Saturday, March 6, 2010

GGT Weekend Summary for March 6th

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Summary

GGT Price:  Bullish New High
GGT Price EMAs: Positive in absolute value (bullish), trending horizontal or upward (bullish).  Nearing peak values.
GGT Volume:  42 consecutive days of positive increases in volume is hard to argue with -- the market is accumulating stocks, and this is bullish.
# of Long-recommended Stocks:  Approaching historical peak levels -- caution is advised.
GGT Long-Cash Ratio - Completely bullish.
GGT Long-Cash Ratio EMAs:  Very positive which is bullish, but very steep in slope, which is unsustainable.
GGT Strength:  Hit an all-time high value of 1.0 -- Overbought.  Has been in overbought territory since this past Tuesday.  Protect profits, consider contra ETFs which show strength.

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GGT Price

The GGT Price index continues to move higher, hitting a 18-month high of $24.39 with Friday's close.  This was a 2% jump in price from Thursday's value of $23.91, and for the week we have watched the GGT Price Index move upward from $23.65, or a change of 3.1%.  Bull leg indeed.

I have to be candid ...  I've been taking profits off the table, having sold 50-75% of my longs earlier/mid  week.  I've also been moving ever-so-lightly into hedge positions using contra ETFs, so while many of you may have had a great bump on Friday, I actually was mostly neutral in gains, which on one hand bums me out but on another makes me thankful that my risk right now is about neutral.

Here's the graph of the GGT Price Index, together with average volume:



As with all my graphs, right-mouse click on the graph to open it in a new window or new tab.  Since relevant data is contained on the right side of the graph, make sure you can see the entire graph, not just the left side.

That is an amazing pricing graph, and the corresponding average volume graph is no slouch either.  I've layed a less-than-precise trend line on the peaks of the pricing curve since this bull started a year ago -- what you see is simply that we are now overextended above this trend line.  It's hard for me to imagine that this trend line will not continue to be tested -- we've all see prices weave in and out of lines like this but this bull trend, from the basis of this graph only, is certainly intact.  There is no arguing that you should be long in the present market.

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GGT Pricing EMAs/ROCs

More important than the absolute value of the GGT Price is the relative trend of the change in price.  If this change is upward we can expect prices to continue upward.  The converse is true too.  Look at the next graph:


There is a considerable amount of info in this graph. Most relevant to us is that:
  1. All of the rates of change (ROCs) are in the positive portion of the graph. This is bullish. 
  2. The individual ROCs are moving higher on a day-for-day basis.  This it indicates that the market is moving to higher prices faster than the previous day.  This is great, but it cannot be sustained.  I'll color this bullish but understand that this cannot continue without reversal.
  3. We are nearing an all-time high of ROC values.  We saw this on 2/22 when we hit $0.16/day.  We are presently at $0.151/day.  The "so what" here is that when we have had this type of acceleration in the past we ALWAYS corrected, and did so just around the corner from hitting those values.  Whether this is Monday, Tuesday, Wednesday -- who knows -- but we cannot continue this advance day-over-day.  The good news is that as long as the ROC remains positive (+) then prices will continue to advance; if it goes negative, like it did on 1/22, then we know we're in for a correction.  Correspondingly, the all-time high ROC values are bullish, but every time we have been here we slowed down.
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GGT Volume

I've heard the taking heads on CNBC state that "volume is lacking" and that "no conviction in the market".  I think they are wrong.

