December 1996
Letters to the Editor
Editor,
PRESIDENTIAL MARKETS
The article in the May 1996 STOCKS & COMMODITIES titled "Presidential parties and the stock market" used a methodology that had at least two serious flaws. One error was in calculating the DJIA's four-year return from the February after the start of the Presidential term rather than from the middle of the October just prior to the Presidential election in early November. The stock market has discounted administrations' policies before the actual elections. Investors do not wait passively until the actual election, much less the conclusion of the swearing-in ceremonies to trade on their expectations of what would ensue from the Presidential elections. The stock market's behavior in the weeks prior to the Presidential election and in the next few months after the election reflects either the reality of an ongoing administration or the fact that it will soon be replaced. The market, in any event, looks forward, not backward.The second flaw is in failing to correct rates of return for inflation. Annual inflation rates have varied quite a bit over the last 80 years. The two parties have taken different policy approaches to money and credit issues, the Democrats being the "easy money" party. However, even taking a nonpartisan example, the rates of total returns for the first term of the Reagan administration and the last term of the Eisenhower administration would be quite different if discounted for changes in purchasing power.
I would like to see a second article with improved methodology along the lines I have suggested above. It would be interesting to see if it really is true that "regardless of which political party is in the White House, the DJIA has performed roughly the same."
PAUL R. BURBANKThe author replies:
Ozone Park, NY
I spent a serious amount of time deciding on a four-year period to be studied. No two Presidential elections are alike. As I'm writing this, President Clinton is ahead 20 points in the polls compared with Presidential candidate Bob Dole, yet back in 1948, Dewey and Truman were in a dead heat right down to the wire. While the markets may anticipate the outcome of the election, there can be no consistency in that anticipation. Also, to keep the data manageable, I was using monthly data, so a mid-month starting point wasn't feasible. Incidentally, I did redo the numbers using November 1 as the start of the four-year term, and the result I obtained was that the Democrats outperformed the Republicans.I had two reasons for not bringing inflation into the study. My original reason for doing this study was to decide whether I needed to modify my 401k mutual fund switch system -- which is a system that's either all in stock funds or all in a money market fund -- based on the outcome of the November 1996 election. We know that stocks are the only investment vehicle that outpaces inflation in the long run. Therefore, I was purely interested in stock market movement regardless of inflation. Second, I was at the same time doing research on the relationship between long-term inflation and the stock market. I wanted to keep these two lines of research separate. A recent Barron's article did a nice job of analyzing Presidential terms based on the stock market, inflation and five other economic indicators.
I didn't expect this study to close the door on this issue. Most articles that I read in S&C leave me asking a lot of "Hey, what about...?" and "Hey, what if...?" questions. I then go research these questions myself.
Please include my E-mail address in this response in case someone wants to continue a discussion.
Dave Dorgan
dave@betasys.comI'm not a political expert, but my observation is that it's one thing to know a new administration's policies; it's another thing to see them move through Congress. -- Editor.
PSE TECHNOLOGY INDEX
Editor,
I am an occasional reader of your magazine, and the August 1996 article "Pacific Stock Exchange Technology Index" has prompted a question which may be critical to my understanding of the entire concept of technical analysis.The sidebar to the article on page 33 states:
"The PSE is a price-weighted, broad-based index, representing 100 exchange-listed and over-the-counter stocks from 15 different technology-oriented industries. Approximately half the stocks, 51.1%, are listed on the NYSE, and approximately half, 48.1%, are listed on the NASDAQ."While I do not dispute that both 48.1% and 51.1% are "approximately half," I am curious as to exactly how many stocks are in each group. I am further interested in the mathematical calculation that could yield a result of 51.1% from a base of 100 stocks.
I am confident that the answer to this puzzle will reveal another unsolved mystery surrounding the black art of technical analysis.
BOB COSTA
via E-mail
CHI-SQUARE
Editor,
I have been enjoying Scott Barrie's recent articles on how to use Commitments of Traders reports to make trading decisions. In his results data, he includes a chi-square value. Could you share with me how this figure is calculated?Chi-square is a statistical test to determine if the patterns exhibited by data could have been produced by chance. Figure 1 shows sample chi-square calculations that originally appeared in a 1992 S&C article by Arthur A. Merrill, "Chi squared." The complete article appears in Technical Analysis of STOCKS & COMMODITIES: Volume 10, pages 13-14 (January 1992)
In addition, you could consult a college textbook for a more complete explanation of chi-square. -- Editor
From the article "Chi squared":
Overall, there were more rising days than declining days, so the expectation isn't even money. Rising days were 52.1% of the total, so the expectation for rising days in each day of the week is 52.1% of the total for each day. Similarly, Ed = 47.9% of T.
This is a highly significant figure; the confidence level is above 99.9%.-- Arthur A. Merrill
STOCKS & COMMODITIES,
January 1992
CALCULATING HISTORICAL VOLATILITY
Editor,
I'm a novice technical analyst. I was trying to set up the spreadsheet shown on page 18 of the August 1996 issue of STOCKS & COMMODITIES. The equation read:=(STDEV(F4:F8)*SQRT(260))*100However, this equation takes only five days of data. Why are we calling it a six-day standard deviation? Also, why did we start from cell G8 instead of G7?One more thing: A few bottom line numbers to the last row would make it more understandable for me. Is there a place on your Web page that shows the complete list?
