Thursday, June 24, 2010

Stock Market : Putting the Ceridian Index to the test...

Two days ago, weak housing numbers resulted in a selloff on the DOW. You go back another week, good economic numbers boosted the current rebound in the stock market. Go back further, you will see a bad employment report from the US that caused a mini-one day meltdown in US stocks. Economic recoveries are never a straight line and along with it comes a confusing mix of good and bad reports. You get a few bad reports in a row, the pessimists will loudly declare the economic recovery has faltered and we are in a double dip recession. You get a few good numbers in a row and the optimists will come out to say the economic recovery is better than expected. The stock market index dances around like a drunk man and stock traders bet on which direction this drunk is going to move. Heavy selling and buying occurs after these economic numbers are released depending on whether they beat analyst expectations. Very long term value investors generally ignore all these movements, if possible they sometimes take advantage of the selling to accumulate stocks.

Suppose you have a way of knowing these numbers ahead of time, before other traders and market participants. Suppose you know ahead of time with good probability what these number will be relative to expectations before they are released, you will have an advantage if you are a shorter term investor/trader - the Warren Buffett Way is not the only way to make money. Enter the Ceridian-UCLA Pulse of Commerce Index.

Researchers at UCLA found a way to measure the overall economic activity in realtime by tracking the volume and location of fuel purchased. This index closely monitors the over the road movement of raw materials, goods-in-process and finished goods to U.S. factories, retailers and consumers. The researchers back tested their numbers and found that is highly correlated with the govt numbers released later in the month[Link to White paper]. Of course, a widely known useful index published on the Internet would have been factored and discounted by the stock market....however, UCLA only started publishing the Ceridian Index in Feb 2010 so it is still not widely used and the vast majority of investors still don't know how well it correlates with other economic numbers.

The coming weeks will be very interesting for several reasons. After the stock market sold down in May 2010, there is wide spread belief on Wall Street is that the US economy has slowed due to the "European crisis". This belief has also been reinforced by the disastrous disappointing jobs report release in early June [Link]. The Ceridian Index shows a completely different picture - the index had a massive surge of 3.1% in May, the one of the biggest, if not the biggest, rise in this recovery. The US govt will be releasing more numbers in the coming days/weeks for the performance of the US economy in May 2010 and it will be interesting to see if the Ceridian Index will be proven correct over the more pessimistic views of most analysts. The stronger than expected US economy and ample liquidity is the main reason for my projection that the stock market will rally until some time in end Jul.

The mainstream financial media is starting to report on the Ceridian Index but it still calls it a "little noticed indicator" [Read : Truckers Say Market's Wrong, Economy Grows]. Over time as more people watch the Ceridian Index, its utility for traders will decline but I think we still have some time to exploit this.

For the longer term, I believe the prognosis for global economy is poor. We are coming to the tailend of a stimulus driven recovery and many govts around the world have began to realise that growth cannot be sustained without addressing the high level of debt in the system. Many have began to implement austerity (painful?) measures and the global economy may have to go through some adjustment before it can get on a more sustainable path of recovery. The UK govt emergency budget based UK growth on several assumptions UK's ability to grow its exports and demand from surplus nations to replace the growth generated by govt spending and financial sector growth. Its austerity measures will start to bite faster than the global economy can change to provide support for UK growth.


Anonymous said...

News are good and bad in erratic and random manners because the sharks(big bosses) create the news to manipulate the markets.

Anonymous said...

To be a good trader. You just need to have balls of steel. And not care very much about what others think abt you.

The only person. I know who fits that bill is darkness of the brotherhud. They are very good in the entry and not so very good in the exit. But one thing that I have noticed abt them.

When everyone sell. They buy. When everyone buy. They sell. When people panic, they are very calm. When people confident. They chow. When politician saying good times coming. They sell. When govt collapese, they buy.

Anonymous said...

You cannot compare Dr Darkness (insert year) to your 9 to 5 trader. This guy predicted the biggest computer glitch ever to hit the dow industrial 1 week before it happened! Then he quickly did a 180 and told everyone it was a lucky guess. When Bernanke said everything was looking up in the US economy in the last quarter. He cashed out on all his positions. No reason was given. Shortly after that the market crashed. Again he claimed it was a lucky guess. I hate to say this. But when a man attributes so many coincidences to lucky guesses, then I think someone should serious investigate him.

Anonymous said...

Only time will tell whether this Ceridian Index is reliable and not some whitewash.

Anonymous said...

in the end, it is the human bahaviour that determines the market

BW said...

Hi Lucky,

Interesting indicator. Do you follow the ECRI's weekly index too? The indicator has a good track record, and has been trending down for the past 6 weeks. They are predicting a slowdown, but not a double dip in the US (for now at least).

Separately, have you noticed the wide discrepancy between our manufacturing production and export growth? Production is growing over 50% while exports is in the 20s. Doesn't make sense, unless there's a huge deflation in export prices(which isn't the case). What is your take?

Depending on which data you follow, you'll reach different conclusions about the 'competitiveness' of our manufacturing sector vs the other Asian NIEs. According to the export data, we are lagging Taiwan / Korea. But using production data, we far outstrip them.

Anonymous said...

***Economic recoveries are never a straight line and along with it comes a confusing mix of good and bad reports.***

The problem with the human mind is that they like nice clean logical flow of explanation correlating some number of comfortable variables that they are familiar with - again usually moulded by the usual group of spin doctors or "consultants".

Anonymous said...

Discipline is very hard to cultivate. Although I am a fan of Darkness. I am not so sure many of his calls are good for either my high blood pressure or heart. I am not saying he doesnt regularly offer good pointers which are worthy and very unique. You will be hard pressed to get it anywhere else. Only I believe his risk threshold is way to high for his or my good.

Anonymous said...

Dear Mr Lucky

As you might recall, I was the first to call for crash and 1st to call for recovery on YOUR blog ... while not mocking you ... and i am feeling charitable today ... so ... let me share a fav quote ...

Prediction is very difficult, especially about the future.
- Niels Bohr (unknown dumb religionist)

In the very, very short term however, it is easier.
REAL Financial reform = market goes down.
Financial reform that reforms nothing that needs reforming = market goes up.

If you still believe Obama's farts are rose scented then at least consider that , in the short term, Goldman and friends can create "liquidity" faster than the Market and/but also create shorts faster than the Fed can print money.

Blogger said...

Get daily suggestions and methods for earning $1,000s per day ONLINE totally FREE.