The big picture as told by unilateral pairs trades.

As this is the end of the year, there are plenty of predictions re. 2006 around. Lowly me will join the fray for anyone who is reading and add my two cents, though I expect to be wrong.

The main theses "pundited about" for 2006 related to: inflation, housing bubble, recession/slowdown, commodities. Well, what does unilateral pairs analysis say?

1. TLT is outperforming SHY, meaning investors see long-term rates staying low, but with no inversion of the yield curve (unless TLT:SHY ratio breaks down below Nov. 05 lows). This is good for stocks and growth.


2. Looks like AGG may have finally bottomed v. TLT. This means that investors have no longer stopped selling corporate bonds and buying TLT. Seems intuitive given the major washouts in the corporate bond market, see GM, FNM, VC, $XAL, etc. Perhaps the worse is over. This has potential to be a good sign as AGG:TLT outperformance means increased confidence in corporations.


3. SPY is outperforming AGG and recent highs. This is great news as common stock holders (SPY) bear more risk than corporate creditors (AGG).


3. XLK has broken its downtrend v. SPY. Potential bottoming?


4. USD is falling v. gold. This should be the other "conundrum." Does this mean the USD is losing value? Or does this mean that as 2 billion people+ in the world become more affluent that gold is becoming more expensive, irrespective of confidence in the USD.


5. Euro is falling v. USD. Hmm, maybe the USD is not in that bad of shape.


6. CRB v. USD. Perhaps commodity prices are finally under control?


Conclusion: 2006 has potential to look good for higher-risk assets: stocks and corporate bonds. The sky is not falling and maybe things will be ok. Chinese/Indian labor + global savings glut = low interest rates? China finally learning to be more energy efficient leading to lower CRB? And perhaps this will lead to a good year for SPY?

One thing is likely, the consensus will be wrong.

Sector Review

10 Best Performing Industries
Industry Name	Percent Change
DJ US Internet Index	31.48%
DJ US Airlines Index	28.69%
DJ US Platinum & Precious Metals In...	24.84%
DJ US Trucking Index	22.37%
DJ US Aluminum Index	20.60%
DJ US General Mining Index	20.43%
DJ US Nonferrous Metals Index	20.18%
DJ US Delivery Services Index	18.73%
DJ US Industrial Transportation Ind...	17.80%
DJ US Railroads Index	17.43%
One-Month Performance
DJ US Nonferrous Metals Index	10.89%
DJ US Gold Mining Index	10.71%
DJ US Aluminum Index	9.52%
DJ US Distillers & Vintners Index	9.40%
DJ US Paper Index	8.39%
DJ US Industrial Metals Index	8.14%
DJ US Basic Resources Index	7.45%
DJ US Mining Index	7.42%
DJ US General Mining Index	6.53%
DJ US Airlines Index	6.52%

Year-End Markups

Watch list for the last week of December. Stop = Thursday's low (12/22/05). Sell when intraweek trend is broken.

Symbol	Rank	Last Price	Buy @
PRLS	1	9.42	9.5
HANS	2	85.59	87.6
ISRG	3	122.27	124.1
SIRF	4	30.36	31
HOLX	5	39.46	40
GES	6	36.19	37.1
LCAV	7	49.54	50.25
TZIX	8	17.32	17.5
NWRE	9	24.72	25.1
INGR	10	51.47	51.5
PSYS	11	58.22	59
FCL	12	38.56	38.8
TFSM	13	7.87	8.3
IPS	14	82.82	83.5
BZH	15	73.51	74
SIE	16	82.1	82.7
AMHC	17	46.11	46.5
HLEX	18	24.56	25.15
WAB	19	27.54	27.7
VSEA	20	44.71	45
July
adlr	14	14.91	15.1

Caution: Watch for reversals in energy, housing and real estate.

05-12-26 Monday: Market Briefing

Monday, December 26, 2005 (data as of prior close)

RS weakening: energy (OSX, XNG, alt. energy, coal), REITs. Sell into strength, reopen positions if RS emerges 1/06.

RS gaining: XAU, industrial metals. Buy weakness and breakouts.

Market Strength 10-day high: ~2530
Market Strength 10-day low: ~2435
Market Strength intraday stochastic: 7 , falling

Nasdaq 10-day high: ~2270
Nasdaq 10-day low: ~2215
Nasdaq 10-day stochastic: 60, neutral

Breakout Strength, 10-day stochastic: 72, rising
Breakout Strength: intra/it: 100, rising

Outlook: Bottoming. 12/20 potential near-term low. Unconfirmed short-term uptrend. Possible year-end run-up. Look for erratic trading as volume will be low. Likely that selling pressure has abated as many stocks corrected in early December, theoretically due to profit taking. Rather unlikely that portfolio managers would wait until final week of trading to lock-in gains.

