Sunday, November 22, 2009

November 20th Weekend Update

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As always, we'll start with the facts...

The GGT price index continued to fall on Friday, and ended the week at $19.16.  Coincidentally, this is the same level as one week ago, and is off Tuesday's high of $19.64.  Volume on Friday was very low:  1.1M shares, with normal 50d moving average of volume at 1.45M shares.  Falling prices on lower volume gives me pause at the longevity of the decline, so I'm looking for other signals that tell me that we're going to reverse to the upside.  Nevertheless, we're not seeing anything (yet) that points to a reversal, so the present stance in contra ETFs or the short side of the market is still the prudent one.  Further to this, since we did bounce off of the high this week, it does suggest that there is considerable room for a short-term decline.

Here's a chart of the price and volume numbers; judge for yourself.


 Remember, these two "indices" are not visible to the general market, so they do give us an unbiased view into behavior.

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The GGT/Elder Force Index is presently slightly negative at ~ -200K.  We typically do NOT see reversals to the upside until one or all of the following occurs:

1) the GGT FI spikes below -400K or lower
2) the GGT price index "churns" while the GGT FI reverses and moves higher

Since we're not seeing either of these, my belief, and in view of the Thanksgiving week of weakness, is that we're not going to see any reversals or major moves either way before the Thursday holiday.  We may see some form of rally on Friday if we believe that retail is healthy, but for this to happen we'll need to see some majorly good news this week, and I'm not aware of any possibilities.  Here's the GGT/Elder FI chart for your own edification; click on it to see a larger view.



























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The GGT Long-Cash Ratio, which is a ratio of the number of stocks in the database that have a LONG recommendation (2000) to a CASH recommendation (2920), is still struggling below 1.0, and has a value of 0.685.  It appeared that on Tues/Wed of this week we were in a great position to break above 1.0, hitting values of 0.95 and 0.96 respectively, but this is a failed attempt and the present value of 0.685 does not bode well for us moving aggressively higher in the short term.  When the GGT LCR is below 1.0 the bias of the database is downward.  From an overview basis, the number of stocks that are not above their optimized exponential moving averages (EMAs) and rate-of-change (ROCs) values is large, hence although we're seeing prices continue higher on a medium/long-term basis, and we need to play accordingly, this longer-term rally is very shallow / long-in-the tooth from a participatory point of view.

I wrote about the "W" patterns in the LCR, and was expecting such off of the 11/2 bottom in the LCR, but it really never materialized.  The dollar's decline drove most of the upward drive since 11/2, but this past week's decline in the dollar caused the reversal to the downside, breaking the "W".  What *has* materialized is that we're now trending downward in LCR from a short-term perspective, and I don't see any apparent support lines.  The result is that the "W" pattern is broken, we're trending downward in LCR on lower prices and volume, and there is no clear divergence going into the shortened Thanksgiving week.  Based on the data presented to date I expect that we're going to head a tad lower or trend horizontally over the next week.

Here's the LCR and price chart; click on it to expand it to full size ...



 
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The LCR Change timer transitioned over the past week from a long-bias to a cash-bias, with the final transition to cash (or contras) on Friday.  While not a perfect timer, it has been right far more than being wrong, and has been in use since September 2008, nearly 15 months running. As of Friday's close, if you had invested in the broad GGT index, or shorted it accordingly on the day that the signal transitioned from 0 to +/- 1, you would be up 86%.  Yes, theoretical, but indicative none-the-less.  Here is the latest chart; click on the image to see it in full-scale:


The GGT Change Timer is a fast timer -- based on the LCR -- and it requires that you have access to your PC around 10-10:30 on the days that there is a pending transition.  It requires that you observe the ADV/DEC line of the major indexes (c.f. http://finance.yahoo.com/advances ), and it requires that you have your trades lined up and ready to execute.  Many of you have praised this timer, and many of you are critical.  It's not for everybody. I do post how I am preparing to use this timer on a given day, and if nothing else, I ask that you trade it on paper, seeing if it works for you. 

