May 22, 2008

Lo and Behold: A Non-Random Walk Down Wall Street

For those technical analysis haters out there (and there are lots of them), Dr. Andrew W. Lo's presentation titled "Technical Analysis: An Academic Perspective" at the MTA Symposium on May 16 must have come as quite a shock. Here was a distinguished academic, a professor at MIT with impeccable credentials who has over the past 2 decades not only produced numerous seminal papers disproving the random walk theory (most notably Lo & MacKinlay (1988), a paper pointedly titled "A Non-Random Walk Down Wall Street") but also proved the utility of technical analysis (Lo, Mamaysky & Wang (2000)).
More on this presentation in future posts.

Re-enter the Bear

The 30-minute chart of SPY (click to enlarge) shows that the strong uptrend that started on 3/17 and took the S&P ETF from 126 to 144 (a bear-wounding 14% pop) has received what might turn out to be a lethal blow yesterday on significant volume. If we break the previous local low of 138 and then start making lower highs and lower lows, then the bear rally theoreticians (and practitioners, yours truly included) will have come out on top, barely, hanging on by their fingernails, but victorious nonetheless. Obviously that's a big if and the shorts have been wrong and bloodied for the past 2 months so we'll have to follow this very closely.

May 9, 2008

I just finished reading When Genius Failed by Roger Lowenstein about the rise and demise of Long-Term Capital Management. Great book. I absolutely recommend it to anybody with even a remote interest in markets and particularly their psychology. It's crazy how none of the lessons of that whole saga were actually learned and pretty much the same thing happened again 10 years later with the subprime debacle. As Lowenstein says:
"One can be big (and therefore illiquid); one can (within prudent limits) be leveraged. But the investor who is highly leveraged and illiquid is playing Russian roulette. [...] On Wall Street, though, few lessons remain learned."

May 7, 2008

Time to Stay Short (maybe)

Quick update on my short call of a few days ago.
Obviously,I was a little early but I still haven't folded. All my arguments are still valid. The Dow did break intraday above its 200-day Moving Average on 5/2 but then ended up forming a bearish shooting star candlestick formation. After that, it stayed just below the falling 200-day MA.
Today was a good start if this market is going to break down from here as I expect it to but it was hardly sufficient. Should the DJIA not follow through on the downside and end up blowing past its 200-day MA (now sitting at 13,034) and its 5/2 high (13,132) then I'll give up on that short trade. The market has shown a lot of strength lately and some serious selling fireworks of the type we witnessed today must materialize in the next few days to change that.