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.