Monthly Stock Market Report

January 22, 22 Monthly Stock Market Report This document is for internal use only. The document or any of its contents should not be distributed outside of the Federal Reserve System without permission. Market Analysis for Period Ending Wednesday, January 16, 22 This document presents technical and fundamental analysis commonly used by investment professionals to interpret direction and valuation of equity markets, as well as tools commonly used by economists to determine the health of financial markets and their impact on the domestic United States economy. The purpose is to provide a synopsis of equity markets from as many disciplines as possible, but is in no way an endorsement of any one mode of study or source of advice on which one should base investment decisions. Definitions of terms and explanations of indicator interpretation follow the charts in the Endnotes section. Technical Trends Figure 1 presents trends and daily volumes for the New York Stock Exchange and Nasdaq Composite Indices. The New York Stock Exchange Composite Index (NYSE Index) closed Wednesday, January 16 at 575.16. This level marked a 13.3 decline since the recent high of 663.56 on May 21, and it is 1.4 below the opening value on January 1, 21. The has risen 14.1 since September 21, the low point following the terrorist attacks, though the level has not changed much since mid-november. The National Association of Securities Dealers Composite Index (Nasdaq Index) closed at 1944.44. Between January 1, 21 and January 16, 22, the Nasdaq Index fell 15.2. Since the September 21 low, however, the has increased 36.6, and until recent days was at its highest level since the beginning of August (figure 1). Figures 2, 3, and 4 present some technical indicators commonly cited by stock market analysts. As of January 16, the relative strength for the NYSE Composite had a value of 4.5, remaining in what is commonly viewed as neutral territory (figure 2, upper panel). The number of stocks falling to new 52-week lows has declined sharply since the end of September, while the number of stock making new highs has gradually increased (figure 3 upper panel). The middle panel shows that momentum

(overbought/oversold oscillator) has fallen back towards oversold territory, while the Market Breadth indicator (figure 3, bottom panel) is at its highest point since November 1999. For the Nasdaq Index, the relative strength also remains in the neutral range (figure 2). The upper panel in Figure 4 shows that the number of stocks reaching new lows has leveled off, while the number of stocks reaching new highs has increased slightly. Declining stocks still outnumber advancing ones at a fairly constant difference (lowest panel, figure 4). The momentum indicator has repeatedly fallen towards oversold territory in recent months (figure 4, middle panel). Volatility Indicators of market volatility are shown in figure 5. The Chicago Board of Options Exchange (CBOE) provides daily measures of volatility for the S&P 1 (VIX) and for the Nasdaq 1 (VXN). Both volatility indicators declined sharply after September 21, when the indices were at their lowest levels, and are now at levels similar to those seen in the summer. Put/Call ratios appear in figure 6. Monthly data are shown from January 1997 through December 21. The CBOE individual equity put/call ratio increased in December, approaching levels usually interpreted as bullish. The S&P 1 put/call ratio decreased in October and now resides just below bullish territory (figure 6, top panel). Sector Performance Figure 7 compares the performance of the various economic sectors within the S&P 5 as well as other international and style indices. Eight of ten sectors in the S&P 5 have a negative year-todate return as of January 16. Information technology, which had the largest return over the past five years, is already returning more than four in the first two weeks of the new year. The materials sector has the lowest return so far in 22, losing 5.9 after struggling in the previous five years. The industrials sector also has a large year-to-date loss, 5.2, after returning an average of 1.4 between 1997 and 21. The Wilshire 5, composed of all U.S. equity issues, has fallen 1.8 year-to-date. Similarly, the German DAX declined 3.4, the British FTSE 1 has fallen 1.7

