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Tuesday, May 3, 2016

Bloomberg: The Super Rich Were the First to Bail During the Financial Crisis

The Super Rich Were the First to Bail During the Financial Crisis

World's Fastest Business Jet

When the going gets rough, the 1 percent start selling.

That's the finding of a new paper that says people with the highest income bailed from stocks disproportionately on the worst days of the financial crisis. The share of selling by the biggest earners rose "sharply" in days following spikes in volatility, according to data on millions of sales reported to the government in 2008 and 2009.

Mapping selling patterns in periods of tumult is of interest to researchers trying to get at the psychological underpinnings of events such as the financial crisis, when more than $10 trillion was erased from U.S. share values. Their main conclusion, that different people react with varying urgency to signs of trouble, could help identify behavioral biases that feed market meltdowns.

"Very, very high income people are disproportionately likely to sell a bunch of stock during a financial crisis," said Daniel Reck, a doctoral candidate in the economics department at the University of Michigan and one of the paper'sauthors, said by phone. "It's difficult to say exactly how much high-income people are responsible relative to everyone else, but they're certainly contributing more to volatility."

One explanation for the divergence is that rich people have more at stake per person and are more sensitive to shocks, though it's only speculation, Reck said. Another is they believe they're better market timers. A third possibility is that investors who earn less are reluctant to sell at a loss, a cognitive tendency known as the disposition effect.

For the study, researchers from Ohio State University and the University of Michigan examined about 273 million Internal Revenue Service 1099-B forms that record sales in stocks and mutual funds, comparing them with levels of gross income and plotting them against fluctuation in the CBOE Volatility Index. To control for the fact that rich people own more stock, the study focused on changes in the typical selling levels among income groups versus the years before the collapse of Lehman Brothers Holdings Inc.

"We find that, starting in September 2008, the share of sales volume attributed to the top 0.1 percent of income recipients and other top income groups rises sharply until the beginning of 2009, and in 2008 and 2009 the sales of these groups are relatively more associated with stock market tumult as measured by the VIX," they wrote.

Specifically, according to the paper, a roughly 10 percent increase in volatility correlated with a 3.3 percent increase in sales volume for the top 0.1 percent of earners, relative to less-affluent investors. When the VIX went up 25 percent, proportionate selling by the ultra-rich rose almost 8 percent.

Using average selling levels by the various wealth classes, the authors estimated that the effect might have accounted for roughly $142 million of excess selling by the 0.1 percent group on the day of Lehman's collapse alone, and $1.7 billion in the 10 days after what was then history's biggest bankruptcy filing.

Other investor demographics, from gender to marital status to place of residence, showed no signs of being related to the volatility sensitivity of stock sales, the study showed.

The stock market meltdown provided a special opportunity for the study's authors to explore which cross section of investors contributing most to selling pressure. The paper joins an expanding pool of research assessing the effect of wealth on investment decisions, and how different groups judge risk.

"The older view of the stock market is that prices move in response to news that arrives -- it's not usually thought of as a large collection of individuals trading on slightly different information and having different reactions to new events," Reck said. "Documenting this kind of heterogeneity will allow us to paint a fuller picture of how stock markets actually work."

The paper, titled "Who Sold During the Crash of 2008-9? Evidence from Tax-Return Data on Daily Sales of Stock," was co-authored by Reck, his fellow doctoral candidate Bryan Stuart, Michigan economics professors Stefan Nagel and Joel Slemrod, Ohio State accounting professor Jeffrey Hoopes and IRS research analyst Patrick Langtieg.

While the IRS data provided new means for assessing who unloaded equities during the crisis, it doesn't give a complete picture, the authors note. Absent from the numbers are share purchases, which would provide net selling data. It's also possible that people increase levels of selling from non-taxable retirement accounts during crises. 

So were people who sold during the 2008 rout guilty of a behavioral bias involving market timing or just good traders? Both could be true. Someone selling early in the plunge avoided at least part of the biggest equity wipeout since 1937, which saw the S&P 500 plummet 57 percent.

At the same time, holding stocks since the 2007 peak hasn't been a money-losing proposition. The S&P 500 has posted annualized return of almost 6 percent since the high point in October 2007.

