Sunday, March 28, 2010

3/26 Weekend Summary - A Mixed Bag of Readings, but LCR Does Not Lie.

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Summary

GGT Price Index:  rangebound over the past week; Friday/Friday change is +0.97% with a daily variance of 0.7% --> barely above the noise floor of the markets.  We are either topping or resting for the next leg upward.

GGT Volume Index:  solid, @ average volume all week (1 wk average 2.23M).  No warning signs here.

GGT Price EMAs:  Still upward and parallel, which is bullish.

GGT Price Rates of Change:  Well-defined downslope since early March, but positive (so GGT Price is still trending upward). These two things balance and make this indicator cautionary.

Relative Recommendation Ratios:  We are coming off a 3/15 peak where we have had a huge number of stocks rated LONG.  When this has occured in the past we have always corrected within 30 trading days and at least -4% drop to the downside. 

GGT Long-Cash Ratio:  The LCR continues to drop, which is bearish.  Stocks prices in the database cannot remain horiztonal or slightly upward-trending in direction if the number of CASH recommended stocks continues to increase.  Either the LCR must reverse and sync with the drift upward of prices or prices overall must drop to sync with the dropping LCR.

GGT LCR EMAs:  3 of the 4 (13d, 21d, 34d) are moving south off of recent peaks.  Only the 55d is trending upward, and it is doing so at a very slow rate.  Falling EMAs is a confirmation of the weakening database and is bearish.

GGT LCR Rates of Change:  The LCR ROCs have all moved into negative readings, indicating that on a sustained basis the database is growing in numbers of CASH-recommended stocks on a day-over-day basis.  This is clearly bearish.

LCR Change Timers:  Both are recommending CASH, which means to protect long profits and to get your contra ETF shopping list ready.

GGT Strength:  bullish divergence between price-only model and price+volume model.  The price-only model has strength improving, but the price+volume model has strength down significantly.  Favoring a bearish stance here because of the 0.527 strength reading (been trending downward since early March).

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GGT Price

The GGT Price sequence, including Friday 3/19 as well as this past Friday, is as follows:

$24.66 -0.964%

$24.87 0.852%
$25.09 0.885%
$24.89 -0.797%
$24.75 -0.562%
$24.99 0.970%

If you started with $1 on the morning of 3/19 and multipled the daily changes, you ended the day on 3/26 @ $1.0097.  Put another way, if you started with $10,000 on the morning of 3/19, you ended $97 to the upside this past Friday, not including commissions.  Daily variance is 0.70%, or $70 on $10K, so we are just barely above the noise floor of the broad markets. 

Sometimes it pays to sit on the sidelines, and I've been talking about being cautious for over a week.  There is nothing in the price action to suggest otherwise.  I'm not seeing anything in the pricing that tells us we are headed south, nor am I seeing anything that could propel us upward from here.  I reiterate:  caution is advised.

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GGT Volume

GGT Volume is solid, with 2.2M shares indicated on Friday with 50d MA volume of 2.09M shares.  When prices do not move on constant volume we typically see "churning".  The ever-so-slight upward drift of prices on solid volume still qualifies as cautionary.  I typically like to see in groups of stocks:
  1. slightly falling prices on lower volume (bullish),
  2. rising prices on solid volume (bullish), or
  3. rising prices on higher volume (bullish). 
If we are not in these three categories I typically wave my yellow flag, and will do so here too.  Despite this, by itsself, volume is solid.

Here's the combined GGT Price and Average Volume chart; as with all my charts, right-mouse click on the chart for options to open it in a different window so you can see a larger view:



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GGT Price LCRs

The following graph is interesting to me:




The graph above tells me that we're still very early in any potential downtrend.  Certainly, the past week has been challenging, but if you look back at the data since 5/27/09, "corrections" always were indicated with the GGT Price Index dropping below the EMAs, if not the EMAs crossing each other from above.  It's clear that this has not yet occurred, so jumping either long OR short is very early.  For now, the graph above tells me that we've been bullish, and up to this past Friday, we should remain bullish.  If there is *any* cautionary view above, it's that the GGT Price Index is hitting some form of "resistance" (although resistance does not exist for the GGT Price Index because fewer than 300 people know about it).

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GGT Pricing Rates of Change

Take a close look at the following graph:



Here, I plot the GGT Price Index against EMAs of the changes in GGT Price.  This is known as Rates of Change, or ROCs, and basically tells us how fast we are moving upward or downward in price.  I smooth these ROCs with different EMAs.

