Archive for February, 2008

XTR - The Large Cap Hypothesis

The top six of the large capitalized stocks consist of 75% of the total market capitalization. And this is one hypothesis we raised when we launched the XTR this month. Large caps still remain a very key segment for the local markets and should continue to drive relative growth in Romania stock markets.

Large cap or as we call them blue chips is a term used by the investment community to refer to companies with a market capitalization value of more than $10 billion. But considering emerging markets lack the critical mass, the capitalization categories need to be reclassified. Since the launch we also have reworked on the limits to make it more representable.

Blue chip stock globally are seen as less volatile investments as compared to owning shares in companies without blue chip status. Blue chips have an institutional status in the economy, which keeps them ahead with consistent growth and performance. Blue chip companies are also known to weather downturns and operate profitably in the face of adverse economic conditions.
We consider large cap above 2 billion Ron (~500 million Euros), Mid Cap from 0.35 billion lei till 1.99 billion lei and small cap the rest. This was the reason we added Transelectrica and Transgas to the large cap list.

The hypothesis got a positive confirmation after we crunched the data for Feb 2008. Large cap turned out to be only positive capitalization category for Feb 2008 compared to mid cap and small cap. This might look strange considering the many of the stocks have large denominations and are still not cheapest in terms of valuations.

We continue to anticipate growth and positivity from current levels.


Breadth indicators measure the degree to which the vast majority if issues participate in a market move. It therefore monitors the extent of the ongoing trend. Generally speaking the fewer the number of issues moving in the direction of the major averages, the greater the probability of a reversal in the ongoing trend. Breadth indicators best on the aggregate market but can be even used with sectoral indices.

The basic interpretation remains the same. The longer a price trend is maintained without a follow up by the broad market, the more vulnerable is the advance. At market bottoms, breadth is not such a useful concept for determining reversals because the majority of stocks usually coincide with or lag behind the major indices. On the few occasion when breadth reverses its downtrend before the averages, it is actually a more reliable indicator than the one at the top. This was the current case of AD indicator compared the marketwide averages on BVB.

AD issues are plotted by itself. This indicator is helpful to determine daily market strength as the readings move from overbought to oversold levels. Since the reading are sensitive and volatile, exponential moving averages are used to smooth them. AD ratio is similar to the AD issues in that it displays market breadth. The advantage of the ratio is that it remains constant regardless of the number of issues that are traded on the market (BVB in our case). AD cumulative line is used for measuring the overall marketwide strength.

So one might ask why does AD or breadth indicators work. Or for that matter why they should work in Romania. The market as a whole, discounts the business cycle and normally reaches its bull market peak 6 to 9 months before the economy reaches its peak in business activity. Since the peak in business activity is itself preceded by a deterioration of certain leading sectors such as financial, consumer spending and construction, it is logical to expect that the stocks representing these sectors will also peak ahead of the general market.

It is normal that the A/D line to coincide or lag at market bottoms. However, when the AD line refuses to confirm to a new low in the Index, the signal is unusual and very positive, but only when confirmed be a reversal in the average itself. This is the scenario in the local markets case again.

We have modeled the AD indicator for Romanian markets and the results suggested a bottom on 23 JAN. We have illustrated all the eight extreme readings and how the BET performed after that. The table below highlights the overbought percentage level. The highest reading being 100% and lowest being 0%. Higher readings suggest euphoric sentiments and lowest panic and fear. The backtested results shows that the indicator was able to identify Feb 05, Feb 06 and Jul 07 tops. And Mar 05, Jun 06 and possibly the recent Feb 08 low. As we are closing the issue prices are already 13% up from the 15 Feb low, which was identified 23 days before by the AD indicator. However, how far prices push up from here remains to be seen.

To read the latest XTR issue write to us for a free trial today or download the report from REUTERS KNOWLEDGE, YAHOO FINANCE, THOMPSON ONE or THOMPSON RESEARCH.

XTR - Peaks and Bottoms

When prices rise, 80% of the market components rise together and when market falls 90% of market components fall together. This is a phenomenon witnessed world over across markets and across assets. We witnessed this in Romania from July 2007 when a majority of market components declined together.

This issue of XTR analysis the erosion in market capitalization across the market to look for the above mentioned trends and seasonalities. The objective is to identify the stocks, sectors and indices that eroded the most in value and to drive cues for stock selection based on results.

A majority of the market peaked in July 2007. But there were some exceptions like Policolor which was making historical highs in Jan 2008 when markets were falling. This clearly talks about an underlying interest and strength in the stock. PCL is not a part of XTR 21. On the other hand there were stocks which made new historical lows. This was owing to short trading history like Alumil and Flamingo, but also because there are some market component like Altur Slatina, which never participated in the market rise and are undergoing a multi year stagnation. All of these exceptional stories can not be valued on the same scale and needs further study.

The other interesting part to watch was the bottoms. A majority of the market bottomed in 2000. And it was not until FEB 2008 that we saw 4 stocks bottoming just in the first two weeks of Feb 2008. This could be interpreted in many ways. One that we really are at an oversold extreme and second if we see more stocks bottoming in March we could be in for a multi month bounce. And even if prices retrace half of the fall from July top we have a 100% return from respective lows. What happens however, remains to be seen.

