Monday, January 17, 2011

All Timers Long ... Blogs are Mixed in Views ... What to do?

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Summary
  • The GGT Short-Term LCR Change Timer is LONG, which signaled LONG as of the close Wednesday night.  Since Thursday the index is up 1.33%.  I missed this signal due to my travels and I will not be chasing it.
  • The VTI Short-Term Timer, which is directly related to the GGT ST LCR Change Timer, signaled LONG as of the close of Thursday night.  The open price was $66.25 on Friday, and it closed up 0.65%.
  • The Intermediate-Termed Elder Force Index timer continues to indicate LONG, and has been long since 12/1
  • The slopes of all the primary GGT EMAs (5d ... 65d) are pointing upward, and have been since the close of Thursday's markets.  This is bullish.
  • The GGT strength index is up significantly from last Friday's level of 0.575, ending the week at 0.782.  Values above 0.8 are approaching overbought, but this is a less-than-scientific level.
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Commentary

There is a considerable amount of noise present in the market, specifically the number of blogs that purport to have an edge here or there (my blog notwithstanding).  In general, I've been down-selecting my reading space rather than increasing it, relying more and more on GGT indicators.  This being said, I do pay attention to the following links via my BlogShelf reader on my iPad:
Of course, the commentary by Pascal Willian @ http://www.effectivevolume.eu, specifically detailing 20d money flow should be part of your weekly, if not nightly review.

The issue, as most of you know, is that it is easy to justify any position.  Generally, the blogs above are aligned in the same direction, e.g., either they all are hinting at the bullish side, or they are pointing downward on the bearish side.  Unfortunately, with all opinions (because their crystal balls are as good as mine), we have a mixed situation:
  • Billy is LONG, solidly long.  The reasoning is sound and the indicators in the market are what they are -- bullish.
  • Frank, at Trading the Odds, gives historical evidence to this MLK week as being decisively negative, especially as the week moves onward.
  • Rob, at Quantifiable Edges, hasn't blogged in a week and his last blog entry was more on his methods and not on indicators.  Hence, he gets a hall pass.
  • Dave, at ETF Roundup, has been on hiatus and will return (today).  He too gets a hall pass.
So, this leaves me to be a tie-breaker.  The challenge is this -- if I'm wrong, then we'll either miss gains (sitting on the sidelines) or take a hit.  If I'm right, we'll have gains made through appreciation of value or the protection of equity (sitting on the sidelines).  There simply is no way to be sure at this present time.  

I do note though that the upside reward isn't as good as the downside risk, so gains attained right now are in a more risky market.

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The LCR System

I place about 90% of my first gate analysis on the status of the GGT Long-Cash Ratio system.  To recap:

GGT ranks stocks individually into two broad classes:  LONG and CASH.  Stocks in a LONG status are there because they have PRICE AND VOLUME above historical levels where the stock also performed well (or performed less poorly).  Contrasting, stocks with a CASH recommendation are there solely because they are failing in terms of price appreciation, against the same historical levels.  What is unique about this system is that each of the stocks gets updated daily, classified, and then the entire database is cranked through the meat grinder to determine the LONG:CASH ratio level.  Hence, when we see the LCR moving upward, we know that the database is appreciating in terms of price and volume.  When we see the LCR moving downward, we know that the database prices are falling.  Typically, we want to buy stocks when the database LCR is increasing, as the number of stocks above their historical norms is increasing.

The raw database LCR value is presently at a value of 2.033, and indicates that 1771 stocks have some form of long status and that 871 stocks have some form of cash status.  Here's a chart of the raw LCR values so that you can see how this compares to past levels:




What strikes me about the present LCR levels is how relatively unremarkable the present levels are.  "Choppy", "noisy", "in-determinant", are all words that come to mind.  What I can say is that clearly, we are not below 1.0, which is when we typically are characterized with decreasing prices, so if we are not in a dangerous zone, by inference, we must be in a safe zone, or at least, a less-dangerous zone.  Also note that when we go above 2.5 we generally keep going through 3.0 although this rule did not apply over the last couple of weeks. Admittedly, we cannot infer much from the raw LCR chart except that there does not appear to be a clear trend upwards or downwards.

