Monday, March 21, 2011

A Pause or a Reversal? The LCR Has Been Here Before ...

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I'm away on travel most of this week to the west coast so blog entries will be curtailed.
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Summary

  • The GGT price index rose +1.02% on volume that was 29% above average.  I attribute some of the volume increase to quadruple witching, but rising prices on volume is a good sign.
  • All of the pricing slopes have turned up, with the exception of the 13d (no idea why it's holding out).  This is necessary for us to make money on the long side.
  • The pricing accumulator, which tells us whether we should enter stocks on the next trading day or not, is telling us to avoid entry of stocks on Monday, as the likelihood of a downday is increasing (reward/risk is poor).  The value is presently pegged at overbought, and given past history, there is only a 13% chance that today will be an up day (futures up 1% as I write this so it looks like we'll be in the 13%...)
  • The Elder 13d Force Index is in CASH.
  • The slopes of the Long-Cash Ratio (LCR) EMAs are all negative but are pointing upwards.  This a good first step to moving long.
Conclusions:  while there is no signal to move long, the overall indicators are not deteriorating, and to some extent, are showing a very slight improvement.  I intend to sit pat on Monday.

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Market Internals on Friday

Friday wasn't a day to get excited about, as far as I'm concerned.  Here's a view of the behavior of the market, as determined by the average performance of 2x and -2x ETFs, relative to the 2x S&P500:



I explained this figure last week, so refer backwards a few days to get the details.

The top trace is the SSO, which is the +2x ETF on the S&P500.  The middle trace is the SSO minus the average of 9 +2x ETFs, all in different sectors of the economy.  The result is a relative behavior of this average to the SSO.  The bottom is the average of 9 -2x contra ETFs, basically the opposing "pair" of the +2x contras, and I subtract the SSO from this result.

When the middle trace is red the 9, +2x ETFs are underperforming the +2x S&P500, and this is the condition we see right now.  We also see in the lower trace that the -2x contra ETFs actually improved throughout the day, relative to the opening, showing that the S&P500 was under pressure all day.

This combined presentation is not one that I would call one of strength and because of this presentation, I think that the volume we saw on Friday was due to options/futures expiration and not much else.  While the bears certainly did NOT claw their way back they made great progress on Friday, and because of this, I am wary to whether this soon-to-be three-day up leg can be sustained.

The opposing position would have been supported if the picture above had solid green for the middle trace, e.g., all of the sectors (or the majority of them), as measured by the +2x ETFs, would have outperformed the S&P500.  I would have also liked to have seen strength in buying into the weekend, but instead, we saw gradual selling of long positions throughout the day.

Conclusions:  we're not as healthy as we would want to be to move aggressively long for the intermediate term.  I intend to remain largely in cash for the next day or two at a minimum.

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GGT Pricing EMA Slopes

This next figure gives me the state of the health of pricing EMAs within the GGT universe:



This figure shows the slopes of various moving averages, from 5days in length to 65d, on the left, and the daily change of these slopes on the right.  Here's how to interpret:

  1. On the left, we've been in a pattern of increasing downward-pointing EMAs.  This has been evidenced in more "red", with the red growing from the shorter EMAs to the longer EMAs.  Consider this increasing bearishness as the calendar days click off.
  2. On the left, there are periods where we reverse the "redness", and see a couple of days of apparent recovery.  It will be incredibly important to see more than two days of "green" if we are to break the present pattern.
  3. On the right, we bounce between a couple of days down, a couple of days up, then repeat the cycle.  We've just experienced two days upward.  We'll need several of these days up to get me to move long.  Looking back over recent history, 4 continuous days up on solid volume would be a strong influence on my present outlook.
Conclusions:  The damage has stopped, based upon Friday's action (almost green across multiple time frames).  We need several days like this (more than 2) in order to have confidence to re-enter the market on the long side.

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GGT Long-Cash Ratio Slopes

Whereas the pricing slopes tell us the pricing behavior of the database, as well as give us a short-term indicator of where the prices are moving, the GGT LCR slopes tell us how much support is under the price moves.  

Here, I'm looking for an increase in the LCR value, relative to a few days ago, as well as "green" in terms of the slopes or change in slopes.  Here's the presentation:



Here, we see the raw Long-Cash Ratio on the left, the slopes of LCR in terms of redness and greenness, and on the right, we see the change in slopes on a day-over-day basis.  Here's how to interpret:
  1. As you can see on the far left, we've had a significant number of consecutive down days of the LCR.  In fact, this is the longest streak (-7 days) since 11/9/10, which also was 7 days in length.  I note with interest that we also had a -7 day streak that started on 10/14/10, so we dropped in October, went up for 5 days, then dropped again for -7 days.  Relating this to recent action, we're "more or less" at the ending point of the first wave of down days, and we may/may not see the second wave down.  I would consider a test downward as healthy, as it would test the bottom formed over the last week or two.
  2. On the left, the slopes of the LCR are all "red", meaning that they are all negative.  I'd like to see some green here, first appearing on the left with the 5d and 8d periods, before I'd move long into this market.  Right now the database is NOT confirming the price action, which causes me to pause.
  3. On the right, we've had two days of "greenness", indicating that the slopes, while negative in value, are pointing upward.  This is the first condition to a sustained bull ... we need more green on the right to show that we can pull ourselves out of the abyss.  We're not there right now.
For the curious in you, here's the presentation from OCTOBER 2010 of the same LCR conditions that we seem to be experiencing right now:



If history is any indicator, we MAY be at the date corresponding to 11/1/10, but of course, your crystal ball is as good as mine.

Conclusions:  The LCR EMA behavior is not supporting the aggressive price EMA behavior, even on the shortest time scales, so this too gives me pause to entering the market on the long side.  I want to see continued days and increased "greenness" on the left side of the LCR slope presentation, which will reaffirm any sustained upward pricing movement.  Until then, I'm sitting more-or-less pat.

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GGT + Effective Volume Stocks and ETFs

I've posted the stock and ETF updates in the Yahoo! GGT forum in the files section, and you can download the file to view stock candidates.  Simply refer to the "DashboardEV" file.  Because of market conditions, I do not plan to enter any of these stocks today, as the reward/risk levels are poor.  I'll re-evaluate tonight after I land on the west coast.

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Trading Plan for Monday

Well, I'm presently holding contra ETF positions.  I'll most likely hold these as I think the likelihood of a decline, short-term or not, is fairly large from here.  My position in BIDU is also not performing well, and if we have a strong up day and BIDU decides not to participate, I'll cut it loose.

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

Regards,

pgd