Look for bids in small float stocks and possible selling into strength by institutions. Tuesday-early Thursday should be peak for window dressing due to t+3 settlement and avoidance of blantant window dressing on 12/30/05. Sell into mid-week strength. Find potential long and/or short plays for the first week of January.

Top 100 Alpha: 208
Top 3 Sectors/Alpha

Strong: NTRI TRE TIE PRLS GMXR
Weak: tzoo ampx snda antp jas

tages: January effect, year end selling, strategy.

To the BBC, Yeah! Yeah! Yeah! BBC 1!

World market looking good


Do you see a cup and handle too?

Here's another obscure indicator, the BBC Global 30. It's the only real-time, 24-hour global index around, I think. I believe that the Dow Jones Global Titan/SP Global Indexes are not widely available on a 24-hour basis. As index construction goes, the BBC Global 30 is a pretty good index, unlike the SPX and its negatives. Notice how as a planet, the market is finishing at its high. Perhaps the world is finally working off the excesses of 2000-02.?!?

Once again, there are a lot of negatives in the US: deficits, debt, bubbles and the apocalypse is nigh. But I see a cup and handle and a wall of worry that needs to be climbed, nevertheless expect to be wrong.

A hedge fund for you.

Obscure indicators can be fun and helpful. Here's one more...if you're reading this you likely know what a hedge fund is. This mutual fund operates like a public "fund of funds," one single investment buys 100 different managers with various long-only strategies (which rules out certain segments of the hedge fund word: merger arb, etc...though there are one/two funds that specialize in closed-end fund arb). This above chart shows the ratio between MOFQX:SPY. Now when MOFQX outperforms SPY, it means active managers/alpha is being bid-up....this is good. Likewise, MOFQX underperformance means active managers are finding it tough to beat the market (usually cuz the markets going down).

Now the key level to watch is 0.10, the 2005 high. If that level is broken, can good times be right behind?

Things to look for between now and 1/10/06

The current market outperformers are XLE and HUI. This is stating the obvious as of 1/1/06, XLE/HUI will go up or go down: either this year's momentum will continue to push the leaders higher into 3/06 as portfolio managers reallocate to xle/HUI (see NWX 1/00 or XLE 1/05) or there will be a reallocation away from XLE/HUI to ______.

In the meantime, should this week's low hold until 1/1/06, look for blow-off movements in the mo-mo stocks (see QCOM 12/99, TASR 12/03, ANTP 12/04). There is no way to predict which stocks will get bid-up, especially among the smaller float stocks. Candidates include: HANS, BOOM, ISRG, NTRI, TRLG, AAPL, GOOG. One play....set trigger orders above recent highs, hold on and know when to walk away.

12/23/05: market briefing

Friday, December 23, 2005
Market Strength 10-day high: 2540
Market Strength 10-day low: 2440
Market Strength range/st: 51
Market Strength, intra/st: 13, rising
Market Strength, intra/it: 5, neutral

Nasdaq 10-day high: ~2270
Nasdaq 10-day low: ~2215
Nasdaq 10-day range: 55

Breakout Strength, 10-day range: 71
Breakout Strength: intra/it: 46, rising

Outlook: Bottoming. 12/20 potential near-term low. Unconfirmed short-term uptrend. Possible year-end run-up.

Top 100 Alpha: 206
Top 3 Sectors/Alpha: 65 Gold, 65 Drilling, 62 Refining
Bottom 100 Alpha: -68
Bottom 3 Sectors/Alpha: -29 Movie Theaters, -25 Toys, -25 Drug Related Products

Strong: NTRI TRE TIE PRLS GMXR
Weak: tzoo ampx snda antp jas

ARA: Buy some paper at the copacabana?

Interesting brazilian paper company: nice dividend, low P/E, hedge against USD/America, good idea for conservative/income investors. FYI, ARA's forest holdings are mostly outside of the Amazon basin.

HUI-Gold

The gold miners appear to be on the verge of entering a period of outperformance v. gold/GLD.

Not too late to join the most obvious trade of the year

This has to be the most obvious pairs trade: long TM, short GM. However as the chart shows, the TM:GM ratio has gone parablic as TM is at the cusp of a breakout, while GM is collapsing. It's not too late to join the fray: short GM on strength in Q1 2006 when there should be a brief respite from the year-end tax loss selling. Definitely short GM if it breaks below its 2005 low. As for TM, it looks like it's beginning another leg up. Buy on weakness and load the boat when TM clears its old 2000 high ~110.

