Sunday, January 30, 2011

1/28 Weekend Update

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I'm traveling all week on the west coast so entries will be brief this week.  I will attempt to run the updates nightly and post by market open the following morning.

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Summary

  • The Long-Cash Ratio (LCR), which is a measure of how many stocks in the database are ranked LONG to those that are ranked CASH, attempted to thaw and move long on the 26th and 27th.  This was met by the events in Egypt on Friday, resulting in a refreeze.  It is possible we'll get a number of stocks to move upward on Monday if the tensions relax by market time.
  • The LCR moved down 33% on Friday.  Out of 548 datapoints, this one ranks as the 23rd largest one-day drop on record.  Major selloffs in the market of this magnitude are typically followed by buying opportunities.
  • The Pricing system is still very bullish, and indicates that this short-term pullback should be used to enter those stocks that have "reset".
  • The short-term LCR Change Timer is LONG, but is showing signs of moving to CASH with any weakening of the markets.  
  • The Elder Force Index timer is LONG, and a major selloff notwithstanding, is several days from issuing any form of a CASH signal.  
  • The Contra ETF system, while showing signs of life and bullishness, is still too early.  Shorting stocks here for any intermediate-termed play would be risky.
  • GGT New Long candidates are favoring a couple of Contra ETFs as well as many oil service stocks.  Give a look!

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The LCR System

Here is the present view of the LCR system.  As with all my images, click on the figure to open in a separate window or tab:


I draw your eye to the middle of the figure, specifically the bottom.  The middle of the figure tracks the status of the slopes of various length EMAs, specifically from the 5d EMA through the 65d EMA.  As you can see, we were experiencing some "thawing" on Wednesday and Thursday of this past week of the 5d EMA -- this means that investments made within this period probably were working out for you, as the database was expanding with New Longs within this period.    This bullishness is also evident on the right side of the figure, which plots the "slope of the slopes".  Here's how to think about all of this slope stuff, thanks to GGT, LLC member Ken Phillips:

  • We can equate the slope of an EMA as to whether a car is driving forward (slope pointing upward or positive) or if the car is driving backward (slope pointing downward).  We know nothing about the speed of the car -- we simply know if it is moving forward or backwards.  This is the thrust of the middle of the figure.
  • Now, "slope of the slopes" tells us whether our foot is on the accelerator or brake.  When we have our foot on the accelerator the right side of the figure will be green; when we have our foot on the brake the right side of the figure will be red.
  • Of course, we can be moving forward (middle of figure is green) and our foot is on the accelerator (right of figure is green).  12/3/11 is an example of this.  For the most part, for the period 12/3 through 12/7, we were driving forward and we were accelerating to the upside.  On 12/8 we put our foot on the brake (right of figure is red), but the car was still rolling forward (middle of figure is still green).   You can see that on 12/15 the car started moving backwards (middle of figure turned red).  On 12/17 we were on the fringe, as our foot was on the accelerator and we started moving forward, and on 12/21 we moved forward into Xmas.


Why is this important?

The Long-Cash Ratio (LCR) is a measure of the expansion and contraction of the GGT database in terms of Longs and Cash - rated stocks.  When the database is shrinking (car moving in reverse), this very fact tells us that we have to be better at picking stocks that are going up because as a whole, the market is consolidating.  The converse is true too -- when the database is expanding (car moving forward), we're going "with the flow" and the database is giving us more stocks to choose from.  This is very important because we want to pick stocks and enter the market when the database transitions from the "car is rolling in reverse" to the "car is rolling forward".  Indeed, picking and entering stocks when the car is rolling forward AND the car has been accelerating forward for several days is probably not a wise choice over the long haul.

So, as you can see, we've been "rolling in reverse" for some time, and Friday's action just pushed us faster in reverse (rolling in reverse going down a hill?).  We've had caution signals all over the place, so nobody should have been caught off guard with the events in Egypt triggering a mass sell-off.  If you were caught with your drawers down and found yourself getting spanked you need to read this blog a bit more often.