What the graph above tells me is that:
  1. the EMAs of the ROCs are all still greater than $0.00.  This means that GGT Price still has an upward trajectory, e.g. average stock prices in the data base are moving upwards (we're making money if we're long).
  2. the EMAs of the ROCs has been falling steadily since the beginning of March.  This means that although the GGT Price Index has been moving up, it has been doing so at a slower rate as this bull leg gets tired.  THIS IS CAUTIONARY.
  3. if the slowing in ROCs continues, we will most likely cross below $0.00 prior to April 12th (see the red arrow pointing downward and connecting the ROC values.
Because of #1 balancing #2, I'm coloring this as cautionary.
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Relative GGT Ratios

Many of you have responded favorably to the next graph so here is the update:


Note that in the above graphic I've enlarged the ovals (not circles) to show the "zones" that the number of LONG recommended stocks (bright yellow) has played within.

A few observations on the chart above:
  1. We're coming off the top of LONG recommended stocks (not New Long or Affirmed Long, just LONG), which peaked at 61.9% on 3/15. 
  2. The all-time LONG high was 64.5% on 9/21/09.   On this date the Price Index was at $19.12.  The next low after this high was 10/2 when the Price Index was $18.39.  We achieved a lower peak on 10/16 then started a significant drop until 10/30/09, where we hit the price index of $18.09, a reduction of -5.4% from the overall 9/21 peak.  I would not be at all surprised to see equivalent behavior going forward.
  3. Friday's value was 54.5% and declining, in case you're interested.
This graph is simply telling us that the underlying database is weakening.  The decrease in LONGs ususally proceeds a drop in the Price Index, so this is cautionary.  I would not be surprised to drop a couple of % from here, recover to a lower high, then drop more.  Another view of this data above that might be a bit easier to interpret is as follows:


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Long Cash Ratio

The GGT Long Cash Ratio continues to fall and closed Friday 3/26 at 1.942, indicating that 2033 stocks in the database have some form of long status and 1047 have some form of cash status.  This continued decline in underlying database price strength (the only thing that can cause the number of cash-status stocks to grow) does not portend well for an up leg at this point in time.  Here's the LCR/Price Chart:



What should be evident in this graphic is that we're 50% of the way down in a "reset" of the LCR before an upleg has resumed.  Aside from the extreme left-side of the graphic, we've not typically reversed from these levels, hence I think we have a bit more dropping of the LCR to experience

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GGT Long-Cash Ratio EMAs

The following graph is telling:



The graphic above shows the raw LCR value smoothed with 4 EMAs.  What we see here is that the 13d, 22d, and 34d have all started to fall over and move more negative than their recent peaks.  While the past is no predictor of the future, I think that the graph gives us some insight into the behavior of the markets and when bull-legs get tired, LCR tends to drop, pulling the respective EMAs down after some period of time.  I think that this chart gives us insight about what is happening, so I am coloring it red.

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GGT LCR Rates of Change



The graphic above is clear:  All ROCs of the LCR are now negative, which means that the LCR and its EMAs are all in agreement and the LCR is losing ground fairly rapidly.  Until we get a reversal in these ROCs we have a bearish condition.

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GGT LCR Change Timers

Friday morning 3/19 the GGT LCR Change Timer (slow) confirmed a move to cash; I notified you about this here.  I sold all my longs, except for my Contra ETFs, and in hindsight while I could have kept them with minimal impact, the reward/risk ratio grew with no apparent upside to the markets.  Interesting to note that my contras haven't done anything, so movement to contras still has been a bit early.

The LCR Change Timer (fast) is presently in cash. 

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GGT Strength

I have the ability to track the strength of each individual stock in the GGT database.  When I do this and normalize all the strengths between a value of 0 and 1, I can track the strength of the database.  Furthermore, I have the ability to separate the strength of the database based purely upon price, as well as price & volume.  The latter capability is important, because volume offers a way to confirm price action.

With Friday's close we have a bearish divergence.  The non-volume portion of the tool has indicated that the strength of the database has improved, e.g., when volume is removed from the equation, 2%  more stocks appreciated on Friday in price than fell.  Indeed, http://www.finviz.com/ shows that 48.1% of the stocks on the exchanges did in fact advance, and 44.0% of the stocks declined.  The percentage difference between http://www.finviz.com/ and GGT is simply that the universes are different, as is the methodology.

What is more striking is that when volume is inserted into the tool we have a significant drop in strength, e.g., of the stocks that fell in price, more did it on higher volume.

Typically, these two indicators travel with each other -- when one goes up, the other does too.  Here, the divergence indicates that there is a lack of broad participation in stock price appreciation, e.g., the big boys did not play on Friday on the upside, but for those that did, the volume of the declining issues outpaced those of the gaining issues.  This is a bearish divergence.

For the record, the price & volume strength of the database is at mid-scale levels of 0.527.  A reset below 0.4 before starting the next up leg would be welcomed, but I'm not sure we'll see it.

Two things are going to happen here:  a reversal upward (strength can improve dramatically from 0.527, powering the stocks upward), or we're going to have prices get in line with the LCR.  Given that this is the last week of the month I would not be surprised at a short rally here, then continued dropping of the market.

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As always, you are responsible for your own trading decisions, not me.  Please do your homework.

Regards,

pgd