, and the Japanese Nikkei 225 has lost 3.5 of its value as of January 16, 22. Over the last five years the Russell 1 Large-Cap Index returned 15., while the 2 Small-Cap Index returned on average 8.7 annually. Year-to-date, however, the 1 Large-Cap Index depreciated 1.7, while the Russell 2 Small-Cap Index depreciated 2.5 (figure 7). Both growth and value stocks have seen negative returns in 22, following an average return of more than 14 in the previous five years. Valuation Figure 8 displays historical and current -earnings ratios for the S&P 5 economic sector groups described above. Figure 9 graphs the current and previous earnings forecasts for several calendar years in the top panel, and lists the current and previous growth of earnings forecasts for each S&P 5 sector in the two tables. Figure 1 shows three measures of historical and future valuation: historical PE ratios in the top panel, forward and trailing PE ratios using analysts' estimates of operating earnings in the middle panel, and strategists two-year forecasts of earnings growth in the lower panel. Among the economic sectors, -earnings ratios generally increased since the fourth quarter of 2. The ratio for telecommunication services increased from 18 to 75 during that period. The sharp increase in this ratio can be traced to the decline in earnings. The ratio for the materials sector has risen from 2.7 to 63.1 in the same period, despite a decline in stock s. The energy sector has seen a steady decline in its ratio from 26.5 at the end of 1998 to 14.1 as of January 16, due to both a decline in stock s and an increase in earnings (figure 8). The analysts surveyed by Thompson Financial/First Call project a 7.7 decline in earnings for the S&P 5 in the first quarter of 22, and a 16.6 decline for the calendar year. Analysts have cut earnings expectations for the first quarter for each of the ten sectors, often sharply, since July's projection. Earnings for the transportation sector are expected to continue to fall in the wake of the terrorist attacks. The energy sector is also expected to see a large decline in earnings, 52.7. Most sectors are not expected to see positive earnings growth until the second quarter of 22 (figure 9). The macro projections from strategists for the growth of earnings for the Standard and Poor s 5 over the next two years have been revised downward to 18.3 in the fourth quarter of 21, below the 6.1 historical average annual growth rate. The S&P 5 trailing -earnings ratio decreased

to 31.9 in the fourth quarter of 21 from 39.9 in the third quarter. During the same period the -earnings ratio for the Russell 2 increased to 37.9 from 24.8. The fourth quarter forecast for the S&P 5 forward to operating earnings ratio, using bottom-up forecasts from analysts, increased to 23.9 from 21.6 in the third quarter (figure 1). Comparative Returns The dividend- ratio, an indication of the yield investors receive through dividends by holding stocks, increased to 1.41 in the fourth quarter from 1.38 in the third quarter. The earnings- ratio fell to 2.5 in the third quarter from 3. in the second quarter. Both of these ratios are still substantially below the 5.4 real rate of interest on corporate bonds and their respective historical averages, 3.4 and 6.3 (figure 12). Typically, the earnings- ratio falls below the real return on bonds when analysts expect earnings to rise rapidly. Nonfinancial corporate businesses have tried to maintain dividends in the face of sagging profits, resulting in an unusually high dividend to operating profit payout rate of 77.2, the highest ever recorded (figure 13, lower panel). Moody's upgraded fewer investment grade securities in November than October, but more than the number of downgraded securities. The number of downgrades in speculative grade securities increased and remained far above upgrades in that category. The default rates on junk bonds continue to rise rapidly, from 14.1 in October to 14.7 in November. The junk bond failure rate also increased, from 49. to 5.3, though it remains below the levels of April and May (figure 15, lower panel). Please contact Matthew S. Rutledge for questions and comments (617) 973-3198.

Figure 1 Daily Trends of Major U.S. Stock Exchanges 7 65 New York Stock Exchange * 2-day moving average 1 millions of shares 4 35 3 6 55 NYSE Composite Price Index 5-day moving average 1 daily volume 25 2 5 15 1 45 5 4 7/3/2 1/3/2 1/4/21 4/6/21 7/1/21 1/15/21 1/16/22 * New York Stock Exchange Composite Index closed at 663.2 on July 17,2. 4 Nasdaq Stock Market * Nasdaq Composite Price Index millions of shares 5 45 2-day moving average 1 4 3 5-day moving average 1 35 2 daily volume 3 25 2 15 1 1 5 7/3/2 1/3/2 1/4/21 4/6/21 7/1/21 1/15/21 1/16/22 * Nasdaq Composite Index peaked at 4274.67 on July 17, 2. Source: Bloomberg, L.P.

Figure 2 Moving Averages and Relative Strength New York Stock Exchange 65 6 18-day moving average 2 55 5 NYSE Composite Price Index 9-day moving average 2 45 Relative Strength Index 3 1 Overbought 8 6 4 2 Oversold 7/2/21 8/2/21 9/4/21 1/1/21 11/9/21 12/12/21 1/15/22 24 Nasdaq Stock Market 21 9-day moving average 2 18 Nasdaq Composite Price Index 15 18-day moving average 2 12 Relative Strength Index 3 1 8 Overbought 6 4 2 Oversold 7/2/21 8/2/21 9/4/21 1/1/21 11/9/21 12/12/21 1/15/22 Source: Bloomberg, L.P.

