Tuesday, May 13, 2014

May 12th: Constructive Action In The Markets, But ...


With the market action of Monday, May 12th, a number of my indicators have moved long into the market. Generally I'd be quite busy setting up orders, but not so much this time. Here's why:

1) Across-the-board volume was quite low. In fact, it was -14% below average but prices jumped (on average) +1.6%. Some individual stock names did well but overall, not as well as I would like.

2) My longer-termed crossing timer, built with the 13d/65d exponential moving averages (EMAs), still has the 13d trend below the 65d trend. This is my final safety net that keeps me on the right side of the markets (or at least keeps me from being 100% invested) and until this moves up to 13d > 65d, I'm precluded from jumping in with both feet.

3) The number of stocks making new 52-week highs, while larger than the previous week or two, was still quite anemic. In fact, Monday's number was on par with last Thursday's value, and this was a (generally) flat day for the markets.

All of this being stated, my short-term timer has signaled that some positions should be entered:

The short-term 4d timer is based on the action of an indicator I have developed called the Long-Cash Ratio (LCR). I have a private database of about 3000 stocks, and each is individually ranked as "long" or "cash". A stock obtains a "long" rating when it is performing above historical bullish levels and a "cash" rating when it is below these bullish levels.

The short-term timer triggers whenever their is a transition from a broad "cash" status in the 2d, 3d, and 5d moving averages of this LCR value. As it turns out, Monday's action was fairly strong in this regard, all other macro signals ignored:

As you can see from the above table, we've whipsawed quite a bit with this timer, and hence, patience is required when you take it's signal recommendations.

In general, the win/loss record for the timer has a positive bias, but it does rack up more losses than wins:

Out of 100 trades since late 2008, 55 have been losers and 45 have been winners. The good news is that it responds quickly to missed signals, limiting the downside relative to the upside. Average losing trades only amount to -1.45% yet average winning trades are +3.49% if using a broad index (I use the ETF '[[IWM]]' as the tracking ETF).

I'll place an order to put a toe in the market his morning with IWM, with a buy-stop at $113.15, which is just above yesterday's high. I'll keep adjusting it down on a day-for-day basis if it isn't touched and if the short-term signal remains valid.

You could also do this with the [[SPY]] or the [[DIA]], as each is hitting new 52-week highs (but note that the IWM and [[QQQ]] are not). My entries for the SPY would be $190.06 and for the DIA $167.09. Same ratchet-downward approach applies (also known as an "Elder Entry").


Stocks that are of interest to me are the following:


as these are what I would consider to be holding up well in the present climate. Other stocks that are at the top of my watchlist are:


In my humble opinion this is a rather short list for such a strong day.
Caution is advised until we see significant follow through.

As always, you are responsible for your own investment decisions and I am not. Please conduct your own diligence, and please take ownership for your actions.