Sunday, February 27, 2011

A Few GGT/EV Equities Look Attractive, but Will be Cautious

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Summary

  • There is no exact bias in terms of largecap vs. small cap, so invest in the best stocks and ETFs, independent of market capitalization.  Largecaps certainly have been losing attractiveness to the favor of smallcaps, but conversely, there is no decisive move away from largecaps to smallcaps.  If we see a market deterioration I would expect the flight to largecaps to become decisive.
  • The present trend is for volatility to to continue to increase at a rate which favors short-term declines compared to longer-term declines.  This means that there is a growing expectation within the market that the next 30 days will be more bumpy than the past 30 days, and it could be wise to take some money off the table.
  • The GGT Long-Cash Ratio table of slopes of various moving averages is all bearish, from the 5d to the 65d.  This means that the database is contracting, and it also means that your ability to to pick stocks has to improve because the chances of picking stocks that are sub-par is greatly increasing.  We failed to reverse this trend with Friday's action on the primary indexes, which will be a big warning sign if we do not reverse sometime next week with a significant series of up days.
  • The GGT Price Change Accumulator is telling us that buying stocks on Monday is a 50/50 proposition and that we must be selective.
  • Greek God Trading stocks and Effective Volume stocks are now able to be correlated in one file, allowing faster scanning of stocks that are at levels where they have historically outperformed and are attracting money.  At the present time this file will be posted over the weekend, and if we get a volunteer to step up (Excel 2007 and Windowz XP required), perhaps this could be moved to daily.
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LargeCap Stocks vs. SmallCaps

As many of you know from my presentations, I like to keep track of whether the market is favoring large caps or small caps.  Here's the most recent chart from Stockcharts.com, a free charting service (at least to generate this chart):



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

This chart plots the Russell 1000 Large Caps, represented by the ETF IWB, against the performance of the Russell Micro Caps, represented by the ETF IWC.  I've placed a 34d moving average on the ratio, so your eye can see the turning points.

When the trend line is moving upward, large caps are favored.  This is because the numerator of the fraction is growing faster than the denominator.  Conversely, when the trend line is falling, small caps are favored.  When the trend line is horizontal, there is no discernible favoritism.

You can see that since the middle of January 2011 that we initially saw a flood towards large caps (as evidenced by the gap up), but since then, we've been slowly bleeding back towards a bias to small caps.  The nearly-horizontal trend line, in combination with some of the ratios trading above and below the line show that there is no great bias either way, so you can trade away to your heart's content without fear of leaving money on the table.

This being said, if the markets start heading south, I would expect a rapid move to the safety and dividend-rich area of large caps, and this can be evidenced by the two black bars on Tuesday and Wednesday of this past week.

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Anticipated Market Volatility

This next chart is illustrative about present market conditions, because it ratios the expectation of volatility over the next several months (VXZ) against the short-term volatility over the next 30 days (VXX):



A link to this chart is here.  This is a weekly chart, and I've placed a 7-week MA on the results, which I have found to be a good indicator of when you should be in or out of the market.

As you can see, for this most recent week, we have exclusively traded below the 7w MA, which historically hasn't been a great time to be long.  Most notable was the period of late April/early May, when we simply could not move above the 7w MA and the slope of the EMA turned down.  This being said,   Also note though the lack of the solid red candle -- we did not finish the week on the lows, hence we have an open red candle (finishing lower than we started, but higher than the lows).  This is important, because it indicates that while the present climate is not overly bullish, it's not overly bearish either.

If you look closely at the figure at the week after the 7-week line has been penetrated, if the week after trades completely above the 7w line, this has been a great signal to move back into the market.  Not 100%, but overall, if you use sound money management after the week that trades completely above the 7w line, you'll make money.  We need to keep this in mind going forward.

What gives me pause is the slope of this 7w MA, which I've plotted on the top of the figure.  It is now below 0, and the closure of this value below 0 indicates that the week-over-week change now favors a significant increase in the ETF VXX, or the VIX, which is the volatility index.  

Because of the slope of this ratio falling below 0 it may be prudent to take some money off the table and keep it in areas that appreciate when the market declines.

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The Health of the GGT Database

I've not posted this summary view of the GGT Long-Cash Ratio slopes in a few weeks, so it'll be good to review:


The first thing that most likely draws your eye is the red "Bearish" lines at the bottom of the figure, which correspond to the last 4 days of trading.  This view is of the slopes of various EMAs on the Long-Cash Ratio (LCR), which is exactly what it sounds like -- a ratio between the number of LONG-rated stocks in the database to those that are recommended in CASH.  When you apply various moving averages to this ratio, and then look at the direction (slope) that each moving average is pointing, you get the figure above.

Friday the 25th was an up day as far as the indices were concerned, but nothing budged on the LCR slopes -- not one of them turned green.  This is ominous for a subtle reason:  to move a stock from CASH to LONG, we need both price and volume to appreciate over historical optimized levels where the stock did well, and Friday's action failed to produce a move where stocks reversed.  There was no large inflow of money into stocks across the board, as measured by lower volume.  This resulted in lack of moving from some form of CASH status to a New Long status.

