Sunday, November 27, 2011

Update for Monday, November 28th

Summary
  • The price slope model (PSM) is bearish and has been in a sustained contraction since 11/16.
  • The Database Strength model has hit another local minimum. This new low has occurred because of falling prices and higher volume on a day where market volume was 65% below the 50d MA. This is quite remarkable, and indicates that there was broad selling into the Thanksgiving weekend. Historically, when we have hit the lowest levels, we have an opportunity to enter on the long side with good R/R.
  • Prices continue to accelerate to the down side.
  • The Long-Cash Ratio (LCR) slope model continues to indicate bearishness with more stocks accelerating to cash/short status. Avoid long positions in general.
  • The Elder Force Index timer that I employ is solidly bearish. Avoid long positions with an intent on holding for the intermediate term.
  • The 5d / 65d timer that I employ on the GGT system is indicating cash is king. This being said, bonds are attracting some attention here.

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"[Be] fearful when others are being greedy and [be] greedy when others are fearful” -- Warren Buffet

For the GGT system to signal buy, we need stocks to start to reverse their drop. Over the last 7 trading days we've had a fairly steady drop in prices, often on higher volume within those stocks that are dropping, and this does not necessarily bode well for moving long for the long term.

But what about the shorter term? We are at incredibly low levels here in the strength index. I conducted a study where I ranked the top 100 oversold levels in terms of performance if we were to have bought the GGT index the morning after we had hit the oversold condition. Here's the results for every dollar invested:




Across the top are the days since hitting the low, and obviously, you can see the average, standard deviation, minimum value, and maximum value. 

In the case where I take the top 100 days, on all measured time frames we have had a positive average, but clearly, the standard deviation (68% probability) shows that we could end up slightly below the water line at any time during the first 9 days. Also, you can see that the minimums are extremes -- 2 * the standard deviation amounts is a 95th-percentile probability and most of the extremes on the down side are outside of this range. We're in wild times, but in general, buying when we hit these extreme lows has worked in the past for the majority of cases, sample size = 100.

Let's do the same thing with a sample size of the top 50:






More of the same here. Average return drops slightly, volatility increases slightly, but the extreme min/max levels are about the same. This is encouraging.

Let's do the same test for the top 20. Note that Friday's action places us within this group.








The data here suggests a further increase in volatility as well as a reduction in average gains. At the same time, note that the minimums are actually higher, and the maximums are nearly equivalent to the previous tests. This data does not convincingly tell us that we should move long at the open on Monday, but it does suggest that we are within a zone where historically, downside is limited and the upside has been quite favorable.

Whether or not you choose to go long Monday for a short-term pop, we are oversold in the markets and I am expecting a short-term bounce some time this week.

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The GGT Price Slope Model continues to exude bearishness, and has done so convincingly since 11/16. This being said, there are some indications that show some slowing in the drop:






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

I've changed the presentation slightly. Specifically, you can see where I've taken away the bullish/bearish tags and inserted numerical values. This change will give us the ability to see an overall trend of the slopes, which is useful in determining whether a change is underway.

Specifically, take a look at Friday's action with respect to the slopes, shown on the left portion of the figure. While negative (red), we see a local minimum on the 5d MA, but the 3d and 2d are respectively higher. Hence, there is some abatement of the rate of plunging in the GGT price index, although the negative values of the slopes still show a net loss day-over-day (slope units are $/day). You can see many times in the past where this more-negative value in the 8d/13d/21d region has shown that a reversal is imminent (note too there are times where no "ripple" occurred yet we had a reversal -- it's all related to the strengths of the slopes of the slopes, on the right side of the figure).

On the right, you have the Slopes of the Slopes (SoS'). These are failing at convincingly moving us out of this territory -- we see that last week gave us 2 attempts to reverse a declining SoS but we were only partially successful. Of interest here though is that the 34d/55d/65d SoS are at a value of nearly 0 -- horizontal -- and this means that they could move either direction with any positive move in the markets. 

In looking back at reversal dates such as October 4th, it's pretty clear that the SoS values were not horizontal -- they had some positive or negative magnitude -- and more importantly, they changed decisively with positive (or negative) action on the overall markets. This will be an important tell going forward -- a gradual slip into "green" on either side of the chart will not be a compelling signal to move long, statistics above notwithstanding.

Below is the LCR slope model:










Same changes here -- I've placed the magnitudes within the cells as opposed to the "bearish/bullish" monikers that I've used historically. You will also see the addition of a new column entitled "Daily LCR Change Rank". This is exactly what it sounds, I've ranked the day-over-day changes in the LCR for all of GGT history (799 trading days to date). Color coding is as follows:
  • Red text/white background: LCR change was NEGATIVE, and it was within 1 standard deviation of the historical average. *yawn*
  • Green text/white background: LCR change was POSITIVE, and it was within 1 standard deviation of the historical average. Again, *yawn*
  • Lightest of red (almost pink): LCR change was NEGATIVE, and the change is between 1 std dev and 2 std dev. This places the move between a 5% and 32% probability of occurring, and is notable.
  • Lightest of green: LCR change was POSITIVE, and the change is between 1 and 2 standard deviations. Same comment as above.
  • Medium red (e.g., 11/9/11): LCR change was NEGATIVE, and the change is between 2 and 3 standard deviations. This places the move between a 0.3 and 4.6% chance of occurring, and is quite interesting.
  • Medium green (e.g. 10/6/22): LCR change was POSITIVE, and the change is between 2 and 3 std dev. Same comment as above.
  • Bright Red (e.g., 11/1/11): LCR change was NEGATIVE, and the change is greater than 3 standard deviations. These are rare events, with a probability of happening less than 0.3% of the time, so we need to PAY ATTENTION.
  • Bright Green (e.g., 10/4/11): LCR change was POSITIVE, and the change is greater than 3 standard deviations. Pay attention folks ...

There have been some pretty clear indications that we should move long/short in the markets based on the overall magnitude and direction of these LCR values. In this latest downwave the 11/1 signal (4th strongest change down in the LCR since September 2008) we should have exited our long positions at this time. On 11/9/11 we had another bow-shot, with the 14th strongest change down, and this could have easily been a signal to move to contra ETFs. 11/21 and 11/23 have both signaled further selling, compelling us to ensure that we are not holding long positions. This being said, remember my comments above concerning being oversold -- we are clearly there and the succession of these down 'markers' in the LCR tell us just how powerful this wave down has been.

With respect to the remainder of the figure, note the same inability of the LCR SoS' to move decisively above 0... we're abating in the drop, and we need to see strong magnitude changes from here.

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My trading plan for Monday is to mostly sit pat. None of my indicators are telling me to enter the market on Monday, and available stocks to choose from are few.

Regards,

pgd