Saturday, March 5, 2011

March 5th Weekend Update, Part 1 ...

I plan to make multiple entries this weekend, hence the Part 1, Part 2 titles...  These will be separate entries so check back or better yet ...

Please "Subscribe" using the tools at the left so that you get automatic notification, via Google Desktop, Google Reader, or your selected subscribe method.  I've been getting a number of notes from folks asking how they can get notified of updates and this is the easiest way.

There is NO face-to-face meeting in March; I'm obligated with family-centric things on our normal weekend.  I will be conducting a WebEx sometime during the month, so stay tuned.

  • Despite the primary markets falling yesterday on average volume (Dow down -0.72%, NASDAQ down -0.50%, and S&P500 down -0.74%), the GGT price index rose +0.15% on volume +9% above the 50d MA.  I take this as more bullish than bearish for the markets.

    I attribute the difference between the GGT price index and the major indexes to the fact that GGT stocks are more encompassing than the three primary indexes, giving us a broader view than a few industrials (DJ30), technology (NASDAQ), and financials (S&P500).

    I also attribute the difference to the fact that the GGT index is equal-weighted, whereas the primary indexes are market-cap weighted (the bigger their market cap, the more influence they exert).  This gives the smaller-cap stocks as much say as the larger caps, and smaller-capped stocks have been outperforming the market since late January / early February.
  • The GGT Price Accumulator Change tool, which is an oscillator that measures the short-term overbought/oversold basis of the GGT database of stocks, is back down to -14, it's lowest possible value, and is telling us that on a reward/risk level, it is okay to consider entering stocks on Monday.   Correspondingly, I'll perform an EV analysis on Long GGT candidates sometime this weekend.
  • The GGT Short-Term Change Timer, which typically holds for only a few days, has indicated a move LONG for Monday.  To play this timer, one should enter the stock early in the morning after the timer signals a move long.  The timer, when applied to the GGT index, is at 16.3% ARR since inception in September 2008.
  • The VTI timer, which is the actual trade (Vanguard Total Index ETF) that can be performed that closely resembles the performance of the GGT price index, is confirming the GGT Short-Term Change Timer move to the long side.  This timer, when applied to the VTI, is at 18.4% ARR since inception in September 2008.  Consider entering your position by 9:45 a.m if it is moving upward.  If it is moving downward, use intraday pivot analysis to determine the support levels and enter at the intraday support.
  • The Intermediate-length Elder Force Index timer is still in mixed mode, and this results because the two methods used to calculate the output are not confirming.  This is cautionary for the intermediate term.
  • Of significance is that the Elder Force Index timer, using a simple moving average (SMA) method in the calculations, has been in CASH since the close of Thursday's markets. This is significant because this timer last entered two-consecutive days of being in cash on 11/16/10, and emerged from this state on 12/2/10.  This is cautionary for the intermediate term.
  • The bears that arose on 2/22 are under increased pressure according to the GGT Long-Cash ratio.  This means that on a short-term basis (5d, 8d), the database is expanding in terms of stocks entering "New Long" status, which is bullish.  The fact that the slopes of longer-duration moving averages are pointing down is not to be ignored and hence, I'm cautionary over the intermediate term, but with a bullish bias.

GGT Price Accumulator Change Tool

This is a metric that I developed over the past few months and released in February.  Here's the chart:

As with all my charts, right-click to expand in a new window or tab.

The chart shows an oscillator that moves between -14 and +14.  When it is in the green zone, below -5, this typically has presented a good buying opportunity on a short-term basis.  When it is above +5, this typically has been a poor buying period, as we've typically pulled back within a day or two.  Correspondingly, when we move into the green zone, it's been a good time to pick up stocks, as measured by the solid red line, which is the GGT price index.  Note that purchases in the red area typically are followed by a drop in the GGT price index, but purchases in the green area typically precede rises in the price index.

My recommendation is to buy good stocks in the green zone.


Short Term Timer

Here's the latest dashboard of the short term timer that I follow:

As you can see, the VTI has just signaled long, enabling entry on Monday.  This is a short-term timer -- on the order of a few days (as you can see), and as such, you need to be nimble.  As you can see, the VTI timer equity curve hasn't moved either way in nearly three months, but overall, since inception in September 2008, it has appreciated 52%, or 18.4% per year.  Here's the actual equity chart:

The chart above presents 4 traces:
  • Equity w/ No EMA filter is simply buying/selling the VTI according to the short-term timer signal.  When we don't apply the 150d EMA filter to this method you can see that we can seriously draw down our equity, and further, it takes longer to get back.
  • Equity w/ 150d EMA filter is exactly that -- we can only buy when the price is above the 150d EMA of price.  This results in large improvements to our equity, hence, we'll be more inclined to go with a method like this if we don't see that our equity balance is under the starting level.  Where the red line is flat is where we were in cash.  You may miss some moves upward with this rule, but you're trading with the long-term trend which I've proven is more lucrative.
  • The VTI price is shown in green -- you can see what the price has done since inception in September 2008.
  • The VTI 150d EMA line is shown, and you can see that we are significantly above the line.
The largest drawdown with the 150d EMA filter added to the timer is from 4/15/10 to 4/27/10 where the VTI equity curve moved from $1.4342/dollar to $1.386/dollar, or a drop of 3.36%.  This gives us a reward/risk level over 2.5 years (also known as the Calmar Ratio) of CR = 18.4%/3.36% ~ 5.5, which is a very, very good statistic.

The rules for this timer are simple:
  1. The VTI (or equity) must be above it's 150d EMA
  2. An adaptive EMA is calculated on the change in the GGT Long-Cash Ratio.  If the change in value of this adaptive EMA is positive, then it's okay to purchase the VTI.
  3. If the change in value of this adaptive EMA is negative, then it is time to sell the VTI.
You can trade other stocks/ETFs with this timer, although I've only tested a handful.  Send me a note if you want the list and the details of performance.  I generally announce the changing status of this timer in this blog.


Elder Force Index Timer

Here's the table for the Elder Intermediate Timer:

We're right on the fence with this timer.  As you can see, the output right now is one of a "Mixed" recommendation.  This means that if you are long, stay long.  It also means that if you are in cash, don't go 100% long in equity on Monday -- be very selective about your entries.  

If we get a "Cash" signal then all long positions should be sold.


The Long-Cash Ratio ... are the Bears Going Away?

I use this next table to keep track of the slopes of various EMAs on the Long-Cash Ratio.  The LCR is a measure of the number of stocks in the database with a recommendation of LONG -- they are above their historical threshholds for doing well -- to those that are recommended as CASH -- those that are below their historical threshholds.  When I plot various lengths of EMAs of the LCR, we get an idea of the ebb and flow of stocks in terms of the trend.  Here's the table:

Of significance here is the recent "thawing" of the bearish areas, melting into green "Bullish" indicators.  These are the shortest EMAs on the LCR, and they need to generally move first to the long side before everything else (not a 100% requirement, but when we see this, we need to pay attention).  As an example of this look back to the 2/1 timeframe, which was the start of the most recent up leg.  Hence, it can be worthwhile to start moving long when we see this type of behavior (with other indicators confirming, of course).


Based on the above, we need to be cautious, but there are indications that the long side of the market is still very much alive and active.  I'll discuss some stock and ETF ideas in my next entry, most likely tomorrow (Sunday).