This Thursday is Thanksgiving. But the real feast for investors and traders comes the following day. Strong retail performance on “Black Friday” could boost stock prices and predict the direction of the market for the rest of the year. But unexpectedly weak sales might cause a panic—proving that consumer confidence and the underlying economy is not that strong, and giving retail traders an excuse to bail out of an overheated stock market. Sounds exciting, but it is not necessarily true!
Black Friday—the day after Thanksgiving—is traditionally the busiest retail shopping day of the year. Department stores pack Thanksgiving papers with inserts, they advertise with flyers, TV and the web, and shoppers line up before dawn the next day to capitalize on the “door busters”. Black Friday is also the day that retailers are supposed to turn “in the black” for the year after presumably stocking up on inventory in the earlier months.
The second tradition is clearly obsolete: with just-in-time inventory management, no retailer could afford to wait 11 months to turn profitable. But it is indeed the “busiest day of the year”, if you believe Wikipedia: since 2003, every Black Friday except one has indeed seen higher retail sales volume than any other date. Of course, this may be a self-fulfilling prophecy since stores have longer opening hours on that day and offer their biggest discounts and loss leaders.
Black Friday has occasionally had a temporary effect on the stock market. In 2011, the DJIA increased almost 300 points on the following Monday after retailers reported stronger-than-expected sales. However, financial newsletter writer Mark Hulbert did an analysis of 114 years of market activity in which he tracked the correlation between market performance on the Friday and Monday after Thanksgiving and the balance of the year, and found… no correlation.
In fact, in recent years the market had performed exactly the opposite of the Friday/Monday reading. When stocks were up on those days, they were typically down till the end of the year and vice versa. (This is through 2008, when Hulbert’s article was written.)
There are other considerations when looking Black Friday as a leading indicator for the markets. At one time there was very little price discounting for the holidays; now it’s pervasive. So a strong sales performance on that day may have very little bearing on a retailer’s profitability. Also, “Cyber Monday” on the Monday after Thanksgiving is becoming an equally important benchmark. If people can’t go shopping on Friday (or prefer not to battle the crowds), they increasingly place online orders on Monday when they return to work. Weather can also have an impact: if it’s terrible, more people may stay home.
So for traders looking for clues as to where the market is headed, Black Friday may not offer the best set of tea leaves. A strong or weak Black Friday performance may be a confirming factor, or it may be an outlier, but it doesn’t have the ability to change the direction of the market by itself. You’re probably better off with the supply and demand trading strategy taught at Online Trading Academy, which allows traders and investors to anticipate market turns with a high degree of accuracy.
With the latest U.S. government shutdown behind us (for now), it is worth asking if it had a serious, lasting, or permanent effect on the economy. Traders would most likely say no: the S&P barely skipped a beat on shutdown day, and when the government re-opened 16 days later it was up 2.3% for the period. (SPY opened at 168.14 on 10/1 and closed at 172.07 on 10/16.)
What you should take into consideration:
The opportunity cost or actual financial cost of operations that could not be completed because government offices were closed. Example: Alcatraz, a national monument, was closed. Therefore, San Francisco businesses that depend on tourism lost money. Example: With passport offices closed, there were people who cancelled overseas trips because they could not get their passport in time. This was a direct cost to them of airline tickets or prepaid tours they were unable to use.
The cost of paying furloughed Federal workers without getting any productivity in return. (After some discussion that they might not be paid this time because of the budget crunch, they were indeed authorized to receive their full back salary. In addition, some states allowed furloughed workers to keep unemployment compensation, so they were in effect paid twice.) Also, while Federal workers received their back pay, government contractors probably will not. Their spending (including upcoming holiday shopping) will have to adjust for the lack of earnings during the 16 day period.
The cost in confidence. You probably would not invest in a company when you know its management is mentally unbalanced, even if its business and its industry were fundamentally sound. Citizens, institutions, and overseas investors have long made their decisions on the assumption that the U.S. is one of the most stable and best-run economies in the world. For them, stock prices and borrowing costs have reflected this.
Right now, with stocks at an all-time high and borrowing rates close to historic lows, it is hard to make an argument that people are giving up on the U.S. economy. Yet, can we be even stronger without the dysfunctional behavior in D.C.?
According to S&P, the total cost of the shutdown was about $24 billion. The source also predicts that the GDP will grow 2.4% in Q4, compared to 3% if the shutdown had not occurred.
The crucial test comes on January 15, which is the kick-the-can-down-the-road deadline to both approve the budget and increase the national debt ceiling, so the U.S. does not default on its loans. A number of analysts have warned that the cost of this would be catastrophic. Stay tuned.
Over the weekend, overseas markets reeled with the possibility that the U.S. government might shut down as it entered its new fiscal year on October 1st without a budget. On Monday night the unthinkable happened: the shutdown actually did happen. But the sun rose on Tuesday morning and, improbably, the markets were higher.
The shutdown directly affected some people, ranging from low-income people who rely on assistance to tourists at National Parks, but the financial centers decided they would be relatively unaffected. In fact, Bloomberg pointed out that historically the S&P has risen an average 11% in the twelve months following a shutdown, compared to an average 9% in years when there wasn’t a shutdown.
A much more serious deadline looms on October 17th, when the national debt ceiling must be raised or the government will theoretically start defaulting on its obligations—including U.S. Treasury notes, traditionally the last refuge of safe money. As with the budget crisis, the two sides are expected to stay at a standstill until the last minute before approving an increase.
