Money, trading, ivestment

Could constitutional changes help promote prosperity

admin — Sun, 20 Nov 2011 20:41:07 +0000

When we think about how to get the most out of our government, it is important to distinguish between ordinary politics and constitutional rules. Constitutions establish the procedures utilized to make political decisions. Constitutions can also limit the activities of government.
The framers of the U.S. Constitution were aware that even a democratic government might undertake counterproductive actions. Thus, they incorporated restraints on the economic role of government. They enumerated the permissible tax and spending powers of the central government (Article I, Section and allocated all other powers to the states and the people (Tenth Amendment). They also prohibited states from adopting legislation “impairing the obligation of contracts” (Article I, Section 10). Furthermore, the Fifth Amendment specifies that private property shall not be “taken for public use without just compensation.” Over time, however, these restraints have been significantly eroded, due in part to Supreme Court decisions that have effectively reinterpreted the Constitution. To- day, it is difficult to think of an economic activity that is beyond the reach of majority rule or normal legislative procedure.
Public-choice analysis highlights the importance of constitutional rules and procedures capable of restraining government activities to those areas in which it will promote prosperity. If left alone, even democratic governments will tend to cater to special-interest groups and draw significant resources into rent seeking. If we can figure out how to constrain the activities of government to those areas in which it is most likely to be productive, higher income levels can be achieved. The challenge before us is to develop constitutional rules and political institutions more consistent with economic efficiency and prosperity. The theory of public choice and its applications can help us do that. Needless to say, this topic is one of the most exciting and potentially fruitful areas of research in economics.

Trendlines

admin — Tue, 15 Dec 2009 20:48:38 +0000

The trendline remains the most popular and readily recognized tool of chart analysis. It can be any of the following:
A support line is drawn to connect the bottom points of a price move. A horizontal support line is extremely common and represents a firm price level that has withheld market penetration. It may be the most significant of all chart lines.
A resistance line is drawn across the price peaks of a sustained move, or a horizontal resistance line representing the fixed level that resists upward movement. Resistance lines are not normally as clear as support lines because they are associated with higher volatility, which causes erratic price movement.
A channel is the area between parallel support and resistance lines that serves to contain a sustained price move. When the support and resistance lines are relatively horizontal, or sideways, the channel is called a trading range.
A bullish support line would then be a rising line drawn across the lowest points of a price move, and a bearish resistance line is a declining line drawn across the highest peaks of a price move.

The Dow Theory

admin — Sat, 12 Dec 2009 20:47:35 +0000

In its basic form, the Dow theory is still the foundation of chart interpretation and applies equally to stocks, financial markets, commodities, and the wide variety of vehicles used to trade them. Its major premise is that averages remove a large amount of extraneous price motion; therefore, Dow’s original work applied exclusively to averages and not to individual stocks. In fact, Dow’s Industrial, Utility, and Transportation averages have survived the test of time. The difficulty with interpreting stock movement is in the thinness of a specific issue especially in the early part of the twentieth century; its fixed number of shares and light volume made the movement of one stock an unreliable indicator of an economic turn. Taken in total, it would be improbable to move the average by the manipulation of a single issue; hence, the averages become the subject of analysis. Commodities, especially the financial and index markets, differ from stocks in their enormous volume, as demonstrated by the Eurodollars, which can trade exceptionally high volume with only the slightest price movement. In futures, trading can be limited to one primary contract with little distortion because of constant massive arbitrage between futures and cash, and between one bank and another, especially in the interest rate and currency markets. The possibility of one trader influencing the U.S. bond market (other than the Chairman of the Federal Reserve) for more than a few seconds is remote to the point of no concern. When working in financial markets a single product is often given the same significance as a sector in the stock market when constructing a portfolio or index, yet in the footsteps of Dow, a group of international interest rates, with similar maturities, or a U.S. dollar index, can still be a valuable substitute for a single market.
The Dow theory defines price motion, as represented by the average, in three distinct primary, secondary, and minor trends. These elements have often been compared with the tide, the wave, and the ripple. The primary trend denotes the main move that exceeds 20% of the original price; the secondary trend is an adjustment or correction, and the minor movements are day-to-day fluctuations. The theory emphasizes the main move. As Angas said: “Be simple. Take the grand view.” it is easier to identify the dominant trend than to worry about every change in direction.
Accumulation and distribution are the beginning phases of a bull or bear market. Accumulation is the period in which the insiders begin to acquire a long position in anticipation of a bull move. In charting, this is traditionally seen as a wide formation at a low price with increasing open interest and erratic peaks in volume representing large purchases. The distribution phase serves the same function for anticipated bear moves.
A unique part of the original Dow theory that prevents it from being applied to commodities markets is the principle of confirmation, requiring that a signal be produced by more than one average. There has been some criticism with regard to the significance of an industrial group being confirmed by a rail, but the concept seems sound. If the purpose of the Dow theory is to identify major trends in the economy, it is unlikely that the average of one stock group would be going up and the other group moving down in a well-defined inflationary or deflationary period. In the same way, one would not expect the price of corn to increase and the price of wheat to decrease in absolute terms. A period of inflation should uniformly affect stocks and commodities; any items varying from the total pattern should be explained on an individual basis.
The relationship of the number of shares or contracts traded to the development of a price move is characterized by saying that “volume expands with the trend.” Whether a bull or bear market, activity increases as the trend becomes clear. In futures, the open interest has been treated in the same manner, with increased open interest, especially during the accumulation and distribution phases, a sign of a new move forming.
The Dow theory has other points that have been incorporated into chart interpretation. The exclusive use of closing prices is important for two reasons: (1) they are most closely followed by the typical speculator, and (2) they discount the effects of any positions taken by floor traders who are day-trading. Support and resistance lines were introduced as a substitute for the secondary move, which may have been difficult to define. Lastly, the theory expressed a trading philosophy by stating that a trend should be assumed to be intact until a reversal occurred.

