Broad Market Analysis

“Beware of geeks bearing formulas”
Warren Buffett
Index
1

Introduction

2

Inflation, interest rates and the FED

3

Flow of capital

4

Economic turning points and govern...
1

2

3

4

5

6

7

Introduction
• Analysis techniques that identify
market trends by reviewing flow of
money, analyzing ...
1

2

3

4

5

6

7

Introduction
• There are a variety of reports, indicators indicators and
general tools that enable in...
1

2

3

4

5

6

7

Inflation, Interest Rates and the FED
• Preservation of capital is at the heart of the investment
bat...
1

2

3

4

5

6

7

Inflation, Interest Rates and the FED
• FED is a conglomerate of 12 separate banks governed by a
seve...
1

2

3

4

5

6

7

Inflation, Interest Rates and the FED
1

2

3

4

5

6

7

Inflation, Interest Rates and the FED
• Money supply is the key to keeping the economy
expanding or c...
1

2

3

4

5

6

7

Inflation, Interest Rates and the FED
• Federal fund rate
 interest rate at which
banks lend and bor...
1

2

3

4

5

6

7

Inflation, Interest Rates and the FED
• Federal fund rate
– interest rate at which banks lend and bor...
1

2

3

4

5

6

7

Inflation, Interest Rates and the FED
1

2

3

4

5

6

7

Inflation, Interest Rates and the FED
• Discount rate
 interest rate charged by the 12 Federal Reser...
1

2

3

4

5

6

7

Inflation, Interest Rates and the FED
• Increase in rates has a negative effect on stocks prices
• Na...
1

2

3

4

5

6

7

Flow of Capital
• Money controls the economy of nations and the quality of life
for people
• Success ...
1

2

3

4

5

6

7

Flow of Capital
• General tendency of all stocks to follow the market
• Various studies attribute as ...
1

2

3

4

5

6

7

Economic Turning Points and Government Reports
• Fed collects data from a number of resources, uses t...
1

2

3

4

5

6

7

Economic Turning Points and Government Reports
• Employment Cost Index (ECI)





quarterly data ...
1

2

3

4

5

6

7

Economic Turning Points and Government Reports
• Producer Price Index (PPI)
 strong influence on the...
1

2

3

4

5

6

7

Economic Turning Points and Government Reports
• Retail Sales
 consumer spending makes up for approx...
1

2

3

4

5

6

7

Economic Turning Points and Government Reports
1

2

3

4

5

6

7

Economic Turning Points and Government Reports
• Housing Starts and Sales of New and Existing Homes
...
1

2

3

4

5

6

7

Economic Turning Points and Government Reports
• Construction Spending
 nonresidential and public ho...
1

2

3

4

5

6

7

Economic Turning Points and Government Reports
• Capacity Utilization
 measures at what rate the man...
1

2

3

4

5

6

7

Economic Turning Points and Government Reports
• Personal Income and Consumption Expenditures
 help ...
1

2

3

4

5

6

7

Seasonal Factors
•
•
•
•

Have an impact on the markets year round
Are much broader than climate issu...
1

2

3

4

5

6

7

Seasonal Factors
• January Effect
 describes a pattern in which smaller cap-stocks outperform their
...
1

2

3

4

5

6

7

Seasonal Factors
• Quarter End Fluctuations





end of quarter is of special significance to por...
1

2

3

4

5

6

7

Seasonal Factors
• Supply and Demand
 the number of total number of shares (supply) is fixed
 deman...
1

2

3

4

5

6

7

Strategic Market Assessment Using Indexes
• There are evens that have an impact on entire industries,...
1

2

3

4

5

6

7

Strategic Market Assessment Using Indexes
• DOW
 back in 1884 Charles Dow
published the average
clos...
1

2

3

4

5

6

7

Strategic Market Assessment Using Indexes
 used stock market indexes as a way of gauging trends in t...
1

2

3

4

5

6

7

Strategic Market Assessment Using Indexes
• William P. Hamilton
 Dow successor at the WSJ
 refined ...
1

2

3

4

5

6

7

Strategic Market Assessment Using Indexes
 volume must confirm the trend
» Mr. Dow was a big believe...
1