"At this point it's too early to tell whether market timing has been successful," Reck said. "We have the data -- we know what they sold and we can tie it to historical stock prices. But right now, we're not conclusive one way or the other."

Sunday, May 1, 2016

Market Outlook

Market Outlook - Charts Singling Weakness!

Economic Data:

First out is the chart of the Chicago FED National Activity Index, which you can see in this chart is indicating weakening and below trend!   (

  The next two Indicator that I watch closely are the FED Adjusted National Financial Conditions Index and non-financial leverage sub-index of the NFCI.
  As you can see there is a Divergence between the Adjusted (Purple) and the non-Adjusted Index.  The chart of the sub-index non-financial leverage in (Purple) is also seeing a Divergence.

The National Financial Conditions Index (NFCI) and adjusted NFCI (ANFCI) are each constructed to have an average value of zero and a standard deviation of one over a sample period extending back to 1973. Positive values of the NFCI indicate financial conditions that are tighter than on average, while negative values indicate financial conditions that are looser than on average. Similarly, a positive value of the ANFCI indicates financial conditions that are tighter on average than would be typically suggested by economic conditions, while a negative value indicates the opposite.

The non-financial leverage sub-index of the NFCI best exemplifies how leverage can serve as an early warning signal for financial stress and its potential impact on economic growth. The positive weight assigned to both the household and non-financial business leverage measures in this NFCI sub-index make it characteristic of the feedback process between the financial and non-financial sectors of the economy often referred to as the "financial accelerator." Increasingly tighter financial conditions are associated with rising risk premiums and declining asset values. The net worth of households and non-financial firms is, thus, reduced at the same time that credit tightens. This leads to a period of deleveraging (i.e., debt reduction) across the financial and non-financial sectors of the economy and ultimately to lower economic activity.

Stock Market Index Analysis:

Let's start with the weekly chart of the S&P 500 first, just to paint the bigger picture, before I discuss the candle patterns in each chart.
  As the chart below shows, the Market has had a significant uptrend since the February's low, the last week's close was well off the highs at 2134.72, leaving behind a Shooting Star that was already showing on this intraday chart.
A Shooting Star is a bearish candlestick pattern with a long upper shadow with a small real body at the lows of the session.(Stock Chart prepared on

S&P 500 Index Daily:

As the chart shows below in this intra-day view you can see a Doji at the right side of the chart.
  A Doji session represents a market at a juncture of indecision, it can also be interpreted as being in a stalemate between bulls and the Bears.
  When the market is rising and overbought and then a doji appears the Japanese say that the market is tired.   A doji's emergence may not foretell an immediate price reversal.   It may only suggest that the market is vulnerable and susceptible to a change.(Stock Chart prepared on

Stock Charts above their Moving Averages:
The percentage of stocks trading above a specific moving average is a breadth indicator that measures internal strength or weakness in the underlying index.
  First, you can obtain a general bias with the overall levels. A bullish bias is present when the indicator is moving above -20%.   A bearish bias is present when the indicator is moving down from  +80%.   For myself I look at the high of the chart for an overbought candlestick reversal pattern.  Likewise on the Low of the chart I'm looking for a Oversold candlestick reversal pattern.(Stock Chart prepared on

Market Valuation Where Are We Now!

                Since we see Economic weakness from Chicago FED National Activity Index, we must wait for the next two months of data to come in for making a definitive conclusion.
  For the Market, as you can see from the charts that the Market is Overbought and moving in a box range (sideways movement) and the Stocks in the Market above their long-term moving averages also showing overbought trend.
  The Market Valuation is also signaling that the Market has little upside going forward this year.
  I'm also concerned about the non-financial leverage chart showing this segment of the economy leveraging up debt again.
   Question is what should the Active Investor and the Trader do in this slow growth box range market?
  For me and my family and friends retirement plans, I will follow my investment plan and money management rules.


This article was prepared for educational purposes only. Its contents do not recommend, advocate or urge the buying, selling, or holding of any financial instruments.
The author expresses personal opinions in this article contents, herein, and will not assume any responsibility whatsoever for the actions of the person reading these contents. The author may or may not hold positions in the financial instruments discussed in this article content.
The author is not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Trading and investing involve high levels of risk. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future performance.