Tuesday, August 29, 2006

Confusing Market Action

Bulls and bears both seem confused at this point. One bear calls for a week of sideways action. This morning the Federal Reserve did a massive permanent open market operation - i.e. buying bonds and putting new money into the money supply. Someone on Silicon Investor who follows the Fed closely said it was the biggest he's seen. Changes in money supply in both Japan and the US often have a strong relation with stock market action. So in retrospect it wasn't surprising then that the market went up. I'm still puzzled about what is the causal driver in these money supply changes - is it market players or the monetary authority? Most commentators seem to assume that it is the Central Bank that drive these actions. However, standard macro theory says it would be investors and traders driving the Central Bank to respond.

In other news my "other model" - what I call the "autoregressive model" (as opposed to the "stochastic model" - both nicely obscure names :)) - the best I had before the latest one - has given a sell signal on the S&P 500 on the weekly chart. The previous signal was a buy for the week of 19 June. Previous to that was a sell in the week of 1 May. So the model is behaving pretty nicely in recent months and I wouldn't ignore it. Previous to that there was a sell for the week of 20 March... but before that a buy for three weeks in April 2005. On the other hand one of the indicators from the "stochastic model" is indicating a buy, but others aren't. So maybe we do just keep going sideways all week.

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