Figure 3 Index Breadth and Momentum Indicators - New York Stock Exchange 65 New Highs and New Lows 4 number of stocks 4 6 NYSE Composite 3 55 5 New Highs New Lows 2 1 45 7/2/21 8/2/21 9/4/21 1/1/21 11/9/21 12/12/21 1/15/22 Momentum Oscillator 5 75 5 Overbought 25-25 -5-75 (-1121.1) Oversold -1 7/2/21 8/2/21 9/4/21 1/1/21 11/9/21 12/12/21 1/15/22 65 6 Market Breadth 6 Cumulative Advances - Declines number of stocks 15 1 5 55 NYSE Price Index -5-1 -15 5 7/2/21 8/2/21 9/4/21 1/1/21 11/9/21 12/12/21 1/15/22 Source: Bloomberg, L.P. -2

Figure 4 Index Breadth and Momentum Indicators - Nasdaq Stock Market 3 New Highs and New Lows 4 number of stocks 5 25 2 NASDAQ Composite Price Index NASDAQ New Lows NASDAQ New Highs 4 3 2 1 15 7/2/21 8/2/21 9/4/21 1/1/21 11/9/21 12/12/21 1/15/22 75 5 25-25 -5-75 -1 Momentum Oscillator 5 Overbought Oversold -125 7/2/21 8/2/21 9/4/21 1/1/21 11/9/21 12/12/21 1/15/22 22 2 18 16 14 Market Breadth 6 NASDAQ Composite Price Index number of stocks -2-25 -21-215 -22 12 Cumulative Advances - Declines -225 1-23 7/2/21 8/2/21 9/4/21 1/1/21 11/9/21 12/12/21 1/15/22 Source: Bloomberg, L.P.

Figure 5 Volatility 7 75 7 65 6 S&P1 and CBOE's OEX Volatility Index 8 S&P1 Price Index 55 5 45 4 35 55 5 VIX 3 25 2 45 15 1/2/21 3/6/21 5/7/21 7/9/21 9/7/21 11/13/21 1/16/22 3 Nasdaq 1 and CBOE's NDX Volatility Index 9 9 25 2 VXN 8 7 6 15 Nasdaq 1 Price Index 5 1 4 1/2/21 3/6/21 5/7/21 7/9/21 9/7/21 11/13/21 1/16/22 1 S&P5 Index Return and Implied Volatility 45 1-year average Returns Implied Volatility 4 35-1 3-2 25-3 2 15-4 1 1/2/21 3/6/21 5/7/21 7/9/21 9/7/21 11/13/21 1/16/22 Source: Bloomberg, L.P.

Figure 6 Put / Call Ratio 16 15 14 13 12 CBOE Index and Individual Equity Put/Call Ratios 1 Excessive Put Buying = High Put/Call Ratio = Overly Pessimistic = Bullish Sign S&P 5 Price Index ratio.9.8.7.6 11 1 9 8 Ratio for Individual Equity Options Excessive Call Buying = Low Put/Call Ratio = Overly Optimistic = Bearish Sign 7 Jan:1997 Nov:1997 Sep:1998 Jul:1999 May:2 Mar:21.5.4.3.2 Dec:21 5 4 Nasdaq 1 Price Index and Put/Call Ratio ratio 4 3.5 3 3 2 Ratio Index Price 2.5 2 1.5 1 1.5 Jan:1997 Nov:1997 Sep:1998 Jul:1999 May:2 Mar:21 Dec:21 S&P 1 Price Index and Put/Call Ratio ratio 16 15 14 13 12 11 Ratio 1.5 1.25 1 9 8 Index Price 7 Jan:1997 Nov:1997 Sep:1998 Jul:1999 May:2 Mar:21 1 Dec:21.75 Source: Haver Analytics

Figure 7 S&P 5 Economic Sectors - Index Returns 23.4 19. 15.4 14. 1.4 1.1 7.4 7. 6.8.9 5-Year Annualized Performance of S&P 5 Economic Sectors -5 5 1 15 2 25 Info Technology Health Care Consumer Discretionary Financials Industrials Telecommunications Energy Utilities Consumer Staples Materials Year-to-Date Performance of S&P 5 Economic Sectors 4.1 -.12-2.29.25-5.19-3.3-3.43 -.45 -.34-5.91-8 -6-4 -2 2 4 6 5-Year Annualized Performance of Selected Geographical Indexes Year-to-Date Performance of Selected Geographical Indexes 15.32 9.8 6.14-8.88-15 -1-5 5 1 15 2 DAX, Germany Wilshire 5 FTSE 1, U.K. Nikkei 225, Japan -3.4-1.8-1.7-3.5-4 -3-2 -1 1 5-Year Annualized Performance of Selected Russell Style Indexes 15.2 15. 14.5 8.7-5 5 1 15 2 1 Growth 1 Large-Cap 1 Value 2 Small-Cap Year-to-Date Performance of Selected Russell Style Indexes -1.8-1.7-1.6-2.5-3 -2.5-2 -1.5-1 -.5.5 Source: Bloomberg, L.P.

