Sunday, February 3, 2013

The energizer bunny keeps going and going and ...

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I've received a few notes over the past week asking different questions along the same theme:  why I pulled out of the TSP market a few weeks ago ( http://ggt-tsp.blogspot.com/2013/01/signal-change-effective-january-11-2013.html ), why I called a top a week ago, and what I think in the face of folks like Minervini and others who are still fully invested.

The last question is easy -- MM has a risk tolerance far different from mine.  I simply can't invest when my personal indicators are telling me to start to lock in profits and/or buy protection on my existing positions.  It's important to have a plan, have metrics, and stick with your plan when the winds try to change your direction.

Nothing major has changed for me in the big picture.  The number of stocks in the GGT database (3098 to be exact) which are long continues to pull back from the peak a few weeks ago:


Right click on any image in my blog to open it in a new tab or window.

With the exception of the 2d EMA of this value the 3d through the 21d EMAs are all with a negative slope, e.g. the day-over-day change is negative, meaning more stocks are moving to a "cash" status on these time frames than are moving long.  I call this a contracting database, and when the database contracts it simply is not a good idea to enter stocks on the long side.

Another good metric I use to gauge whether I should be stepping in is the slope of the 8d EMA of the Long-Cash Ratio (LCR). Out of all the values I watch this one has the highest correlation with the GGT index movement.  This means that if the GGT price movement is positive on a day-over-day basis there is a high probability that the 8d EMA of the LCR is moving up too.  The same thing applies on the down side too.

When these two are not in sync something is wrong and I take note -- generally by moving out of the markets.  We're not in sync right now and this is important to me.  Here's a view:


The 8d EMA of the LCR started moving with a negative slope on 1/16.  On 1/22, 1/23, and 1/25 it moved positive (you can't see it easily with the eye since the movements were small), and all other times it has been significantly negative in slope.

Take a close look at the chart above and you'll see that when the 8d EMA of the LCR is falling that prices generally follow fairly quickly.  This time they are not, but that doesn't mean that we're home free.

My LCR table provides a table view of the 8d LCR slope, as well as many other EMA values of the LCR:


The left side of the table shows the slopes of the 2d, 3d, 5d, etc. out to the 65d.  The right side of the table shows the "slope of the slopes", and for you science-minded folk, this is acceleration.

We need a considerable amount of green on the RIGHT side of the table to turn the LEFT side green.  Conversely, red on the RIGHT will eventually lead to lots of red on the LEFT.  Look carefully at this table and you'll see that acceleration ALWAYS precedes velocity in color -- hence the nature of using this table to understand where we are going.

Friday 2/1/13 was a strong day in terms of the markets and price action.  The Dow closed over 14,000.  The Russell is in new high territory.  Talking heads are saying the sky's the limit and that everybody should jump into the markets.  Their crystal ball is as good as mine, but I will say that we are due for a pullback to digest all these recent gains.

In terms of the LCR, Friday's action was constructive but not nearly as powerful as the prices of the markets would have you believe.  The LCR moved up +4% from 2.885 to 2.995, which in the big picture is not very strong.  You can see that we stopped the bleeding on the 2d and 34d slopes of the LCR -- and this is the right direction if we are to sustain an up move.  In terms of acceleration we had all measured time frames showing positive -- another requirement that is constructive for the bulls.  So yes, we've had some recent weakness, the markets were up Friday, the LCR acceleration is attempting to move upward on all time frames, and ...

... well, your crystal ball is as good as mine.  I have no idea if we are to continue on this path (moving higher in prices) or if we will drop lower in the LCR, or both (a negative divergence).  I'm simply being very careful right now.

Note that time frame is important.  Note that the 65d EMA slope of the LCR is positive.  Stocks are still moving long into the database on a 65d scale faster than they are leaving.  This is a LONG-TERM (13w) uptrend.

All down trends start with a short-term pullback.  Short term for me is anything less than 34d in length.  We barely touched the negative 34d slope as shown above so we're right on the fringes.  Intermediate length for me is the 34d and 55d.  If these move negative, as well as my Intermediate-term Elder timer, then it gets interesting.

Here's my timer status, and it shows that on a short-term basis we're contracting, but on the intermediate-term and long-term scales we are still bullish:



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There's no question that we could continue to move higher.  Take a look at this link:  http://www.newyorkfed.org/markets/tot_operation_schedule.html, which is for February (when I post this), and then compare this schedule to the previous month.  Only $1B in difference between the two.  With an unprecedented safety net like this if we do pull back I doubt it will be very deep.  We may not pull back at all -- hard to know.

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My primary strategy is as follows:
  • I want to see the 8d LCR start moving higher (as viewed in the graph and LCR table above) before I will consider entering ANY positions.
  • I will only use stocks from my *current* leader's list (available here) as consideration.  These are quality stocks.
  • The stock must have a favorable effective volume pattern on multiple time scales on the day of entry.
  • I will only enter a stock if it breaks out higher on projected higher volume for the day.
If you have questions you can post them here, my private email if you have it, or you can find me at StockTwits at http://stocktwits.com/Grems8544 

Regards,

pgd