It Takes Volume To Be Bullish

A market that rises without real demand is a market that is whistling past the graveyard.

Shares battled back for the second session Monday following last week’s harsh selling. But the rally coincided with tepid volume, doing little to instill confidence that there is enough demand to sustain the seven-week advance.

After a market puts in a low and begins rallying, it is preferable to see that rally occur on strong volume. This is a sign that large investors, the lifeblood of any durable advance, are on board. However, after a market advance goes roughly six to eight weeks without at least several major accumulation days showing up, it is time to be concerned about the sustainability of that rally.

This lack of market volume was evident just prior to the end of the 2002-2007 bull market in mid-October 2007. It was also apparent during the six weeks leading up to the May 2 peak in the Standard & Poor’s 500 Index

The adage “it takes volume to put stocks up, but stocks can fall of their own weight.”

A brand-new bull market will typically see emerging leaders break out of bases and move up 20%-25% or so before pausing to digest their gains.

Adapted from: 

Demand wanted

By Kevin Marder

Sept. 27, 2011, 12:01 a.m. EDT

http://www.marketwatch.com/story/demand-wanted-2011-09-27

Ben Graham Views of Market Crisis

Opportunities in Crisis

危机

When the market is desolate – everyone has lost money on everything.  We are so consumed by mental anguish that it is difficult to make rational decisions. The future is seems so bleak and every piece of news added to your agony. 

Nevertheless, the financial future is no more uncertain now than it used to be; in fact, it is  far less uncertain than when the market was at its peak, the future seemed bright, and  no one even imagine the disaster that would befall the market. Now, we realised the absolute certainty of blue skies ahead then was an illusion.  But all we now is the feeling and fear that worse misery may lies in store.  At this point of time, we may not be aware that this notion is also most likely to be an illusion.

With the market is plunging and the everyone is panicking, the easiest thing is to join in the mass exodus.  Many stress-out investors liquidated their whole portfolios in March of 2009, just as equities bottomed out.   

Investors who are  stampeded by the market panic is “perversely transforming his basic advantage into a basic disadvantage.”  How is this so?

Market fluctuate.  Though the price may change every seconds and minutes but the value should remain the same unless the fundamental changes.  Why suffer mental anguish over something which we have no control.  We, however, can control how we respond to it.

雨过天青

Yes, it is absolutely terrifying to be in the midst of a market crisis. However we cannot based on fear to make rational decisions. So when opting between following your emotions or investment plan, stick with your plan. Panic will not last forever, the crisis will eventually tail off. This one will too.  All crisis will passed as the history of markets showed for the past 200 years - Markets do recover.  When in a market crisis, think "This too shall pass."

Do not panic.  Do not sell off - this is where most investors made the serious mistake of selling low and buying high.  Selling will cause you irrevocable loss.  As Elis put in, "Flight to safety is like locking the barn door after the sheep had run off."  You are unlikely to buy back until the market has risen and regret will cause you to buy near the market peak - what Jason Zweig, call the Sheepish Bulls.

機不可失

Buffet said:  When other fear, we are greedy.  When others are greedy we are fearful.  We invert our emotions.  Market Crisis offers us the best opportunity to buy good stocks at wonderful prices.  History has shown that best money were earned by the people who stepped up and bought stocks and kept buying on the way down during market crisis.  Those who fled stocks for the safety of bonds and cash suffered. As it is popularly known - buy when there is blood in the street; even if the blood is yours.

So see Market Crisis as an opportunity and an advantage.  Though Bear markets may be gut-wrenching, they are the only means by which future returns can be raised.

泰然自若

Look at Market Crisis like disruptions in life ie floods, electrical failure, or earthquake. People are unable to continue their normal life and suffer a lot of inconveniences.  But things will return to normal with some changes and life continue. As an investor, your investment also go through raining day and sunshine.

Adopt an outlook of imperturbability - as long term value investor, prices in the short terms does not matter to us. .  If you have to know what your investments are every day, you're making a mistake. Look at it as trying to shake us off from our beliefs ground in history and facts.  Avoid investment pornography will prevent us from joining the market irrationality.

References:

Jim Cramer’s Lemmings

Mad Money

Human aren’t rational especially when money is concerned.

This is typified by CNBC program, aptly named as "Mad Money".  The show's host, Jim Cramer is a former hedge fund manager giving his buy/sell recommendation on a number of featured stocks, including stocks suggested by viewers' phone calls or emails. This are often decried as investment pornography or entertainment masquerading as advice similar to advertisements promoting the hot fund.  This entertaining show about financial matters has become very popular nature attracted more than hundreds of thousands of viewers nightly. In a study, researchers had gathered stock returns, daily volume data, intraday quotes and other kinds of financial information on buy recommendations that Cramer made between July 28 and October 14, 2005.

 KEY FINDINGS:

1.         A statistically Significant Short-Term Rise in the price on the day directly following the day it is recommended. This is most apparent for small stocks, where the increase is just over 5% compared to the previous close. For the entire sample, the average rise is almost 2%.  These rises were not attributed to any new information.  However,  the rises were not sustained and faded away within 12 days in what it termed as the "Cramer bounce".

2.         Trading volume on these stocks also spiked dramatically. For smaller stocks, the trading volume increased by as much as 900% on the day following the recommendation. In some cases, the level of turnover stayed significantly elevated for as long as 16 days after the recommendation was made.

3.         These stocks generally receive much higher buyer-initiated trades on the day following his buy recommendation. This peak in the proportion of buyer-initiated trades ultimately drops back to pre-recommendation levels after about 12 days.

4.         It was also determined that the bid-ask spread for recommended stocks did not change at any point in time. A lack of change in the bid ask spread suggests that there is no information asymmetry as a result of Cramer's recommendations. This is because nothing new about the stock has surfaced during that time and, therefore, the current bid-ask spread should still reflect the stocks' fundamentals following Cramer's recommendation, even if the market value of the stock does not.

5.         Short sales tended to spike dramatically within the opening minutes of the trading day following Cramer's recommendation. There are at least some rational investors who are aware of the Cramer bounce and are attempting to profit from irrational behaviour.

CONCLUSION OF THE STUDY:

1.         This study provides evidence that the irrational behaviours of individual participants in the financial world can create predictable, collective actions that can have at least a short-term influence on stock prices. For the most part, it can be assumed that the investors that are contributing to the Cramer bounce phenomenon are making stock purchases as a result of Jim Cramer's influence, rather than as a product of rational thought. Cramer's recommendations have a direct effect on stocks' prices.

2.         This study also shows that stocks are (eventually) driven by fundamentals. The stocks recommended did eventually return to their "true" values. In this case the stocks returned to their original values in a short time span.  However, such bubbles sort can also continue for years, as was the case with the dotcom bubble of the late '90s.

3.         This study is an example of how irrational behaviour can cause stock prices to fluctuate in a manner that is contrary to efficient market theory. Investors should not discount the role that emotion and investor psychology play in the way the market behaves. While there is no formula or indicator that can account for or assess the emotional aspects of investing, investors can save themselves from being caught up in "madness" by investing prudently, rather than just following the crowd.

Adapted from:

Albert Phung, Mad Money ... Mad Market?, Updated 28 September 2006

http://www.investopedia.com/articles/06/madmoney.asp