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What do I believe about employing a stock screener pattern finder? It is stupid. Don’t do it!

Allow me to clarify.

I like stock screeners a whole lot. I am a big fan of them. They scan a large number of stocks in seconds. They will do what a human is able to do in an 8 hour work day in four seconds. But you have to understand where to draw the line with stock screeners.

Employing a stock screener with criteria including the price of a stock, the volume traded per day, and also a candlestick pattern is good. Where I draw the line is trying to use a stock screener to do the very subjective interpretation of stock patterns.

All pattern recognition on a chart should be left to a human. The reason is that computers lack wisdom. They’re optimal at doing large amounts of objective computational work. They’re awful at doing subjective analysis that needs wisdom.

Using a stock screener to give you buy signals on patterns is brimming with potential issues.

For example, a bullish channel breakout might be a awful buy if the stock has a history of developing volatile v tops. Especially if the v top forms on an individual stock while the overall S&P 500 is in a downtrend. Or what if unemployment numbers are released in a day that could be bad? Or let’s say the bigger pattern on a weekly chart shows a bearish engulfing candlestick or a MACD going negative? Or what about the market entering into the two weakest months of the year, September and October? Or a number of other things your personal computer that lacks wise practice simply cannot contemplate.

Technical analysis is as much an art as it is calculating numbers. Once you understand all of the technical analysis patterns over several years of trading, after this you have to forget all that objective data and learn to let the trend guide your understanding of patterns. It is simple to look down the middle of a chart and think could of, should of, would of. Though the real challenge is existing in the far right most area of the chart. Only leading traders using the right balance of left and right brain hemisphere processing and a whole lot of luck, can flourish in this region of the chart. Something a stock screener pattern finder will not have the ability to accomplish.

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With the ongoing economic turmoil continuing to keep prices and sales volume down across the United States, the number of Foreclosed homes for sale continues to rise. As banks continue to make futile attempts at restructuring bad loans the “ghost inventory” is steadily climbing. This ghost inventory can be defined as housing stock that is either owned by the banks but has not been released for sale yet or homes that are in a “limbo stage,” and have yet to be foreclosed on but will be at some point.

The recent $8,000 tax credit which ended in this summer simply caused another temporary boost to the market which leads uninformed buyers to chase a credit which in the long run actually had no value. This credit was more of a head fake than anything else,as sellers were able to increase their sales prices by this amount or more in order to attract the easily fooled buyers. In many cases the aftermath of this credit will show that shortly after its expiration home prices will have dropped more than the original $8,000 the government was offering.

What else is keeping the housing market down? Lack of confidence.

Recently the chief economist for the National Association of Realtors,less than a week before the release of its monthly existing home sales report, warned that this lack of confidence grounded or not, could pose a bigger risk to recovery than expected.

“As long as people hold back,whether realistically or irrationally,or rationally; Lawrence Yun chief economist of the National Association of Realtors says, “then naturally there will be too much supply in relation to the demand, and that could lead to some over-correction in home prices in some markets.”

What is most likely in store for the U.S. housing market is a continuation and increase of Foreclosed homes for sale over the next 2 to 3 years until new jobs are created and the economy once again begins to recover.

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The loss of liquidity was not contemplated at all in the risk management models used across the industry, with the consequent increase of model back-testing failures. To give an idea of the impact of the liquidity component in these failures, we have observed in convertible bond portfolios three times the failures experienced by equivalent equity portfolios. The differential was entirely explained by the loss of liquidity in the convertible bond market, a market dominated by hedge funds that had to de-leverage their portfolios suddenly and all at once.

The combination of these events and the discovery that many monetary funds were investing relevant portions of their assets into illiquid instruments, such as ABSs, has increased the focus of regulators on Liquidity Risk.

Where the asset management industry is concerned, the most evident outcome of this new focus is reflected into the recent CESR recommendation for UCITS IV regulation (CESR/09-963, 28 October 2009). In this paper the CESR recommends the introduction of an ad hoc liquidity risk management process. Liquidity risk must be “…appropriately assessed, managed and monitored overtime” for all the UCITS.

The recommended prescription is reinforced by the following article, where the regulator requires that management companies perform stress tests and scenario analyses to measure the impact of potential liquidity crises, similarly to what is done under current legislation for stress tests on market risks.

The introduction of Liquidity Risk is the biggest surprise of UCITS IV according to many practitioners, even if this recommendation has been preceded by similar initiatives by the FSA in the banking regulation and by the Italian Consob for illiquid instruments marketed to individuals, under the MIFID hat.

The surprise comes along with worries and unresolved questions on the implementation of these new rules and liquidity risk procedures. Market Liquidity Risk is still a gray area in the risk management research. In the remainder of the article we try to define market liquidity risk, explain where the implementation problems come from and propose a possible solution.

Market Liquidity Risk is the risk of losing a certain amount of money when we liquidate the positions held in a portfolio/fund. Assume for a moment that we can observe bid and asks for all the instruments that we hold in our portfolio, and that the size of these proposals is consistent with the quantities that we hold. Assume also that we are revaluing our portfolio using mid prices.

In this case the market liquidity risk is simply the cost of liquidating our portfolio at the observed bids (and asks for short positions), as measured by the distance between mid price and bid (or ask).

