Monday, January 3, 2011

And Let 2011 Begin ...

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Summary

  • The GGT LCR subsystem indicates that we have moved into a period of database consolidation, and continued growth of the number of CASH-rated stocks will likely be the norm.  This means that it will be increasingly difficult to purchase stocks long and make money.
  • The GGT Pricing subsystem indicates that we are continued bullish, but have some weakness developing.  This status is at odds with the LCR subsystem and the divergence will clear itself within the week or so -- either the markets will correct, as indicated by the LCR subsystem, or the markets will move strongly to the upside, as indicated by the pricing subsystem.
  • The GGT Short-Term LCR Change Timer is in CASH.  It is not prudent to purchase new short-termed positions at this point in the market.  We are at least two-full trading days (close of markets Tuesday) away from seeing this status change.
  • The Elder Intermediate-Term Force Index Timer is LONG.  My suggestion is to choose your stocks carefully, as this market has many cross-currents that are not considered by the Elder system.
  • The Contra Intermediate-Term Timer is in CASH.  It is not prudent to move into contra positions at this time.  THIS BEING SAID, two contra ETFs are showing New Long status:  PSQ and SQQQ are confirming.
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LCR Subsystem


Let's start with a broad view, using the Long-Cash Ratio (LCR) System:

































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

Starting on the left, the LCR value, which is calculated based upon the number of stocks in a LONG status compared to those in a CASH status, continues to drop, ending the year at a less-than-remarkable 1.457.  This is telling us, in snapshot form, that we have 1610 stocks LONG and 1105 stocks in CASH.  Next to that value is an indicator showing the day-to-day change, and you can see that since the 12/22 peak, the LCR has been steadily dropping.  I don't care if it's due to the holidays or not, a dropping LCR isn't bullish.  Period.

Next from the left is an indicator that tells me, again in snapshot form, the present status of the LCR exponential moving averages (EMAs).  As you can see, on 12/31 we had "red" across the board, indicating that we have complete inversion of the database EMAs (5d < 8d < 13d < 21d < 34d < 55d).  This certainly is bearish, and again, is not a good setup for a long-term bull, but is quite the opposite.

The middle section is where I consider the "meat".  This section shows the status of the EMA slopes.  As you can see, all the slopes, from 5d through the 65d (13w or 1 qtr) are "red", which means that they are pointing downward, and have been for the last 4 days.  In fact, the first crack in the ice appeared on 12/15, and aside from some dancing on 12/21 and 12/22, we've been heading steadily downward.

Downward-pointing slopes of the LCR EMAs indicates that the database is contracting on multiple time scales.  Short-termers, e.g., those with a 5d horizon, are picking from a pool of stocks that is growing smaller and smaller, and the long-term pickers, e.g., those with a 65d horizon, are picking from the same, shrinking pool.  This forces us to be surgical in our picks if on the long side, and in the broadest sense, is akin to swimming up stream.

Finally, the right part of the graphic simply indicates the "slope of the slopes" of each of the EMAs.  Notice how these must be "green" for the middle part of the graphic to move "green" -- the slopes of the slopes (SoS) need to be pointing upward in order for the primary LCR slopes to move into positive territory.  We've only had 1 positive day out of the last 6; again, not a bullish case in any view.

This next graphic is a different view of the LEFT pane above -- it shows the status of the EMAs in graphical format, which some people prefer:




























Omitted above are the 5d and 8d EMAs.

As you can see, we tend to oscillate between relatively high levels that range ~ >2.5 to levels that drop to ~ 0.5 or so.  By definition, the faster EMAs tend to move the highest / lowest, as we would expect, as they are not being averaged as much as the slower EMAs.  What we see above is that we are entering a period of inversion, and you can visualize for yourself that reversals from this area are few and far between.

This next graph represents the middle portion of the table above, again in graphical format as opposed to tabular, which tends to be easier for some folks:




























Shown are only 3 of the 7 LCRs, typically what I consider the "intermediate-term" values, as well as the price index of the GGT database (blue).  Specifically, the traces above show daily changes in the LCR EMAs, also known as the slopes of the EMAs.  When the daily changes are in the white area, the changes are positive, and when they are in the pink area, they are negative.  As you can see, we dipped into the negative area around 12/15, tried to break out on 12/21- 12/22, failed, and now are heading lower.  During this same time the average price of the GGT database has failed to make new highs, which is generally problematic for making money on the long side (as well as short) using stocks.

We are consolidating, and while the futures are pointing to higher opens this morning (first trading day of the year), overall, we are starting from mediocre levels.  This is a less-than-ideal setup.

Bottom line:  from the perspective of the GGT LCR subsystem, the markets are contracting, and presently, they are heading downward.  While they could reverse, history of reversals from this point are virtually non-existent, and committing dollars to the long side, while the database is contracting, is generally dangerous to portfolio health.  From the perspective of the GGT LCR subsystem I see no compelling reason to jump into the markets with this setup.

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GGT Pricing Subsystem

Throwing a bit of a wrench in the bear gears is the status of the pricing subsystem:






































I setup the Pricing System more-or-less in the same format as the the LCR Subsystem.  Starting on the left, we have the daily changes in the pricing index, as well as volume change.  As expected, the last couple of weeks have experienced poor volume and decreasing prices overall.

