Tuesday, January 1, 2013

Update for January 2nd: I don't think we're out of the woods yet ...

Happy New Year everyone! I took my family to New York City to watch the ball drop. While I recommend that everybody should experience this, I can also say that we'll most likely never be back for this event -- simply too many people and it was incredibly expensive for the value received.

============

Monday's action, despite being after a weekend and before a holiday, performed well with respect to price and volume. Given that many professional traders were still on vacation, the volume number was respectable too. The GGT price index rose +1.66% on volume that was -8% below the 50d MA. The prior 5 days of trading averaged -18% drop in volume per day, so -8% was an increase relative to the holidays. Noted.

The GGT price slope model, which looks at various slopes of moving averages on price of the GGT index, went from being almost 100% in cash to signalling that we should move aggressively in on Wednesday. I don't agree across the board but let's start with the facts:


Right-click on the image to open in a new tab or window if you want to view a larger version.


Right-click on the image to open in a new tab or window if you want to view a larger version.

Of significance here is that the slopes (left side of the table above) and slopes of the slopes (or acceleration, right side of the table above) are all green. When this occurs on volume we have a signal to move into the markets. Further, if you look closer, the Database Strength, which includes price, volume, and price rate of change information into one index, also rose a substantial amount. This is quite significant and is worthy of digging deeper.

I've performed a study of price movements of the price slopes and when the 55d and 65d are already long with everything else in cash, and when we see a transition across the board like we did with price slopes, what results in the trade placed on the next day is interesting:



This table indicates that historically, since November 2008, that trades placed on the day after the transitions seen Monday have only a 12-35% chance of turning into positive trades. Note that this was with the GGT price index and not individual stocks, but it does suggest that we are in for a rocky road as far as the broad indexes are concerned.

==================

The GGT Long-Cash Ratio, which incorporates moving averages of the LCR of the entire database, did not move as aggressively as price, so there is more emotion in the markets than there is substance:


Right-click on the image to open in a new tab or window if you want to view a larger version.


Right-click on the image to open in a new tab or window if you want to view a larger version.

As you can see in the table view, the 2d and 34d-65d slopes turned positive, but everything else is still negative. While I will be the first to state that we're certainly moving in the right direction, it is hard for me to justify moving all my cash into the market at the present time. Being selective is key.

Note that Monday's LCR change was the 199th strongest 1-day change out of 550 measured values on the positive side, so hardly a resounding "jump with both feet" sign.

I've also done some work with looking at the edges of investing when the LCR slopes change -- and the mixed table status tells us that we're at a crossroads. Although I'll not present the data in detail, the analysis is much like the price transitions edge model shown above. The LCR being in this present state has only produced gains 19-22% of the time, again since November 2008. 

We need some clear leadership and "knock the skin off the ball" performance over the next week in order to have confidence that the activity on Monday will continue. Of course, this is all tied to the activities in Washington.

===================

Given all of this, my timers are still mixed:

1) short term is in CASH
2) intermediate term just moved LONG
3) long term remains LONG



If we continue to move upward I expect the short-term timer will flip long, indicating to move into the waters again on a short-term basis. We'll see.

==============

The obvious question here is what stocks are on the radar?

My short-list of favorable stocks, already screened for what I consider "highly-interesting" effective volume patterns (see http://www.effectivevolume.com), from top to bottom (top being most interesting), is as follows:


Right-click on the image to open in a new tab or window if you want to view a larger version.

Here is the list if you do not want to type it:

LAD
USAT
USG
CVLT
DSW
IPGP
ARMH
VPFG
ALJ
EXP
HW
RAX
WAL
MTZ
TYL
GHL
CTB
APOG
PIKE
SPNC
AHS
ASGN

These are not all my leaders; these are simply the ones I've set various alerts on for Wednesday's action. The list could change dramatically by Thursday, so applicability does not extend past Wednesday, January 2nd.

I own positions in CVLT and MTZ.

I am compelled to pick up a position in CTB on Wednesday due to rules of an account I co-manage. Note that CTB is a GGT "New Long" with the close of markets on Monday, December 31st. Also note that of all the industry groups that these stocks belong to, CTB/Tires/Consumer Cyclicals is the only group that is up in price over the past 5 days. Money has been moving into this industry group/sector.

Here is the EV chart for CTB:


Right-click on the image to open in a new tab or window if you want to view a larger version.

I'm not overly excited about CTB -- it's been ignored by the institutionals and has largely not participated this signal, but recently the stock is seeing large effective volume and with the GGT "New Long", I'll be in soon.

I'm looking to enter positions on high volume and rising prices. Criteria is hitting 150% of the volume of the strongest down day (price and volume) of the last 10 trading days, and jumping in as soon as I detect this pattern.

As with all my ramblings, please do your own diligence. I am not responsible for your actions -- you are, and as such, you're on your own to make your own decisions.

Regards,

pgd