Figure 8 S&P 5 Economic Sectors - Earnings Growth PE Ratios for S&P 5 Economic Sectors 8 7 6 5 4 3 2 1 SP5 Consumer Disc. Consumer Staple Energy Q4 96 Q4 98 Q4 Current Financials Health Care Industrials InfoTech N/A Materials Telecomms Utilities Earnings Growth for S&P 5 Economic Sectors (annualized change) 15 5-YEAR 3-YEAR 1-YEAR 1 5-5 SP5 Financial Utility Transportation Basic Materials Capital Goods Communication Consumer Cyclica Consumer Staple Energy Health Care Technology Operating Earnings Growth for S&P 5 Economic Sectors (annualized change) 1 8 5-YEAR 3-YEAR 1-YEAR 6 4 2-2 -4 SP5 Financial Utility Transportation Basic Materials Capital Goods Communication Consumer Cyclic Consumer Staple Energy Health Care Technology Source: Standard & Poor's Compustat Special Projects, Bloomberg, L.P.

Figure 9 S&P 5 Economic Sectors - Earnings Forecast S&P 5 Operating Earnings (Year-over year change) 3 2 Calendar Year 2 1 Calendar Year 1999 Calendar Year 22 Calendar Year 21-1 -2 6/26/1998 12/25/1998 6/25/1999 12/31/1999 6/3/2 12/29/2 6/29/21 12/28/21 Growth of Earnings - Quarterly Pattern (4-quarter change) Sector Current Mar2Q Oct-1 Mar2Q Jul-1 Mar2Q Current Jun2Q Oct-1 Jun2Q Jul-1 Jun2Q Current Sep2Q Oct-1 Sep2Q Current Dec2Q Basic Materials -4.4% 21.6% 72.2% 6.8% 5.4% 23.2% 58.3% 55.5% 31.8% Capital Goods 1.% 2.1% 15.1% 9.2% 1.1% 8.% 24.4% 25.7% 22.1% Communications 3.2% 17.% 19.7% 5.1% 5.7% 14.5% 11.8% 12.8% 18.4% Consumer Cyclicals Consumer Staples -5.1% 14.8% 27.8% 16.7% 16.2% 35.8% 23.% 22.5% 43.3% 4.9% 12.4% 14.6% 9.5% 11.6% 13.2% 14.% 16.3% 18.1% Energy -52.7% -27.8% -17.4% -4.1% -34.2% -19.5% -13.4% -8.3% 39.4% Financials 8.4% 9.9% 12.4% 23.2% 23.1% 26.2% 45.4% 45.9% 34.8% Health Care 11.% 14.4% 14.3% 1.8% 1.8% 14.3% 12.8% 12.8% 15.3% Technology -33.2% -6.6% 32.3% 33.% 33.3% 7.2% 125.8% 124.6% 116.8% Transports -175.% 586.8% 427.4% 9.4% 1.1% 236.4% -415.2% 412.5% -235.3% Utilities 4.2% 6.7% 6.6% 8.8% 6.7% 11.2% 11.3% 13.% 11.1% Total -7.7% 3.5% 13.4% 8.% 8.8% 18.4% 28.6% 29.3% 39.% Total ex. Tech -4.8% 4.7% 11.1% 6.1% 6.9% 14.3% 23.% 23.8% 32.6% Total ex. Energy.% 8.1% 19.% 15.8% 15.9% 23.8% 34.% 34.1% 38.9% Growth of Earnings - Calendar Year (4-quarter change) Sector Current 1CY Oct-1 1CY Jul-1 1CY Apr-1 1CY Jan-1 1CY Current 2CY Oct-1 2CY Jul-1 2CY Current 3CY Basic Materials -5.4% -45.% -32.3% -2.8% 7.9% 43.5% 7.9% 64.9% 68.3% Capital Goods -4.2% -2.% 5.1% 7.2% 14.4% 11.9% 14.% 17.2% 12.5% Communications -24.2% -26.2% -23.2% -15.9% -3.4% 11.5% 22.4% 22.5% 13.4% Consumer -27.6% -19.7% -12.2% -3.2% 5.% 19.7% 21.3% 24.5% 31.2% Cyclicals Consumer Staples 6.3% 7.% 9.9% 11.% 11.5% 12.9% 14.8% 17.5% 16.1% Energy -3.8% 3.2% 7.5% -1.% -4.2% -26.7% -16.4% -11.2% 16.9% Financials -7.2% -1.4% 6.% 1.7% 1.9% 27.4% 2.5% 16.5% 12.7% Health Care 12.8% 12.5% 11.8% 12.7% 15.3% 12.8% 15.9% 15.6% 15.2% Technology -62.1% -58.1% -45.1% -23.3% 1.9% 45.7% 59.8% 55.% 65.8% Transports -1.6% -73.7% -35.1% 1.7% 22.4% -7825.4% 166.% 69.1% 136.7% Utilities 15.1% 14.2% 16.1% 12.2% 11.5% 8.5% 13.4% 11.3% 11.2% Total -16.6% -12.7% -6.%.% 8.9% 15.8% 18.6% 19.2% 2.6% Total ex. Tech -7.9% -3.9% 1.7% 4.5% 8.6% 13.4% 15.1% 15.5% 17.5% Total ex. Energy -18.% -14.5% -7.4%.1% 1.3% 21.2% 23.3% 23.1% 2.9% Source: Thompson Financial/First Call

