Friday, November 20, 2009

Notables from Thursday, November 19th

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GGT price fell from $19.61 to $19.33, a change of -1.4%, on below-average volume of 1.32M shares.  Volume was up from Wednesday's value of 1.27M shares, but the 50d MA of volume is still at 1.45M, so we're trading lower prices on lower volume.  I get nervous at reading the tea leaves when this happens ... lack of volume shows lack of participation, and falling prices become discounted when there isn't a mass exodus to the door.  We'll have to see how expiration impacts this today (yes, it is November expiration day today).

The long-cash ratio (LCR) fell a large amount, from 0.963 to 0.775, and indicate that the database is weakening.  2142 stocks have a long recommendation, and 2763 have a cash recommendation.  The fact that we could not get this value above 1.0 is a tell that even though the bulls appear to be in control, the prices on the indexes are not supported across the entire market.

Because the LCR dropped, the LCR Change Timer moved from Long (+1) to Long-Cash (0).  Continued weakness in the markets today will cause this timer to move to the cash side, indicating a short-term bearish stance.  This timer is right more than it is wrong; since September 2008, if you would have traded the GGT on the long and short sides (yes, theoretical, I know, but it's a good index), you would have increased your investment pot 88%.

The way to trade this timer is simple:  if the market is down by 10-10:30, as measured by the ADV/DEC lines on all three indexes, then move to contra positions on the indexes.  If you are risk-tolerant, move into the -2x leveraged inverse contras, such as TWM, SDD, QID, DXD, SDS, MZZ, SMN, DUG, etc.  If you are REALLY tolerant of risk you can play the -3x leveraged inverse contras offered by Direxion, such as TMF, BGZ, MWN, TZA, ERY, FAZ, DRV, TYP, DPK, and EDZ.  Do you homework folks, do your homework.

If the markets are down at 10-10:30, and you enter the contras, the change timer will be indicating cashing your long positions in long equities.  I have already set my sell stops on all my equities, including my longs, and am ready to exit this bull leg.  Per my blogs the last two days, I now am fully loaded up to the contra side, and have gains ranging from 2.78% to 3.74% over the last 2 days.  If today is down these will increase proportionally.

GGT strength plummeted on Wednesday, dropping from 0.629 to 0.447.  This is a solid bear signal and indicates, along with the weakening in the LCR, that we are moving to a bearish phase.  While the markets could certainly reverse in view of the shortened Thanksgiving week next week, I'm not seeing anything that points towards a major bull at this point.  Today will tell.

The NASDAQ got slammed yesterday in strength, falling to 0.260 from 0.556.  The R2K dropped a huge amount, from 0.626 to 0.341.  The S&P400, which are the mid-caps, fell from 0.628 to 0.268.  Overall, anytime we fall below 0.3 (or so, this isn't an exact science), we see a setup for a reversal.  Remember, on MONDAY of this week we were at 0.95 levels, so we've knee-jerked FAST to the downside; this, above anything else, gives me pause on the longevity of this bear leg.

At this point I think that we have no option but to play the downside of this market, as driven by the LCR and strength indexes, but understand that we've moved far and fast and that we could reverse, especially in view of Thanksgiving week, which is typically an up week.  Keep your mental/actual stops tight.

As always, your comments below are welcomed and appreciated.

Regards,

pgd