INTERPRETING THE BAR CHART

admin — Tue, 08 Dec 2009 20:46:26 +0000

The bar chart, also called the line chart, became known through the theories of Charles H. Dow, who expressed them in the editorials of the Wall Street Journal. Dow first formulated his ideas in 1897 when he created the stock averages for the purpose of evaluating the movements of stock groups. After Dow’s death in 1902, William P Hamilton succeeded him and continued the development of his work into the theory that is known today. Those who have used charts extensively and understand their weak and strong points might be interested in just how far our acceptance has come. In the 1920s, a New York newspaper was reported to have written:
One leading banker deplores the growing use of charts by professional stock traders and customers’ men, who, he says, are causing unwarranted market declines by purely mechanical interpretation of a meaningless set of lines. It is impossible, he contends, to figure values by plotting prices actually based on supply and demand; but, he adds, if too many persons play with the same set of charts, they tend to create the very unbalanced supply and demand which upsets market trends. In his opinion, all charts should be confiscated, piled at the intersection of This same newspaper may have repeated this idea applied to program trading after the stock market plunge in October 1987. Nevertheless, charting has become part of the financial industry, whether the analyst is interested in the fundamentals of supply and demand or pure price movement. The earliest authoritative works on chart analysis are long out of print, but the essential material has been recounted in newer publications. If however, a copy should cross your path, read the original Dow Theory by Robert Rhea;’ most of all, read Richard W Schabacker’s outstanding work Stock Market Theory and Practice, which is probably the basis for most subsequent texts on the use of the stock market for investment or speculation. The most available book that is both comprehensive and well written is Technical Analysis of Stock Trends by Robert D. Edwards and John Magee. it is confined entirely to chart analysis with related management implications and a small section on commodities. For the reader who prefers concise information with few examples, the monograph by W.L. Jiler, Forecasting Commodity Prices with Vertical Line Cbarts, and a complementary piece, Volume and Open Interest, A Key to Commodity Price Forecasting, can still be found. A valuable recent addition is jack Schwager’s, Scbwager on Futures: Technical Analysis (Wiley, 1996), the first of a three-volume set.

FINDING CONSISTENT PATTERNS (part 2)