Figure 1 PE Ratios and the Growth of Earnings Price-Earnings Ratios 8 7 6 S&P Smallcap 6 5 4 3 Russell 2 S&P 5 2 1 Wilshire 5 1959:Q1 1963:Q4 1968:Q3 1973:Q2 1978:Q1 1982:Q4 1987:Q3 1992:Q2 1997:Q1 21:Q4 S&P5 Price-Operating Earnings Ratio 3 4-qtr Trailing Earnings 2 1 4-qtr Forward Earnings 1968:Q1 1974:Q4 1981:Q3 1988:Q2 1995:Q1 21:Q4 5 S&P5 Price-Earnings Ratio and the Growth of Earnings 6 4 3 2 yr Growth of Earnings 11 4 2 2 1 Price-Earnings Ratio (left scale) 1959:Q1 1963:Q4 1968:Q3 1973:Q2 1978:Q1 1982:Q4 1987:Q3 1992:Q2 1997:Q1 21:Q4-2 -4 Source: First Call, DRI, Bloomberg L.P., Frank Russell Company

Figure 11 Breadth of the S&P 5 One-Year Price Changes for Companies (median age change for each decile, ranked by performance) 15 1 5-5 -1 1968 1972 1976 198 1984 1988 1992 1996 2 1 9 8 7 6 5 4 3 2 1 Proportion of the S&P 5 Stocks Whose Price Increased Over One Year 1968 1972 1976 198 1984 1988 1992 1996 2 PE Ratios for Companies (median ratio for each decile, ranked by PE ratio) 1 8 6 4 2 14.4 PE=14.4 1967 197 1973 1976 1979 1982 1985 1988 1991 1994 1997 2 Source: Standard & Poor's Compustat Special Projects

Figure 12 Comparative Returns Dividend-Price Ratio 12 for the S&P 5 and the Real Corporate Bond Rate 13 11 1 Yield on A-Corporate Bonds Less Inflation Expectations 9 8 7 6 5 4 3 2 DP Ratio 1 1982:Q1 1986:Q1 199:Q1 1994:Q1 1998:Q1 21:Q4 14 Earnings-Price Ratio 12 for the S&P 5 and the Real Corporate Bond Rate 12 1 EP Ratio 8 6 4 2 Yield on A-Corporate Bonds Less Inflation Expectations 1982:Q1 1986:Q1 199:Q1 1994:Q1 1998:Q1 21:Q4 5 4 3 2 1-1 -2-3 -4 Growth of Real Earnings for S&P 5 (average rate of growth for 2 years forward) -5 1982:Q1 1986:Q1 199:Q1 1994:Q1 1998:Q1 21:Q4 Source: Haver Analytics, FAME

