Saturday, March 31, 2012

Surprising Correlation Between STI and Dow Jones Avg

Today, I finally got time to sit down and have a good look at STI and Dow Jones data. As I was fiddling with the data, I decided to take a look at its correlation. After all, we often chat up with each other excitedly in the morning if Dow went crazily up or slid frantically down the previous day, making exclamations and predictions about the current day's STI. So it would be indeed enlightening to find out how exactly is such a prediction based on Dow Jones performance.

Analysis 1 set-up 
Using the data from Yahoo Finance, I first weed out the different holidays to match the dates. This was quite tedious given the messy nature of the data available. What to do, it is still free and much better than nothing. And it seems pretty consistent and error free, at least. The date range for the data is from 24/1/2008 to 26/3/2012. I decided to chop off some data at the start of 2008 because there was quite a few missing dates in the Dow Jones data set. Well, 4 years of data should be good and clear enough for a correlation relationship, if any.

Then, I took only the closing day prices for comparison. Note that this is not the change of the day, and just purely the closing day prices.

Here are the results

1. Correlation between STI closing day price with previous day Dow closing day price (ie. the relationship between Dow's price last night and STI's price today)

r = 0.864

2. Correlation between STI closing day price with same day Dow closing day price (ie. the relationship between Dow's price tonight and STI's price today)

r = 0.866

From a statistical point of view, this correlation of around 0.86-0.87 is close to 1 and that suggests a positive relationship. To me however, even if r = 0.86, it does not make a very smart way to trade as it is not entirely close to 1 either. There must be something more to this correlation than this weakly positive value. I was not satisfied so I decided to take another approach to look at this 'correlation'.

Analysis 2 set-up 
Using another approach, I considered only the direction of move and not the magnitude. So it would be easier to sieve out the nuances of noise and volatility in the respective markets and identify if there was any directional correlation. 

Here is what I found

1. Average number of days where a loss or gain in Dow the night before will be matched with a similar direction of move in STI.

Average number of days = 0.617

2. Average number of days where a loss or gain in STI in the current day will be matched with a similar direction of move in Dow at night.
Average number of days = 0.304

Surprisingly, the correlation between Dow and STI is at best weak. Even though the simple linear regression analysis puts the figure at around 0.86 based on closing day prices of both indices, the impact is clearly even lesser when put to perspective in the direction of move of both indices compared. In fact, for every 10 days Dow increased/decreased, there would be 4 diverging days on the STI. That is really some news for short-term traders looking at strategies to employ. Definitely after looking at this, previous day's Dow prices is an inaccurate prediction of the direction of move STI will make in the current day! The opposite is worse. To use STI to predict Dow's price. Of course, this is not too unexpected given the economic impact Singapore exerts on the US - hardly. 

Sunday, March 18, 2012

The Little Known Chicago Fed National Activity Index

Have been pretty busy lately but as I was listening to a podcast on where a Chicago Bank economist was interviewed over his views on the current economic situation in the US, I got pretty interested in a particular piece of content. Yes, the topics discussed were employment, consumption and housing sales. Pretty much as expected. And we know that the employment statistics in the US has been rebounding quite steadily. Although it is still far from pre-2008 levels, the figures are still pointing to a much better economic picture.

However, the more interesting part of the conversation that really caught my attention was the introduction of this Chicago Fed National Activity Index - CFNAI as a pretty good indicator of economic health. Well, for a start, I have little idea and cannot keep track of the enormous number of indices and figures that typically pour out from the US. Basically, there's some sort of a data due every day. Kind of. And so, as he was introducing this index, he mentioned that it is a combination of many economic indicators and my eyes lit up. It was also not only a Chicago-based focus but national.

A closer look online, I found that the CFNAI is a weighted average of 85 indicators of national economic activity. And it touches on data related to product and income, employment, unemployment, personal consumption, housing, sales and inventories. Wonderful! This would allow a much simpler analysis job whenever I need to know something more about the economic health of the US - the biggest economy of the world.

For those of you who are wondering what is this indicator all about, you can check it out at The latest report is available at
And from that report, here's how the economic health of the US has been lately. The zero line represents an economy that is growing at its historical average. A positive value indicates above-average growth that is essentially what we want to see. Evidently, it does not seem anywhere correlated with current and previous year's stock prices but it still does give a good representation of the economic health we see in US. And this is definitely backed up with all the data that we know. So at least for most of us, we can gather this information as a good supplement to our trading activities so that while we are employing any sort of methods and taking positions, we are fundamentally aware of the state of the largest economy in the world.

Healthy Trading.

Sunday, March 11, 2012

Why Trendlines Make Healthy Trading

Trendlines are the simplest of all technical analysis but yet the most often ignored by novice traders. Truth to be told, whenever I am analysing a stock, my attention is first fixated onto the MACD and the RSI. Probably these are in colour fills and they grad attention far easier than trendlines that require one to manually draw onto a pool of black and white blobs. Nonetheless, I am constantly reminding myself that trendlines are what makes a trade tick. Obey them.