2

3

4

5

6

7

Strategic Market Assessment Using Indexes
• INDEXES





late 1800’s bonds were highly regarded
s...
1

2

3

4

5

6

7

Strategic Market Assessment Using Indexes
 The New York Stock Index ($NYA)
» measures aggregate perf...
1

2

3

4

5

6

7

Strategic Market Assessment Using Indexes
 another popular way of categorizing stocks is by market c...
1

2

3

4

5

6

7

Strategic Market Assessment Using Indexes
 indexes can track performance in terms of specific econom...
1

2

3

4

5

6

7

Strategic Market Assessment Using Indexes
 other indexes are designed to track the performance of ec...
1

2

3

4

5

6

7

Strategic Market Assessment Using Indexes
• HOLDRS
 sector specific depositary receipt
 trade like ...
1

2

3

4

5

6

7

Strategic Market Assessment Using Indexes
 Index Shares (iShares)
 exchange traded funds (ETF’s) or...
1

2

3

4

5

6

7

Industry Sectors As Forecasting Tools
• Economy has an array of sectors that can be doing well as
ano...
1

2

3

4

5

6

7

Industry Sectors As Forecasting Tools
Market Indicators
• Number of tools called indicators that prov...
1

2

3

4

5

6

7

Industry Sectors As Forecasting Tools
 advance/decline line is best used in conjunction with senior ...
1

2

3

4

5

6

7

Industry Sectors As Forecasting Tools
• Volume





is the level of activity associated with a sp...
1

2

3

4

5

6

7

Industry Sectors As Forecasting Tools
• TRIN
 also known as the closing Arms Index is a volume indic...
1

2

3

4

5

6

7

Industry Sectors As Forecasting Tools
• New highs and lows





market analysts focus on the rati...
THANK YOU VERY MUCH
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Broad Market Analysis (session 5)

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Broad Market Analysis (session 5)