Take a look back up at the 12/1 period.  Note the thawing of ice on 11/29 for the slope of the 5d EMA, then  the gradual transition of the 5d, 8d, and 13d to "green" on 12/1, the addition of the 21d and 34d on 12/2, and then the "all in" signal on 12/3 told us to participate.  Note though that the right side of the figure had been green for some time, and as frequent readers of my blog know, the right side rarely has a string of greens for more than 4-5 days.  Hence, the downward movement of the markets on 12/8, 12/9, and possibly the 13th gave us good entry opportunities.

We had a thawing of the ice occurring the 26th and 27th of January, a slam this past Friday with everything red, and now, I'm expecting a relief rally in the next day or two.

Of course, your crystal ball is as good as mine as to whether this one will continue upward or will be a brief event...

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The Pricing System

Whereas the LCR System tells us the aggregate ratio of LONG:CASH within the database, the Pricing System tells us what the database price is doing.  This is a equal-weighted price index of about 2656 stocks.  Here's the dashboard:



The layout is the same as the LCR presentation -- the middle of the graph shows the slopes of various EMAs, and the right side shows us the "slopes of the slopes".

The first thing that should catch your eye is the "sea of green".

The next thing that should catch your eye is that Friday's action, while bad for many people, didn't nail the GGT system as bad as the DJ30, NASDAQ, and S&P500 were hammered.  In fact, the GGT price index only fell -0.40%, which is remarkable (far left column).  Volume was significant -- +41% higher than the 50d MA -- but overall, not a terrible day compared to others.

Despite the status of the LCR -- the database shrinking day-over-day, and the apparent disconnect in the GGT price -- increasing day-over-day as the number of stocks to fuel the database higher gets smaller and smaller, we are still clearly in a bull market until proven otherwise.  One day of a downdraft does not make a bear market.  Correspondingly, I think it prudent to buy the dips, but ensure that your exit strategies are quite intact, and I would not commit any more than 50 of capital, if that much.

Major warning signs will be the middle of the Pricing System figure turning red -- we're not there yet.  There have been so many comparisons in the market of this recent behavior to that of the Feb-April 2010 run I think it illustrative to show that snapshot, just so you know what we're looking for:



Note how red starts creeping into the figure from the bottom ... this clearly was telling us to be careful.  Although not shown, the LCR system flashed all red as early as 4/27/10 and stayed that way until mid-July.  Note that the present pricing system looks to be more-or-less the same presentation as that near the end of April, 2010.

Certainly, we must pay attention to see if we can watch the train wreck in front of us ...

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Timing Systems

The Short-Term LCR Change Timer system is in LONG-CASH (0), which means that if Monday is a down day as far as the LCR is concerned (determined after market close), then it will transition to CASH (-1).  Watch the ADV/DEC values at http://www.finviz.com near the end of the market and if it favors the DEC side, you know that this timer will transition to CASH.

I am not presently holding the VTI, which is my proxy for the GGT Price, so for me this signal is moot.

The Elder Force Index on the GGT system is presently LONG, and at an average decline rate of $43Ksh/day, we are still 2-3 days from either the simple moving average (SMA) or exponential moving average (EMA) methods flashing a sell signal.  Of course, one big down day in price on higher volume would take this out, but I think we have some time on our hands to experience a bounce.  We'll see.  Nevertheless, this timer is telling us that we should play the LONG side, and not be shorting stocks.

