Payday, Loans, finances

Dollar Returns

admin — Sat, 26 Nov 2011 09:35:28 +0000

If you buy an asset of any type, your gain (or loss) from that investment is called the return on your investment. This return will usually have two components. First, you may receive some cash directly while you own the investment. Second, the value of the asset you purchase may change. In this case, you have a capital gain or capital loss on your investment.1
To illustrate, suppose you purchased 100 shares of stock in Harley-Davidson on January 1. At that time, Harley was selling for $37 per share, so your 100 shares cost you $3,700. At the end of the year, you want to see how you did with your investment.
The first thing to consider is that over the year, a company may pay cash dividends to its shareholders. As a stockholder in Harley, you are a part owner of the company, and you are entitled to a portion of any money distributed. So, if Harley chooses to pay a dividend, you will receive some cash for every share you own. In addition to the dividend, the other part of your return is the capital gain or loss on the stock. This part arises from changes in the value of your investment.
At the beginning of the year, on January 1, the stock is selling for $37 per share, and, as we calculated above, your total outlay for 100 shares is $3,700. Over the year, Harley pays dividends of $1.85 per share. By the end of the year, then, you received dividend income of Dividend income = $1.85 × 100 = $185 Suppose that as of December 31, Harley was selling for $40.33, meaning that the value of your stock increased by $3.33 per share. Your 100 shares are now worth $4,033, so you have a capital gain of
Capital gain = ($40.33 – $37) × 100 = $333 On the other hand, if the price had dropped to, say, $34.78, you would have a capital loss of
Capital loss = ($34.78 – $37) × 100 = -$222 Notice that a capital loss is the same thing as a negative capital gain.
The total dollar return on your investment is the sum of the dividend and the capital gain: Total dollar return = Dividend income + Capital gain (or loss)
In our first example here, the total dollar return is thus given by Total dollar return = $185 + $333 = $518 Overall, between the dividends you received and the increase in the price of the stock, the value of your investment increased from $3,700 to $3,700 + $518 = $4,218. A common misconception often arises in this context. Suppose you hold on to your Harley-Davidson stock and don’t sell it at the end of the year. Should you still consider the capital gain as part of your return? Isn’t this only a “paper” gain and not really a cash gain if you don’t sell it?
The answer to the first question is a strong yes, and the answer to the second is an equally strong no. The capital gain is every bit as much a part of your return as the dividend, and you should certainly count it as part of your return. That you decide to keep the stock and don’t sell (you don’t “realize” the gain) is irrelevant because you could have converted it to cash if you had wanted to. Whether you choose to do so is up to you.
After all, if you insist on converting your gain to cash, you could always sell the stock and immediately reinvest by buying the stock back. There is no difference between doing this and just not selling (assuming, of course, that there are no transaction costs or tax consequences from selling the stock). Again, the point is that whether you actually cash out and buy pizzas (or whatever) or reinvest by not selling doesn’t affect the return you actually earn.

The Square-Root Theory

admin — Sun, 13 Nov 2011 09:33:06 +0000

The two previous methods show a conspicuous concentration of entry techniques and an absence of ways to exit. Although it is valid to reverse positions when an opposite entry condition appears, Dunnigan spends a great effort in portfolio management’ and risk reward conditions that were linked to exits. By his own definition, his technique would be considered trap forecasting, taking a quick or calculated profit rather than letting the trend run its course (the latter was called continuous forecasting).
A fascinating calculation of risk evaluation and profit objectives is the Square-Root Theory. He strongly supported this method, thinking of it as the golden` key, and claiming support of numerous esoteric sources such as The journal of the American Statistical Association, The Analysts journal, and Econometrica. The theory claims that prices move in a square root relationship. For example, a market trading at 81 (or 9′) would move to 64 (8′) or 100(10′)~ either would be one unit up or down based on the square root. The rule also states that a price may move to a level that is a multiple of its square root. A similar concept can be found greatly expanded in the works of Gann.

Key Government Reports

admin — Sat, 12 Dec 2009 09:40:53 +0000

Even when there is public concern over the state of the economy, the market does not react in a similar way to all economic data. Some reports seem to be more important than others, and the market appears to focus on one report at a time. The most significant data seem to be unemployment and the Consumer Price Index (CP1). During a period of sustained low unemployment, as seen in 1997, even a modest increase will not cause much concern. A jump in the CPI, however, will always warn the market to expect a preemptive strike by the Fed, cutting off potential inflation by nudging rates up slightly. The Trade Balance report was particularly popular in the late 1980s when the deficit with japan seemed to be at the root of the U.S. deficit. Sagging U.S. exports and overconsumption of foreign-made products by Americans looked as though the U.S. work force could not compete in the world market.
Other reports can also attract the attention of traders, but may be more difficult to interpret. Durable goods, retail sales, budget, and tax legislation all directly affect the economy and prices; however, it is not always clear how to relate the changes in durable goods orders with price change, or how the latest news on tax law will contribute to the economic well-being. More important, it is difficult to assess how the government will manipulate interest rates in reaction to these data.

