI that it wasn't going to recover the losses ever and it might even go down some more since that was its general direction before I took it anyway. Right now I'd rather have the cash for trading rather than being carried as a bump in the book.

Turns out I should have held NEW a bit longer but the way I was feeling at that moment I needed a winner and that was it and I'm happy with what I got out of it. I took KNOT on a blow-off bottom but set my stop way too close and was stopped out - I didn't have my heart or mind in the trade - maybe tomorrow. I think KNOT is going to get back to where it was - it, afterall, is selling dreams and not real stuff like baby wear. Dreams are a lot easier to value. (If you detect the slightest hint of sarcasm here it's probably because there is a little in the air at the moment).

But when you get bucked off the bull you pick yourself up, make sure nothing is broken, and then you either get back on the bull or you go home and hide under the bed - I don't hide. But I did make some changes and you won't see me holding any stocks in my trading account any longer than 5 hours - if that.

Nuff about my woes - I published a new method to find day trade candidates this morning using a filter that would, if completed, find full scale blow-off bottoms. The filter found 15 matches and of the 15 - four went down today and 11 went up. Needless to say today was a good day for "going up" so I won't say that will be the norm - but I will keep track of this in the wrap and we'll see how well it does.

My three favorites were ETFC, SAY, and TTM - but because this was the first time I've tried this I just watched today. I'm going to continue using this method for awhile and see what develops.

Another interesting detail of the day is that small caps went up and then retreated back to the open - or as I say - they round-tripped. I'm not sure what that portends. Is this the age of the large caps? I doubt it - it might be as simple as the small caps are all overbought. And if you look at the IWM, IWN, and IWO charts together with the stochasticRSI(2) you see the incredible variance of the IWM (the index) and IWO (growth component) both being at 1.000 and the IWN being at 0.000! Apparently value was sold off today hard and that was enough to bring the overall index down. So that leaves the only question as why is value being sold off this year? I have no clue.

GOOG, MSFT and AAPL all went up today as did the semi's. Don't start cheering because I think that is just a one day story.

Another stock that took an amazing haircut today was GIFI. Just last week Trading Goddess was talking about that stock as if it had a real chance post earnings. I didn't think much of the stock - it appeared to me to be ready to come down anyway - but apparently the company has postponed its earnings announcement and that was enough for an 11% haircut. See what I mean about the market being so fearful? I don't think the economy is in that good shape - at least not as good as some of our leaders would have us believe. Gold keeps going up and stocks keep exploding. Although it is possible that gold is starting to peak. I think Bernake scared gold traders today when he started talking about inflation being under control - the worst thing that can happen to the gold bugs is an interest rate cut. If stocks keep blowing up I think that is coming - I'm surprised it hasn't happened already. Jimmy Crack Corn Pone also thinks one is due too.

CRVL continued its droppage today. See what happens when the day traders and scalpers abandon you - absolute chaos.

I think GM is done for awhile - third gap up yesterday and a DOJI today.

Now for the most amazing piece of the puzzle - the up/down ratio actually went down today to 55% from 59% and there were about 300 fewer stocks going up today than went up yesterday. That suggests that today's exuberance was indeed irrational. Now despite that the NEWMOMO method is suggesting we are already due for a correction.



As I've pointed out - this is a relatively new method that I'm using and I really don't know what to expect from it but the icing on the cake is the fact that the ATR(10) for the INDU is at 78.99 which is less than 80. So I'm forecasting a down day tomorrow.

The coin says --- tails - also a down day - I have to start letting the coin go first - I think it is playing me.

We both got it right again so the score is Marlyn 12 - 8 and 4 and the coin is 9 - 11 and 4.

Happy trails to you.

Wrapping Friday

As expected a down day - the problem being there isn't anybody around who really cares enough to buy anything. Given the extra day off next week (Tuesday) nearly everyone who is anyone took off at noon today to prepare for the 4-day mourning session honoring our only unelected President. I know I'm going to pull out my old WIN button and wear it proudly for the next 4 days. (WIN = Whip Inflation Now - Gerald Ford's answer to some of the most miserable run-away stagflation ever to hit the country).

I end the year holding SYMC even though it backed up today, DHI, and I added a very small position in GM this morning. I will be holding them through next week in anticipation of the coming boom in the stock market. Actually I'm taking all of next week off. Nothing special just a short trip I've had planned for awhile.

