Monday, May 14, 2012

Update for Monday, May 14th

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All my models are indicating CASH (not SHORT) at the present time.

The GGT Price Index fell a significant amount on Friday (-2.6%) on volume that was -2% below the 50d MA of volume. This is a huge move for the index and places the daily value under the 200d MA for the first time since 1/18/12. This action will also cause the 200d slope to turn negative, which is an incredibly bad sign for the bulls.




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


The GGT Database Strength indicator, which rolls up price change, volume, and rate of price change, dropped a bit more than 1%. This shows that while prices did drop, volume was not present in the drop (average volume only), and also that the rate of change of the drop was not significant across the board. Friday's action was a controlled distribution of stocks and I interpret as a simple unloading of positions going into the weekend.

You can see from the table above that the slopes of the various price EMAs are all negative, and have been since 5/4. You can also see that on the right side of the table that the slopes of the slopes (acceleration of prices) are back and forth -- we do not have panic developing, but we do have a steady trend down.

There is nothing in the price slope model that indicates a floor is in place or that we are about to bounce.

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The Long-Cash Ratio (LCR) slope model continues to indicate a contraction of the database, e.g., we should not be buying stocks on the long side at the present time. You can see this in the slopes of the LCR all remaining negative:




Of interest to me though is that we are starting to see some positive indications that the contraction is stabilizing. The right side of the table, which is the slope of the slopes and represents the acceleration of stocks moving to LONG recommendations or CASH recommendations, shows that we've had two days of positive-moving acceleration -- and this is a pre-requisite of the database starting to move back upwards in price. This is the primary indicator which tells me that we may be abating in the present drop, as two days of upward acceleration is becoming significant for a short-term bounce.

Futures are down as I write so this will obviously get tested and possibly negated today.

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All my timers are indicating that we should be in CASH:






The shortest time that the 13d / 65d timer has been negative in the past is 19 consecutive days and we just completed day 2. While we could whipsaw from here and move positive, my intermediate-termed Elder timer is hugely negative and has no chance of going positive unless we get a +500 point day in the markets -- probably not today.

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As many of you know, I've been watching divergence of prices with EV for Pascal's universe. He publishes the list of equities daily in his DIVA.xls file, which is available for subscribers at www.effectivevolume.com, and if you are not looking at this file, you're missing a learning experience.

Positive divergence is a rising price and outflow of volume -- large institutions are leaving the equity but it not yet reflected in price.

Negative divergence is the opposite -- large buyers are entering and price has remained low or is dropping.

When I net the two groups against each other a balance for the day is formed and it looks at the average behavior over the last 3 days. Hence, if we have a greater number of negative divergent equities, we are net buying in the market and visa versa, or so my theory goes.

When I apply different lengths of correlation with my GGT index to the net value of divergence, I get an interesting plot:






Normally, a rising price in GGT is heavily correlated with a falling value in net divergence -- sellers step in and begin exiting as prices move higher. The converse is true too -- buyers step in as prices drop. This gives us a negative correlation value, and it typically lies in the -0.4 to -0.6 range on a 34d lookback.

But take a look at what happens if we simply consider just an 8-day lookback: we have periods where the correlation moves strongly positive, indicating that there are points where the market prices AND effective volume align. Also note that I've circled some of these peaks, and they typically correspond to turning points in the GGT price index. Not 1:1 exactly, but they do alert us that things are happening.

On Friday, we jumped into positive territory for this 8-day correlation. This means that because the GGT price index fell -2.6%, and over the past 8 days has been falling a great deal, that we are seeing a significant OUTFLOW of EV that is in line with GGT prices. 

My crystal ball is as good as yours but I think we're at a short-term capitulation point with Friday's and possibly today's action (I'm writing before the open on Monday, 5/14), and I would expect to see the markets move up here shortly.

We'll see.

Make it a great week!

Regards,

pgd