Market Reactions to Reports

admin — Wed, 09 Dec 2009 09:39:30 +0000

To determine whether there is ample opportunity to profit from the price move that follows an event, it is necessary to study the direction of the market move and the subsequent price changes that occur over the next few days. These lagged reactions are the results of market inefficiencies; it is unlikely that prices could immediately jump to the exact price that economic principles require, despite the Efficient Market Hypothesis. With large price shocks there is often an over- or underreaction that is corrected during the next few days. Sometimes prices jump one direction and immediately begin to go the other way until they have completely discounted the price shock.
Where there is an underreaction the prices move higher over the next few days; when there is an overreaction prices move lower. To decide whether a market is a candidate for event trading, you must study the pattern of moves following the reaction to news and decide whether:
1. The size of the average move is enough to generate a profit.
2. The returns are worth the risk of loss associated with these volatile events.
When studying these events, there may be a direct relationship between the size of the reaction and the type of pattern that follows. For example, a small reaction to news may be followed by a steady continuation of the direction of the price shock. If unemployment jumps by !/4% in a month, there should be a reaction by the government to stimulate job growth. The same initial reaction would occur if unemployment jumped by 1 full percent, but the number would be so unexpectedly large that it may be considered an error in which case it is not clear to what extent the government would respond. The market may overreact to a large shock but underreact to a small one. The only way to discover this is by testing these events.
Fundamental to understanding price shocks is that the shock is based on the difference between the expectations and the actual reported data, not just the reported dataThe market always discounts what it believes is its best guess at what the report will say., therefore, if bond prices rise in advance of an important unemployment report, we can say that the market expects unemployment to increase. If bond prices have moved up by 1/2% (equivalent yield) in expectation of a very bad report, and the report comes out neutral, then prices will drop sharply to offset the incorrect anticipation. When studying market reactions from historic records of economic data, you must have market expectations to find consistent results; without those values, the best approach is to work backward from the reaction to infer the accuracy of expectations.

EVENT TRADING

admin — Sat, 05 Dec 2009 09:38:05 +0000

The largest price moves and the greatest volatility are the result of reactions to unexpected news. These market events pose the greatest risks to all traders because they are unpredictable and of such great magnitude that they are out of proportion with normal trading risk. It may be possible to trade for a number of years without experiencing an adverse price shock., therefore, many traders do not plan properly for these situations.
Not all price shocks are of such magnitude that they present an unmanageable problem. it may be that price moves are either the reaction to news or the anticipation of news. This news is most often a release of an economic report by a government agency or monetary authority, but can also be a natural disaster associated with weather or earthquakes, or a political event, such as an outbreak of war, a military coup, or an assassination. The U.S. government releases economic data on an announced schedule, many of them at 7:30 A.M. Chicago time, that create regular disruptions to price movements in world economic markets.
The frequency and size of these price moves, triggered by unexpected news, makes these events a natural candidate for a trading system.’ The profit opportunity, however, does not lie in taking a position ahead of the anticipated market reaction, but in studying the systematic patterns that come after the initial price reaction to the news. Because the news is unexpected, you cannot predict the results nor the extent of the reaction; therefore, taking a market position in advance of a government report would have a 50% chance of success and often very high risk. Studies might show that there is a bias in the direction of the price shock due to the way the monetary authority plans economic growth and controls inflation; however, the risks would remain high.

Market Selectivity

admin — Tue, 01 Dec 2009 09:36:54 +0000

The market seems to focus on one news item at a time. Although the same factors are always there to affect prices, they must reach a point of newsworthiness before they become the primary driving force. For heating oil, the combination of unexpected, sustained cold weather compared with available inventories will activate a weather market. Interest rates, the U.S. dollar, and tension in the Middle East will either be magnified out of proportion or completely ignored, while the anticipation of demand rises sharply. A market analysis of shortages not supported by news may as well be discarded-it is more often that crowd behavior moves the market.