Figure 13 Dividend Yields Dividend Yields for S&P 5 and Components 12 Utilities 1 8 Financials 6 4 Composite 2 Industrials Transports 196:Q1 1967:Q1 1974:Q1 1981:Q1 1988:Q1 1995:Q1 21:Q4 9 8 7 6 5 4 3 2 Nonfinancial Corporate Dividend Expenditures and Personal Dividend Income Nonfinancial Corporate Dividends ( of profits, left scale) Personal Dividend Income ( of disposable income, right scale) 6 5.5 5 4.5 4 3.5 3 1 196:Q1 1967:Q1 1974:Q1 1981:Q1 1988:Q1 1995:Q1 2.5 21:Q4 Source: Haver Analytics

Figure 14 Economic Measures of Equity Valuation 12 11 1 9 8 7 6 5 Real Rate of Return on Nonfinancial Corporate Equity (from National Income and Flow of Funds Accounts) 4 1958 1964 197 1976 1982 1988 1994 2 Tobin's q 14 2 1.5 1.5 1952:Q1 1959:Q1 1966:Q1 1973:Q1 198:Q1 1987:Q1 1994:Q1 21:Q1 12 11 1 9 8 7 6 5 4 Profits of Nonfinancial Corporations ( of GDP) Earnings Before Interest Payments Profits 3 1958:Q1 1968:Q4 1979:Q3 199:Q2 21:Q1 Source: Haver Analytics, NYSE Fact Book, Flow of Funds Accounts

Figure 15 Ratings and Default Rates dollars 9 8 7 6 5 4 3 2 1 Changes in Moody's Ratings of Investment Grade Securities 15 and the S&P 5 PE Ratio SP5 PE Ratio Downgrades Upgrades (145.9) (17.9) 2 JUL98 DEC98 MAY99 OCT99 MAR AUG JAN1 JUN1 NOV1 45 4 35 3 25 dollars 7 6 5 4 Changes in Moody's Ratings of Speculative Grade Securities 15 and the S&P 5 PE Ratio SP5 PE Ratio Downgrades Upgrades 45 4 35 3 3 2 1 25 2 JUL98 DEC98 MAY99 OCT99 MAR AUG JAN1 JUN1 NOV1 6 Moody's Junk Bond Default and Failure Rates and the S&P 5 PE Ratio 2 5 4 3 SP5 PE Ratio Failure Rate Default Rate 15 1 5 2 JUL98 DEC98 MAY99 OCT99 MAR AUG JAN1 JUN1 NOV1 Source: Credqual database, Board of Governors of the Federal Reserve System

Figure 16 Margin Debt and Expected Returns 6 5 4 3 2 1 Margin Debt and Stock Volatility VIX Outstanding Margin Debt Relative to Total Market Value of Equities 1987:Q1 1989:Q3 1992:Q1 1994:Q3 1997:Q1 1999:Q3 1.5 1.4 1.3 1.2 1.1 1.9.8.7.6 21:Q3 ratio Gross New Issuance and the S&P 5 PE Ratio 45 New Equity Security Issuance 4 Relative to Total Market Value 35 3 25.7.6.5.4.3 2 15 PE Ratio.2.1 1 1987:Q1 1989:Q3 1992:Q1 1994:Q3 1997:Q1 1999:Q3 21:Q3 $ millions Gross New Issuance of Securities by Nonfinancial Corporations 1 5 Bonds Equity 1987:Q1 1991:Q4 1996:Q3 21:Q2 Source: Haver Analytics, FAME

Figure 17 Foreign and Domestic Holdings Outstandings 25 $ billions 2 15 1 5 Foreign Holdings of US Securities US Resident Holdings of Foreign Securities 1985:Q1 1987:Q4 199:Q3 1993:Q2 1996:Q1 1998:Q4 21:Q3 12 11 Foreign Holdings of U.S. Equity Securities Relative to Total Market Value of U.S. Equity 2 1 9 8 Foreign Holdings of U.S. Securities S&P 5 15 1 7 6 5 5 4 1985:Q1 1987:Q4 199:Q3 1993:Q2 1996:Q1 1998:Q4 21:Q3 12 1 U.S. Resident Holdings of Foreign Equity Securities Relative to Total Market Value of U.S. Equity 2 18 8 6 4 2 U.S. Resident Holdings of Foreign Securities DJ World Stock Index, Excluding U.S. 16 14 12 1 8 6 1985:Q1 1987:Q4 199:Q3 1993:Q2 1996:Q1 1998:Q4 21:Q3 Source: Haver Analytics, FAME, Flow of Funds Accounts of the United States

