Tuesday, March 25, 2014

Not Out of Woods Yet - Close of Tues, Mar 25

The "New Long" on the short-term timer is most likely going to fail; I'll know more tonight after all the numbers crunch.

Another "nail" in the coffin is the following chart and what it indicates:

Right-click on the chart to open in a new tab or window.

Let me explain what you're looking at.

The top signal is a 5-min view of the exchange traded fund (ETF) that tracks 2x the movement of the S&P 500.  It's symbol is "SSO".  So if the S&P 500 goes up 1%, ideally, the SSO should go up 2% that day.  The converse is true too: if the S&P 500 drops -1%, then the SSO should drop -2% on that day.

The SSO is a "leveraged fund".

Leveraged funds are interesting as indicators because they move faster in one direction or another than the underlying asset that they track.  This can be useful when looking deeper into the market.

The 2nd signal in the figure, as well as the bottom signal, are bar charts, again at 5-minute intervals.  They are constructed differently so in order to interpret what you're viewing you need to read on ...

The middle plot is of the relative performance of 9 other sector 2x ETFs, compared to the SSO.  On the very right is an axis:  this is the average percentage change of the 9 other 2x ETFs, relative to the percentage change of the SSO.

The bottom plot is of the relative performance of 10 CONTRA 2x ETFs, again compared with the SSO.

(A CONTRA ETF is an instrument that goes OPPOSITE of the underlying asset.  For example, for the S&P 500, the -2x contra ETF is the SDS.  When the S&P 500 goes up +1%, the SDS (ideally) goes down -2%.)

Again, the right axis shows the average percentage change of 10 contra 2x ETFs, relative to the SSO.

For the 2nd signal (middle plot), when we have a sea of red, like today, the algebraic average of the 9 remaining sector 2x ETFs UNDERPERFORMED the SSO.  On average we underperformed by about -1.45% relative to the performance of the SSO.  Put another way, even though the SSO was up 1.17% today (Tuesday, March 25), the other 2x ETFs that are sector ETFs, as a group, all underperformed the basic SSO ETF a fairly significant amount.  This means we have a divergence AND more importantly, that the underlying market is NOT supporting what we saw as an increase in the S&P500.

The middle trace "bleeding red" tells me, relative to the SSO, the underlying ETFs which represent other markets dramatically underperformed on the long side despite the major indexes moving higher today.  Trader's hearts were not in the long side.


The bottom trace is the CONVERSE of the middle trace, that is, if the markets are heading down relative to the performance of the SSO, we should see it as STRENGTH in the bottom trace.  You see this YESTERDAY, with massive green as the SSO dipped and the contra markets moved upward.  Yesterday, relative to the SSO, from an average perspective contra ETFs outperformed the SSO at the peak nearly by +3%.

With respect to yesterday, the second signal (middle trace) sold off at the same level (rate) as the SSO, so everything was in sync for the first half of the day.  In the latter part of 3/24 the SSO recovered, but the long ultra ETFs did not recover at the same rate, hence why you see more red showing as the SSO recovered.  This is an underlying weakness.

With respect to the bottom trace, TODAY (3/25) shows that the contra ETFs were underperforming the SSO early, but started to fight back by 11:00 as the SSO dropped.  This is why you see a patch of green between 11:00 and 13:00 ET for 3/25 -- the contra markets were actually gaining faster than the SSO was losing.  After lunch (13:00 ET), the SSO recovered somewhat, but the contra ETFs didn't give up much ground, e.g., even though they underperformed the SSO, they did not do so at nearly the rate that the long leveraged ETFs of the middle plot did.

Conclusion?  I conclude that the SSO (and S&P 500), while up for the day, has no foundation as the CONTRA ETFs did not lose nearly the same relative percentages as the LONG ETFs did.

For me, this points to lower markets in the near term.

We'll see -- your crystal ball is as good as mine.

Monday, March 24, 2014

Short term timer moves LONG


Here is the status of my various timers:

Short Term Timer
Intermediate Term Timer
Long Term Timer
NEW LONG (3/21)
Cash (Whipsawing Started 3/11)
Long (2/14)

Since 2008 the signals on the short-term timer have been fairly robust, as can be seen in the statistics shown below.  The equity used is the GGT index, which closely resembles the Russell 2000.

The values that are meaningful are the average winning trade value (+3.49% per trade), average losing trade value (-1.47%), and the t-Test/SQN value (2.52).  SQN values above 1.8 indicate more than chance is occurring, so this 2.52 metric indicates that the timer should keep you on the right side more than not.

Additional values that are meaningful are the ME value (0.58) and the PRR value (0.88).  ME values above 0 indicate a positive expectation that the system will make money in the long haul.  PRR values above 1.0 are desired, so the 0.88 value is indicative of the need to “tread lightly”.  Certainly, now is NOT the time to jump back into the market with both feet.

Caution is advised.  The high count of distribution days across the major indices, in combination with the whipsawing of the intermediate timer, both give me pause.  Throw in the quadruple witching day on 3/21 and the result is higher daily volume on uncertain prices.  Nevertheless, the Long-Cash Ratio (LCR) moved upward and is now reflecting a new short-term buying cycle, so entry into positions, however risky at this point, is enabled. 

It’s important to note that the short-term timer will generally precede the intermediate and long-term timer signals.  This is by design.  I have no intention of committing all my money at this time.  10-25% of a full position is about my maximum level of risk tolerance with the present timer status.

From a longer-term point of view, I like the following stocks in that they all have dividend payments, although some are not very exciting on the dividend front:

The "yellow" rows are due to data at TradeStation not populating this morning; this is common and when trading starts they do some magic on their end and the data will complete.

The list is sorted most favorable effective volume (http://www.effectivevolume.com) stocks at the top descending.