For a recap - the up/down ratio is now at 38% and the new 20 day high/low ratio is 42% and the VIX is 7% over its 10 day moving average. These things mean that next week will be a good one - at least on Wednesday. I'd really like for the market to fall back for the next two weeks and then, when there is lots and lots of things to buy, take off from there.

With the exception of the SPY everybody else (DIA, QQQQ, IWM, GS) finished with a red candle in the last hour - which is good. That means that there was even more capitulation following through from yesterday.

I'll be back later this weekend with a fearless prediction for the next year - it doesn't matter whether I'm right or wrong - it's just something you can look at and compare with all the other fearless no nothings out there.

The magic coin having nailed today finishes the year 42 - 31 and if you don't know how much better the coin is than Cramer you just aren't paying attention. For the First Trading Day of the New Year the coin says --- Heads - bull market -

And that's a wrap.

Tuesday Wrap Up

Dumped SYMC 5 minutes into the session and glad I was to do so. Picked up some AMD and got out a little ahead of commissions - it was up to a reasonable profit but I let it degrade into nearly a break even trade. A couple of old favorites such as HANS, GM, and AMR made some today - but I picked AMD as the trade of the day and that's the way of this game. You make your pick, you buy the assets, and you take what you get. But AMD is officially off my Christmas list.

This is nonsense - the market goes up for an hour and then degrades the rest of the day. I'll give you an idea - by 10:15 the DIA was up 25 cents to 123.22 - it closed at 123.35. Made 25 cents in 45 minutes and took another 6 hours to make an extra 13 cents. And it never really was much higher than that just another nickle. Can't make any money in this kind of environment. I'm considering going back to my old method which was strictly overnight - buy at 3:45 sell at 9:45. In that half hour you will make more money than at any other time in the market. So sayeth brother Brett (Dr. Steenbarger) and so sayeth Marlyn. But it takes real guts to hold overnight in this environment - so if you don't have the stones don't make the play.

Currently flat and happy - always be tomorrow. For tomorrow, although I think it is going to be a down day (but I think that almost every day and am wrong quite frequently) I will be watching BRCM, CTXS and AFFX. If the method I am researching pans out I will let you in on it tomorrow evening.

The up/down ratio prints 49% which is neutral as is the VIX. New 20 day highs did pull back some to 1028 and the new 20 day lows went ahead to 150. These changes are extremely small and meaningless. The three sisters, the ugly step sister and the proxy for the market of the 22nd century, GS, all finished the last hour in the white(green) which is a totally bogus signal as far as I'm concerned.

The problem remains - nothing to buy. To put it into a different perspective right now for stocks between 5 and 250 with an average 90 day volume greater than 500K there are 200 closing at the upper Bollinger Band and only 9 closing at the lower Bollinger Band. Tell me we aren't top heavy. Something has to give and, truthfully, we need a couple of weeks of solid declines. I hope we get them because only then will we be able to get back to making real money again on the day side. Besides the shortists need a break too.

Ol' magic coin is 33 and 25 having missed yet another one but persevering always it bravely soldiers on and for tomorrow says - heads - bull market. I think we can fade that.

Friday Wraps Up Early

Early day - we didn't do much - added a bit to our GM trade from the other day and began a swing trade in AMD - other than that nothing too exciting.

This was a strange day - started out down then went up then went down again. Goldie (GS) kind of set the tone for the whole day - gapped down nearly $2 at the start, went down from there for the first 15 minutes losing another dollar then turned around an went up for the next couple of hours until about 11:15 when it reversed again finally finishing the day off 19 cents. All three sisters, the ugly stepsister and GS, the proxy for the stock market of the 22nd century finished the last hour in the red - which, believe it or not is a good sign. The VIX pulled way back into the neutral zone and the up/down ratio prints 40%. The new 20 day highs pulled back again but remain above 600 at 672 and the new 20 day lows also pulled back to 135. Believe it or not but all these things together suggest not just an up day on Monday but a strong up day to boot.

The magic coin is 33 and 20 having missed today and for Monday says ... heads - bull market - well we think so too.

I Kid You Knot

Believe it knot I missed KNOT again. How can one person be so dense? Here it is - see if you can pick up the trade without my annotations to get in the way.



I did play AMR for a bit and closed my ATHR trade for a nice profit - then I blew it all on GM - still holding a handful of shares 80 cents under water - thankfully I didn't take a major position. It might work out OK in the next couple of days - we'll see.