Figure 18 Demographics 1 9 8 7 6 5 4 3 2 Capital Gains Relative to Personal Income Total Capital Gains Total Long-Term Capital Gains 1 1985 1986 1987 1988 1989 199 1991 1992 1993 1994 1995 1996 1997 1998 1 8 NYSE's and Nasdaq's share of the Total Market (by market value) 6 5 4 Households' Equity Ownership by Net Worth Decile ( of net worth) Equity Bond Short-Term 6 3 4 2 1 2 NYSE NASDAQ 1985 199 1995 2-1 Total 2 4 6 8 1 1 8 6 Distribution of Equity Ownership by Sector Trusts Insurance Other State & Private Pension 4 2 Households 198:Q1 1984:Q3 1989:Q1 1993:Q3 1998:Q1 Source: Haver Analytics, Survey of Consumer Finance, Flow of Funds Accounts 21:Q3

Endnotes 1. 5-Day, 2-Day Moving Average: Moving averages represent the average investors paid for securities over a historical period, and present a smoothed picture of the trends, eliminating the volatile daily movement. Because these lines offer a historical consensus entry point, chartists look to moving average trend lines of s to define levels of support or resistance in the market. When a chart trend is predominantly sideways (Figure 1, top chart), moving averages and the underlying series frequently cross, but during a time of prolonged increase or decrease (bottom chart) the daily s of a security typically are above or below the trailing average. Moving above or below the 5- day moving average is sometimes associated with rallies or corrections. Similarly, prolonged movements, such as bull and bear markets can be represented by securities remaining above or below their 2-day moving average for prolonged periods of time. 2. 9-Day, 18-Day Moving Averages: The 9-day and 18-day moving averages are often used together to provide buy and sell signals. Buy signals are indicated by the 9-day average crossing above the 18-day when both are in an uptrend. The reverse, the 9-day crossing below the 18-day while both moving averages are declining is a sign to sell. However, this simple can often be misleading because of its dependence on trending markets and inability to capture quick market turns. 3. Relative Strength Index: This (RSI) momentum oscillator measures the velocity of directional movements. When s move rapidly upward they may indicate an overbought condition, generally assumed to occur above 7. Oversold conditions arise when s drop quickly producing RSI readings below 3. 4. New Highs, New Lows: A straightforward breadth indicator, this is the 1-day moving average of the number of stocks on a given or exchange making new 52-week highs or lows each day. This indicator also demonstrates divergence. If an makes a new low, but the number of stocks in the making new lows declines, there is positive divergence, and in this case a lack of downside conviction. Conversely, In rising markets if an makes a new high but the number of individual stocks in that making new highs does not increase this suggests a false rally. 5. Overbought / Oversold Oscillator: This momentum indicator is calculated by taking the 1-day moving average of the difference between the number of advancing and declining issues for a given. The goal of the indicator is to show whether an is gaining or losing momentum, so the size of the moves are more important than the level of the current reading. This is first affected by how the oscillator changes each day, by dropping a value ten days ago, and adding one today. If the advance decline line read minus 3 ten days ago, and minus 1 today, even though the market is down again, the oscillator will rise by 2 because of the net difference of the exchanged days' values. This suggests a

trough, however, if today's reading was minus 5 it would demonstrate a gain in downside momentum. The magnitude in moves is useful when compared with divergence to the. If the Dow peaks at the same time the oscillator peaks in overbought territory, it suggests a top. If the then makes a new high but the oscillator fails to make a higher high, divergence is negative and momentum is declining. If the at this point declines and the oscillator moves into oversold territory it may again be time to buy. If the rises but does not make new highs, but the oscillator continues to rise above a previous overbought level, upside momentum exists to continue the rally. 6. Cumulative Advance / Decline Line: Referred to as market breadth, the indicator is the cumulative total of advancing minus declining issues each day. When the line makes new highs a rally is considered widespread, but when lagging a rally is seen as narrow. 7. Volatility: With regard to stock s and stock levels, volatility is a measure of changes in expressed in age terms without regard to direction. This means that a rise from 2 to 22 in one is equal in volatility terms to a rise from 1 to 11 in another, because both changes are 1. Also, a 1 rise is equal in volatility terms to a 1 decline. While volatility simply means movement, there are four ways to describe this movement: 1. Historic volatility is a measure of actual changes during a specific time period in the past. Mathematically, historic volatility is the annualized standard deviation of daily returns during a specific period. CBOE provides 3 day historical volatility data for obtainable stocks in the Trader's Tools section of this Web site. 2. Future volatility means the annualized standard deviation of daily returns during some future period, typically between now and an option expiration. And it is future volatility that option pricing formulas need as an input in order to calculate the theoretical value of an option. Unfortunately, future volatility is only known when it has become historic volatility. Consequently, the volatility numbers used in option pricing formulas are only estimates of future volatility. This might be a shock to those who place their faith in theoretical values, because it raises a question about those values. Theoretical values are only estimates, and as with any estimate, they must be interpreted carefully. 3. Expected volatility is a trader's forecast of volatility used in an option pricing formula to estimate the theoretical value of an option. Many option traders study market conditions and historical action to forecast volatility. Since forecasts vary, there is no specific number that everyone can agree on for expected volatility. 4. Implied volatility is the volatility age that explains the current market of an option; it is the common denominator of option s. Just as p/e ratios allow comparisons of stock s over a range of variables such as total

