Friday, August 26, 2011

Paul's Dashboard and the Recovery So Far and Looking Forward

I do a lot of analysis in Excel using the data from Yahoo Finance since 1984, which covers the period of the rally to and crash from September 1987.

I use Excel functions to do charts from the data, to do calculations of performance and to calculate percentiles of performance so I can put current performance in a quantitative perspective.

I summarise the recent performance and the trends into a "Dashboard" which I colour to provide me with a quick overview of the market for buy/sell analysis.

One of the charts  I maintain compares the current recovery with past recoveries and 2 averages, one of all recoveries since 1987 and one not including the 2003 to 2007 bubble recovery.

Here then are the Dashboard and a Recoveries Chart.

The Dashboard shows that while on virtually all measures the All Ords is trending down, the 10 day SMA (using 6 days data) has turned up. It also shows that volatility, overbought/sold and recent growth are in the area where buying should be considered. It also shows that growth over all periods I monitor from 2 months to 5 years is well below median. Further we remain well below both the recent and the historical high. But do note that we are up substantially since the bottom. That brings us to the Recoveries Chart.

The Recoveries Chart shows that until the last 25 days this recovery was well above average - "too far, too fast". It is now a below average recovery and since 1987 only one recovery has been lower for any significant length of time looking forward, the 1987 recovery. The chart looking forward from today also shows us a "cone of possibilities" and on balance the previous patterns would indicate that there is a lot of historical precedent for the market being higher over the next year or so, but this is tempered by the knowledge that 1987 was also a >50% fall like 2007-9 and there are fundamentals that will provide a strong headwind. Based on an eyeball estimate the area within the "cone" (ie looking forward from today within the upper and lower bounds of previous recoveries) above the current recovery level is about twice as much as the area below the the current level - odd of 2 to 1 in favour of an upswing to higher levels over the next 10 months you could say.

Being armed with the information from the Dashboard and Recovery Chart will help in understanding the basis for my previous article.

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