Wednesday, February 05, 2014

Three Interesting and Very Useful Market Graphics

By Dr Van Tharp Trading Education & Workshop Institute

“A picture is worth a thousand words.” — Early 20th Century U.S., Multiple Attributions

Long-suffering readers of these articles know that I have a real soft-spot for cool graphics. Today’s charts may not have that big of a cool factor (see this link for examples of really cool charts), but today’s graphics are definitely interesting, timely and useful.

First, A Market Check

The tenor of the market has certainly changed since last Wednesday. As of right now (Monday evening 1/27), the S&P 500 has gone back to test the Bernanke/tapering announcement low (12/18) on a reversal bar that launched the markets to new highs. The following chart does not count as one of our three cool ones today, but then again, it’s still pretty useful:

A break of the key support level shown in the graphic above (which may or may not have happened since this article was penned on Monday evening) would be bad news for the bulls. As of Monday’s low, this pullback has dropped the S&P by 4.2%. A full blown correction is still a far ways off (10% off of the highs would take us down to 1,665.76 on the cash index chart above and would almost reach the October 2013 lows).

Those Three Other Charts

Apple reported 4th quarter 2013 earnings on Monday along with a bunch of additional data. While the quarter’s global iPhone sales, iPad sales and total corporate revenues were at all-time highs, they missed analysts’ estimates and Apple sold off more than 8% in aftermarket trading.

The bigger story, though, is that Apple's growth story has been slipping and will continue to slow. Take a look at the daunting year-over-year line on this graph from Business Insider:

Here’s the practically inevitable conclusion: from an investor’s perspective, I believe that Apple is destined to be the next Microsoft. By this I mean that the company will soon become a world dominating cash cow that has no way to significantly grow their revenues in their existing markets. Massive innovation and market share gains are giving way to modest upgrades and serious doubts on gaining further market penetration. The next big rumored things out of Cupertino; a TV, payment gateway, and a watch(!?!) elicit few “oohs” and even fewer “ahhs”…

The next chart from is interesting both for its scope and usefulness.

First of all, let’s realize that Russell Investments put together this handy chart so that they could encourage investment advisors to steer clients toward their wheelhouse — small cap stocks. With that said, the chart does give us four pieces of useful data for a broad range of investment assets: the minimum and maximum returns for any given year during the data period covered (grey bar); a typical 12-month range for the asset (blue bar), the average for the asset class (vertical white bar) and lastly the 2013 calendar year return for the asset.

For me, the most useful way to use this chart is to look at the current year’s returns and compare them to the typical range. Regression toward the mean is inevitable, though it may take more than a year to realize. If you’d like to see the verbiage that the folks at Russell Investments provide to help investment advisors help their clients you can view the full page here.

Our last chart today is from Balyasny Asset Management’s third quarter 2013 letter to investors via the Zero Hedge blog. It shows the firm’s amount of assets under management (light blue) and how much purchasing power the firm has used (dark blue):

In the letter, the hedge fund says that they are allocated at a 1 to 5 ratio — more than double the allocation from the 2007-2008 bubble years! It doesn’t take a rocket scientist to figure out how much the market needs to drop in order to wipe out all assets levered-up at 5x! Caveat emptor, indeed.

Click Here to Review More Financial Intelligence