To illustrate my point, let me refer to the current weekly charts of First Resources and Gallant for a deeper appreciation to the trendlines that I am talking about. I have chosen these 2 stocks just for ease of discussion and that the trendlines have been going on and on since 2009. Surprised? Let's delve deeper.

First Resources has a diagonally up-sloped uptrend for the last 2 years and the trend is still firmly in tact. What is more surprising is that the stock obeys its boundaries very closely, only breaking down in the 2011 sell down and re-entering the region sometime in December last year. That coincided with the soon to come bullish uptrend in the last 2 months. Look where it is now. Firmly sitting/resisted by the mid-trendline (I would like to name it this given it like the 50% fib retracement level).

Of course, the next question is where will this stock head? Right now it is still undecided obviously from its persistence along the mid-trendline for 3-4 weeks but still slightly trending upwards. A bullish break into the upper half of the trend region is possible. However, from the MACD, there is some negative divergence to its histogram (the difference between the signal and its avg) and the signal line. RSI is also strongly in the overbought region. These 2 indicators are clearly suggesting a pull back to come. 2 v 1, you decide.

My point here is not to predict the future trend of this stock price - I have promised myself to only trade when it breaks clearly instead of its slight indecision now - but rather the simplicity of this trade. Anytime along this uptrend, you would have made money some how or rather given its clear clear uptrend. Plus, here comes the punchline, it really has been obeying its boundaries. It is not a science nor an art but it simply obeys its boundaries! So what do you do? Just buy low sell high!

Gallant is an illustration of a sideways trending stock that is perhaps much much harder to trade and to book profits since there is no up/downtrend to support price divergence created by volatility (swings in price action). It takes another approach as horizontal trendlines are used to encapsulate the trending region of the stock price.

Again, if one observes the chart, the stock has been relatively trading in that narrow band, breaking out in end Dec 2011 and breakdown down in May 2010. Otherwise, it has been quite within its boundaries. However, upon closer inspection, it is clear that a sideways trending stock is never that easy to trade, plus this stock does not have much strong up and downs within its boundaries. For example, from Feb to Oct 2010, it simply refused to leave the lower half of the region. In our trader's sense, it does not oscillate and putting a long position when it bounced off the lower trendline may not book one really good profits.

This week, the stock is seen plunging from its highs in Jan/Feb 2012, with prices hitting the trendline and then returning. Using a fib retracement, the stock has just touched the 61.8% retracement and is heading further down, confirmed by the MACD direction and RSI trending down over the last 3 weeks. A really good opportunity to open trades and earn a quick buck. A further check on its daily chart (not shown here) shows very strong MACD downtrend with red histograms. The downtrend is almost further confirmed. However, I would like to caution that this trade needs to be fast as the fib is already 61.7% to 78.6% region and resolute booking of profits early is absolutely necessary in case the stock rebounces.

Having said so much, my point here is not to share some stock tips nor suggestions of stocks to buy but a quick lesson on trendlines and how they can be used to enhance trades. Perhaps my daily trendlines usage is not well refined enough as I prefer to start from weekly. You may have have your own preferences. Whatever it is, never ignore trendlines before you book in that trade. Remember.

Healthy Trading.

Monday, March 5, 2012

Why Did I Trade When I Said to Be Wary?

I have been learning in the last 5 years of my trading journey and I have often made mistakes - plenty, in fact in the early stages. But having said that, though the frequencies of bad trades are less often now, they have not been completely eradicated. I am still not satisfied with myself. I am not satisfied with my greed and ability to give in to my will.

2 weeks earlier, I posted a key post suggesting a pull back/volatility/consolidation phase in this bull run of 2 months. I said further to stop putting in trades and to ease out on open positions. I did. But I only obeyed the latter despite my strong convictions seeing the very obvious negative MACD divergence on the Dow Jones chart and subsequently a gap down on the STI. Since then, neither the STI nor Dow Jones have recovered to its February highs. 

I saw it coming, I did my homework but guess what. I caved into temptations when the STI tried to stage a swift pull up on the small fall. It was really tempting to bet in the bull direction and say "Hey, perhaps yesterday or my analysis was an aberration" Or like my other post mentioned, "Looks like it can go on further".  Then, in all honesty, that really took over me and I plunged into commodities - arguably the worst buys of the 2nd half of the February month. 

Why did I enter? Greed and impulsive trades without checking technicals nor fundamentals of the sector (commodities). When I look back, I really should not have entered given the pull back was evident on commodities lately (ex crude oil companies which are typically more so classified as oil & gas).

What next? Thankfully to closing quite a lot of my key opened positions, I booked my profits that have almost reached my objectives of this year and that helped a lot in my risk management. Glencore just announced an improvement in their profits for this quarter and I am cautiously optimistic on the cyclical nature of commodities being able to bring me breakeven in 2-3 months. I am also thankful for trading stocks of strong business groundings that should be able to withstand any future shocks while the commodities market starts to pick up again.

Til then, the outlook and momentum still seems slightly downcast together with the STI's.

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