Often, EMAs (exponential moving averages) applied to the LCR can help me discern a trend.  Here's a chart with the 13d, 21d, 34d, and 55d EMAs plotted:




Of significance here is that the primary EMAs shown above are "interwoven".  This exemplifies the noisy, raw LCR graph previously shown, and indicates again that there is really no primary trend on these time scales (which I consider the primary, intermediate-length scales).  I would argue that caution is advised with respect to longer-termed holdings (those longer than trading days, or 2.5 weeks), simply because we could move either way as far as the markets are concerned.

Remember, the LCR EMA graph is not a price graph -- it is a state of the database.  It is telling us that the number of available stocks to choose from is relatively static within the database, and when this occurs, it's time to look at other indicators.  It's not saying that the stocks aren't changing -- it simply is telling us that overall, neither the bears nor the bulls are winning in terms of longs/cash.  In fact, we are seeing rotation in terms of sectors, but more on that later.

If the two graphs above were not enough to convince you that there is no trend in terms of the database expanding or contracting, then this next one should show you in a graphical way just what is occurring.  If we plot the "change in the LCR EMAs", day-over-day, we get this next graph:




This graph shows that we've been bouncing back-and-forth above and below the "0" line, which is where the slopes of these EMAs (13d, 21d, 34d) change from pointing up to pointing down.  As we can see, all are in the white portion of the graph, which means that the slopes are pointing up.  What we've been experiencing though is a bouncing effect, so while stocks certainly are moving up in price (see the solid blue line), the database is not experiencing the same joy.  In fact, while some of the stocks are moving upward, the chart is telling us that a nearly equivalent amount are moving downward.  This hasn't been a great time to pick stocks, at least on these time frames.

This last graph is the familiar dashboard of the LCR system:





Here, we see that in the middle of the graph, that we have three days of the slopes of the LCRs all being "bullish", with the last two day's confirming the 65d EMA slope.  For now, we are bullish, but all of the "red" in the middle portion of this graph, and the choppiness of the red/green, tells me that we need to be cautious and ensure that if we commit monies, it is not with the expectation of holding for the intermediate length time frames...

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The Pricing System

Wuda, cuda, shuda ....

Here's a summary dashboard view of the GGT Pricing System:




The left column is the daily GGT price change, in %, and next to it is the volume of the day, compared to the 50d MA volume of the GGT database.  We've been solidly above the 50d since returning from the holidays, so we know that the institutional folks are back at their desks.

Again, the middle of the figure is where the primary action lies, as this is the slope of different length EMAs on the GGT price series.  What is most important here is the sea of green -- especially the 55d EMA -- and with one exception on 11/16, we've been pointing upward.  Perhaps there is a lesson here, as we place dollars in the bank, and this "greenness" is tied directly to dollars.

Just as the LCR ROC chart can tell us about how far we are from the slopes moving positive or negative, we can do the same thing with the pricing slopes:



 Of significance here is the amount that we are up over the pink area.  Now, don't get complacent -- all one needs to do is look back to the middle of November and we had a huge downdraft from these levels over the course of a couple of days, but the point here is that invested portfolios have been making money because as a whole, the database has been appreciating on multiple time scales, all with upward-trending slopes.  The 13d, 21d, and 34d lines plotted above are the same 13d, 21d, and 34d columns of the previous figure -- please make sure you understand what you're looking at between these two figures, because the data is the same, just presented differently.

