Thursday, January 20, 2011

A 1-Day Sell-Off; Shall I join the masses?

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Yesterday, when I commented that

"Note that we've rarely seen 6 days of successive gains in the LCR, with the last occurrence being 8/13/10 to 9/15/10.  Based on this alone I would not be surprised at some form of pullback."


I didn't expect to see a 39% change to the downside in the Long-Cash Ratio (LCR) in one fell swoop.  Putting this in perspective, I have 541 discrete levels of the change in the LCR since we started keeping track.  Yesterday ranks as the 12th greatest change in the LCR to the downside in over 2 years of tracking.


This begs the question of "what typically happened after such a dramatic bow shot?"

  • November was the most recent occurrence of this drop in LCR.  On 11/9 the LCR dropped -22%, then on 11/12 it dropped another -36% (rank 18th), then on 11/16 it fell another -38% (rank 14th).  We rallied after Thanksgiving.
  • October 19th saw a drop in the LCR of -50% (rank 3rd), and 4 days later it jumped +12% (rank 147th to the upside), and 12 days later it jumped +62% (rank 11th to the upside).
  • October 4th saw a drop in the LCR of -30% (rank 31st to the downside), and the next day we whipsawed +47% to the upside (rank 24th up).
  • August 11th saw a drop in the LCR of -51% (rank 2nd), and 12 days later it jumped +43% (rank 30th to the upside)
  • July 16th saw a drop of the LCR of -39% (rank 13th), and 4 days later (7/22) we saw a jump of +64% to the upside (rank 10th up)
  • Here's an interesting sequence:
    On 6/29 the LCR dropped -43% (rank 5)
    On 6/30 it dropped another -22% (rank who cares)
    On 7/1 it dropped another -20%
    On 7/2 it dropped another -20%
    On 7/7, just 2 trading days after the 7/2 date, the LCR jumped +46% (rank 25)
    On 7/8, it jumped another +35%
    On 7/9, it moved another +30%
    and on 7/13, it jumped +102%, which is the 2nd strongest jump ever.  Dead-cat bounce indeed.
We all know what happened after 7/13 until the end of summer ...
  • If you've followed this history lesson this far, you're probably wondering about the worse day in GGT history:  it came on 5/6/10, when the LCR dropped -71% (obviously rank #1 to the downside).  The next 5 days saw slight gains in the LCR:  +5%, +14%, +16%, +39% (rank 35 to the upside), and +15%, then it was all downhill with another selloff on 5/20.   For those of you who recall, most of the major timing systems signaled a move to CASH near the end of May, 2010.  
What I take from all of this is that while we may head down here, there will be a few days available to sell into the rallies.  There's no need to panic, as a considerable amount of cash is deployed out in the markets and it's not all going to move to the sidelines overnight.  I'd watch for some bull traps of the larger entities, e.g., the big boys and gals driving price up on larger volume so that they can exit quietly under the cover of us retail lambs...

All this being said, it's going to be hard to hold on today, as I see that the futures are down as I bang this out ...

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The LCR System

Here's the snapshot of the LCR dashboard:



As with all my images, right-click on the image to open to a new window or tab.

Starting from the left, we see that the LCR dropped -39% from 2.141 to 1.299.  The teeter-totter of the number of stocks in the database that have some form of LONG status to those recommended as CASH still favors the LONG side, but obviously, not by much.  When the LCR drops below 1.0 the teeter-totter is in favor of the bears and we need to note this accordingly.

Of particular interest is the solid RED line across all three dashboard areas:  left, middle, and right.  Let your eye move backwards in time and you can see when this occurred in the past.  What is significant is that usually, we see a glop of red in the right-most panel, followed in time by a glop of red in the middle panel, and then a glop of red on the left.  This is because the right side of the figure is the most sensitive -- it tells us the "slope of the slopes", or put another way, overall momentum of the database.  If momentum slows enough, we move from advancing upward (middle of the figure being green) to declining downward (middle of the figure being red).  This is because the middle of the figure plots the slope of the EMAs, e.g., are the EMAs trending up, or are they trending down.  If they're red they are trending down and we're losing whatever the EMAs are tracking.  IN THIS CASE the EMAs are tracking the number of stocks in the database that are moving up on price and volume appreciation -- RED means that we have less to choose from, and typically, it's a period of consolidation.