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Contra Watch

My mouth is drooling at the opportunity to move into contra positions.  We may have such an opportunity, the Elder signal notwithstanding.  Here's a composite, equal-weighted view of my contra index:



The first thing that you should note is that we're too early to jump with both feet onto contra ETFs.  Here's my interpretation in support of this statement:

  • While Bull Power is positive (high's are above the 13d MA which is bullish), Bear Power is more negative (low's are below the 13d MA which is bearish for contra ETFs).  Ideally, we want both of these to be positive.
  • The 13d and 34d slopes of these EMAs on the composite price index are both below $0/day.  We had a brief opportunity that this was going to reverse last week, with the 13d closing firmly above this level, but it failed Wed-Thurs-Fri.  Ideally, we want both of these closing above the $0/day line.  Note that we're close -- the 13d is at -$0.027/day and the 34d is at -$0.070/day.
  • The proverbial "slopes of the slopes", at least as far as the 13d and 34d are concerned, are pointing lower, not higher.  This shows a loss of momentum to the upside for contra ETFs.
  • All the EMAs are inverted, with the 8d < 13d < 34d < 40d < 160d.  Ideally, we want some (if not all) of these to have the shorter one cross the longer one from below as we march through time. This is not occurring.  
Again, one day of negativity (Friday, 1/28) does not make a bear market.  If you short from here I think you'll be covering sooner than you want, and most likely for a loss.  The mood in the market is still with the bulls, albeit ones who are skating on thin ice.


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GGT New Longs -- ETFs

A number of GGT New Longs in the ETFs are worth watching.  These ETFs are experiencing a net inflow of monies over the last 40 days, and over the last 8, are seeing some preliminary accumulation, so purchasing limited positions on dips probably will not go against you if the market continues south (my discussion of Contras notwithstanding).  None of these listed ETFs "sold off" in the last 30 minutes of Friday's action, which I consider more bullish (e.g., they are not pure day-trades):

SDS
TWM
PSQ  (nice accumulation pattern on Friday)
SHM

BZQ also fired as a New Long, and certainly, over the last 2 days, accumulation has been very strong.  In general though smart money is avoiding this one (lower $-Vol makes this statement obvious).

I note that of the GGT New Long ETFs that were bond related, only SHM shows accumulation -- all the others sold off near the end of the day.  Hence, AGG, BSV, BIV, and CFT are all "AVOID".

GGT Affirmed Longs - ETFs

These are ETFs which were already long and basically said "buy me because everybody else is":

OIH
XOP (strong accumulation over last 8 days)
VNM (don't ask me why, but this looks good over the past 40 as well as 8 days)
FXP (strong accumulation in last hour on Friday, but 40d is mixed and about even)
EEV (poor accumulation prior to Friday, but complete intra-day reversal on an 8-day time frame.  40 looks promising)
EDZ -- day trading vehicle my tail... this has been in a general distribution but knocked the skin off the ball on Friday.  Note that someone picked up 500K shares at just before 13:10 @ $22.90, which is a big hunka change.
EUM -- solid accumulation at the end of the day is noteworthy

GGT New Longs -- Stocks

I think there was leakage on the Massey deal -- HUGE accumulation in the last 30 minutes.  Here's the chart:



VRSN -- impressive LEV accumulation last 30 minutes
TSO -- nice, steady accumulation for the past 8 days but 40 days has been lacking.  We could be seeing rotation occur right before our eyes.
DNR -- major jump just before 1/25 close, then impressive buying mid-day Friday.
WNR -- couple spots of $1M buying on Friday mid-day, more than one.  In general not a barn burner on the accumulation radar
SFY -- huge, I mean HUGE LEV run-up in the last 30 minutes of Friday's action.  Good 8-day accumulation but poor 40-day, see my note for TSO, as it applies here too.
LUFK -- nice accumulation for both 8d and 40d period.  Not much movement on Friday, indicating that smart money is already in this one.

Although there were a few semiconductor ETFs and stocks that appeared as New Longs, they are all in distribution so I would avoid.

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Trading Plan for Monday

Travel day starting at 3 pm, so I'll move into selected New Longs provided they meet Elder criteria, etc.  I'm certainly not getting very deep here though, as I think we are on thin ice.  But, I need to play something ...

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Remember, you are responsible for your own trading decisions, and I am not.  Please take ownership for your actions.

Regards,

pgd