AKIN OKTEM
via E-mailTo reiterate from my "Calculating historical volatility" sidebar on page 18: "Connors and Raschke state that they use a six-day and a 100-day lookback period for their historical volatility calculation. To reproduce the same values in Excel that the authors presented, I found that I had to use five and 99 periods for the formulas of the standard deviations.
"Different software programs view this problem differently. For example, consider day 1 to be day zero, and therefore, a six-day lookback is only five observations (that is, day zero through day 5); six days actually represent five changes. Therefore, the standard deviation only uses five observations. In addition, recall that the volatility calculation is an annualized rate, and so, the standard deviation must be multiplied by an annualization factor. This is simply the square root of the number of trading days in the year." -- Editor
NOVICE TRADER ON THE WEB
Editor
Can you please tell me how to access your "Novice Trader" area at the S&C Web site? I could only call up the first heading in each A<B<C heading.JIM CURNOW
via E-mailAs of this writing, there are only three entries available. We will continue to publish more Novice Trader entries. -- Webmaster
TRADERS' TIPS ON THE WEB
Editor,
I wanted to implement a tip from a recent Traders' Tips, but I use SuperCharts and the TradeStation tip can't be typed into SuperCharts. I could import into SuperCharts a verified system created in TradeStation, but you failed to mention the name of the file you stated was available at the Omega Research Web site, and there are hundreds there! Maybe you could keep the file for download at the S&C Web site.SABBYWe are working on this. In the meantime, we'll try to include the file name. Incidentally, all our Traders' Tips from June 1996 onward are posted at our Web site. See Traders' Tips under "This month in S&C" on our home page at www.traders.com. All formulas can be copied and pasted. -- Editor
via E-mail
EXCHANGE NEWS & INFORMATION
Editor,
My first exposure to STOCKS & COMMODITIES magazine was in September 1995 during a trip to New York. While reading a copy of your magazine, its excellent quality impressed me from the beginning and I decided to subscribe. I'm writing you to congratulate your editorial board for the richness of the material presented and especially for the August 1996 interview with Robert Koppel.As a floor trader myself for 25 years, I have endured daily the challenges of the stock exchange. If, by any chance, STOCKS & COMMODITIES would dedicate some pages to the Brazilian stock exchange, I am at your disposal for further contacts. As with many Latin American markets, as well as the markets of emerging economies, the Brazilian market is undergoing a period of economic transition and readaptation to the new realities and problems of globalization.
DECIO A. PECEQUILO
Sao Paulo, Brazil
via E-mailThank you for your letter. The editorial scope of STOCKS & COMMODITIES is technical analysis and trading techniques, and we generally don't publish feature articles on news or information about particular exchanges or markets. However, we do publish news in our Trade News & Products column. If you are interested in submitting an article on technical analysis or computerized trading methods, please look on our Web site for our Author Guidelines: (https://www.traders.com/Documentation/EDitorial_Dept/authors.html). Press releases on exchange news may be submitted to the attention of Trade News & Products. -- Editor
CLARIFICATION
Editor,
We were delighted to find MESA96 featured as a Solution Provider in John Sweeney's review of TradeStation 4.0 in your October 1996 issue. We would like to clarify several points.MESA96 is supplied with a registry code that corresponds to the TradeStation security block number. Once that code is entered as the default for an indicator, no further action is required on the part of the user. If the defualt is not entered, the registry code must be reentered with each use. This is unnecesary if the default is set.
MESA96 supplies five dynamic link libraries (DLLs) for each indicator, numbered xxx1 through xxx5. These DLLs are identical except for their name. An unlimited number of DLLs can be created by copying and renaming. The reason for the different names is the way TradeStaion assigns global variables -- assigned by the name of the DLL. If the same indicator using the same DLL name is used on two charts, the global variables become scrambled. The global variables are required because MESA96 is dynamically adjusted, using the previous bar's dominant cycle as the measurement length for the calculation of the current bar. The restriction only applies to real-time charts because bar-by-bar updates are not performed on end-of-day data. There is no limitation on the number of charts that can be used in real time or end of day.
JOHN EHLERS
President, MESA Software
ERRATA
The "Rate momentum model" sidebar on page 77 of the October 1996 STOCKS & COMMODITIES contained an error. In the middle text column in the paragraph beginning with "But what about the dividend yield of the S&P 500?", the next sentence should have read: "If the S&P 500 dividend yield is lower than it was six months previously, then stocks have climbed at a 15.3% rate, while if the dividend yield is higher than it was six months before, stocks gain just 7%."This is a momentum model, and therefore when dividend yield is higher, stock prices are lower, and the momentum of the market points to lower prices. If the dividend yield is lower than it was six months ago, stock prices are higher, and we anticipate the momentum to continue with higher prices. That is why the "lower dividend yield" is a bullish signal.
