Friday, November 2, 2007

Odds and Sods

Friday is always a good time to do some housekeeping, so here are some updates to recent themes in the blog:

In terms of fear, yesterday showed a fair amount of it, as the 25.3% increase in the VIX is about twice the median for a 2.6% drop in the SPX. While today’s markets seem to have settled down a little after an exciting opening, the elevated fear persists. For those who may be interested, you can always eyeball today’s VIX and SPX percentage changes on my fear-complacency graph to make your own assessment.

Now that the Fed may be done cutting rates for the moment (see Mike Shedlock, “Is it Two and Done?”), the good-news-is-good-news-and-bad-news-is-good-news cycle may be coming to an end as well. This means we are likely entering a Rorschach cycle, where interpretations of government data start to be largely driven by your view of the investing landscape, in addition to any psychotic disorders that may be lurking just below the surface.

In the four generals, four horsemen, etc. category, the large cap tech leaders continue to do well, while Southern Copper (PCU) has struggled a bit. The big story in the group, however, is MasterCard (MA), which saw its stock surge 20% after a blowout earnings report. Much of MasterCard’s success can be attributed to increased acceptance of plastic across the globe, rather than in the US, where growth is slowing. In fact, given the doldrums that the Retail HOLDRS (RTH) ETF has been in since July, I will be focusing closely on the many retailers who report earnings just before Thanksgiving. For some related perspectives, Toro’s Running of the Bulls argues convincingly that the four horsemen have a lot of room still to run, while Chris Perruna is following MasterCard closely.

Some quick takes for the VIXophile crowd:


pik said...

Hi Bill,

Do you think last weeks volatility also involved sector rotation? Did you see a large shift from one sector to another?


Bill Luby said...

I'm not sure how much sector rotation necessarily impacts volatility. Some of the major sector trends from the past week were more a continuation of existing trends than the beginning of new ones (money flowing into technology and gold and out of financials and consumer discretionary, for instance)...but you raise an interesting question that I will definitely look at soon: does increased volatility in the financial sector presage anything over and above volatility of the markets in general.

If it were the case that increased volatility in the financial sector (and corresponding rotation of money out of that sector into other sectors) turns out to have some predictive value, my hunch is that this would likely be the result of a third cause that simultaneously affects both volatility and sector rotation, so volatility and sector rotation would both be symptoms of a different issue (i.e., concerns about the stability of the financial system as a whole) than necessarily one causing the other.

An interesting question that will give me a number of things to chew on.



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