One day of red does not make a trend, so again, there's no need to panic and sell the farm.  We need to see how the next couple of days perform in order to know if the markets are going to favor the Contra-side of the equation.

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The Pricing System

Here's the pricing system dashboard:




Of importance here is that we have a sea of GREEN, not red.  Yes, the database is getting smaller in terms of the number of stocks that are appreciating in price and volume, but no, we don't have a full implosion of the thing that matters most -- the price of the stocks.

Starting from the left:

The GGT price index fell -1.64% yesterday, ending the day at $30.04.  Volume was 23% higher than the 50d MA of volume, so falling prices on higher volume is a distribution day.  Consider this a bow shot.

The left panel, which is a sea of green, tells us where we have been, not where we are going.  We've been in a bull-market (duh), which is evidenced by the 5d EMA > 8d > 13d > 21d > 34d > 55d.  There's nothing here that tells us otherwise.

The middle panel tells us the SLOPES of the pricing EMAs.  Specifically, we have some cracking in the ice -- the 5d and 8d EMAs are pointing downward.  This means that on these time scales, and on these time scales only, if you've made investments within this window, there is a good chance you're losing money.  If we see more RED creep into this middle panel we'll know we're in trouble, so continue to watch.  For now though, the longer, shorter-termed EMAs (13 and 21d) are intact, and all of the intermediate lines are still bullish.

The right panel feeds the middle panel.  Like the LCR dashboard, the right panel above is the "slope of the slopes", and if we see lots of red here, it's because day-over-day, we're accelerating to the downside.  In fact, we do see this for the shorter EMAs (5d, 8d, and 13d), and of course, because of yesterday's draft downward, we see it across the board, but overall, we'll simply have to watch.

The far right column of numbers is my GGT strength oscillator, and it varies from 0 to 1, with a 1 being incredibly overbought and a 0 being incredibly oversold.  A drop in strength from 0.769 to 0.488 is a huge drop for one day, and actually gives me some hope for a bounce upward in the next couple of days (perhaps early next week), because this is a great distance to go in a short time.  

So, in general, yes, we have experienced a bow shot.  Yes, investments I've made over the last 8 days are more-or-less underwater.  Sell the farm?  Not yet, although I won't let my present holdings drop too far.  Futures are looking worse so I'll simply evaluate the end of the day -- if I see a major drop in the index components then I'll know that this is for real.  I've actually been seeing some buying at the end of the days, so I'm not convinced yet that we're headed south for good.

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The Timers

Here is the dashboard view of my two primary timing systems:



The Short-Term LCR Change Timer, shown on the left, is showing a "0" status, which is a LONG-CASH recommendation.  IF today is a down day as determined by the LCR change, there is a high likelihood that the timer will move to CASH.

Closely related to the LCR Change Timer is the VTI timer.  It is presently LONG, although it took a heck of a hit yesterday.  I chased this timer, buying a position on Tuesday because I missed the signal on the previous Friday, and I've paid dearly for this mistake.  Don't chase timers!

The right side of the graph is my Elder Force Index timer.  It is showing a LONG status, which indicates that it is prudent to consider the LONG side of equities and not the contra side.  I do note though that this timer fell a HUGE amount yesterday and is sitting just above the zero-line, which is the crossover point.  If today is another distribution day of the magnitude we saw yesterday there is a good chance that both the simple-moving-average (SMA or MA) method and the exponential moving average (EMA) methods will both drop below 0, indicating that we should unload all our long positions with no questions asked.  We'll see.  The SMA method normally changes about 41K per day and it is presently at +163K, and the EMA method normally changes about 42K per day and it is presently at +80K.  Putting this in context of yesterday, the SMA method dropped -93K and the EMA method of calculation dropped -220K, so we are well within striking distance of a personal sell-off.

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The Contra Watch

Here is my summary view from HGSI of the Contra ETFs that I track:





I note that bull and bear power are still both negative, which means that the highs and lows of the index are below the 13d EMA.  This is BEARISH FOR CONTRAs, so we're early.  

Below the bull/bear indicators are my Elder FI(13) ribbon bars, one calculated with an EMA method, and one calculated using the SMA method.  Both are NEGATIVE (red), so again, we're too early for contras.