From the combination of the LCR charts, as well as the pricing charts, I conclude the following:

  1. The database is churning, neither growing or contracting in any regard.  Since we have New Longs as well as New Cash recommendations occurring each day, the inflows to New Longs and the outflows to New Cashes is more or less balanced.  
  2. Prices continue upward with respect to the database, which we established prior as not expanding.  This means that the stocks recommended in some form of "Long" status have to be carrying an increasingly disproportionate weight compared to the recent past.  As long as the stocks that rotate out (New Cashes) do not depreciate faster than the stocks that are rotating in (New Longs) the price index will continue higher, so we need to place our attention on finding these equities.
  3. This rotation of the database but increase in prices is unprecedented in the 2.5 year history of GGT.  Because of these uncharted waters, throwing caution to the wind and jumping on the USS InvestEverything is not something I'd consider prudent.
  4. Volume levels are still above the 50d MA, indicating the presence of big buyers/sellers.  Hence, we should be able to find stocks that are appreciating due to volume accumulation but are in a healthy uptrend too, e.g., stocks that meet sound Effective Volume as well as Elder Force Index criteria.
  5. While I didn't discuss the details, both the price charts and LCR charts have a "slope of the slope" section (far right on each), and as you can see, both are very green.  Monday is probably NOT the day to pick an entry to stocks and fire all of our powder, but careful selection could prove valuable.
With these thoughts in mind, I went hunting.

GGT New Longs, which were posted in our Yahoo! group over the weekend, provide a good starting point of seeing what is "en vogue" for the given day.  I start with this list, then filter down via Effective Volume using my TradeStation code, but you can use web-based links just as easily: www.effectivevolume.eu and/or www.monest.com/charts.

When I do this, I see that the "hotter" industry groups are as follows:
  • Business Services
  • Communications
  • Computer Services
  • Construction & Agriculture
  • Oil & Gas (Integrated and Operations)
  • Personal & Household
  • Semiconductors
If I had to pick two that had the most stocks meeting EV criteria, I'd say that Oil & Gas and Semiconductors seem to be the hottest, but they all have multiple stocks.

This being said, I think that the following stocks are ready for entry, provided that they pull back some to allow entry AND provided that EV continues to increase:

PCLN
TEVA
DISH
PBR
QEP
CHK
ARUN

PCLN is already 0.6% below my buy point, and the huge rise of EV at the end of day Friday is encouraging. If EV holds yet the price drops this could be even a better bargain.

TEVA is 0.1% above my buy point, and has been on a steady accumulation over the last week or so.  Prices seem to have hit some resistance, so any downward movement while EV remains uptrending could bode well.

DISH is 0.1% above my buy point, and it looks like it could pull back a bit from here.  The EV story has been mixed, but there was a steady divergence in price and EV over the last few days that suggests buying at the lows, which is always a good thing if DISH is going to run upwards.

PBR, QEP, and CHK are all from the same Oil & Gas Sector, and have been doing well overall.  Of the 3 I like CHK, but all are good candidates.

ARUN is a love-me-hate-me stock   I owned it a few weeks ago when it started to drop, and just recently, it started back up and again, looks solid for all the same reasons.  Furthermore, LEV has been moving in while SmEV has been flowing out, so this historically has been a good setup.  We'll see.

Other stocks that are in the middle of a pullback but have a good LEV pattern overall are:

BSFT
PVA
IFF
PLD
IM
IT
L
JAH
RDWR
RBY
HYC
IRET
CNH
BPOP

Many of these meet some form of Elder Force Index criteria too (check carefully), so could provide good entry under our GGT, LLC rules if they continue upward.  Note though that these are in a pullback, so watch the daily RSI(2) or equivalent to see when they truly start their march upwards.

The following stocks are all solid performers but are WAY over my entry points, so I need them to pull back.  They meet Elder FI(13) criteria but fail FI(2) < 0 criteria, but are on my watchlist nevertheless.  All have good LEV patterns as of this writing:

BIDU
FFIV
CRM
CLX
ISRG
LPS
NVLS
CYMI
UTEK
CBS
CVX

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Trading Plan for Tuesday

Short-Term Timers:  I may place a position in VTI if it pulls below the Thursday/Friday buy price.

Intermediate Timers:  Elder fits in here, and many of the stocks above fit this criteria.  I'll wait to see if the market drops and stabilizes, and if the prices drop to within my buy zone.

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

Regards,

pgd

Ownership Disclaimer:  GGT, LLC holds the following positions:  COG and FTNT.  My personal accounts hold DIG, ERX, IEZ, PALL, TMV, UWM, XLE, XME, and XOP.