It will be absolutely critical for a follow-through this coming week in terms of price and volume.  If we get it, play it, if we don't, then I'm extremely worried about this present climate.

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The GGT Price Change Accumulator (PCA)

Earlier this month I introduced a new tool, derived from the GGT pricing data, which shows whether we should enter or avoid purchasing stocks on a given day, provided we know the past few days of behavior.  This is an oscillator, and it has been very helpful on whether we should purchase stocks on a day-over-day basis.  Think of this as a final gate to placing the buy order on an equity that you've already screened and are interested in.

Presently, the PCA Oscillator is sitting at a value of 0, and it's been there for 2 days.  This is neither bullish nor bearish -- it's middle ground.  The optimal times to purchase stocks was Wednesday and Thursday mornings, when prices seemed to stabilize on the downside and the oscillator was reading -14 for two consecutive days.



If you choose to purchase stocks on Monday, do so if they show strength -- price and volume appreciation relative to Friday's action.  I would never plan to purchase stocks that are falling to a cheaper level in the present market climate.

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GGT and Effective Volume

Pascal Willain, who is the creator of Effective Volume, has graciously granted me permission to integrate daily EV data in with GGT data, and provided we can keep the calendars in sync (he's in Belgium, I'm in Virginia), I'll include EV data when I post stock data.

In the zip file that is posted to our GGT Yahoo! group, you will find a new file entitled "DashboardEV".  This file contains a listing of GGT stocks which correlate to Pascal's EV stocks, sorted first by GGT recommendation (New Long, Affirmed Long ...) then by Pascal's overall rating on the stock.  Here's an example for stocks:



Again, click on the image to open in a new window or tab.

A few observations:
  1. Not all of GGT's New Long rated stocks for Monday, February 28th, are listed above.  This is because Pascal does not include every stock that is included in the GGT system.  He has a universe of about 1000 stocks, GGT has a universe of about 2600 stocks.
  2. In general, there is a high correlation of GGT long-recommended stocks (New Long, Affirmed Long, Long) to stocks that have good Total EV recommendations ("Buying surges", "Buying continues").  These stocks should be a focus of your efforts if you are seeking new investment, as they are attracting money AND they have a favorable rating from the GGT system.
  3. There are a few instances where GGT data and EV data to not have a confirmed correlation.

    Examples above are SNDA, which is a GGT New Long but the Total EV Status indicates that "Selling Continues".  SNDA should be avoided.

    Another mixed signal in confirmation is NFX.  NFX has a GGT New Long recommendation but the Total EV Status is "Selling Continues" and the LER Status indicates "Do not buy". 
  • GGT is giving the stock a New Long recommendation because it has moved above it's historical levels for appreciation in terms of price and volume action on the day of recommendation.
  • Total EV Status is "Selling Continues" because the stock has been in distribution mode for some time, and it continues to reflect poor EV compared to historical EV levels.  
  • LER Status reflects "Do not buy" because the Large Effective Ratio value of  -123.1 shows that compared with historical accumulation levels, NFX is doing very poorly.
The best candidates on the joint table are those candidates where:
  • GGT Recommendation is New Long or GGT Affirmed Long (not shown in the figure) are confirming a (1) AB Buy signal near 100, (2) Total EV status of "Buying surges", which means it's a new breakout, (3) LER Status of "Acc." or "Str. Acc.", which means the stock is under new accumulation, and (4) Rating on the higher end of the scale for long positions, as this is an equal-weighting of sector strength, AB value, and Extension Tot EV.
Given this criteria, CPWR looks compelling for Monday.

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GGT Recommendations for Review for Monday, February 28th

ETFs:
  • BAB -- thinner trade at $7Msh, but huge LEV change on Friday alone.  Has not been in 3-days of LEV accumulation but someone bought a block of 247K shares early Friday @ $25, causing this to move up in terms of price and LEV all day.  It held up nicely during the down draft of Tu/Wed/Th.  Volume was 59% above average
  • BND -- nice LEV divergence pattern from SmEV, and price has been walking up steadily.  Did quite well during the downdraft.  Volume was 30% over average on Friday.
  • DBO -- solid LEV accumulation the past the days, and Friday saw continued accumulation even under price pressure.  Volume was 66% above average.
  • EMB -- large reversal of LEV to the upside on Friday with steady prices, which always is attractive to me.  Fails three days of accumulation though ...
  • GSG - rather constant LEV growth over the past 3 days on horizontal price movement.
  • IJH -- this is the Midcap 400 from iShares and it sold off in the down draft, only to return with a vengeance on Friday.  It ended the day in the last 5 minutes of trading with a huge, stair-step jumps in LEV, which is not characteristic of expectation of dropping markets.  I see this as bullish.
  • JNK -- sold off hard on Tuesday and Wednesday, in terms of price and LEV, but in the last 5 minutes of trading on Friday it jumped in LEV to almost where it was before the selloff.  Note that someone picked up 600K shares @ 11:23, which barely moved the price (stealthy purchase) @ $40, so we had a $24M+ transaction here, and then in the last minute of the trading day LEV volume jumped dramatically.  Volume was 103% of average.  Again, I consider this bullish.
  • VCIT -- another bond fund that has been under steady LEV accumulation over the past week.  Thinner to trade, but notable.