The MACD histogram has just eeked out a positive value, which is a ray of sunshine for the index as a whole.  This means that the faster EMA is above the slower EMA, and this is an early stage of bullishness.

The %B ribbon bar is green, which I've inverted from the default HGSI presentation (it is normally RED when  %B is low -- don't ask me why).  The fact that it's starting to trend upward gives me another ray of sunshine for the contras, but don't get too trigger happy at this point.

Below the %B ribbon is a window containing my 13d and 34d slope lines.  The 13d slope is crossing the 34d slope from below (bullish), and both are pointing upward ("slope of the slopes" is up).  BUT, look at the numerical values on the right side of this window -- they are negative.  This means that on the 13d and 34d time frames (short term and intermediate term) CONTRA POSITIONS ARE LOSING MONEY, and as of last night, the 13d was losing it at a rate of -$0.1418/day and the 34d at a rate of -$0.1374/day.  They simply are losing it less fast right now, which is a necessary condition to making money in contras.  When these lines cross the 0 line it'll be "Katie, bar the doors" for the bears on stocks will be all around us.

Finally, ALL the EMAs are inverted (8d < 13d < 34d < 40d < 160d), so we are very, very bearish overall on contra positions.  The only saving grace right now is that volume was above the normal levels for this index, AND we had a 1-day move upward in the contra index price.

All this being said, there are some contras worth watching:

SMN, the -2x contra on Basic Materials, saw a significant inflow of volume, much of it attributed to Large effective volume (LEV) yesterday.  It did end the day with a drop in LEV, so be cautious.  Nevertheless, it did move upward a significant amount and did trigger a buy signal on my short-term views.

SKF, the -2x contra of Financials, moved upward yesterday in price as well as LEV, but like SMN, sold off in terms of LEV late in the session, which is bullish for the markets overall.  Despite this, it did signal a buy signal on my short-term daily views, with the 13d crossing the 34d from below.

ZSL, the -2x contra of Silver, saw a major inflow of LEV and increased a dramatic amount (+6%) on Wednesday.  I've actually had a long signal on this since 12/7 but have been ignoring it because gold and silver were topping in this time frame; now this looks to be a signal worth reviewing in detail.

TWM, the -2x contra of the Russell 2000 Small Caps, moved up a good amount on Wednesday but the move was not supported by LEV (in general).  Yes, LEV did move up, but it was all over the map in terms of volatility, so it's hard to read this one.  Small EV (SmEV), or that volume attributed to investors like you and I, remained fairly constant and flat, so I'm not seeing a mass flood to TWM despite my position in UWM getting wacked.

TZA, the -3x contra of small caps, moved up a large amount and more importantly, was supported by a steady, upward flow in LEV, while SmEV dropped in the morning and then remained flat for the balance of the day.  This could be a good surgical strike if it continues, and by the way, it signaled a buy signal on the daily charts with yesterday's action.

PSQ, the -1x contra of the Q's, increased a significant amount (because the NASDAQ got wacked), but volume was not supportive of the move, so I don't think that the big boys/girls think that this is a major down draft at the present time.  

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Trading Plan for Thursday

Short-Term Timer:  I'll exit out of my VTI position if it continues to lose ground.

Intermediate-Term Timer:  I'm holding a number of Elder stocks at Marketocracy as well as in the GGT, LLC portfolio.  If the Elder FI(13) on any of these drops below 0 between 3 pm and 4 pm I'll sell them.

Top 25 ETF portfolio -- I'll move into those ETF that have positive-trending LEV today in my real portfolio, and I'll make the appropriate changes at Marketocracy for all 25, per my blog of last night.  I still have to calculate the new Top 25 Stocks, which I'll do after I take care of some items this morning, so check back later.

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Remember, you are responsible for your own trading decisions, and I am not.  Please do your diligence, and please take ownership for your trades.  Continued following of my blog implies your acceptance of the disclaimer that I have listed at the top of the blog masthead, located on the left side of the web page, when you enter the web site.

Regards,

pgd

Position Disclaimer:  I own or influence positions in the following equities:  AAPL, ADTN, BPOP, CAT, COG, DIG, ERX, FTNT, GLW, IEZ, IYR, JAH, KOL, PALL, TEVA, TMV, UWM, VTI, XLE, XME, XOP.