  1. 1. Broad Market Analysis “Beware of geeks bearing formulas” Warren Buffett
  2. 2. Index 1 Introduction 2 Inflation, interest rates and the FED 3 Flow of capital 4 Economic turning points and government reports 5 Seasonal factors 6 Strategic market assessment using indexes 6 Industry sector as forecasting tools
  3. 3. 1 2 3 4 5 6 7 Introduction • Analysis techniques that identify market trends by reviewing flow of money, analyzing index performance, keeping tap on industry leadership, changes in the advance/decline line (A/D line) • Three out of four stocks move in tandem with the general trend of the market • Take into account that the market will change course when it suspects the economy is heating up or slowing down.
  4. 4. 1 2 3 4 5 6 7 Introduction • There are a variety of reports, indicators indicators and general tools that enable investors to keep their fingers in the pulse of the stock market • These tools include:        monetary policy: (interest rates, value of the dollar) Government report index analysis sector comparisons market indicators seasonal factors changes in political climate
  5. 5. 1 2 3 4 5 6 7 Inflation, Interest Rates and the FED • Preservation of capital is at the heart of the investment battle • Rate of inflation is an ever-changing  rate runs at 3% to 4%, said to be on check  inflation means less profits > lower stock valuations  high inflation > increase in interest rates > slows the economy down (reins on lending and business expansion, increases mortgage rates and scales back consumer spending)  low inflation and low interest rates keep money flowing into the stock market
  6. 6. 1 2 3 4 5 6 7 Inflation, Interest Rates and the FED • FED is a conglomerate of 12 separate banks governed by a seven member Board of Governors • Federal Reserve System is charged with fostering growth without generating inflation  Federal Open Market Committee (FOMC) > balance the amount of money in circulation  economy needs a boost > members tell the Federal Reserve Bank of New York to speed up the creation of dollars  inflation is on the rise > they use their secret weapon: interest rates  money supply is the key to keeping the economy expanding or contracting
  7. 7. 1 2 3 4 5 6 7 Inflation, Interest Rates and the FED
  8. 8. 1 2 3 4 5 6 7 Inflation, Interest Rates and the FED • Money supply is the key to keeping the economy expanding or contracting  M1: money that can be spent immediately, includes cash, checking accounts  M2: M1 + assets invested in short term, includes money markets and money market mutual funds  M3: M2 + big deposits include institutional money market funds
  9. 9. 1 2 3 4 5 6 7 Inflation, Interest Rates and the FED • Federal fund rate  interest rate at which banks lend and borrow federal funds among themselves  most sensitive indicator of the direction of the market  set daily by the market  these loans take place in a private financial market Federal Reserve Bank of New York (gold reserve vault)
  10. 10. 1 2 3 4 5 6 7 Inflation, Interest Rates and the FED • Federal fund rate – interest rate at which banks lend and borrow federal funds among – most sensitive indicator of the direction of the market – set daily by the market – these loans take place in a private financial market
  11. 11. 1 2 3 4 5 6 7 Inflation, Interest Rates and the FED
  12. 12. 1 2 3 4 5 6 7 Inflation, Interest Rates and the FED • Discount rate  interest rate charged by the 12 Federal Reserve Banks for short term loans made to member banks  Federal Reserve Board controls interest rates by moving the discount rate up or down – Ben Bernanke (chairman)
  13. 13. 1 2 3 4 5 6 7 Inflation, Interest Rates and the FED • Increase in rates has a negative effect on stocks prices • Natural law of financial physics that money always flows to the highest return on capital • Stocks and bonds have an inverse relationship to interest rates  does not always hold  these divergences are usually short lived • Bond prices and stock market move in tandem INTEREST RATES DOLLAR BONDS STOCKS Up Up Down Down Down Down Up Up Sideways Sideways Sideways Up
  14. 14. 1 2 3 4 5 6 7 Flow of Capital • Money controls the economy of nations and the quality of life for people • Success of a company stock depends on money • Flow of money sometimes becomes flight of money  interest rates in once country are lower than risk-adjusted rates in other countries  the fact that money has moved between countries and between investment categories such as bonds, equities and commodities and between individual stocks, commodities and bonds results in a shift of the risk/reward ratio
  15. 15. 1 2 3 4 5 6 7 Flow of Capital • General tendency of all stocks to follow the market • Various studies attribute as much as 70% of a stock’s performance to the movement of the market as a whole • Many investors fight the trend by taking a contrarian stance • Stock market is a mini-version of the flow of global capital • So too does money flow into the stock market as a whole, always searching for the best risk/reward ratio • Money tends to seek out the hottest sectors or stocks • Regardless of market direction, not all sectors go up or down at the same time
  16. 16. 1 2 3 4 5 6 7 Economic Turning Points and Government Reports • Fed collects data from a number of resources, uses this data to judge whether the economy is expanding or contracting, more importantly at the pace it is doing so  employment report  followed by investors  picture of the nation’s health  several important components:     unemployment rate non-farm job growth weekly hours hourly earnings Unemployment rate (%)