It may be easy to compute this loss for an equity portfolio, where bid/asks and volumes are available, both in normal and stressed times. It becomes much tougher to follow this approach when the assets held in the portfolio are bonds, illiquid bonds, OTC derivatives and the plethora of opaque financial instruments that can be found in abundance in many mutual funds.

We call this the Liquidity Risk Paradox: the information for calibrating liquidity risk models is available only for liquid instruments. In other words, we will never find the data that we need on illiquid instruments, where most of the Liquidity Risk actually lies.

For a long time it seemed that the problem did not have a solution and this explains in part why the risk management industry has never implemented a universal solution for measuring and managing market liquidity risk across all financial instruments, from equities to OTC derivatives, to illiquid bonds.

However, current technology and availability of data allows imagining new solutions. We have recently finalized one year of research and development for developing a new approach to liquidity risk.

The approach replicates the way market makers create the bid and ask of an illiquid product: they introduce in the pricing function of an instrument the bid and ask of the OTC derivatives that will be used to hedge the position, obtaining the equivalent bid/ask of the instrument.

The approach can be used for any financial instrument that links a pricing function to traded OTC derivatives, enlarging dramatically the set of instruments for which Liquidity Risk is computable, including opaque assets for which no price and volume information is available.

This article was written by Dario Cintioli on December 2009, he is the Global Head of Risk Management and Complex Pricing at StatPro, a leading provider of portfolio analytics, data solutions, asset pricing services and risk management software for the global asset management industry.

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The Hong Kong government took new steps Friday to rein in the city’s surging property market, in another example of how low interest rates in the U. S. Are rippling across the world.

Officials in Hong Kong, a special administrative county of China, were prompted to move as the local economy defied fears of a global economical slowdown. The government Friday raised its full-year economical-growth forecast after reporting gross domestic product grew rapidly and without delay than expected in the second quarter, despite its forecast that second-half export growth can slow.

Home prices have risen 13% so far this year, extending a 30% increase in 2009, raising worries with regards to the possibility abruptly plunge in property prices if economical conditions deteriorate.

On Friday, Hong Kong’s de facto central bank broadened a rule restricting home mortgages to 60% of the value of the property to utilise to real estate worth at least 12 million Hong Kong dollars (with regards to $1. 5 million). The rule antecedently applied to properties over HK$20 million. The move effectively extends limits on lending in the luxury property market to the wealthy city’s upper midtier market.

City officials also said they would put limitations on flipping sales contracts on new condominiums before the properties are delivered and make further and added city land available to developers.

“We want to put in perspective the preventive measures before a bubble forms,” said Hong Kong Financial Secretary John Tsang, who attributed the skyrocketing housing prices to the combined constituents of plentiful liquidity, historically low interest rates and limited property supply.

Much of Hong Kong’s current strains can be traced back to the U. S. Hong Kong maintains a peg with the U. S. Dollar, which means it essentially imports U. S. Interest-rate policy. The U. S. Federal Reserve on Tuesday indicated interest rates will be low for even longer than antecedently expected.
But different from the U. S. , Hong Kong is growing at a healthful clip. Second-quarter economical output grew a still strong 1. 4% from the former quarter, slower than the initial quarter’s sequential 2. 1% GDP rise. The healthful info prompted the government Friday to raise its full-year GDP growth forecast to 5% to 6% from 4% to 5%.
Hong Kong’s economy also continued to get a boost from mainland China, exceptionally from the speculative capital inflows known as hot money. Wealthy mainland residents make up a considerable chunk of consumers of Hong Kong property for investment intentions. Hong Kong has its own legal scheme and immigration controls, though its leaders are at long last chosen by Beijing.

The low U. S. Interest rates are having a huge effect in other constituents of the earth. The narrow divergence between U. S. Rates and Japan’s rock-bottom policy rate is one component in the rapid appreciation of the Japanese currency.
Frances Cheung, a senior strategist at Credit Agricole CIB, said her bank will raise its forecast for Hong Kong’s 2010 GDP growth to 5. 5% from 5. 2% in light of the second-quarter info. “I expect the yearly growth of GDP will moderate in the second half due to the fading base effect,” Ms. Cheung said. Hong Kong’s economy contracted 2. 8% last year, its initial full-year decline since 1998.

The new measures declared Friday follow a variety of measures the government has introduced this year to cool the city’s sizzling property market. In February, it raised the stamp obligation, or transaction levy, on sales of luxury property respected at more than HK$20 million to 4. 25% from 3. 75%.

It has also been putting more prime internet sites up for auction and has sold around 4,000 subsidized apartments to provide more affordable homes to middle and lower-income residents.
Mr. Tsang said Friday the government will auction three extra internet sites to developers on its latest application list in the remainder of this fiscal year, which ends March 31, regardless of whether any developers table an offer. These internet sites could accommodate with regards to 540 little, residential units, he said.

Mr. Tsang also said the government will also discern more rural internet sites for residential use and consider converting around 20 hectares, or with regards to 49 acres, of land in the first place earmarked for industrial or mercantile use into residential development internet sites.

By CHESTER YUNG And JOYCE LI

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