The Price/Volume graph I showed previously shows that average volume has been increasing day-over-day since January 11th, 2010.  On Friday the GGT Volume Index showed 2.04M shares traded, with a 50d MA level of 1.79M shares.  We have had 42 consecutive days of rising volume -- not rising average -- but day-for-day rising volume compared to the average of that day.  The money is flowing in from the sidelines/institutionals, driving demand, which drives prices.  GGT volume is certainly bullish due to the rise-over-rise in values.
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Ratios

I rarely show the following chart because it takes some time to look at and understand what it is you're viewing:


























GGT separates stocks into 6 classifications:
  1. New Longs (#NL - dark green)
  2. Affirmed Longs (#AL - light green)
  3. Longs (#L - yellow)
  4. Cash (#C - blue)
  5. Affirmed Cash (#AC - purple)
  6. New Cash (#NC - red)
This chart plots the absolute number of these ratings, relative to each other.  When you see the yellows (# of Longs) peaking in value (and blues getting thin - # of Cashs) we're nearing historical levels where prices have reversed.  We're not there yet, but we're getting there.  Color this cautionary.

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GGT Long-Cash Ratio (LCR)

One of the most powerful aspects of GGT is the classification of the stocks into 6 categories.  If we take a broad brush and simply group them as longs and cash, then take the ratio of the two, we get the LCR.

The LCR jumped from 1.923 on Thursday to 2.561 with Friday's close.  Out of nearly 400 trading days this is the 25th largest jump to date.  I note with interest and surprise that in the majority of cases where the jump was greater, that stocks continued upward in the near future.  There are 2295 "Long" recommended stocks in the database, and 896 "Cash" recommended stocks.  Here's a graph of the GGT Price and LCR:



I've colored regions of "up" and "down" periods, according to the direction of the LCR.  Take a close look at the above -- you can see areas where the LCR was falling but prices were horizontal or weakly ticking upward.  I'm convinced that the LCR can be an early-warning indicator for us.

Probably more telling is that there is NOTHING indicating a divergence between the LCR and the Price index -- they are both pointing upward with Friday's action, and as you can see, both have been lock-step for some time (since 2/8/10).  Correspondingly, the LCR is bullish.

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LCR Rate of Change EMAs

Just as we can plot ROCs on price EMAs, we can plot ROCs on LCR EMAs.  The data is instructive:



Just as in the Price ROC graph, we have some interesting take-aways:
  1. The ROC EMAs are all positive.  This means that the rate of change of the LCR is positive, e.g., that it is increasing within the length of the EMAs.  This is another way of saying that the trend is LONG for each of the ROC EMAs.
  2. By the time that the GGT Price was moving upward, the LCR ROCs had been already moving upward.  In fact, 2/9 was the "reversal" day in GGT Price, but the ROCs had been gaining ground as early as 2/2.  I missed this divergence, but certainly will not the next time it happens...  Presently, there is NO divergence, and the trend is upward.
  3. The ROCs are VERY STEEP.  Too steep to be sustained if you ask me, so I think we'll see some form of a relaxation in the slope of the ROCs.  THEY CAN STILL REMAIN POSITIVE, which means that the LCR continues to go up.  IF the ROCs move into the pink zone I would expect that LCR and Price has already started to move agressively downward.  I think this steepness is a warning shot across our bow. 
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GGT Strength Index

Another unique feature of GGT is the ability to calculate the "strength" of a stock.  Think of it as an overbought/oversold indicator.  Values close to 0 are "oversold" and values close to 1 are "overbought".

The GGT Strength index hit an all-time high of 1.0 on Friday, indicating that as a database, it is very, very overbought.  Here's a chart of GGT Price and Strength:



Price is shown in dark blue and purple indicates strength, between 0 and 1.  Red areas are where the GGT Strength has moved above ~ 0.9 (it is not an exact science).  When this occurs long trades are risky because the database as a whole is overbought.  The yellow regions are where strength was red but then dropped below ~0.4.  At this point the database is showing weaker strength and is entering oversold.  Once we resume upward above ~0.4, we move into a green zone.  Note that these values of 0.9 and 0.4 move around as market conditions change.

If you go by these rules, we see that we're presently in a red zone.  This means that the market is overbought and that profits should be protected, which is what I've been doing this week.  I also enter contra ETFs as they show strength during this period.

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As always, you are responsible for your own trading decisions, not me.  Do your diligence.

Regards,

pgd