The economic calendar is normal, featuring housing starts, retail sales, and Michigan sentiment. The CPI will be important someday, but only when it breaks the recent path of gentle increases. With summer vacations in full swing (even Congress is on a five-week recess) the punditry turns to tried and true topics – the spike in volatility, mistakes by the Fed, how near is the next recession, and how the bull market will end. Whatever the subject, the answer is often a call to action. Expect the pundits to be looking at the week behind to find material for the week ahead, asking:

Should you get out, hide out, or ride it out?

Last Week Recap

In last week’s installment of WTWA, I summarized what we learned from an especially jam-packed week of news, and then asked whether the facts changed your mind? That was a good question, but for most the answer was a firm “no.” People have the motivation and ability to use facts to confirm their existing biases.

I also warned individual investors about using volatility as a risk measure. Monday’s trading and the result for the week provided a perfect example of why this is a mistake.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. This week I am featuring Jill Mislinski’s version, which combines a lot of information in one picture. The full article also includes several other interesting takes on price movement.

The market lost 0.4% for the week, but this tame result misses the big story. The trading range was 4.1% including 2.7% in a single day. My weekly Quant Corner translates this into a volatility calculation which you can compare both to VIX and to past readings.

Noteworthy

The Council on Foreign Relations has responded to The Economist’s “Big Mac” indicator, which uses prices around the world to see which currencies are over-valued. If the market is efficient, the prices should be the same. As they note, however, Big Macs do not “travel well.” They suggest the “Mini Mac” index as an alternative. This index compares the price of iPad minis across countries. Read the full post for some amusing comparisons, which might actually make sense.

As shown in the graphic at the top, the Mini Mac Index suggests that the law of one price holds far better than does the Big Mac Index. The Big Mac shows the dollar overvalued against most currencies, by an average of 35 percent (a whopper). By contrast, the Mini Mac shows the dollar slightly undervalued—two percent on average (small fries).