The Financial Times has posted an interesting hypothesis by RBC Capital Markets, about why “crossing the debt ceiling would be catastrophic.” The full article is on a private site, but in brief the reason a default would be so dire is that markets have no mechanism to identify and trade defaulted vs. non-defaulted obligations so the entire system would freeze up.
“The Treasury’s systems do not clearly mark what scheduled payments are for what reasons, so it is impractical to try to prioritize payments. And clearing systems like Fedwire do not allow defaulted securities to flow, so the system would seize. In order for the clearing systems to work, the Treasury would need to notify the market of a default almost a day before the default happened (to give everyone time to modify payments), and that is not going to happen because the Treasury will not want to declare default while Congress still has time to pass a bill.”
The FT is a London paper, so its columnists regard all of this as one more example of U.S. craziness. Yet if a default does happen, markets and economies around the world would face serious disruption. To quote another Brit, Oliver Cromwell, now is a good time to “keep your powder dry” and stay alert and ready to respond quickly to market conditions. Online Trading Academy students know the best opportunities are found in volatile markets, and that’s exactly what we may face in the weeks ahead.
Today we’re featuring one of our Online Trading Academy instructors: Russ Allen! Russ tells us about his own trading journey and how he relates to his students.
Russ Allen has had a professional path that many OTA students would like to emulate. After an extensive career in business, in 2003 he switched jobs and became a full-time trader. He learned the basics at Online Trading Academy, and soon after became an OTA instructor.
“I had been CPA,” Russ explains, “so I never considered paying an advisor to manage my money. Most advisors don’t do any better than the indices. Plus, like a lot of other OTA students I’d been successful in other ventures and thought, how hard can this be?” He chose Online Trading Academy from the several options available at that time because it offered classes at a physical location where he would be able to do “real time trading using real money.”
His first year was a struggle, however, because he “was looking for a mechanical solution.” Russ focused on technical indicators after completing his Professional Trader class and overlooked the broader and more important signals provided by trends and supply and demand zones. Then, he took advantage of his privilege for lifetime retakes of any on-location class and repeated Professional Trader. Russ says, “I was able to finally grasp that the process I was trying to automate was not the right process.” Since then his trading results have been consistently profitable.
Russ had done some teaching as an aspect of his financial consulting business, and in 2006 was invited to become an Online Trading Academy instructor. He covers a wide range of in-person and online courses including ProActive Investor, Futures, and Options. He e also writes a weekly options column in “Lessons from the Pros.”
“One of the things I have to offer is that I come from a completely different career. Not that long ago I was a complete novice about trading and investing. So when students ask a question it’s easier to get inside their head than someone who has grown up in a trading environment. And if they have the questions, it’s likely others have it too.”
Russ advises his students to follow what he calls the “Laws of Trading.” First, go with the flow of the market instead of trading in the opposite direction of the larger trend, unless you have a very good reason. Second, respect the trend of your own stock or other asset. Third, only buy in demand zones and sell in supply zones and make sure you have an adequate reward to risk ratio. Fourth, always have a stop in place. And finally, wrapping around all the other laws, you must have a trading plan. “If you’ve heard this before,” he sums up, “it’s because it works.”
There were two articles in the September 14th issue of the Wall Street Journal that illustrate the danger of relying solely on statistics. First off, Jason Zwieg’s “Intelligent Investor” noted that over the past 20 years, the Dow Jones Industrial Average has delivered a 9.8% annual return while the S&P 500 returned only 8.6% annually. That would appear to set up a clever offsetting trade: Buy the diamonds then go short an equal amount of SPX and you’re a sure winner, correct?
Well, not necessarily. Since 1930 the S&P has actually outperformed the Dow, 9.6% per year counting dividends compared to 9.4%. According to Kenneth French, a finance professor at Dartmouth’s Tuck School of Business, “there is no way anyone should confidently say the expected return on the Dow [is] higher than the expected return on the S&P… any differences you observe are almost certainly noise.”
The two indices are weighted differently: the higher the price of a stock in the DJIA, the greater its effect on price moves; on the S&P stocks are weighted by total market value. In addition, the Dow is just 30 stocks, and those stocks are periodically swapped out (we just lost Alcoa, the last under-$10 blue chip), making it even harder to make accurate comparisons to the broader market and further undermining the statistical reliability of the result.
The second article is, if nothing else, entertaining. “Ask Ariely” columnist Dan Ariely describes a game you can play at parties based on the statistical certainty that if you flip a coin, over time it will land 50% heads and 50% tails. In the game you tell everybody to flip a coin and remember the outcome. Then you announce the winner is “tails” and say that everybody who got tails gets a drink and the losers get nothing. If you’re popular enough to have a large party, you will get some statistically significant information from the results. If over 50% of guests announce they are winners, then some percentage of your friends are liars.
The moral of these two stories is that you can do pretty much anything you want with statistics by choosing the ones that support your case and presenting them in the right context. Among traders, the loser is the uneducated investor who takes them literally in making market decisions. That investor would do a lot better to follow the simple, rules-based strategy taught at Online Trading Academy which allows us to anticipate market turns based on price and price alone—regardless of what the statistics say.
In another post we recently discussed Bitcoin and some reasons why it is the center of much attention and controversy. In an effort to explore it further, we asked professionals in the financial industry to share their opinions on Bitcoin. Here’s a preview of what they had to say:
One thing is for sure: not everyone agrees! You can read the full list of replies here.