Trading on the News

admin — Sat, 21 Nov 2009 09:34:41 +0000

Even without a sophisticated method of measurement, there are many professional speculators who trade on the news. When a bullish news item or report is introduced and the market fails to respond upward, the experienced trader looks for a place to sell. it shows that expectations exceeded reality and prices had already anticipated the bullish interpretation of the news; there may be a large number of sellers above the market. Similarly, opening calls, available for most markets, are transmitted via wire services beginning about a half hour before the opening bell. Regardless of the means for determining the opening direction, an experienced trader may take advantage of a higher opening call to place a sell order. There are frequent cases of so many traders wanting to sell a higher opening that the influx of orders after a call, before the opening, has changed the direction from higher to sharply lower on the open.
Agricultural weather markets function purely on news. Traders with long positions wait for the 5day forecast hoping for no rain., they anticipate a loss of a specific number of bushels per acre for every dry day once the rainfall is below a given level. Weather markets are nervous and are characterized by evening-up on weekends., they rely heavily on anticipation and emotion. It is said that a farmer loses his crop three times each year: once for drought, once for disease, and once for frost. In 1976, the news carried numerous articles on the desperate wheat crop in the western states, showing films of virtually barren fields, and yet the United States harvested one of their largest wheat crops on record. Weather markets have a history of volatile anticipation but are a risky way of making long-term price predictions.
The discounting of news is as important as the news itself. An old saying in the market, “Buy the rumor, sell the fact,” implies that anticipation drives the price past the point where it would realistically adjust to news. When the actual figures are released, there is invariably an adjustment back to their proper level. The pattern of anticipation for each economic report or news event should be watched closely.

Ranking and Measuring

admin — Mon, 16 Nov 2009 09:33:54 +0000

The problem of ranking and assigning values to news items requires a knowledge of how others see the news. Klein and Prestbo studied this problem for the stock market and concluded that about 90% of the Wall Street Journal readers perceived news in the same way (bullish, bearish, or neutral). The same relationship can be assumed for futures markets. A reason for the uniform interpretation of the news articles is the publicized analysis. Within minutes of the release of an economic report or Fed action, the wire services begin to quote independent and poll opinions of the meaning of the report, then transmit those interpretations over their news media to he relayed to most traders. The professional analysis is taken as correct, and later discussions based on that interpretation serve to solidify the opinion.
News can also be measured empirically, by studying the immediate impact of an expected or surprise news item. For statistical reports, such as the Producer Price Index, care must be taken to use the correct figures. Market reaction is a combination of expectations compared with actual figures, and corrections in the previous month’s data. in some months it is difficult to know whether the jump in prices was due to a downward revision of the previous month, or current values that are lower than expectations. When testing these factors, the historic data must include the actual numbers released in the reports, and a separate value for the revision of the previous month. Industry expectations are also important, but they can be determined empirically from the market’s reaction. Therefore, following the release of an economic report, we can expect the price change to he expressed as:
Price change =f(a(current value – expectations) + b(revision -previous value))
where a and b are weighting factors, a > b implying that the current value is more important than the previous one. It is necessary to make the assumption for this type of measurement that the effects of a news release are most important in the short term, and that their influence on the market is diluted daily.

Volume Drops and Spikes

admin — Wed, 11 Nov 2009 09:32:19 +0000

Volume spikes are carefully watched because they are seen as a significant positive action by the traders. For a stock that has been relatively inactive, a volume spike is a warning that something is changing. In futures, a day of very high activity means that the market is sensitive to news. In both cases, a sharp increase in volume can be a predictor of change, or at least of higher volatility.
At this time it is worth remembering that a volume spike is a clear indicator of a positive action, while a volume drop can be ambiguous. Volume can decline because there is little interest in a stock or futures market; buying and selling pressure have been eliminated. When a currency, gold, or any traded product reaches a price that is considered fair (also called equilibrium), volume normally declines. Volume may also drop on the day before a holiday, or just by chance. While there are seasonal and other predictable patterns associated with volume drops, they are far less certain than large increases.

VARIATIONS FROM THE NORMAL PATTERNS

admin — Mon, 09 Nov 2009 09:32:09 +0000

One final note of warning when using volume indicators to confirm price direction: markets have patterns in volume that cause the same effect as seasonality To decide that a buy signal is more important because it came near the end of the trading day, when volume was much higher than midday, is not correct because volume is always higher at the beginning and end of the day. You may conclude, in general, that those two periods produce more reliable trading signals; however, a volume confirmation must be compared against the normal volume for that time period.
Open interest and market breadth also have seasonal patterns. In agricultural markets, farmers hedge in larger numbers during the growing season than in the winter, raising the open interest. In stocks, there is a lot of activity associated with the end-of-year positioning for tax purposes, and traditional rallying during holiday seasons. While this predictable market activity may be enough to confirm your positions, it does not indicate that something special is occurring.