The starting point of this timer is when it is sitting at a "0" value.  If we have transitioned from a +1 to 0, this is a LONG-CASH transition, and any follow-through to the downside will see you:
  • 1) closing your long positions
  • 2) entering (if you already haven't) contra ETF positions
Conversely, if you have transitioned from a -1 to a 0, this is a CASH-LONG transition, and any follow-through to the upside will see you:
  • 1) closing your contra/short positions
  • 2) entering (if you already haven't) long positions
I personally advocate using the leveraged ETFs with this timer, but of course, you must balance this with your tolerance of volatility.

Since we JUST entered the confirmed CASH (or contra) position, I suggest you wait to enter the long side of the next signal.

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Each stock in the GGT database is assigned a strength value between -5 (weak) and +5 (strong).  When all the strengths of the stocks are summed and normalized, we get a value between 0 (weak) and +1 (strong).  Right now the GGT strength of the database is at 0.383 and has been falling all week, but the transition between Thurs/Fri was weak, showing a possible bottom/reversal indicator could be near.

Here's the chart of the LCR and the GGT Strength Index plotted on the same graph -- click on the image for a larger view.  Note that strength index peaked on 11/16 and headed south, but the LCR didn't peak until 11/18, so the strength can be a good indicator for us to pay attention to for market turns, relative to other indicators.

As I always say ... need to watch for the divergences ...




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Just like the entire GGT database of 4900+ stocks has a strength, we can use the individual strengths to form the strengths of various indexes.  I do this, and I generally report on this in my daily blog.  Of interest is where we are sitting on the various indexes, and what our game plan should be for the upcoming week:  Here's the strength chart of the indexes:




The figure above shows various domestic indexes, plotted with the GGT Change Timer signal.  It is obvious that all the strengths are downward trending; what is not obvious is that most of the strengths are entering over-sold areas, usually below 0.3 or so.  Here are the actual strengths of the various indexes:

DJ30:  0.556 --> outlier; down only slightly from Thursday's value of 0.577, is the strongest of all
NDX-100:  0.141, is certainly in over-sold territory.  A hedge to the long-side is warranted
S&P500:  0.292, down from 0.344 on Thurs
S&P400:  0.110, is the lowest valued index and is begging for a hedge to be placed
S&P600:  0.266, down from 0.33 on Thurs
R2K: 0.283, down from 0.341 on Thurs

As most of you know, I'm holding -2x leveraged contra ETFs right now, and closed all my longs early Friday morning.

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This last chart is of the aggregated BRIC stocks, rolled up as strength indices for each country. 




Here are the strengths:

Brazil:  0.296, solid down trend all week
Russia: 0.166, solid down trend all week, begging for long-side entry ...
India: 0.296, solid down trend all week, but slowing from Thursday
China, 0.301, solid down trend all week

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I've posted the dashboard file for these indexes in the GGT Yahoo! group files section; download the zip for Friday and review the dashboard.

There are two schools of thought on how to play these; here's the first school:
  • enter the contra positions in the individual index when the strength peaks above 0.8 or so (not an exact science).  Sell any long positions on the next day if they gap down, or if the GGT Change timer changes state.
  • enter long ETF positions in the individual index when the strength drops below 0.2 or so.  Sell any contra positions on the next day if they gap down, or if the GGT Change timer changes state.
The second school modifies which longs to play -- rather than play ETFs, play GGT stocks that are in the particular index.  Specifically, review the GGT stock dashboard and pick those stocks that have:

  • a recommendation of  New Long or Long, OR
  • a recommendation of Cash, but a long strength of +3
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Summary


All-in-all, I am not expecting a major move this week in either direction.  I think the lower prices on lower volume show lack of participation overall, and I expect prices to continue to drift downward or trend horizontally through Wednesday.  Friday is the wildcard; it depends on how far down we are whether we will move, as well how well black Friday is received...


Keep the bias to the downside for now; if you didn't enter this week, as I suggested, I think it may be a bit too late.  We'll see.

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As always, leave a comment below if so desired.

Regards,

pgd