Nuff said? There, how you like the apples?
Seriously though, the market took a beating yesterday, but overall the chart is still in ok shape. Volume is tracking lower and I really believe that is because the institutions are waiting for earning season to start up this week and see how things are really doing out there. We did find support in the 1130s on the S&P today, and that was our old line of resistance, so as long as it holds as our line of support I feel ok. The one concern I do have is that because of the light volume is that a selloff in heavy volume will hit us pretty hard.
Here are a few things I heard today that I found interesting:
1) Government right now accounts for 30% of personal income! Yikes!
2) The Flash Crash Report - a single $4.1 billion dollar trade triggered the May 6 flash crash that saw the DOW plunge 700 points before rebounding within 20 minutes, a government report said. The trader was not identified in the report, but others have tied it to money manager Waddell & Reed Financial. The rumor is that a Waddell computer program initiated the sale of 75,000 S&P 500 futures contracts that set off a frenzy. Waddell is prudently denying the accusation.
3) Falling U.S. Currency - the dollar index has hit an 8-month low amid mixed economic data and more Fed officials talking up further monetary stimulus. This is causing commodities to extended their big Q3 gains into October and gold rose to a record high. Oil is now back above $81 a barrel.
4) October as a month of crashes - Although October has a dark reputation for the stock market, the month has a positive record in the year of midterm elections. Seven of the past nine Octobers in midterm years have been winners for stocks. The average gain in the Nasdaq was 8%, and the median 5%. It didn't matter which political party was about to gain seats. It didn’t matter which political party winning.
Here is an interesting point of view from Cumberland………
Cumberland Advisors
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Media Hype and Financial Market Intelligence
October 1, 2010
This commentary was written by Michael McNiven, a Vice-President and Investment Advisor Representative at Cumberland . Prior to Cumberland , he was a university professor and also worked in financial media. His bio is found on Cumberland ’s home page, http://www.cumber.com. He can be reached at Michael.McNiven@cumber.com.
At Cumberland Advisors we respect the service that major financial media institutions deliver by way of market news and information. Theirs is the business of trying to communicate events as they unfold, including the implications that are often unknown at the time. Our task is to sort through this news flow and separate the “wheat from the chaff.”
We do our modest best to contribute intelligent, transparent views that help our clients, as well as listeners and viewers, to understand what is really going on in the markets and what needs further attention. We try to cut through hype and misperceptions in the market. We access numerous sources of meaningful research and analysis that shed light on our advisory practice, in order to manage with skill and safety the funds in our care. This Commentary will seek to explain the mechanism of media hype in the markets and further explain the fundamental need for diligent analysis and insight to cut through popular misunderstandings.
It is a common pastime to disparage “the media” as a bunch of talking heads who produce a lot of empty noise. To be sure, the current multimedia environment and the 24/7 news cycle have resulted in an ever-expanding spectrum of available information. The critique that it is all just a bunch of noise, however, misses a fundamental point of what “the media” is supposed to be accomplishing, which is, to communicate news and events as soon as they know about them. The information coming from for-profit, advertising-based media models is the raw material from which market understanding and analysis can be constructed. As such, it can be appropriate to detect that some subjects at various times have more human-interest appeal or common intuitive appeal—hype and/or fear—and therefore get greater air time, though in retrospect they may have little lasting substance or consequence. That’s the nature and the pitfall of being in the news business and trying to assess and report the yet-unknown implications of breaking stories.
Massive amounts of data and news flows, however, put a premium on experience and knowledge to help make sense of it all. As never before, the burden of analysis for creating context and applying intelligence to sort it all out into meaningful and actionable knowledge rests on the user. Therefore, finding resources of trusted, intelligent, and diligent market analysis and advice has become paramount.
Some examples of hype vs. market reality in the current market:
1. Bond Bubble—Much press has been given to the story of a “bond bubble.” But the “bond bubble” may be limited to treasury bonds. Other bond options continue to show good promise. A treasury-bond bubble simply decreases the attractiveness of the overall asset class as returns decrease. Eventually, investors will look for better returns in other parts of the bond market or in equities. The fact of the matter is that individual bond accounts appropriately positioned for the needs of the client may decrease in value at the margin, due to inflows, but overall the risk to the capital remains low. In addition, any interest-rate increase that impacts bond prices has been extended out further (see #2).
2. Rapid Inflation—Many investors have feared that inflation would accompany the recovery that began March 9, 2009. In spite of the strong markets of 2009 and 2010 and the fears of rapid inflation, little inflation has occurred. Now the fears have turned the other direction to deflation. Recently, hibernating bears have awakened to the summer 2010 slow patch in the economy, predicting a return to recession and even a deflationary situation. Not likely to happen. The truth is—in spite of the fact that it is less exciting—that the economic recovery is sustaining itself, albeit at a slower pace than most would prefer, and will likely continue to slowly repair in coming years. For now and well into 2011 and possibly beyond, the FOMC is not likely to increase interest rates.
3. Euro Collapsing—The 2010 sovereign debt crisis in Europe, fueled by the Greek problem, was feared to bring about a collapse of the euro as a currency. Although it is a serious crisis that yet has to be fully resolved, with other countries such as Ireland currently in the crosshairs, European leaders have shown unity and resolve in the efforts to sustain the euro and the Union. From the July 7 low of 1.19, the euro price has moved stronger, to 1.36 against the dollar. After all of the fear, the euro continues to mature in becoming a battle-tested reserve currency that may become more attractive over time as an alternative to the dollar. In fact, the case for increasing future allocation of investments outside of the US continues to strengthen. The Europeans are trying hard to deal with their problems. Also, the risk in US markets has likely increased relative to Europe. (Note: David Kotok and his co-author Vincenzo Sciarretta have recently published a book on European investing: Invest in Europe Now!)
4. California’s Municipal Default—In spite of the hysteria, the likelihood of California defaulting on its municipal debt is … ZERO. There has never been a payment missed on California debt, due to the high priority of bond payments in the state’s constitution. Yet, a worried investor base has not internalized that message, buying credit default swaps unnecessarily (CDSs are insurance contracts against the loss of value in case of default). In other words, a worried investor base in California municipal debt is pushing the market’s perception of California default to near 50% and paying handsomely for the protection, when the real default probability is basically zero.
Serious advisors and managers face the challenge to access and understand all types of market information, contextualize it, and make informed and timely decisions based on it. The advisors don’t always get it right, and markets are far too dynamic and complicated to tolerate arrogance. Advisors have to know what other market participants know, and to make sense of it all in coherent and steady market execution. Add to that the fact that breaking market news at times emerges, either coincidentally or strategically, on weekends and holidays. What is certain, therefore, is that financial professionals and advisors must be rigorous and dedicated in order to stay appropriately tuned into market movements and media without being swept away by them. Markets can move quickly, and clients want peace of mind and real expertise in exchange for the fees they pay, so that they can concentrate on other things.
Cumberland seeks to be a voice of reason and independence in making sense of issues that impact the financial markets and the accounts of our clients. For many years we have made and will continue to make a concerted effort to provide insight and understanding, and to transparently communicate our advice and investment decision-making process to our clients, business partners, and other associates. We currently use these frequent market Commentaries to communicate our views, and will consider other methods and media for future outreach. Your feedback is always welcome.
Michael McNiven, Vice President and Investment Advisor Representative