Cover the GM short when GM puts an VW-class interior into a Chevy. Alas, GM's problems are structural...its products suck: too much plastic, lackluster exterior and interior aesthetics...even Helen Keller could the turn signals click on-off in some of those cars. Lexus crushes Caddy. GM=Folgers in a SBUX world. And unfortunately, it's the line factory worker (who can build a great product if given a chance) that gets the shaft for poor design and marketing. Worst case scenario: GM goes the way of RCA and lives on as a foreign-owned brand. Best case: GM declares bankruptcy, freezes its pension plan, crams a no-frills wage package onto the UAW.

El Coke es el

Possible idea for a unilateral pairs trade. Long KOF: short KO.

Latin America booming, hedge against USD decline, favorable demographics, Coke "seems" cooler and has better brand equity overseas, KO has poor execution and can't get a good energy drink/non-carbonated drink going (KO should have bought out HANS or Red Bull or even the old Quaker Oats in 1999). Is everyone at KO brain dead....do they suffer from a lack of imagination?

No reason to own KO unless you are an index investor (even then you're better off long SPY and short KO's percentage in SPX).

Strong January redux

purple: SPX; black geometric average of top 10 SPX stocks in 2004.

A prior post set forth the theory that strong January performance in an S&P500 stock foreshadows year-long outperformance. Above is the performance of the 10 best SPX stocks in 2004. Note that in 2004 strong January performance was associated (on the whole) with strong year-long performance.

Naturally, not every stock that makes a high in January will be a blockbuster. However, a good strategy may be buying a basket of SPX stocks that make January highs and then selling the laggards as the year progresses.

Q1 2006

A close-up of what kind of stocks should be bought in January. 50-50 Long Short represents a portfolio that perfectly went long the best SPX stocks and short the worst SPX stocks on 1/1/05: 1/2 long, 1/2 short.

2006 Watch List

Symbol	Company Name	Last Price	Long	Short
NTRI	NutriSystem Inc.	42.8	44	36
VPHM	ViroPharma Incorporated	19.59	21	15
TIE	Titanium Metals Corporation	66.08	80	55
BOOM	Dynamic Materials Corporation	29.94	32	23
HANS	Hansen Natural Corp.	83.74	87	70
MYOG	Myogen, Inc.	31.63	33	18
FORD	Forward Industries, Inc.	15.14	21	14
NDAQ	Nasdaq Stock Market Inc.	38.13	46	34
ASF	Administaff, Inc.	43.9	48	42
MNTA	Momenta Pharmaceuticals, Inc.	24.74	26	20
PLLL	Parallel Petroleum Corporation	17.75	19	15
GAP	The Great Atlantic & Pacific Tea Company	31.51	33	27
FTO	Frontier Oil Corporation	40.33	42	32
ISRG	Intuitive Surgical, Inc.	118.83	125	100
GES	Guess?, Inc.	37.17	37	30
HNZ	H.J. Heinz Company	33.96	36	33
TRB	Tribune Company	30.24	34	30
SNV	Synovus Financial Corp.	26.38	29	26
RSH	RadioShack Corporation	20.85	24	20
GM	GENERAL MOTORS	19.85	25	18
CMCSA	Comcast Corporation	26.49	28	26
NYT	The New York Times Company	26.98	29	26
CD	Cendant Corporation	16.71	19	16
KO	The Coca-Cola Company	41.41	43	41

A watch list of a few stocks for 2006. Long indicates buy entry trigger, short: short sell entry trigger.

2006 game plan: putting it all together--SPX's good and bad

Green line: a blended portfolio long: best stocks, short: worst stocks. Perfect hindsight yielded 60% return with 0.27 beta.

Prior posts reviewed the performance of the best and worst stocks of the SPX. The above chart summarizes the good and bad of the SPX in 2005. Though the good and bad stocks of the SPX performed similarly in the 4th quarter of 2004, in January the good immediately outperformed the bad, as presumably portfolio managers re-positioned for the new year. Assuming that the observations above continues again the 2006 working hypothesis should be:

1. short stocks that a) have poor relative strength and b) break below its Nov-Dec low;
2. buy stocks that a) have strong relative strength and b) break above its Nov-Dec high (with appropriate stops of course).

How will this hypothesis hold up? Stay tuned.

The "Average" Crappy SPX Stock of 2005

Above is the performance of the "average" bottom 20 SPX stock, calculated as the geometric perfromance average of the 20 worst stocks of the SPX including DAL and DPH. Notice that on the average the bad stocks broke below 4th quarter low in the 1st quarter of the new year and this breakdown implied poor performance for the rest of the year.