  17. 17. 1 2 3 4 5 6 7 Economic Turning Points and Government Reports • Employment Cost Index (ECI)     quarterly data based on a survey on employer payrolls measures changes in labor costs on wages and salaries non farm private sector and state and local government analyst specifically look at acceleration or declaration • Consumer Price Index (CPI)  measures the value of a basket of goods in the current year to the value of that same basket a year earlier  widely regarded as the most important inflation report  a year to year CPI report can give a clear picture of the rate of inflation  increase in inflation has a negative effect on stocks and vice-versa  http://www.minneapolisfed.org/
  18. 18. 1 2 3 4 5 6 7 Economic Turning Points and Government Reports • Producer Price Index (PPI)  strong influence on the Fed’s reaction to pricing inflation  index gauges the prices of commodities:  raw materials  intermediate goods  finished goods  investors look for an annualized PPI to stay below 3% • National Association of Purchasing Management Index (NAPM)  another indicator of economic growth  wide ranging view of the manufacturing sector’s ups and downs  broken down into specific components of supplier deliveries, order backlog, new orders, production, employment, inventories, import orders, new export order and prices paid  example: statistics for order backlogs > vendor performance index  web site: www.napm.org
  19. 19. 1 2 3 4 5 6 7 Economic Turning Points and Government Reports • Retail Sales  consumer spending makes up for approximately two thirds of the national economy  most closely watched economic indicator  reviews monthly sales for auto manufacture, major retailers, and chain store sales • Gross Domestic Product (GDP)  is the total production and consumption of good and services in the US > excellent gauge of economic growth  single most comprehensive picture of the economy
  20. 20. 1 2 3 4 5 6 7 Economic Turning Points and Government Reports
  21. 21. 1 2 3 4 5 6 7 Economic Turning Points and Government Reports • Housing Starts and Sales of New and Existing Homes     housing stats show the first signs of any new direction changes are usually set off by changes in home mortgage rates high stars indicate a healthy economy sales of new and existing homes gives analyst an idea how future sale of things look, such as appliances, furniture and other good
  22. 22. 1 2 3 4 5 6 7 Economic Turning Points and Government Reports • Construction Spending  nonresidential and public housing projects  a strong number here > high degree of confidence in economy  Lagging indicator > numbers are not re[ported until structures are completed  analysts do the reading every three months>very volatile • Industrial Production Index  aggregate output of all country’s utilities, factories, mines  directly affects the stock market  lagging indicator > numbers are not re[ported until structures are completed
  23. 23. 1 2 3 4 5 6 7 Economic Turning Points and Government Reports • Capacity Utilization  measures at what rate the manufacturing capacity of the nation is being utilized  80% or lower can cause concerns of underutilization  high (not too high) capacity utilization brings stock up and bonds down  capacity rate of 85% can indicate the point at which inflationary pressures begin • Factory Orders – Durable Goods and Nondurable Goods  looks at factory shipments that are measures of current demands, new factory orders, inventories and unfulfilled orders  tracking orders for big ticket items such as cars refrigerators that are expected to last more than three years
  24. 24. 1 2 3 4 5 6 7 Economic Turning Points and Government Reports • Personal Income and Consumption Expenditures  help gauge the prospect of future consumer spending  as income rises, so does the stock market  important way to measure overall economic activity
  25. 25. 1 2 3 4 5 6 7 Seasonal Factors • • • • Have an impact on the markets year round Are much broader than climate issues During election years > historically high performing years History tends to repeat itself
  26. 26. 1 2 3 4 5 6 7 Seasonal Factors • January Effect  describes a pattern in which smaller cap-stocks outperform their blue chip brethren in January  statistically the pattern has been evident  there has been years (1996-1999) in which this effect failed to materialize • October Jinx • great crash of 1929, repetition in 1987, as well as the minus 554 point day in 1992 • history of the DOW, 6 of the 12 largest daily drops have occurred in October > many good runs have began in November • Government shut-down in 2013 also occurred in the October month
  27. 27. 1 2 3 4 5 6 7 Seasonal Factors • Quarter End Fluctuations     end of quarter is of special significance to portfolio managers SEC requires mutual funds to post performance and holdings clunkers are replaced in favor of stocks that are current favorite window dressing creates some wild times on the last trading days of March, June, September and December • Monthly Options Expirations  third Friday of every month > final hours of trading can bring some wild price gyrations  money managers and traders will often create sophisticated hedge positions that will need to be unwound