Somewhat of a surprise is the status of the pricing EMAs, which are shown in the left-side of the figure.  Here I'm only showing the 8d - 55d, rather than starting at the 5d.  What we have is the opposite of the LCR situation -- all the pricing EMAs are in "proper" order, with the 8d > 13d > 21d > 34d > 55d.  Here's a graphical view of this:



























I've super-imposed the GGT price index over the intermediate-termed EMAs for reference.  As you can see, not only are the EMAs in "proper" order, the GGT price index is still trading above the EMAs, and this is bullish.

Note though that this condition in the Pricing system is a divergence from the LCR system -- the database is contracting, which means the number of stocks with a CASH ranking is growing, and this is true on all measured timescales (5d through 65d).  A CASH ranking occurs only if one situation is true:  prices of stocks with this recommendation are falling below their historical, optimized levels.  Hence, experiencing a contracting LCR, while prices continue to move higher on the database as a whole, simply indicates that fewer stocks are having to move higher than "normal" in order to get the database average to continue higher.  Call this a pricing bubble or not, it is indicative of a situation that must resolve itself:  either the LCR will reverse to support the rising prices (e.g., prices and volume will align with the pricing system), OR, the pricing system will collapse and align with the LCR system.  Continued divergence simply is not sustainable for any significant period of time.

The middle of the Pricing table above shows the status of the slopes of the various EMAs.  Again, ALL of these are positive (green), and with this situation, it is difficult to argue that we have anything bearish occurring.

This being said, here is a graph which shines a different light on the slopes of the pricing EMAs:




























Take a close look at this graph.  Here, I'm showing the GGT price index along with three intermediate-termed  EMA slopes.  What we have here is a set of slopes with positive values (all are in the white area, which means that the slopes are still pointing upward), but the "slope of the slope" (SoS) for each of the indicated EMAs is pointing downward.  In fact, if you look closely, you can see that the 13d slope is about to move into negative territory.

Again, futures are strong today, so I expect a reversal of this SoS trend on a 1d or 2d basis.  Nevertheless, we do have weakness appearing in the pricing system, so this does suggest that we could be closer to alignment with the LCR system than what a simple table view presents.  With a positive slope value to the EMAs, it is possible to make money in this market, as we bank increasing prices and nothing else.  With a contracting database, your stock selection must be surgical.  Correspondingly, stick to sectors/industry groups that are seeing price appreciation as well as large effective volume (EV) increases, and shy away from those that do not fit this situation.

Pascal Willain offers some EV suggestions at his paid site http://www.effectivevolume.eu; wander over there if you are so inclined.

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Timer Status

The GGT Short-Term LCR Change Timer is in CASH.   It is not prudent to chase new short-term positions at this time.  The timer reaffirmed this position on Friday, December 31st, and correspondingly, it cannot move to a buy status until the close of markets on Tuesday, January 4th, at the earliest.  We'll need two solid days of pricing AND volume increases within the database to see this revert the present call.

The Elder Force Index Timer is presently LONG.  According to this timer, it is okay for us to purchase stocks on an intermediate-term basis.  Choose your positions carefully, as this timer does not discern momentum changes like the LCR or pricing slope discussion above.  I would limit your candidate pool to those stocks in industry groups with upward-sloping 34d MAs, as well as stocks with upward-sloping 13d and 34d EMAs.  Both the industry groups and stocks MUST have increasing LEV.

The Contra ETF Timer is in CASH.  Here is a view of my Contra Index:





















This index is comprised of 88 inverse ETFs, including leveraged securities.  The graph indicates that it simply is too early for contra positions at this time:

  • The Elder FI(13) ribbons, both EMA and SMA calculations, are red.  This means that for contras, the FI(13) < 0, which is bearish for contra positions.  Since the EMA reacts faster than SMAs, I expect to see some green on the top ribbon before the SMA turns and confirms.  
  • The MACD Histogram is virtually zero with no discernible trend.  Indeed, the MACD and MACD signal lines are interwoven, causing the histogram to appear collapsed.
  • The 13d and 34d slope lines on the EMAs are NEGATIVE.  
  • The price index of the contra universe is trading well under the EMAs, and until we see some crossing of the EMAs from below, contras are an avoid.
  • Note that ALL of the indicated EMAs (8d, 13d, 34d, 40d, 160d) are pointing downward.  This is bearish for contras as a whole.
This being said, there are some contra positions that show early life if the primary markets head south.   PSQ, the ProShares Short of the Q's, just flashed a "New Long" status as of the close on Friday.  As many of you know, it takes both price AND volume to achieve this status, so the fact that this occurred on a shortened trading day is notable.  It is also notable that LEV has been growing in PSQ since 12/28.

SQQQ, which trades about 1/10 the volume of PSQ, is a -2x version of PSQ and also has achieved a "New Long" status as of Friday.  I will avoid SQQQ for now, but simply include it as having the underlying and the leveraged version of the same index show the same new status is notable.

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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 actions.

Regards,

pgd