Thursday, April 29, 2010

Price and Long-Cash Ratio Divergence ==> Dangerous Waters

The GGT Price Index climbed 0.23% on Wednesday, finishing at $26.30.  Volume was strong at 3M shares.

The GGT Long-Cash Ratio (LCR) fell a large amount Wednesday, from 1.923 to 1.700, picking up 83 more stocks on the cash-recommended side.

These two indicators cannot remain out of sync for very long -- the LCR is a derivative of the price index.

A CASH recommendation is provided any time a stock falls below the historical optimized pricing EMA levels.  There were 108 "New Cash" stocks on Wednesday, meaning that with respect to price, each of these fell below the limbo bar where they were prior above the bar.  Conversely, a LONG recommendation is provided any time a stock excells at BOTH price and volume over some historical optimized level -- and there were 25 of these stocks that were below the limbo bar that made it above the bar.

The GGT Price index is an average of all the stock prices in the database -- when the price index drops, the entire database, on average, has dropped, and when the price moves up -- like yesterday -- the entire database price has moved upward.

The divergence is that while the underlying database is showing price strength (appreciation of the database price index), it is doing so on lower volume (the number of New Longs dropped relative to the number of New Cash).  Correspondingly, the LCR falls while the Price Index climbs.

There are only two ways to resolve this:
  1. The LCR will reverse and the bull will continue, with stocks gaining in price AND volume. I favor this occuring simply because we've been in an uptrend, earnings are relatively strong, and market confidence is strong.
  2. The price index will reverse, with the markets collapsing.  I do not favor this approach, but nevertheless, it certainly could happen, given our overbought areas.
With the futures up significantly on all three exchanges, I am leaning towards method #1 above, but remember, we cannot predict the market -- only read where it has been.  You sometimes drive off the road when you drive forward while looking in the rear-view mirror ....


Remember, you are responsible for your own investment decisions.  Please do your own homework.