  28. 28. 1 2 3 4 5 6 7 Seasonal Factors • Supply and Demand  the number of total number of shares (supply) is fixed  demand for the fixed number of shares will vary continuously depending on the data available: company, sector and the economy  Stock exchange is like an auction:  more buyers than sellers > stock prices will   more sellers than buyers > stock prices will • International and Political Factors  politics does not always reinforce  business interests worldwide economic dependency has moved to the front > digitally linked with fewer trade barriers than ever before
  29. 29. 1 2 3 4 5 6 7 Strategic Market Assessment Using Indexes • There are evens that have an impact on entire industries, sectors at times the market as a whole • Comovement or covariance – the degree to which stocks move together • Indexes serve the purpose to think of the aggregate or composite performance of stocks • Index represents a cross section of the economy or market sector • Understanding indexes is an effective way of subdividing the stock market into groups or sectors • Price weighted (DOW) vs. capitalization or market weighted (S&P 500)
  30. 30. 1 2 3 4 5 6 7 Strategic Market Assessment Using Indexes • DOW  back in 1884 Charles Dow published the average closing prices of 11 U.S. companies  in 1896 two new averages were published daily:  average prices of 20 railroad stocks (Dow Jones Railroad Average)  average prices of 12 industrial stocks (Dow Jones Industrial Average)  in effect, Dow simplified the monitoring of a large number of stocks individually by compiling and publishing the average performance of a list of like popular stocks.  Charles Dow  is known as the father of stock market indexes  original editor of the Wall street Journal
  31. 31. 1 2 3 4 5 6 7 Strategic Market Assessment Using Indexes  used stock market indexes as a way of gauging trends in the economy  Charles Dow also put forth the idea of market trends  trend has three parts: he likened them to tides, waves and ripples » primary trend (tides)  long period of rising or falling stock prices » secondary trend (waves)  lasts three weeks to three months  moves against the primary trend  Retrace or correct anywhere from 1/3 to 2/3 of the prior trend’s movement, with the most frequent correction of 50% » third trend (ripples)  lasts around three weeks  represented fluctuations on the secondary trend  generally considered unimportant
  32. 32. 1 2 3 4 5 6 7 Strategic Market Assessment Using Indexes • William P. Hamilton  Dow successor at the WSJ  refined Dow’s early ideas and developed the Dow Theory  the averages discount everything » market is the world’s most efficient processor of information » anything that happens, including an act of God is already priced in  the market has three trends  major trends have three phases » accumulation phase (informed buying by those close to the co.) » public participation » distribution phase  the averages must confirm each other » Dow was speaking of the railroads and the industrials » both needed to be in the same primary trend, did not have to begin at same time
  33. 33. 1 2 3 4 5 6 7 Strategic Market Assessment Using Indexes  volume must confirm the trend » Mr. Dow was a big believer in volume » it should increase in the direction of the primary trend  a trend is assumed to be in effect until it gives a definite signal it has reversed » one of the basic tools of modern day technical analysis
  34. 34. 1 2 3 4 5 6 7 Strategic Market Assessment Using Indexes • INDEXES     late 1800’s bonds were highly regarded stock market was an unknown territory index is made up of a select group of stocks can measure and report value changes to the whole group by tracking its highs and lows, today’s performance vs. yesterday’s, volume and volatility  many indexes tailored to reflect performance of different sectors  The Dow Jones Industrial Average ($INDU) » Dow 30 » oldest market average in the world  The Standard & Poor’s 500 ($SPX) » capitalization weighed » 500 stocks (industrials, utilities, financials and transportation)
  35. 35. 1 2 3 4 5 6 7 Strategic Market Assessment Using Indexes  The New York Stock Index ($NYA) » measures aggregate performance of all stocks in the NYSE  The Nasdaq Composite Index ($COMP) » capitalization weighed index » measures the performance of all stocks trading in the Nasdaq  The Wilshire 5000 ($TMW » one of the broadest measures of U.S. stocks » created in 1974 it had 5.000 stocks, now it is closer to 7.000 » requirements:  firm’s headquarter has to be in the U.S.  stock is actively traded on a U.S. exchange  stock has widely available information  U.S. Total Market Index » Dow Jones Co. launched this index, designed to represent 95% of all U.S. stocks
  36. 36. 1 2 3 4 5 6 7 Strategic Market Assessment Using Indexes  another popular way of categorizing stocks is by market capitalization  The Russell 2000 Small Cap Index ($RUT) » measure of the 3.000 most actively traded stocks in the NYSE, Nasdaq and the American Stock Exchange » 1.000 largest companies are removed » most widely follow gauge of small-cap stock performance  The S&P Midcap 400 Index ($MID) » consists of 400 mostly industrial companies » selection is made by market size and popularity (trading volume)  The Wilshire 4500 Index » all of the companies of the Wilshire 500 » S&P 500 removed » provides a measure of both small and mid-cap stocks
