Monday, April 25, 2011

My Bias is Bullish, but not all Indicators are Confirming

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Summary

  • The slopes of the pricing moving averages are all positive and are pointing up, which can only be interpreted as bullish.
  • My price change oscillator is at the top of the "overbought" range at +14, indicating today is not a good day to enter stocks long, as the chance of a pullback in the next day or two has increased significantly.
  • The Short-Term Long Cash Ratio (LCR) change timer has transitioned LONG
  • The VTI timer, which is an ETF based on the movements of the short-term LCR timer, has confirmed the movement.  Placing a position on VTI today, even though the price change oscillator is overbought, is something I'm considering.  The equity in this timer since September 2008 is at $1.52 / dollar invested.
  • The Elder Force Index timer, which is an intermediate-length timer (at least 18 days if not more), is in mixed mode.  This means that we do not have strong dollar-volume participation in the market, and that while we certainly can go up from here (remember December?), the chance of gains from here are less.
  • The slopes of the LCR moving averages are just starting to turn positive.  For this bull to be sustained, we need these to all turn positive.
Conclusion:  the bias is bullish, but several indicators are having a hard time confirming this bull leg.  I intend to be cautious.

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Slope Analysis

I use slope analysis of moving averages to give me an idea of how the markets are performing.  There are two key areas I pay attention to:
  1. slopes of pricing averages, which tell us how we are performing on an index level from 5d to 65d in length, and
  2. slopes of moving averages of the ratio of stocks with a LONG rating compared to those with a CASH rating, which tells me how well the stocks within the database are performing relative to price AND volume behavior ( I do believe to have a sustained bull that we need a few days of up prices on above-average volume ).
Here's the slopes of the pricing averages, as well as "slope of the slope" (right side):



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

What the image above shows, starting on the left red/green area, is that we just transitioned from a period where the shorter moving averages were all bearish, but the longer moving averages were bullish.  While the pain in your portfolio increases as the red flows from left to right, the fact that the 55d and the 65d slope indicators have remained green (bullish, positive) for the entire time of the presentation should key you in that we are still in an intermediate-termed bull leg.

The right side of the image shows us that the slopes of the moving averages are all pointing upward, and have been for the last 3 days.  In fact, Wed/Thurs a week ago showed an initial movement upward, followed by a down sequence Friday/Monday, only to be followed by progressively stronger days Tu-Wed-Thurs of last week.  This is a leading indicator, and the combination of the "all green" on the left side as well as the "all green" on the right side compels me to only consider the long side of the market at the present time.

Here's the same presentation, but now applied to the Long-Cash Ratio (LCR):



The LCR slope presentation is not nearly as bullish as the pricing presentation, but in general, it rarely is.  What is important above is that:
  1. we're seeing green starting to emerge in terms of the slopes of the LCR EMAs.  This must continue for this bull leg to find it's footing
  2. we're seeing strong performance in the "slopes of the slopes", e.g., they are all pointing up through the 65d period, which is necessary for the left side of the figure to continue to "grow green".
What concerns be in the above presentation is simply that we do not have the participation that we need in terms of volume.  How do I know this?  Simple -- LCR considers BOTH pricing and volume, whereas the previous discussion was concerning prices only.  Volume is lacking, and has been lacking, so this seems to me to be "artificial".  Whether this is evidence of related POMO money supply from Uncle Sugar is speculation that needs to be debated over your favorite beverage.

Conclusion:  from a slope analysis point of view, pricing signals are strong, but the underlying database is just starting to show some life.  The two are not in sync, and until they are (if they will be that is), I will be careful of this market in general.  "Being careful" means long positions in stocks that are moving to new highs on good volume.

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GGT Files

If you are a member of my GreekGodTrading Yahoo! group, you have access to files which represent detailed snapshots of stocks with respect to the GGT methodology, as well as Effective Volume.  I posted the updates for both stock and ETF files this past weekend, and there have been some subtle changes that you may find interesting.

In the file "GG_stks_21Apr2011_DashboardEV.htm", you'll see a complete listing of the GGT universe of stocks unioned with the EV universe of stocks.  Stocks listed on the GGT side but with no corresponding data on the EV side will have a "NA" indicated, simply showing that they have not yet been added to the EV universe.  Here's a summary snapshot:



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

If you open the file in Excel, you can use the filter function in Excel to select the stocks that have the best combined statistics.  For example, a screen that I like is the following:
  1. GGT Recommendation:  select only those stocks that are New Long, Aff. Long, or Long.
  2. EV:  select only those stocks with a Rating >80
This gives you a subset of stocks that are historically outperforming their previous behavior (due to criteria #1), and that have favorable EV characteristics with pricing behavior (due to criteria 2).

If you end up selecting any stocks with a LER Status of "Do not buy" (unlikely if Rating > 80), simply filter those out.  Same situation for Tot EV Status of "Selling continues" -- avoid those stocks.

I can only backtest to February 17, 2011 using this methodology but I will state that the quality and performance of hypothetical portfolios of these stocks has exceeded other types of buying strategies where EV or GGT status is not considered.

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Another major change that you will see is in the "GG_stks_21Apr2011_Dashboard.htm" file.  Again, if you open this file in Excel, you can use copy/paste functions to select symbol baskets.




You'll see that there are a number of portfolios listed:
  1. GGT Top25 Earnings Optimized Portfolio
  2. GGT GorillaTrades Optimized Portfolio
  3. GGT IBD50 Earnings Optimized Portfolio
  4. GGT Dow30 Earnings Optimized Portfolio
  5. GGT NASDAQ-100 Earnings Optimized Portfolio
  6. GGT Stocks Guiding Higher
Here, "Earnings Optimized" means that the indicated stocks must have appreciating earnings AND that the CEO/CFO is on record over the last 90 days indicating that they are guiding earnings, revenues, or both higher than consensus.  Typically, when the CEO/CFO makes such a statement, the stocks have positive earnings/revenue surprises 80% of the time, and more importantly, the stocks continue to guide higher the following quarter (which generally causes their price to increase).

To make one thing clear -- I do not have a subscription to GorillaTrades, but it's relatively easy finding the most recent portfolio simply by doing a Google search.

"Optimized" also means that I've done a risk/reward analysis on the stocks in the respective universes and have selected only those stocks with favorable risk/reward characteristics over the past 100 trading days or so.  This isn't to say that other stocks in the Dow, NASDAQ, etc. aren't appealing, it simply says that when traded in the basket shown, the stocks presented have the best balance of risk, reward, and diversification.

This leads me to the last column on this file, which you will see indicates "Recommended Allocation".  Simply, if you trade an individual basket, your allocation should be in the ballpark of what is shown.  This will balance risk, reward, and diversification, and prevent concentration in an area that is underperforming.

Finally, at the bottom of the file, you will see an area "GGT Stocks Guiding Higher".  This is a list of GGT stocks for which I have positive guidance data in the present earnings cycle.  I don't think that I have to describe what this means.   A CONSIDERABLE AMOUNT OF WORK has gone into generating, testing, and maintaining this list, and I ask that you NOT distribute this list, period.  I pay for the data, and if I find it out in the public domain, I'll simply pull the files and use them for my own consumption.

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Stock Watchlist for Monday, April 25th

Here are the stocks that I am considering today:



This list is not a recommendation to purchase, it is simply a listing of stocks for consideration.  Please do your diligence, take ownership for your actions, and be respectful of the work and preparation that goes into producing the content in this blog.

Regards,

pgd