admin — Tue, 01 Dec 2009 20:45:18 +0000

The behavioral aspects of prices appear rational. In the great bull markets, the repeated price patterns and variations from chance movement are indications of the effects of mass psychology. The greatest single source of information on this topic is Mackay’s Extraordinary Popular Delusions and the Madness of Crowds, originally published in 1841.’ In the preface to the edition of 1852 the author says:
We find that whole communities suddenly fix their minds on one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion….
In 1975, sugar was being rationed in supermarkets at the highest price ever known. The public was so concerned that there would not be enough at any price that they would buy (and horde) as much as possible. This extreme case of public demand coincided with the peak prices, and shortly afterward the public found itself with an abundant supply of high-priced sugar in a rapidly declining market. The world stock markets are often the target of acts of mass psychology. Many have taken their turn reaching incredible heights. only to drop suddenly at a time when buyers are most confident, to start the long climb up again. it should not be difficult to understand why contrary thinking has developed.
Charting is a broad topic taken to great detail; the chart paper itself and its scaling are sources of controversy. A standard bar chart (or line chart) representing highs and lows can be plotted for daily, weekly, or monthly intervals to smooth out the price movement over time. The use of large increments representing price levels will reduce the volatile appearance of price fluctuations. Bar charts have been drawn on logarithmic and exponential scales,’ where the significance of greater volatility at higher price levels is put into proportion with the quieter movement in the low ranges by using percentage changes. Each variation gives the chartist a unique representation of price action. The shape of the box and its ratio of height/width will alter subsequent interpretations based on angles. Standard techniques applied to bar graphs, point-and-figure charts, and other representations use support and resistance trendlines, frequently measured at 45-degree angles (and at various other angles in more complex theories). Selection of the charting paper may have a major effect on the results.
it may be a concern to today’s chartist that the principles and rules that govern chart interpretations were based on the early stock market, using averages instead of individual contracts. This will be discussed in the next series of articles. For now, refer to Edwards and Magee, who said that the similarity of an organized exchange trading, “anything whose market value is determined solely by the free interplay of supply and demand,” will form the same graphic representation. They continued to say that the aims and psychology of speculators in either a stock or commodity environment would be essentially the same; the effect of postwar government regulations have caused a—more orderly” market in which these same charting techniques can be used.’

FINDING CONSISTENT PATTERNS (part 1)

admin — Thu, 26 Nov 2009 20:43:37 +0000

A price chart is often considered a representation of human behavior. The goal of any chart analyst is to find consistent, reliable, and logical patterns that predict price movement. In the classic approaches to charting, there are consolidation forms. trend channels, top-and-bottorn formations, and a multitude of other patterns that can only be created by the repeated action of large groups of people in similar circumstances or with similar objectives. As of this date, quantitative studies relating the psychology of behavior to the reliability of chart formations have not been reliable. Traditional trading techniques found in the most popular stocks and commodities literature may themselves be the cause of the repeated patterns. Novice speculators approach the problem with great enthusiasm and often some rigidity in an effort to stick to the rules. They will sell double and triple tops, buy breakouts, and generally do everything to propagate the standard formations. In that sense, it is wise to know the most popular and well-read techniques and act accordingly.
Speculators have many habits which, taken as a whole, can be used to interpret charts and help trading. The typical screen trader (not on the exchange floor) will place an order at an even number, from 50 to $1.00 per bushel in the grains, 10 to 50 points in other products. This pattern far outweighs the number of orders entering the market to buy at odd numbers, for example the S&P at 863.50 rather than 863.35 or bonds at 105 16 32 instead of 105 19/32. The public is also known to enter into the bull markets always at the wrong time. When the major media, such as television news, syndicated newspapers. and radio, carry stories of outrageous prices in cattle, sugar, or coffee, the public enters in what WD. Gann calls the grand rush, causing the final runaway move before the collapse; this behavior is easily identifiable on a chart. Gann also talks of lost motion, the effect of momentum that carries prices slightly past its goal. A common notion of the professional trader who is close to the market is that a large move may carry 10% over its objective. A downward swing in the U.S. dollar/Japanese yen from 1.2000 to a support level of 1.1000 could overshoot the bottom by.0100 without being considered significant.

Charting

admin — Mon, 23 Nov 2009 20:42:38 +0000

Nowhere can a picture be more valuable than in price forecasting. Elaborate theories and complex formulas may ultimately be successful, but the loss of perspective is rarely corrected without a simple chart. We should remember the investor who, anxious after a long technical presentation by a research analyst, could only blurt out, “But is it going up or down?” Even the most sophisticated market strategies must capture the obvious trends or countertrends. Before any trading method is used. the past buy and sell signals should be plotted on a chart. Those signals should appear at logical points; otherwise, the basis of the strategy or the testing method should he questioned.
Through the mid-1980s technical analysis was considered chart interpretation. In the equities industry that perception is still strong. Most traders begin as chartists. and many return to it or use it along with their other methods. William L jiler. a great trader and founder of Commodity Research Bureau, wrote:
One of the most significant and intriguing concepts derived from intensive chart studies by this writer is that of characterization, or habit. Generally speaking. charts of the same commodity tend to have similar pattern sequences which may be different from those of another commodity. In other words. charts of one particular commodity may appear to have an identity or a character peculiar to that commodity. For example, cotton charts display many round tops and bottoms, and even a series of these constructions, which are seldom observed in soybeans and wheat. The examination of soybean charts over the years reveals that triangles are especially favored. Head and shoulders formations abound throughout the wheat charts. All commodities seem to favor certain behavior patterns.’
In addition to jiler’s observation, the cattle market is recognized as also having the unusual occurrence of “V” bottoms. Both the silver and pork belly markets have tendencies to look very similar, with long periods of sideways movement and short-lived, violent price shocks, where prices leap rather than trend to a new level, The financial markets have equally unique personalities. The S&P traditionally makes new highs, then immediately falls back; it has fast, short-lived drops and slower, steady gains. Currencies show intermediate trends bounded by noticeable major stopping levels. while long-term interest rates have long-term direction.
Charting remains a most popular and practical form for evaluating commodity price movement, and numerous works have been written on methods of interpretation.

