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<DIV><FONT color=#000000>RTs</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV><FONT color=#000000>This has ref to posts about how SPX/SPM8 premia are
expanding and most major indices are going the one way while SnP goes the other.
</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV><FONT color=#000000>1. Data:</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV><FONT color=#000000></FONT><FONT color=#000000>Index
components:</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV>a. Only 5 stocks are members of both OEX and NDX. That leaves 190 others to
define the trend on that index.</DIV>
<DIV>b. 65 stocks in the NDX are NOT represented in SPX (so only 35 of the 100
are in the SPX).</DIV>
<DIV>c. MSFT and INTC today are responsible for 12 of the 13 down points in the
NDX as of this minute - other gainers and losers cancel each other out.</DIV>
<DIV>d. (MSFT + INTC + CSCO + DELL) = 49.8% of NDX weighting.</DIV>
<DIV> <FONT color=#000000> Above 4 = under 5% of SPX weighting.
</FONT></DIV>
<DIV><FONT color=#000000>e. Correlations between "widely followed" and
better representative indices tell the sector-rotation tale
distinctly:</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV><IMG align=baseline alt="" border=0 hspace=0
src="cid:004801bd829d$f39d71a0$4f832599@xxxxxxx";></DIV>
<DIV><FONT color=#000000>MSH = Morgan Stanley Hitech Index</FONT></DIV>
<DIV><FONT color=#000000></FONT>NFT = Nifty Fifty Index.</DIV>
<DIV> </DIV>
<DIV><FONT color=#000000>See how the near term tech/others correlation has
broken down while the Nifty Fifty, OEX and SPX remain tightly correlated. SPX
and INDU have always been an inferior correlated pair compared to SPX/OEX and
SPX/NFT.</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV><FONT color=#000000>2. Inferences:</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV><FONT color=#000000>a. SnP 500 benchmarked funds (otherwise) are
"cooking the book" (managing just this correlation today/last
week by being underweight technology while NDX benchmarked funds are being eaten
alive). This is a double whammy for tech funds coz COMP has higher YTD ROI than
SPX or INDU so far this year; thereby being more difficult to beat than for the
SPX folks - and attract fund inflows away from SPX benchmarked
funds.</FONT></DIV>
<DIV> </DIV>
<DIV><FONT color=#000000>b. I'd still prefer to look at actual data before
jumping to broad brush-stroke conclusions based on one major index. </FONT><FONT
color=#000000>Sector rotations do happen, and index charts pick these up easily.
</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV><FONT color=#000000>Just because technology is heading down does not
necessarily mean the SPX will also go down. If tech is down, short the NDX or
Pacific Tech or MSH - not the SPX or NY Comp.</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV><FONT color=#000000>I am yet to see statistical validity of this
often-expressed "market truth" (technology leads the market) for the
SHORT term. Long term, given the component weightings in almost all major
indices, everything has a +0.8 or higher correlation - because we mostly look at
the 18 year bull market and a lot of these companies didn't exist before
then.</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV><FONT color=#000000>c. The PREM mismatch in my opinion is just a glaring
signature of volatility expansion about to hit the market. </FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV><FONT color=#000000>Finally, the PREM mismatch statement needs to be put in
perspective.</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV><FONT color=#000000>PREM today has been within historically valid bounds
and quickly corrected by sell/buy programs. A critical assumption in computing
PREM is short term interest rates and transaction costs. While transaction costs
are finetuned over time, it is likely that players would be tinkering around
with a higher than normal interest cost component based on FOMC tomorrow - thus
seeking higher-than-normal premium to consider a trade profitably mispriced
between future and stock. Max misprice today was 0.31% on the NYA - not even
close to the major mismatches we've seen during crash-down or crash-up days,
when it goes to +/- 1%. By itself, 0.31% = juicy misprice (0.31% rotated 3 times
within a day = 1% ROI for the day - which is GOOD for a day's work by the
computer, when annual returns have to be only 25%-30%) - but not
uncommon.</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV><FONT color=#000000>Next email will have a chart to show where we stand on
the volatility assumption made above...</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV><FONT color=#000000>Regards</FONT></DIV>
<DIV><FONT color=#000000>Gitanshu</FONT></DIV></BODY></HTML>
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