Monday, October 25, 2010

Short Term Bounce Likely, but it is Raining in LCR-land...

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Greetings from Blacksburg, Virginia, where VT put a hurting on Duke Saturday, 44-7.  It was a great day for football, and any day I can watch my Hokies with my family is a special day. 

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Overall, we have to be careful in the markets.  It's hard to make this arguement convincing to you when the futures are pointing upward, but remember, my time frame is much longer than a day. 

Let's start with the dashboard:



Our price index moved up a large amount on Friday, +1.16%, on volume that was significantly lower by -16% than what we've been experiencing.  Although this volume is still within a standard deviation of normal volume, it does give me a great deal of pause to see such a surge in prices on what I consider really poor volume.  If you doubt this, wouldn't you rather see the gain in prices on volume that was knock-the-ball-out-of-the-park?  Thus my point.

Consider this cautionary signal #1 from Friday.

The Long-Cash Ratio continues to fall, which is bearish.  A question came up between Hsin and myself on Friday about what the LCR really is telling us.  Let's look at how the LCR is constructed so that everybody has the same reference point:

Every stock in the database has one of 6 classifications, and 3 of these classifications fall onto the LONG half of the court, and the other 3 fall onto the CASH half.  If a stock has LONG classification (New Long, Affirmed Long, Long) then it is trading above an optimized threshold that was determined by looking at price and volume over some time frame in the past.  Conversely, when a stock has a CASH classification (New Cash, Affirmed Cash, Cash) then it is trading BELOW an optimized threshold that was determined by LOOKING AT PRICE ONLY.   Hence, we have a gate-process:  we need to have large price+volume to move into a LONG position, but we only need a breakdown in price to move to CASH.  This ensures that we have demand for a stock when we see price move upward.

When the LCR continues to fall, the database stocks are losing in price value, triggering a move from LONG to CASH.  This means that your ability to pick winning stocks MUST IMPROVE, because the numbers are against you.  We have had 7 consecutive days of falling LCR -- how many of your stocks that you have purchased in this time frame have gained in value?  How many have moved sideways?  How many have lost ground?

So enter the present status of the LCR.  Refer to the figure below:



I've posted the figure above a couple of times this past week.  The left columns show whether a specific EMA of the LCR is above the next longer EMA.  Shown is the fact that since 10/20/10 the 8d EMA has been below the 13d EMA, which is bearish, but the remainder of the long EMAs are above their next adjacent EMAs, which is bullish.

Creating more of a problem is the slope of the EMAs, which is shown in the 6 rightmost columns.  These start with the 5d and include the 65d, so I'm covering many different time frames.  As you can see, all of these have been pointing downward since 10/19/10, and the 5d actually started back on the 15th.

What is significant about this is that if I use just the 65d EMA slope signal and the daily change of the GGT as an index, here is what I get
  • 9/1/10 - 10/18/10:  Bullish Period,  Gain = +12.834%
  • 8/11/10 - 8/31/10:  Bearish Period, Gain = -9.509%
  • 7/8/10 - 8/10/10:  Bullish Period, Gain = +11.76%
  • 6/29/10 - 7/7/10: Bearish Period, Gain = -4.214%
  • 6/15/10 - 6/28/10: Bullish Period, Gain = -1.762%
  • 4/27/10 - 6/14/10: Bearish Period, Gain = -9.327%
You get the idea.  This trend holds quite well and can be improved with some tweaking, but the raw results are shown above. I conclude that fighting the markets with attempts to go long during bearish periods would have been extremely dangerous to your portfolio value.

Now look at the figure again.  We've been bearish across the board with declining slopes since 10/19/10.  Do you think you should be long right now?

The concept of time frames is very important when we look at the market.  I've established above that the LCR is falling across the board, measured from a 5d EMA to a 65d EMA.  How do we determine a local bounce?  Take a look at the next graph:



The figure above shows us that on the three time frames indicated that we are losing ground in terms of the slopes of the LCR EMAs -- they are all in the pink zone, so the slopes are down, e.g., more stocks are moving to cash.

