Monday, December 12, 2011

The Mean is Sensitive to Outliers

Another Monday. Yeah, you know.

Market Operations
I was home on Friday and the huge rally felt wrong to me. Sentiment was flipping so bullish I was a bit surprised. Friday afternoon I bought small spots in FAZ and TZA to hold going into Monday. Today did not disappoint. I closed out FAZ +4% and TZA +5%. They both ran a bit higher during the day but I was glad to grab a few bucks out of the trades. You do not play with 3X type funds, you don't.

The Mean is Sensitive to Outliers
The most frustrating thing about markets since summer is that events happen both much faster than normal and slower. That makes no sense right? It does.

In statistics there is an axiom that the mean is sensitive to outliers. Simply, large outside deviations from the mean can cause disruptions to the data that may or may not be artifacts. We are seeing it plenty. Headline driven panic moves both to the buy side and sell side are clouding charts and technicals. Let's play pretend for a few minutes and see what we come up with.

Here is the chart I worked up for this post (click for larger view):

I submit that aside from all the drama of rips and dips, the S&P 500 hammered out a nice base during the early August to mid October span. It was gut wrenching, it was volatile, but the range held up on both sides.

The move to the highs of late October roughly matched the rectangle width to the upside (70 points). Basing occurred into mid November and then the big sell off. But do me a favor.

Ignore that drop.

Take out the headline driven drop in late November and look at the chart again. The S&P is basing well once more. The rectangle is smaller and the move up, should it come, looks like to the 1320 area.

This is my point. One cannot just ignore price moves, we all know price has memory. That said it's hard to ignore the patterns seen here. The pacing of the basing (tm) has been molasses slow while the spikes both lower and higher have come fast. Like I intimated above, there is the fast action driven by emotion and headlines and then there is the overall action which moves ahead slowly.

Keys for me are the 1230 level, and that the 20 MDA (green line) does not cross back below the 50 MDA (blue line). Should that hold up, it's still a constructive market. We have all become renters of positions or as I like to call it, owning adjacent timeshares, but the trend and pattern is holding up for a higher move.

But I am sure there will will more outliers. They will happen fast and slow down the trend. That said, a few steps back and things are not as dire as one may think watching every day action.

Have a good night.

4 comments:

Anonymous said...

The rectangle is smaller and the move up, should it come, looks like to the 1320 area.

1320 or bust!

getyourselfconnected said...

LOL!!! Must be Randle!

Jennifer Hillier said...

Uh, I think I need a tutorial. Seriously.

But the colors and squiggly lines are cool.

GawainsGhost said...

Prices go up, prices go down. They always have and always will. So the key is not to focus on price, but value.

It's the same in real estate. Look, prices are going down, sales are slowing, mortgage lending is tightening, buyers are scared, because what is the point of buying now if the price is only going to go down?

Well, you buy a house to live in it. A well-built home in a nice neighborhood with good schools, that's a bargain at any price, especially at today's prices.

People concern themselves with price fluctuations, when what they should really concern themselves with is maintenance and rennovation. Hey, 10, 20, 30 years from now, that house will be worth something, more than you paid today, as long as it is well kept.

I notice thay you have upgraded your home recently, GYC. Do you think that was a bad investment?

It's not the same with stocks, I know. You're investing in companies that you have very little control over maintenance and rennovation. But still the rule applies.

Do not concern yourself with price fluctuations. Invest in value. And years from now, let the chips fall where they may.