A quick review of statistics is justified. A normal distribution bell curve provides a way to estimate and shape the probability of an occurrence in a data set. Statistics suggests that increasing the number of random observations in a data set increases tendency to form a normal distribution curve. KOTM took about 252 daily net changes in the SPY and calculated the annual 1, 2, and 3 sigma ranges for 2003 to 2012. Observations outside these ranges were the trading days of interest and the frequency of them is displayed in the chart below.

From 2011 to 2012, the increase in the number of net changes outside 2 and 3 standard deviations, either way, was astounding. The frequency of net changes outside the two sigma range were up over 50% and, more importantly, the frequency of net changes outside the three sigma range jumped up a massive 300%…while the number of trading days stayed constant.

The ‘why’ is still to be determined…Obama, Bernanke, QE, HFT, Europe, or China could all be possible answers to ‘why’ because macro events drive volatility and uncertainty around these subjects does not help either. Either way however, the data is interesting.

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Author

salernoma@mx.lakeforest.edu

Ralph Lauren’s (RL) chart has been bullish for some time now, but recent developments may merit some negative deltas. RL’s long term trend line has been touched many times by pullbacks, but the action as-of –late is concerning. RL seems to be spending a lot of time digesting the $150 level; this price coincides with a major trend line drawn from the market low in 2009. It is interesting to note that most stocks have lost their 2009 market bottom trend line. The prior two touches led to 50% runs in the stock and a higher high, but the touch in July only lead to a 20% run and a top below the all time high. RL has been between $150 and $160 since Aug. of 2012 and has formed a nice rounded top that flows into the aforementioned major trend line. This is a major decision point in the stock and if one believes that the cliff will take down the market, RL’s 1.5 beta will be a nice stock to short.

FB does not have a lot of ‘likes.’ After the IPO debacle, shares slid to a low of $17.55, but have tacked on $10 since. This has been a near 55% rally in the stock in less than two months; courtesy of shorts’ getting squeezed. Short interest has dropped to 4.2%. In short, if the US goes off the fiscal cliff, FB may transition to the lowest volume distribution and cycle back down to lows as shorts get back into the name.

PXD has been in a horizontal range since the better part of September. Nothing has moved the stock out of its barcode-type pattern, but the looming cliff may. The upside to this range has been $110 and the downside has been $101. The cliff may provide the catalyst that makes PXD break $101, and should that happen, PXD may have a date with $95.

The RL, FB, and PXD charts are below.

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Author

salernoma@mx.lakeforest.edu