A Comparison of Seasonality Using Different Methods

admin — Sun, 15 Nov 2009 20:40:08 +0000

Heating oil and soybeans represent two fundamentally sound seasonal markets. Even before we analyze the patterns, we can expect heating oil to post higher prices during the winter months and soybeans to be high during the summer. Heating oil is accumulated beginning in midsummer in anticipation of the winter season, while soybeans are subject to speculative volatility during planting and growing seasons.
For the purposes of comparison, we will use four basic methods of calculating seasonality: average price, median price, percentage change from the previous month, and the moving average deseasonalizing. For our purposes, more complicated methods are unnecessary.
According to these techniques, it is the anticipation of winter that drives prices up, while February and March, typically colder, show lower average prices as most consumers use up the oil they had committed to buy during the previous September and October. Three of the methods for calculation gave similar results, while % Change seems to lead by one month.
When applied to soybeans, all four basic seasonal calculations produce patterns that show the expected winter and summer cycles, with most lines rising and falling smoothly throughout the year. Again, it should be noted that the seasonal pattern of the percentage price changes leads the normal and detrended methods because it acts in the same way as momentum; a decline in the percentage change does not mean that current prices are lower than the previous month, but that prices did not increase by as much as the previous month.

TRADING STOCK INDEX FUTURES WITH STOCK-TRAK

admin — Tue, 10 Nov 2009 20:38:52 +0000

Once you have mastered the basics of trading commodity futures, you may wish to begin trading stock index futures. Your Stock-Trak account allows you to trade futures on a number of different stock market indexes. To trade stock index futures, you first choose the stock index you want to use and find the ticker symbol for that index. You must also know the ticker extension for the maturity month of the futures contract.
The most popular stock market indexes are the Dow Jones Industrial Average (DJIA) and the Standard and Poor’s 500 (S&P 500). Futures contracts for the DJIA trade under the futures ticker symbol DJ. Futures contracts for the S&P 500 trade under the futures ticker symbol SP. At the time this was written, the contract value for a single DJ futures contract was 10 times the underlying index level, and the contract value for the SP futures contract was 250 times the underlying index level. However, these contract values may change and you should consult the Stock- Trak website for the latest contract specifications. If you wish to know more detail about contract specifications, you should consult the Chicago Board of Trade website (www.cbot.com).
For example, suppose you go short a single DJ futures contract when the futures price is 10,150, and then at contract maturity the underlying index has a value of 10,025. Your dollar gain is then 10 × (10,150 – 10,025) = $1,250. Alternatively, suppose you go long a single SP futures contract when the futures price is 1310, and then at contract maturity the S&P 500 index is at 1302. Your dollar loss is then 250 × (1310 – 1302) = $2,000.
Futures tickers for stock indexes have a two-character extension denoting the contract expiration date. Just like commodity futures, the first character is a letter representing the expiration month, and the second character is an integer representing the expiration year.

Futures Contract Delivery Options

admin — Sun, 08 Nov 2009 20:38:34 +0000

Many futures contracts have a delivery option, whereby the seller can choose among several different “grades” of the underlying commodity or instrument when fulfilling delivery requirements of a futures contract. Naturally, we expect the seller to deliver the cheapest among available options. In futures jargon, this is called the cheapest-to-deliver option. The cheapest-to-deliver option is an example of a broader feature of many futures contracts, known as a “quality” option. Of course, futures buyers know about the delivery option, and therefore the futures prices reflects the value of the cheapest-to-deliver instrument.
As a specific example of a cheapest-to-deliver option, the 10-year Treasury note contract allows delivery of any Treasury note with a maturity between 61?2 and 10 years. This complicates the bond portfolio hedging problem. For the portfolio manager trying to hedge a bond portfolio with U.S. Treasury note futures, the cheapest-to-deliver feature means that a note can be hedged only based on an assumption about which note will actually be delivered. Furthermore, through time the cheapest-to-deliver note may vary, and, consequently, the hedge will have to be monitored regularly to make sure that it correctly reflects the note issue that is most likely to be delivered. Fortunately, because this is a common problem many commercial advisory services provide this information to portfolio managers and other investors.