Rhody Trader

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I suppose I can’t really complain too much today. It’s been a grind, to be sure. I had to write earnings previews on for stocks and will be listening in on a conference call later this afternoon. You know how much that thrills me. Here’s where the nice part comes in, though. This morning I suggested to readers of the product I work on that NILE was a good short play. At this writing it’s down 8%. I also indicated that in the mid-950s the S&P was a really nice risk/reward long play. It’s been up 25 points from there.

Call it a silver lining on an otherwise drudge work filled day.

I read something interesting on a note that came out this morning from the head of my Thomson Reuters group. He was commenting on how things are going and pointing out some of the better performers in our business. The market volatility has been a boon to the transactional elements of what we do. In particular, he said September was the best month ever for forex. I presume that’s speaking of the Reuters dealing system. Interesting.

Volatility, as expressed in terms of ranges, has reached where it peak in 1987, though not yet the highs from 2002. That’s what the monthly Normalized Average True Range (N-ATR) reading is telling us.

S&P 500 Monthly chart with Normalize Average True Range

The N-ATR reading is simple ATR divided by price to express it at a %, thus making it more historically and cross market comparable. Right now the monthly reading is just above where it peaked out in November 1987 (keeping in mind that ATR is an average, so it will tend to lag). If October were to make no further new intraday lows, the N-ATR would be about 11.6%. Back in 1987 it was about 11.1%. The highest reading I have is the 13.9% from 2002 (my chart only goes back to 1980). My guess is that we’ll eventually see N-ATR make a new high in this cycle as the average drops some of the smaller range months that are currently still in the mix.

The good part of all this is that these peaks in N-ATR come at the market bottoms.

In case you’re wondering, N-ATR on a daily basis is at about 7%. That is nearly 3 times as high as it was back in March at the next highest level of the last 2 years. Weekly N-ATR is at about 9%, well above the 6.5% peak from back in 2002.

A couple of weeks back, before my vacation, I mentioned an open access period for the stock market analysis service I work on (a Thomson Reuters service). That demo is on as of next week and will run through month end. You can get details on the service here:
www.theessentialsoftrading.com/resources/SquawkBox

This is a totally open thing with nothing to sign up for and no salespeople to be contacting you. My boss just wants to generate some exposure for what we’re doing since it’s relatively new.

If you want to see what the pros are looking at and talking about, this is a great opportunity - especially during this market environment and in the heart of earnings season.

Let me know if you have any questions.

I’m becoming increasingly convinced that traditional ways of viewing and interpreting market sentiment are no longer valid. There has always been a bit of “wise guy” element to reading market psychology. I’m referring here to looking at things like the covers of magazines, the views of pundits on television, what people talk about at cocktail parties, and all that.

It used to be that a major financial headline on the cover of a magazine like Time was a pretty good indication of the end of something. These days, though, the news cycles are so much faster that the media is on top of the things much more quickly. As a result, the public is aware much more rapdily than used to be the case.

On top of news and information dissemination happening much more rapidly, I think there’s more awareness of those sentiment readings. As a result, we’ve got this funky feedback mechanism where contrarian analysis is becoming a large part of what would have otherwise been the standard view of things. That means to a large degree there really isn’t a contrary view.

I think the only really meaningful sentiment reading is what people are actually doing. That shows up in prices, volume, and open interest, as well as in the Commitment of Traders data.

I’ve just started reading Fooled by Randomness by Nassim Taleb. The author has garnered a great deal of press in recent years and has become something of a lightening rod for his views. I’m reading the second edition. The introductory comments suggest a good read. When I’m done I’ll post a review, as always.

Yeah. It’s that time again in the stock market. Four times a year I have to pitch in with coverage of conference calls and earnings previews. It’s a major pain. Most of the time my focus is on technical and quantitative analysis of indices, sector ETFs and individual stocks. In other words, each quarter I have to take spend less time coming up with interesting trading ideas and more time focusing on the fundamentals and news items. It’s annoying.

Yesterday I upgraded this and my trading education blog to the latest version of WordPress. I haven’t really notice to many meaningful differences, at least visually, but both blogs do seem to be running well. If you happen to spot any little issues, please let me know.

Want to know which financial companies are likely to be the long-term winners coming out of the current mess? Then it’s worth looking at the ones involved in the bidding for the Lehman bonds on offer today (listed below). By taking part they highlight their perceptions of being in a good position in terms of capital.

Banc of America Securities LLC 
Barclays Bank PLC 
BNP Paribas 
Citigroup Global Markets Inc. 
Credit Suisse Securities (USA) LLC 
Deutsche Bank AG 
Dresdner Bank AG 
Goldman Sachs & Co 
HSBC Bank USA, National Association 
JPMorgan Chase Bank, National Association 
Merrill Lynch, Pierce, Fenner & Smith Incorporated 
Morgan Stanley & Co. Incorporated 
The Royal Bank of Scotland PLC 
UBS Securities LLC

Several folks have commented in recent days that the governments, central banks, and the like around the world have been going at this financial crisis piecemeal rather than addressing it in a unified fashion. The criticism they are leveling is perhaps a bit harsh in general given that in some cases it has clearly been a case where action was needed very quickly to put out a specific fire - like banks going under.

That said, all of these numerous and various efforts taken around the globe do give the impression of a lot of panic action. For example, the move by Ireland to guarantee deposits created a capital drain from other Eurozone countries where there weren’t guarantees in to Eire. That worsened things in the big picture rather than improved them. In other words, those officials were just reacting without really considering (either that or they were intentionally taking advantage of other EZ members, which has other implications). The idea was perhaps a good one, but more consideration and coordination was required.

When someone, or some institution, is in reaction mode it generally means less than optimal decision-making. Now that the leaders are getting together, maybe we’ll see some more considered action.