  37. 37. 1 2 3 4 5 6 7 Strategic Market Assessment Using Indexes  indexes can track performance in terms of specific economic sectors  The NASDAQ 100 ($NDX) » measure of the 100 largest nonfinancial companies » accurate gauge of the technology sector  The Dow Jones Utility Average ($DJU) » developed in 1929 when all utility stocks were removed form the Dow Jones Industrial Average » index of only utility stocks  The Dow Jones Transportation Average ($DJT) » originally known as the Dow Jones Railroad Average » reliable way to study the railroad sector  The AMEX Oil Index ($XOI) » tracks the performance of the energy sector
  38. 38. 1 2 3 4 5 6 7 Strategic Market Assessment Using Indexes  other indexes are designed to track the performance of economic sectors and industry groups  The PHLX Semiconductor Index ($SOX) » price weighted index of 16 companies » companies engaged in the manufacture and distribution of semiconductors  The PHLX Box-Maker Index ($BMX) » price weighted index » 9 companies involved in the manufacture, distribution and sales of desktops and notebooks  The Street.com Internet Index ($DOT) » 20 companies engaged in the Internet commerce, software and services  useful index links:  www.cboe.com  www.amex.com
  39. 39. 1 2 3 4 5 6 7 Strategic Market Assessment Using Indexes • HOLDRS  sector specific depositary receipt  trade like stocks, but actually are made up of a group of stocks  easily and conveniently buy a basket of stocks within a sector  biotechnology, semiconductor, pharmaceutical  unlike index funds or index shares, they do not track a specific index > represent ownership of stocks in a particular industry • studies prove that being in the right sector outperformed being in the market at the right time by a margin of 4:1
  40. 40. 1 2 3 4 5 6 7 Strategic Market Assessment Using Indexes  Index Shares (iShares)  exchange traded funds (ETF’s) or index shares are funds designed to match the performance on an index  funds buy the same stocks that are in the index  shares of the funds are traded on an exchange like a stock  S&P Depositary Receipt (SPDR – Spiders) – (AMEX), tracks the S&P 500)  Dow Jones Industrial Average (Diamonds)  Nasdaq (QQQ)
  41. 41. 1 2 3 4 5 6 7 Industry Sectors As Forecasting Tools • Economy has an array of sectors that can be doing well as another is doing poorly • Many investors believe that half of a stock’s price performance can be attributed to its respective industrial sector • Money flows in and out of various sectors – sector rotation • BusinessWeek has divided the market into approx. 197 sectors – http://investing.businessweek.com/research/sectorandindustry/overview /sectorlanding.asp
  42. 42. 1 2 3 4 5 6 7 Industry Sectors As Forecasting Tools Market Indicators • Number of tools called indicators that provide insight to broad market analysis      advance/decline line up and down volume TRIN new highs/new lows Market Breath / Advance-Decline line (A/D line)  simply a measure of the number of stocks advancing versus the number of stocks that are declining  2.400 stocks advance vs. 1.200 decline – market breath is said to be positive 2 to 1 and viceversa  graphic representation of the advance/decline line over a period of time  it is cumulative – each day the new total is added to the previous total
  43. 43. 1 2 3 4 5 6 7 Industry Sectors As Forecasting Tools  advance/decline line is best used in conjunction with senior averages  the advance decline line is considered the best indicator of market movement  considered a good sign when the Dow jones Industrial Average and the New York Stock Exchange A/D line are rising together  unhealthy when the Dow is setting new highs and he NYSE A/D line is moving lower – breath is said to be lagging or poor
  44. 44. 1 2 3 4 5 6 7 Industry Sectors As Forecasting Tools • Volume     is the level of activity associated with a specific market or security up and down volume are helpful indicators NYSE reports the level of activity each day market strategist will look beyond total volume and and look at the advancing volume versus the declining volume  more declining than advancing – interpreted as a negative bearish sign  more advancing than declining – interpreted as a positive bullish sign  http://wsj.com/mdc/public/page/2_3021-tradingdiary2.html
  45. 45. 1 2 3 4 5 6 7 Industry Sectors As Forecasting Tools • TRIN  also known as the closing Arms Index is a volume indicator  derived by using the advance/decline ratio and up and down volume  formula is pretty straightforward  if a drop in the senior averages is accompanied by heavier trading volume  ratio > 1 = market negative (falling stocks have greater average volume than advancing volume)  ratio < 1 = market positive (advancing stocks have greater average volume than falling volume)
  46. 46. 1 2 3 4 5 6 7 Industry Sectors As Forecasting Tools • New highs and lows     market analysts focus on the ratio of new highs to new lows new highs refer to stocks that are setting one year new highs new lows are stocks that are setting new one year lows the new highs/new lows indicator is simply the new highs minus (-) the new lows  most insight if used in conjunction with senior averages  Dow is rising to new highs and the primary trend is bullish, NYSE’s new highs/new lows ratio is also moving higher > interpreted as a bullish sign > strength in the overall market  on the other hand, senior averages are recording new highs, but the new highs/new lows ratio is moving lower > it is considered bearish because more stocks are moving lower than higher  insightful to compare data between Nasdaq and the New York Stock Exchange >sometimes market data on one exchange will differ substantially from another
  47. 47. THANK YOU VERY MUCH
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