Foreign Exchange
You know, as ANTONIS A. DEMOS and CHARLES A. E. GOODHART always like to say:
There is an empirical relationship between volatility, average spread, and number of quotations in the foreign exchange spot market. The estimation procedure involves two steps. In the Þrst one the optimal functional form between these variables is determined through a maximization procedure of the unrestricted VAR, involving the BoxÐCox transformation. The second step uses the two-stage least squares method to estimate the transformed variables in a simultaneous equation system framework. The results indicate that the number of quotations successfully approximates activity in the spot market. Furthermore, the number of quotations and temporal dummies reduce signiÞcantly the conditional heteroskedasticity e¤ect. We also discuss information aspects of the model as well as its implications for Þnancial informational theories. Inter- and intra-day patterns of the three variables are also revealed.
It's true. Who knew?
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Stock Market
There is enough action on both sides of this market to justify either a bearish or bullish case. The big rally that occurred this week broke through the first $SPX resistance area at 1260, and that was positive. However, the real resistance on $SPX is at 1280 and 1290 -- the tops of the previous rallies. If the market could punch through there, it would be quite positive, but we don't think it can.
Equity-only put-call ratios have somewhat surprisingly thrown a damper on our set of technical indicators. First the standard ratio gave a sell signal, and now the weighted ratio has just recently followed suit. Admittedly, they are at rather high levels on their charts (Figures 2 and 3), so perhaps another buy signal is not far off. But, for now, they have turned bearish. Since they are such good intermediate-term indicators, we have to respect them. While we're on this subject, NASD stocks have been in such a sorry state that they never gave the buy signals that the other equity-only ratios did (in mid-June). Now, all the others have rejoined the NASD ratio on a sell.
Market breadth (advances minus declines) continues its schizophrenic activity. It ranges from wildly bullish to wildly bearish on back-to-back days. What causes this is the uniformity of institutional activity during a single trading day. They all come in to either buy or sell and demand fills by the end of the day. Then, the next day is a completely new story, with new rumors or news, and a whole other set of lemming- like institutional trading activity. As a result, breadth continues to be a weak indicator.
Volatility indices ($VIX and $VXO) are on buy signals as well. They peaked a couple of weeks ago and have generally been trending lower ever since. A down-trending $VIX is bullish.
So, we have somewhat mixed indicators, with $SPX, $DJX, and $OEX bumping up against heavy overhead resistance -- including their 100-day moving averages, which managed to stem every rally so far (QQQQ is in far worse shape than these other indices). While we allow for the possibility of a rally towards $SPX 1280-1290, we expect that resistance to hold and lower prices to be seen soon.
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