Eight of the top ten losers did not top in July 2007 but starting 2005. And despite the fact that Financials took a sizeable hit there were two financial majors in the worst losers viz. SSIF Broker and Bank of Transylvania. The report comprehensively analysis the overall market in terms of percentage losses and value of market capitalization erosion.

The last 7 months eroded nearly 40% of the Romania market capitalization at about 12 billion Euros. With BETFI contributing 12% and BET-C the rest. The XTR 21 Index we launched early Feb 2008 had a mixed week with 12 stocks down, seven up and 2 unchanged. Overall, the XTR dropped 5.6%.

March 2008 remains a key month for anticipated bottoms. How the market components perform will suggest the trend for next few months. At this stage we just have signatures that we are near an oversold extreme, which could prove to be a low risk entry point in contrast to the July 2007 entry point which was marked by excitement and euphoria.

To read the latest XTR issue write to us for a free trial today or download the report from REUTERS KNOWLEDGE, YAHOO FINANCE, THOMPSON ONE or THOMPSON RESEARCH.

XTR - The Index

All the talk of recession and sentiment negativity pushed us back to the contrarian side forcing us to look at Romanian market valuations and how markets should evolve from here. Well we see this as the start of new restructuring for the local markets.

Romanian market has a 14 year history. And despite all roadblocks the market will push to higher growth and development. Even if we move ahead to the global GDP to Market Capitalization ratio of 0.76, Romanian Equity market capitalization can easily grow (current 18 billion euro) by a multiple of 3 in the next few years. This brings forward a strong need for Index based products viz. derivatives and funds. Specially owing to the increasing market risk brought by the increasing volumes and lack of proper market benchmarks and risk management tools.

And it’s only now that we are witnessing a proper global representation of broad sectors in Romania. Without proper representation of the total economy, the market lacked proper price discovery, leading to shallow secondary market. And because of the archaic Index construction and no Index maintenance techniques the market today has a big gap between need and availability of good Indices and Indices based financial instruments.

An Index is used not only as a market proxy but also for hedging price risk, increasing institutional volumes, price discovery and international visibility. The list of advantages is long. We present to you the Orpheus XTR 21, a 21 stock Index for ROMANIA. This index will be regularly maintained. The index will also work as a model portfolio which will be disseminated on an intra day and regular basis.

For creating the Index we had to tackle many emerging market problems viz. illiquidity, bad data, under represented broad sectors, low priced stocks, lack of data vendors with accurate data. Rather we have been guiding vendor services regarding price adjustments and rectification of data errors, closing price calculations, lack of adjustment, non standardized prices, skew in distribution and size of company and related market capitalization, checkered regulatory procedures, lack of classification based on International standards etc. were some of the other problems we faced.

Under representation of sectors is still an important issue. The very reason every new initial offer should improve the situation. We also had to keep in mind the plan ahead with scalability of XTR to sectoral Indices, style Indices and ETFs. Even the popularity of the current Indices had to be kept in mind. We made statistical tests for all the available indices, benchmarking our construction process with European and Australian cases.

In conclusion, with the launch of the Utility major Transgas, the Romanian capital markets move a step closer to reach a critical mass, gain market momentum, increase liquidity & price discovery, and growth over negativity that we see today.

Dollar 2012

What happens to Dollar in 2012 concerns all of us. It concerns the Euro, it concerns Japanese Yen and it also concerns many emerging market currencies like Indian Rupee and Romanian Lei. But one may ask why 2012? 2012 should be a significant cycle low and high for many assets. Some assets may top, some may bottom and multi year change of trends might happen.

Fractal projections point to 1.85 for EURO Dollar. This is 24% further weakening from here. On the short term though we could be in for a fall till 1.43 and possibly till 1.41. We don’t see more strengthening on dollar than this. Yen on the other hand has been a text book case for us. It was here on 17 JAN 2007 we said that the USD/YEN ratio line broke the 22 year trend line suggesting that YEN is ready to move out of inaction and head to potentially below 80 (33% strengthening). This was the time market was debating about the effect of BOJ (Bank of Japan) keeping interest rates unchanged. As usual there were three views, up, down and sideways. For us at Orpheus the fractal was decisive. Well we have reached near 100, which means half of our target has already been met in about 13 months.

We delivered a similar accuracy on the Indian Rupee, where we called the sub 40 levels when INR was ruling at 46. And then was the Romanian LEI where again we were a year ahead of the market and the best timer of the currency for 2006. The news of LEI becoming the strongest currency of 2006 came a year late. The same thing should happen now, as we move into months and years ahead, FRACTALS should keep us ahead, as we keep a sharp eye on levels and exits and track the respective pairs for you week after week.

Enjoy the latest issue of WAVES.FOREX.



WAVES.FOREX is a perspective product published five days a week. The report highlights the top traded FOREX PAIRS (eg. EURO USD, DOLLAR INDEX, YEN USD, Indian Rupee, Romanian Lei, Swiss Franc, Hungarian Forint, Croatian Kuna, Canadian Dollar). The product highlights Primary (Multi Month) and Intermediate (Multi Week) price trends. The report illustrates key price levels, price targets, price projections and time turn windows. The product uses Elliott waves, traditional technical analysis tools and sentiment indicators.