Note though that on a shorter time frame that we have a recovery upward from the huge drop in LCR values that occurred last week -- we are moving upward on the 13d time scale -- the slope of the slope is positive.  So while the LCR is dropping (pink zone), it is doing less rapidly day-over-day, which points us towards a local bounce.  On a short-term basis we are bouncing upward in terms of the rate that stocks are bleeding from LONG to CASH -- fewer are moving to CASH day-over-day than did after the spike down last Tuesday.  This is short-term bullish but note:  WE ARE STILL LOSING GROUND IN THE NUMBER OF STOCKS TO CHOOSE FROM.

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Back to the dashboard.  The GGT strength index, which is made up of a number of items related to price, volume, and rate of change, appears to have found a local bottom at 0.641.  This is an oscillator that moves between 0 (extremely oversold) and 1 (extremely overbought).  The present value is telling us that we have considerable upside room available, but it also indicates that we have a large amount of downside room that could appear.  This has been rising for the last 3 days and is a bit of a divergence from the LCR, so again, we must take heed and try to understand what is occuring.

I note with interest that although the strength index has been rising for the past three days, the GGT Price Index has gone nowhere -- it is only up +0.15%.  Again, because the LCR has been dropping, it's more difficult to find stocks that are moving upward. 

Here's a plot of the Strength Oscillator with the GGT Price Index:




As you can see above, we've certainly had an upward-trend in the strength index as measured by the lows when we have reversed.  Because this is an oscillator and we are bound by a value of "1" on the top we have an upward sloping wedge, so penetration of this wedge from above could only be considered bearish.  We'll have to wait and see but certainly the graph supports that we could have a local run-up from here.

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Short-Term LCR Change Timer

Because the LCR fell on Friday the LCR Change Timer has remained in CASH.  Hence, on a short-term basis, I too will remain in cash.

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Intermediate-Term Elder Force Index Timer

Columns 12-16 of the dashboard focus on the Elder system.  Right now, the Elder Force Index (13 EMA) is positive, indicating that we can go long in stocks.  The slope is downward, but only for the past day, so this could be a good buying opportunity across the board.  Both the 13d and 34d EMAs on prices have slopes that are pointing upward, so we have a bullish indicator there too.  This timer is telling us that across the board, and falling LCR not withstanding, that we can move long into stocks.

Here's my list of Elder candidates for today:

AYR
AEP
AMMD
NLY
LFC
DCT
TMV
FGP
FIS
GVA
JEF
LPX
MAC
MFC
MCY
MET
NABI
NUVA
TBT
QGEN
RBC
SNDA
TIN
VVR

Note that these all have upward-trending 34d EMA slope lines, and they all are in some form of LONG status as far as GGT is concerned.

Note that FGP and SNDA are both "Affirmed Longs" so these are signaling strong performance as of Friday's action.

My holdings have been getting thinner and thinner over the past few days.  As I indicated last week, I moved my wife's TSP account completely into cash.  Here's the scorecard:

EWO +8.66%
FXI +6.43%
VVC +0.08%
SKS +0.04%
WEC -0.09%
AGCO -0.48%
PLXS -1.24%
TBT -1.55%
SKS -2.59% (2nd position in this stock)
TMV -2.62%
VXX -4.81%

For the week my invested portfolio fell -1.26%, which is disappointing.  In the big picture, I lost less than 0.05% in total net worth, so hardly worth worrying about.  I simply hate taking losses though.

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Trading Plan for Monday

Today is a travel day to the Dallas/Ft. Worth area, where I will be the rest of the week.  I'll attempt to review the stocks above, and with futures up strongly as I write this, many should launch out of the starting blocks with strength.  The falling LCR has me worried though that this is a short-term sucker's rally, so I will pick my entries carefully.

I'll most likely sell my positions above on strength, or at least place a 1% TSL on those positions after they rise today (e.g., place the TSLs on the gainers tonight).  As far as the losers, especially the VXX position which is my hedge, I may try to add another 5-10% position in VXX at the end of the day if we are showing strength throughout the day.

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Remember, you are responsible for your trading decisions, not me.  Please do your diligence.

Regards,

pgd