Stocks:
  • AMAG -- fails a 3-day accumulation test, but Friday saw the volume move to 206% of average, and LEV skyrocket while SmEV sold off.  I always love this type of divergence.
  • CBOE -- steady, divergence LEV/SmEV accumulation pattern, with volume up 88% on Friday.
  • CBR -- another steady, divergent LEV/SmEV accumulation pattern, with volume up 61% on Friday.
  • CIGX --a tabacco company whose LEV pattern held up fairly well under the pressure of last week, and jumped dramatically on Friday.  Volume was 125% of normal, with lots of activity throughout the day on Friday.  LEV has not decreased in any measurable way since midday Tuesday, e.g, this started being accumulated as the market was going down.
  • CPWR is the hands-down favorite according to GGT and EV scans, for the reasons noted above.  Volume was up 61% on Friday.
  • CRI has a great 3-day LEV accumulation pattern but it sold off LEV in a stealthy manner (no change in price) in the last minutes of Friday.
  • DGI -- amazing LEV accumulation in the last 30 minutes on Friday -- one of the largest LEV changes relative to the past 3 days that I've ever seen for a stock, and I look at at least 100 charts per day, every day.  Volume was 128% of average.
  • DY -- held up nicely under the decline of Tu-Wed-Th, and saw a nice, divergent LEV/SmEV pattern that started on Tuesday.  It finished the week at a price high as well as LEV high, with volume up 23% on Friday.
  • HLX - otherwise unremarkable week except that the last hour on Friday saw significant LEV accumulation in a nice, steady, stair-case/stepwise fashion.  I like it when this happens, because it tells me someone or a network of someones are buying at a steady pace.
  • KIM is involved in real-estate, and it's hard to ignore this group right now.  Someone stepped in with a 260K share purchase on Friday @ $18, and LEV didn't budge (because price didn't change).  Now THAT is a stealthy buy.  The day finished a bit weaker in LEV though, as there was some selling in the last 15 minutes, although price finished up 2.83%.
  • MAA -- another real-estate stock that was unremarkable except that there was HUGE LEV accumulation in the last 10 minutes of the day, again, that steady, stair-case/step-wise growth of LEV with barely a nudge in price.
  • MCO -- something is going on with Moody's.  Instead of furious buying in the last 5 minutes, volume generally increased in the last hour, with 200K shares at $31 being traded in this zone.  The day ended strong for price and LEV on MCO, and it bears watching.
  • MHR -- nice, steady accumulation on LEV throughout the day while SmEV remained fairly constant.
  • NWSA -- held up nicely in terms of LEV during the downdraft last week, and finished the week strong.
  • OHI -- another real-estate stock that absolutely skyrocketed in the last 5 minutes of trading in terms of volume and LEV.
  • OMI -- a picture perfect representation of growing LEV while the stock sells off on Tuesday and Wednesday, then rapid acceleration of LEV on Thursday and Friday.
  • SWI -- quiet LEV and SmEV changes on Tuesday and Wednesday during the down draft, and on Thursday, a massive amount of LEV accumulation.  Friday saw a steady LEV while SmEV sold off, and it ended the day with large LEV increases.
  • TRLG -- WOW.  Price up 19% on Friday on volume that was 345% higher.  Of significance is that LEV was increasing during Tuesday/Wednesday while stock was decreasing in price, and the sell-off on price + LEV would have made all of us run away.  Those who stuck around were rewarded on Friday.
  • VIV -- disproportionate LEV accumulation on Friday relative to price change shows just how much attention this stock attracted, and it finished the day at the LEV-high for the week.
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Trading Plan for Monday
  • My Top 25 ETF portfolio will remain fully deployed, except I will sell those equities that are newly rated as New Cash.
  • I intend to lighten up on my wife's TSP funds by at least 50%, moving at least half to cash.  I am taking this action based upon the VXZ:VXX graph and the LCR slope graphs I presented above, as well as I intend to rebalance at the end of the month due to restrictions in her account (only 2 transaction events per month are allowed).  If we were not at the end of the month I would do nothing with her monies at this time (the trend is up until we have evidence to the contrary).
  • I have a number of positions that have only been executed to 25% or 50% positions.  I intend to examine the strength of each and re-evaluate whether I will let the pending orders ride or if I will liquidate and cancel the positions.
  • I may purchase some of the stocks / ETFs above if they show convincing strength (LEV, total volume, and price appreciation) throughout the day.  I intend to enter 25% positions only.
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Remember, you are responsible for your trading decisions, and I am not.  Please do your diligence, and please take ownership for your actions.

Regards,

pgd

Position disclaimer:  As of this writing I own or influence positions in the following equities:  BGU, BTI, CVS, DAG, DBA, DBC, DIG, DRN, DWSN, ERX, FTI, FXF, FES, GIS, GLD, HMY, HPQ, IEO, IEZ, IGE, IXC, MTB, NXY, PZA, RDWR, RJA, SSO, SSRI, TIP, UPRO, URE, UWM, VDE, XLE, XOP, VXF, NUS, NVE, EFA