A description of the columns can be found here.  Note that the 2nd column from the RIGHT is new and is not yet in the document -- this is the change in dividend on a year-over-year basis.

Overall, my combined leaders list is looking relatively strong:

Again, the 2nd column from the right is DIVIDEND change on a Year-Over-Year basis and is not in the description document.  I'm becoming more interested in the combination of my screen with accelerating dividends so I've added that data.

Key stocks that have my attention this morning (Monday) are the following:

These stocks have been seeing significant price + volume decreases yet some are experiencing significant inflow of large effective volume (http://www.effectivevolume.com) .

For the indicated stocks, I'm watching for a breakout in price action to occur that would trigger me to jump in.

Of course, none of these listings are a recommendation to purchase.  Do your own diligence, take ownership for your actions, and ensure that your timeframes are consistent with mine or my timers simply will not work for you.



Wednesday, March 12, 2014

Intermediate Timer moves to Cash with Close on March 11

My intermediate-termed timer has transitioned to CASH with the close of markets on Tuesday, March 11.  I will not be purchasing stocks until this timer reverses to a LONG position.

As timers go, this one is quite stable in signal quality. Here are the stats if we used the GGT index, which most closely resembles the Russell 2000 Index (or use the proxy ETF IWM):

The intermediate timer, also called "combo timer", has a really good stability as the number of trades has increased.  Financial author Van Tharp has a metric for this, termed "SQN", and per his various publications, a value above about 1.5-1.7 is considered good.  Values at 1.5-1.7 are considered "chance".  The higher the SQN the better.  The present SQN here is 2.77, and here's a graph of all the trades of this system to date:

As you can see, we're bouncing on the higher range of readings, indicating that this timer is "in tune", and it has been for the last 20 or so trades.  Note that this is since 2008.

No timer is perfect, nor is this one.  Relative to my long-term timer (the 13/65 day timer I wrote about elsewhere) this timer underperforms in terms of total gain for the markets:

The long-term timer is in puke-green; the Combo timer is in purple.  They both are normalized to a value of 1.00 on 1/2/2009.  Over the course of 5+ years the Combo timer has underperformed the long-term timer by about 20% total.  The reason for this is simple:  the Combo timer takes you out of the markets when things go south, protecting gains and keeping you away from drawdown.  As you can see, the 13/65 timer does NOT do this, e.g., you experience the drawdowns, and they can be psychologically damaging.

As a point of reference, the long-term timer SQN is 1.89 on only 6 trades total since 2008.  Apples to potatoes comparison but you get the idea.

Whatever you decide to do is obviously up to you.


The question is what to do with present holdings?

For those holdings that are GGT Longs, I intend to hold them but will lighten up to 50% positions, including any gains.  I will do this with a 1% Trailing Stop Loss that will become active at 9:45 (to miss the early open bounce).  If the positions rise today (unlikely, as futures are very, very negative) then no harm.  If positions continue to fall I'll exit with some gains in all except one position.

My position in DL just signaled a move to "New Cash" last evening so I'm placing a 1% Trailing Stop Loss on it and will be exiting for a loss this morning.  I can't win them all.

As always, do your diligence, and take ownership for your actions.  You are responsible for your decisions and I am not.



Saturday, March 8, 2014

Short-Term Signal to Raise Cash - EoD Mar 8 '14

The long term trend, as determined by a simple moving average crossing of the 13d and 65d is UP.

The intermediate term trend, as determined by the slopes of a number of moving averages of stocks in the general market, is UP.

The short-term trend has signaled CASH as of the close of 3/8/14.  What does this mean?

A number of folks I interact with zip in and out of the market.  They like to be "early" on the longer signals, and they like to realize short wins.  If this fits your style you probably entered the market about 2/7 (a month ago), have seen some great increases in the broad markets (over 5% typically), and now we're seeing a stalling.  If this is you I'd lock in the gains on these short-term positions come Monday.

On the other hand, if you're like me and like the long-term and intermediate-termed trends, you do not have to do anything.  You literally can ignore the short term timer and do just fine.

Of course, there is a caveat:  the short term timer is the fastest timer, so when it goes south, the intermediate and long term timers could follow.  The intermediate timer will be next, and I'll post if it changes state.

For you mathematically minded folk, here is a historical performance of the short term-timer, as applied to the GGT index (which is closely approximated by the IWM - Russell 2000):

The short term timer, in isolation, is not a hit-the-ball-out-of-the-park system, but it isn't bad.  It gets you into winning trades quickly, and more importantly, it gets you out of losing trades very quickly.  See the "Avg Winning Trade" vs. "Avg Losing Trade" stat.  For those of you familiar with Van Thorp, the SQN value of 2.52 is a very good number.

This being said, your crystal ball is as good as mine.  I intend to stay the course until my timers indicate otherwise.  I do not trade the short term timer because of my personal schedule.  I am more of an intermediate and long-term investor.

Here are my positions and gains:

DL, up 13%
DLPH, up 2%
FB, up 3%
ILMN, up 105%
ILMN, up 4%
PKG, 2 positions, both up 5%
SAVE, up 14%
TRN, up 23%
XRS, up 63%
XRS, up 23%

I have about 9% cash right now and am on the hunt to put that capital to work.

If you follow my Dropbox files each night you've been able to track my holdings, as they are fully listed by account.  If you want this info, send a message to pduncan [ at ] vt {dot} edu with the subject DROPBOX and I'll add you.


As far as "what is looking good", here's my list for Monday, sorted by most favorable effective volume descending:


"Smart money" is flowing into the stocks at the top of this list, but all of these stocks pass my screening criteria as of the close of 3/7/14.

As always, do your diligence, and take ownership for your actions.