Year: 2012

IS/LM curve, Economics made easy.

Hamilton

ISLM model - Wikipedia, the free encyclopedia - Google Chrome_2012-09-25_16-52-57

The above is a standard IS/LM model. What it pretends to show is that there is an equilibrium between Investment and Savings on the one hand and Liquidity and Money on the other. Think of it as 4 variables interacting on each other to find an equilibrium. (This one is from Wikipedia). How it all works precisely can be found on the internet if you are interested. For our purposes now, it is important to see that in this (Keynesian) model GDP (Y) and with it employment grows as interest rates rise. One can quarrel about the dynamics and so on but this is the main lesson. The transfer mechanism is primarily confidence. This is what Charles Plosser of the Philly Fed said today in a speech. He is an academic having spent a lot of his time on studying business cycles in macroeconomic terms, having even written a textbook on the subject. He things his boss is barking up the wrong tree and is willing not to tow the company line (very Un-American) in the process. The beginning of the end of the Fed???

NGQ update

Hamilton

Then and now charts;

NGQ may 2012ngq sept 2012

Then was in May of this year. We would have bought this at about $1.90 following our own advice. Obviously a little too early as the stock did get to $1.60 in July and again in August. Timing is never the strong suit with EW, but even so you would be up about 50% and that does matter. We are out and have no idea where this stock is going. Better yet we have no idea what this company does.

WPT update

Hamilton

wpt sept 25 2012

This is log-scale, works better with such wild gyrations. If you did buy this as suggested you should also be stopped out with a loss of one or two dollars. You could do it again but we prefer to wait a little while before we repeat a mistake even if this might be an excellent time to do it again. The RSI and MACD suggest that it is. We will wait for it to get to around $20 to try it again, that is if it ever does. For the moment the last leg down seems to be missing a 4 and 5. Further more the $20 level corresponds with the low of a triangle and the base of a wedge.

XHB iShares Homebuilders

Hamilton

xhb sept 2012xhb sept 2012 content

So you listen to this guy on TV that KBH, the Homebuilders ETF (iShares) is a screaming buy, and to make the point a chart is shown of the performance over the last year, up a whopping 100% or so. A good reason NOT to buy. Next you figure homebuilders like Lennar, Pulte etc.etc. should be a good buy because you have heard ad nauseum that the housing market  is bottoming and just about ready to take off again. This may or may not be the case. Either way is is good to realize that this “homebuilder” ETF consists of only 27.63% of home builders proper. The bulk consists of companies like Corning, Lowes, Whirpool and so on, hardly a pure play if that is what you were expecting.

Looking at the chart above, it is clear that the rebound has taken the XHB to the 50% retracement level AND to the 4th wave of previous degree, both pretty well standard behaviour and more likely time to sell rather than buy. Also the pattern is that of a text-book  a-b-c with all 3 legs roughly the same as vectors, the signature of a counter-trend correction. Furthermore, looking at the details of the last moves it is clear that this last leg unfolded in a nice channel;

kbh s sept 2012

and can, without too much imagination, be counted as a 5-wave move which all c waves should be. We agree that this was a screaming buy a year ago but definitely not today. Both the RSI and the MACD are confirming this view. The moral of the story is that one should not believe every Tom , Dick and Harry “expert” that comes on TV and certainly not when you are desperate to find something to believe in and are as gullible as a 3 year old.