earnings and number of shares outstanding, implied volatility enables comparison of options on different underlying instruments and comparison of the same option at different times. Theoretical value of an option is a statistical concept, and traders should focus on relative value, not absolute value. The terms "overvalued" and "undervalued" describe a relationship between implied volatility and expected volatility. Two traders could differ in their opinion of the relative value of the same option if they have different market forecasts and trading styles. 8. CBOE Volatility Index (VIX): The VIX, introduced by CBOE in 1993, measures the Volatility of the U.S. equity market. It provides investors with up-to-the-minute market estimates of expected volatility by using real-time OEX option bid/ask quotes. This is calculated by taking a weighted average of the implied volatilities of eight OEX calls and puts. The chosen options have an average time to maturity of 3 days. Consequently, the VIX is intended to indicate the implied volatility of 3-day options. It is used by some traders as a general indication of option implied volatility. (Source: CBOE) 9. CBOE NASDAQ Volatility Index (VXN): Like the VIX, the VXN measures implied volatility, but in this case for NASDAQ 1 (NDX) options, thereby representing an intraday implied volatility of a hypothetical at-the-money NDX option with thirty calendar days to expiration. Both the VXN and the VIX are used as sentiment indicators for the NASDAQ 1 and for the broader market, respectively. Higher readings and spikes generally occur during times of investor panic and at times coincide with market bottoms. Low readings suggest complacency and often occur around tops in s. 1. Put / Call Ratio: These ratios are used as contrary sentiment indicators. Higher ratio values, indicating more put trading, is considered more bullish. The CBOE ratio tracks trade volume of all exchange traded options, reflecting sentiment of professional and institutional strategies. The CBOE equity ratio is composed of trade volume for individual equity options and a better indicator of retail investor sentiment. Equity ratio readings 6/1 and 3/1 denote levels of bullishness and bearishness. Similarly, bullish and bearish boundaries for the S&P 1 are 125/1 and 75/1. 11. 2-Year Growth of Earnings: Growth of earnings over subsequent 8 quarters. Current observations use forecast of earnings from macro projections. 12. Earnings and Dividend Price Ratios: These ratios represent an investor's yield from earnings and dividend payments. Historically, the EP ratio often has exceeded the real return on bonds, reflecting the greater risk to shareholders for choosing equity investments. Recently, the EP ratio has fallen below the return on bonds as investors demand uncharacteristically large capital gains to compensate for the low earnings yield. Historically, the EP ratio has fallen below the real bond rate only when earnings are expected to rise dramatically.

13. Real Bond Rate: Moody's composite yield of A-rated corporate bonds less the expected rate of inflation over the next 1 years as measured by the consumer from the Survey of Professional Forecasters, published by the Federal Reserve Bank of Philadelphia. 14. Moody's Ratings: Denotes the change in dollar amount of investment grade (above BA1) or speculative grade (BA1 or below) securities outstanding for a particular company if that company is up/downgraded during a given month. For example, if company XYZ was upgraded, and they had bonds rated AA2 for $1, AA1 for $2, and A3 for $15, this company's contribution to the chart value is $27. 15. Investor Expectations: Internally generated composite of the Conference Board's 12-month forward investor expectations for no change, increase, and decrease in the stock market. Composite values of 5 indicate neutral expectations. Values below 5 demonstrate bearish sentiment, though the chart demonstrates that the outlook of investors is typically bullish. 16. Tobin's q: The ratio of the market value of equity plus net interest bearing debt to current value of land, inventories, equipment, and structures.