Monday, November 1, 2010

LCR is Bearish but Has Upside Room, as does Strength Index ...

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GGT Price went up Friday, ending the week at $26.41.  This isn't much of a week-over-week increase; Friday the 22nd saw a price of $26.23 and the week before that a close of $26.07.  We're obviously in a horizontal trend with fairly well-behaved excursions, so price simply isn't going to tell us much.

Volume continues to hold a steady-state, trading within a very tight range since the 50d MA Volume bottomed around 10/8.  Only two of the last 14 trading days have seen a volume below the 50d MA, and the volatility has been quite tame.

Given the mid-term elections and the FOMC meeting this Tuesday/Wednesday, I'm expecting more of the same at least through Tuesday.  What happens beyond Tuesday is pure guesswork for obvious reasons.  Let's see if we can present both sides of an argument:

LCR

The Long-Cash Ratio (LCR) continues to drop, and has done so on 11 of the 12 past trading days.  Even the February 2009 bearish collapse didn't see such a run, so this streak is remarkable.  In terms of raw numbers 1638 stocks have some form of LONG status and 1169 have some form of CASH status, resulting in a value of 1.401, down -1% from Thursday.  Those are the facts.

On the bullish side, there are a large number of stocks available from the CASH pool to provide a movement that could take the LCR upward.  We are below "midpoint" if you take a view of "where have we been prior to this?"; here's the graph:
















The solid black line is a 4d SMA on the LCR values, since we started publishing values back in September 2008.  We've recently fallen from dramatically high all-time levels, and certainly, we could power upward from here.  Indeed, I can see at least two or three reversals that have occurred from this zone in the past, so there is a non-zero probability of this occurring and we must always be open to such behavior.

Another good sign is the left-most section of the graph below:

The data starting in column 5 above is simply the status of the LCR EMAs, e.g., are they aligned "properly" to sustain a bull.  The short answer is "somewhat".  Note that although the 5d EMA < 8d EMA, and the 8d EMA < 13d EMA, all the longer ones (columns 7-9) are still properly aligned.  While the markets have not been rocketing upward, they certainly have not been losing much ground.  Hence, if we do reverse from our present levels on Tuesday/Wednesday and beyond, looking for confirmation in the 5d > 8d and 8d > 13d would certainly add to the bullish argument.

There's always a converse.

The data in right-most columns shows the slopes of the LCR EMAs.  The slopes are REALLY important -- if they point down, then the data on the left side (LCR EMA crossings) will start to bleed more than it is.  Conversely, if these slopes turn up, they will LEAD THE BULLISH CROSSINGs -- they have to (make sure you understand why).  

I went back over the last two years+ of data to see if we had any other occurances like we are experiencing at the present moment with respect to the LCR EMA crossings and the slope, and the only other period that I have data is below, which is the 2nd quarter of 2009:

MAKE SURE THAT YOU REVIEW THE DATES ON THE LEFT IN THE FIGURE ABOVE -- THIS IS LAST YEAR'S DATA.  What we have here is somewhat of the same situation, and what followed was periods of peaks but also of dips.  We made money if we played the markets when the slopes were "green" and we moved to cash when they turned "red", which is the same situation as present.

To put this into another view, observe the following:

This view is constructed by taking the LCR RMAs and plotting the slope values.  Note how we're in the pink zone, which means that on these three time scales (13d, 21d, 34d) that we are losing LCR value at about -0.1 of full-scale per day.  Since there are 2807 stocks in the database right now, we're losing about 280 stocks per day on these time scales to the CASH side of the equation -- e.g., the database of available LONGS is shrinking this amount each day.

So, for the present moment, until the traces on the right side of the chart above move to the white zone (positive), you're better served by taking profits and sitting on the sidelines.  The pool of appreciating stocks is getting less day over day, hence you need to have IMPROVING skills to pick winning stocks.  

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GGT Strength Oscillator

When I take an individual stock and evaluate it in terms of price, volume, and rate of change, I get a value describing what I call the strength of the stock.  When cast between 0 and 1, we have a 0 being completely "avoid" and 1 being "buy me buy me buy me".  It's easy then to average the database and see where we are presently sitting.

Last week I wrote about the artificial trend line that was forming from the lows of the strength index.  Believe it or not, we bounced off the lower support, and as you can see in the figure above, this suggests that there is plenty of upside room available for a continued bull leg.  Hence, guess what, since we haven't yet penetrated the support line, my bull-meter has to lean more in favor of an upside bias than downward.

Correspondingly, I'm looking for the LCR ROCs and the LCR slope graphs to indicate bullish tendencies.  Failure to have the Strength Index, the LCR ROCs, and the LCR slopes (the latter two which are more or less the same thing) show us that conditions are improving would be a serious case of "Katie, bar the doors ..."

Stay tuned...

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I have parent-teacher conferences this morning and will continue my entry mid-morning after the markets open.  Check back before noon Monday for further thoughts ...