Assuming that this hypothesis is valid a potential long/short strategy would be: go long 1st quarter breakouts and go short 1st quarter breakdowns. Or at the very least: avoid bottom-fishing in a stock that broke below its 4th quarter low.

SPX losers of 2005

The 20 worst performing stocks of 2005. Don't forget DAL and DPH which were removed from the SPX.

Lessons from 2005

SPX: gray line
Geometric Average of 2005 Top SPX Stocks: black line

The above chart shows the "average" performance of 2005's 20 best SPX stocks (as defined as the geometric average of the stocks) v. the SPX. Though the average stock is highly stylized, several useful lessons can be infered: 1) a strong stock should not fall substantially below its December low; 2) a strong stock should rise above its December high in January; 3) around April 15 (tax time), stong stocks may consolidate as some shareholders lock-in gains to pay tax liabilities.

It is also interesting that in 2004 the average performance of the 2005 20 best equaled 53%. So the momentum for these 2004 winners continued to 2005, partially explained by the continued strength of the energy sector in 2005. Now the question becomes: will 2006's best stocks follow a similar pattern? Which strong stocks from 2005 will continue to perform in 2006? Stay tuned.

Best of the SPX 2005

Starting the year on the wrong foot.

In a prior post, I mentioned the tendency of some, not necessarily all, high momentum stocks to tumble in January. The above charts show a potential strategy for shorting/exiting stocks: sell when the price falls below the low of the final two weeks of the year with a stop at the high of the final two weeks of the year. Let's see if history repeats itself this January.

2005 winners

Company Name	Rank	Last Price	YTD Change
NutriSystem Inc.	1	41.35	1,339.60
GeoGlobal Resources Inc.	2	12.68	1,142.30
Peerless Systems Corp.	3	8.77	555.4
Fieldpoint Petroleum Corporation	4	8	523.3
ViroPharma Incorporated	5	19.36	515.1
Titanium Metals Corporation	6	65.03	442.8
PW Eagle, Inc.	7	20.5	425.6
GMX Resources Inc.	8	36.44	425.3
Dynamic Materials Corporation	9	29.98	384.2
Dobson Communications Corp.	10	7.44	357.8
Cenveo, Inc.	11	13.59	336.5
Hansen Natural Corp.	12	81.73	332.2
BTU International, Inc.	13	12.58	327.2
Myogen, Inc.	14	32.18	296.8
DXP Enterprises, Inc.	15	18	283.6
DayStar Technologies Inc.	16	10.72	283.5
CE FRANKLIN LTD	17	15.2	271.4
Forward Industries, Inc.	18	15.51	268.7
Teton Energy Corp	19	5.8	268.4
Cerus Corporation	20	10.33	263.7
Nasdaq Stock Market Inc.	21	36.9	263.4
Birch Mountain Resources Ltd	22	7.33	248.3
Administaff, Inc.	23	43.25	247.7
Momenta Pharmaceuticals, Inc.	24	23.97	236.8
Eltek Ltd.	25	4.43	235.9
RELM Wireless Corporation	26	7.55	231.6
Parallel Petroleum Corporation	27	17.55	227.6
Home Solutions of America, Inc.	28	4.93	225.5
The Great Atlantic & Pacific Tea Company	29	31.46	206.2
The Lamson & Sessions Co.	30	26.41	204.2

The 30 stocks that performed the best in 2005 from 12/31/04 to 12/20/05.

SPX:GOLD Update

Throughout this blog, you will see a lot of pairs trading analyses, see "How to Trade Like a Hedge Fund" or "Intermarket Analysis." I prefer this form of analysis as investing is nothing more than choosing one asset class from the myriad of classes: stocks v. bonds, stocks v. gold, stocks v. real estate, etc. Good investors will see the capital flowing between classes (as evidenced by the bidding up of prices) and try to capture the price appreciation.

The recent price action between gold and the SPX seems to indicate that a blow-off top in gold occurred. The SPX is very undervalued historically vis-a-vis gold. When the SPX:gold ratio was this low last time (March 2003), equity markets responded with a massive upsurge. However, undervalued assets can stay undervalued for a long time and the SPX:gold ratio may break below its 2003 low. As a result, the price action between now and January 2006 should hep establish whether a bottom in the SPX:gold ratio has been established for this investment cycle. If this is indeed the low, load up on stocks for 2006. Now I am skeptical about stocks at this moment due to the purported housing bubble, deficits, etc. However, this is how bull markets are born, climbing the proverbial wall of worry.