WAVES.FOREX is a perspective product published twice a week. The report highlights the top traded FOREX PAIRS (eg. EURO USD, DOLLAR INDEX, YEN USD, Indian Rupee, Romanian Lei, Swiss Franc, Hungarian Forint, Croatian Kuna, Canadian Dollar). The product highlights Primary (Multi Month) and Intermediate (Multi Week) price trends. The report illustrates key price levels, price targets, price projections and time turn windows. The product uses Elliott waves, traditional technical analysis tools and sentiment indicators.






Anticipating a recession

The “R” word is everywhere. It’s being discussed at World Economic Forum at Davos and now we have clients calling in at Orpheus asking us about Recession and how bad it is. And is there a chance that the global depression might be starting. Such worries though important and critical do highlight the mass psychology and how it reads the Federal interest rate cut and subprime crisis as a start of something bigger and problematic.

First and foremost recession is not an event it’s a process. It happens again and again. And when the recession lasts for more than three successive quarters of negative growth and prolongs we call it a depression. We have had one depression in USA and one in Japan from 1929-1932 and 1980-1993 respectively.

A part of market sees this as a sectoral crisis just in the financial sector. But crisis is never sectoral, it’s always linked to credit and is across market. This is why a financial crisis is also called a confidence crisis, as liquidity dries the counterparties panic and everyone wants out at the same time. This is the reason a onetime write-downs might not be enough. New trader’s from Europe keep falling out of the closet. Markets need confidence more than write-down’s. It’s like saying if the FED cuts the benchmark again things will be fine. Some might however look at it differently i.e. if the FED cuts it again we have a more serious problem. In any case FED cut does little to boost confidence, the most needed commodity today. Markets follow their own rhythm, no wonder S&P 500 has rallied on the same day as a Fed rate cut only six of the last 13 times. And if all this was not enough we have Alan Greenspan doubting FED’s ability to avert a recession, everybody seems ready.

But the recession or great depression does not start till we have these negative quarters. All we are doing now is anticipating. And even if we are anticipating are we not a bit too late? The housing crisis started more than a year earlier and has already pushed prices substantially lower. We have more than a million foreclosures. The Philadelphia housing index (HGX) has dropped by 60% from 2005 high and sales of new houses are at 25 year low. Even the subprime has seen a lot of wealth erosion. The overall economic loss is estimated at $ 2.3 trillion. The third indicator, considered as the most reliable predictor of US slow down is the S&P 500, which is still negative for the last seven years as it failed yet again when it reached previous 2000 highs. This suggests that the slow down what we talk about today is already under play for the last few years and that is why anticipating a recession is different from what is happening.

Robert Prechter market thinker compared Dow Jones with Gold and proved that the slowdown is already happening as Dow Jones has crashed 67% compared to Gold over the last 8 years. This he calls as the silent crash. We have mentioned it so many times prior in our write ups saying that though history repeats itself it never repeats in the same way. And this time the slowdown is happening without people around realizing how our real purchasing power is eroding. Gold is near the $ 1000 mark, and Bill Sarubbi, market thinker and world renowned time cyclists puts it at $ 3000 in years to come. What would that mean? That would mean that even if markets locally or globally don’t really crash, the effective value of money will become a fraction of it. And Gold will become the most valuable asset more valuable than real estate or stocks as they are all denominated in paper money. This is already happening not only in America, but across the world. The real value is shifting to Gold and even though we don’t realize this. And we should consider our self lucky if Gold gives us a last dip back sub $ 600 before starting the next big leg up till 2013.

So though America and emerging markets might be witnessing a fall in value compared to Gold, the relative performance still points positively at what has been created over last seven years in emerging markets is more valuable than what America created in the same time. Plus the level of financial securitization in America or leverage as I might like to call it is much higher in the developed world compared to emerging markets. So even if we may seem to come down together there is always a relative performance. And the adjustments to US slowdown are dynamic and happening all the time. Over the last eight years the US dollar has depreciated 87.5% against the Euro. The slowdown is already taking a toll on the purchasing power parity of Americans. So markets around the world cannot be really clubbed together with looming asteroid and recessions, we do need to factor in local relative currency strengthening also.

Simply putting, all this talk of crisis together is a mass psychology creation. And even if we leave the Gold peg behind, the correlations between Global and local markets is an overplayed statistics. What works is only the short term correlations in contagions, rest correlations are weak and flawed predictability indicator. The world will not come to an end even if the US plays down, as adjustments are happening consistently.

In conclusion, we don’t believe anticipating recession can bring over a more serious chaos than what is already happening. Rather we think the mass psychology element highlights an inbuilt positivity to the whole thing. We in emerging markets are still low on critical mass to get seriously burnt with any global slowdown. And the real crisis may still be months away. And even the worst comes earlier, we can laugh about these terms like the late president Reagan did, when he said, “A recession is when your neighbor loses his job, a depression is when you lose yours”.