Tuesday, November 10, 2009

Sipley, Market Indicators

Richard Sipley, a portfolio manager, offers a survey of ways to assess the health of the market in Market Indicators: The Best-Kept Secret to More Effective Trading and Investing (Bloomberg Press, 2009). These indicators are familiar to professionals and students of the market, and most are publicly available. In that sense, they aren’t “the best-kept secret.” But Sipley brings them all together (and there are more than a hundred of them) in an easy-to-read, well documented book. He also provides Internet sources for many of these “tells.”

I’m not about to bore you with a long list; I’ll just give a couple of examples.

Lowry’s has done extensive work examining market bottoms and tops. A market bottom is often characterized by a few 90/10 down days (that is, 90% of operating companies listed on the NYSE are down on the day and 90% of the trading volume is conducted on the bid) followed within a few days by a 90/10 up day. A market top is normally more complex. Sipley quotes the Wall Street adage that “tops are a process, but bottoms are an event.” (p. 25) One tipoff that the market may roll over is if the number of new highs starts to decline even as prices continue to move upward.

For the very long-term investor Robert Shiller has devised the CAPE (cyclically adjusted price/earnings) ratio. It measures ten years of trailing earnings and compares them to the current stock price. Over the past 130 years the average CAPE ratio has been about 15; however stretched a market becomes, it tends to revert back to the mean—eventually.

The indicators Sipley discusses measure, among other things, what big money and fast money are doing, how investors are feeling (the sentiment surveys), what the options and futures markets are saying, and how active the world of IPOs and M&A is. These indicators are akin to a thermometer or a barometer. They don’t tell you exactly what to do but signal whether it might be wise to take an aspirin or to carry an umbrella.

Sipley ends his book with a list of personal rules, some of which come in the form of well-known and less well-known quotations. Here are three. “Invert, always invert.” (Charlie Munger, crediting mathematician Carl Jacobi, on how to solve a tough problem) “When in doubt, don’t.” (Benjamin Franklin) But you can’t sit forever. “Patience has its limits. Take it too far, and it’s cowardice.” (Holbrook Jackson) (p. 215)

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