Tuesday, July 21, 2015

Short term cautionary

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Yesterday, Monday, July 20th, saw the S&P 500 and the NASDAQ, as measured by the SPY and QQQ respectively, hit new highs.  On a day-over-day basis for the past 6 trading days the SPY and the Q's have moved 1.65%/day and 3.04% per day.  Putting this in perspective, the SPY normally averages 0.15%/day and 0.34%/day using the past 50 trading days, so these are huge daily gains and are well outside the norm.  My own GGT index, which is an unweighted, stock volume above 100Kshares/day index of nearly 3000 stocks has moved upward 0.15%/day for the last 6 days and is averaging -0.01%/day over the last 50 trading days.

Obviously, there is a huge disconnect in the markets.  As many of you know, I generally state that the indexes can be manipulated, and I think we're seeing the heavy weights in the various major indexes pulling the numbers upward in a disproportionate manner.

My Cumulative Tick chart tells a tale of extreme caution:


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

The chart has 3 primary plots.  The top one is the NYSE 52-week New High (green) and 52-week New Lows (red), with their difference (yellow).  When red is above green more stocks on the NYSE are hitting a 52-week new low than those that are topping out.  In robust markets green is above red, the opposite of what we presently have.

The middle trace is a "strength" filter.  It basically looks at trades/min, in this case 500/minute minimum, and if the net bid/ask on 500 transactions per min is positive, it clicks upward by the amount over 500.  If the net bid/ask on 500 transactions per min is negative, it clicks downward by that amount.  What you're seeing is that more/less, throughout the day, there was selling pressure.  This is evidenced by the negative start and minimal recovery throughout the day.  As the day wore on the value accelerated to the downside -- meaning -- more people were net sellers on the day rather than those that were buyers.  Again, this was as the SPY and the QQQ's were hitting new highs.

The bottom trace is the most important one.  The white line is the instantaneous cumulative tick, and it measures net buying/selling on a minute-over-minute basis without any filters.  When it moves up all the moving averages respond, and as you can see, when it moves down, all the moving averages also respond.  The white line was in a solid downtrend all day long, and this means that while the SPY and Q's were making new highs, the market was selling into the highs on a short-term basis.  The fact that the white line is now below the solid red line means that net selling has surpassed the gains of the past 10 days of buying, and the trend is clearly downward from here, at least on a short-term basis.

Another warning shot, at least on a short-term (daily) basis is my Long-Cash Ratio (LCR) table:

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


The left side of the table shows that the LCR has stalled at a local level of 0.639 -- up from a minimum of 0.332 back on 7/9.  It made no substantial forward progress on Monday.  This value means that in a database of nearly 3000 stocks that over 1800 are in some form of "cash" status (avoid) and the remaining stocks are in some form of "long" (potential for having a position).  Since the value has stalled, NEW purchases should be suspended, at least for the short-term.

The green on the left is indicative of slopes of the LCR moving averages.  Slope values are rates of change, and you can see that the longest slope values are still negative -- we have not completely turned the market upwards despite the gains from 7/9.  The day-over-day increase in the slopes is encouraging, BUT, the growing amount of green on the left does not tell the full story.

On the right we see lots of green with some newly-emerging red.  This side of the table shows the "slope of the slope", or acceleration of the LCR on multiple time frames.  This tells me how fast we're moving into a new market condition, and the growing red on the very right bottom of the table tells me we're stalling on a short-term basis.  Day-over-day, the shorter moving averages are failing to continue upward and are actually decreasing, so again, short-term entry of new positions is going to be with much higher risk.

The good news, at least on the intermediate-term or long-term view, is the following chart:

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

This chart plots the number of stocks that are "long" in the database -- e.g., those that are outperforming their historical averages -- and you can see that 1) we're in the green, and 2) the trend is moving upward.  The "green" component means that it is less risky, on an intermediate-term and long-term view, to buy (relative to being in the red zone at the top), and that once the LCR table shows some improvement, it may be time to add to positions.

Hence, I'm bearish on a short-term (1-3d) basis, and optimistic on a longer-term basis.

Strategy:

Aside from adding to my dividend portfolios (which are fully invested at all times unless the market is completely unraveling on all time frames -- it's not), I'm on the sidelines.  I am not adding to my Leaders, Low Beta, or Bargains portfolios with the exception of already pending orders.

My cash target right now is ~ 66%, meaning I'm holding 66% of my portfolios in cash.  Exposure at this point is limited.

You can follow my portfolios here:

Greenfield Bargains:  https://www.collective2.com/details/95793176
Greenfield Dividends: https://www.collective2.com/details/94780986
Greenfield Leaders: https://www.collective2.com/details/94921209
Greenfield Low Beta:  https://www.collective2.com/details/95702992

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

Regards,

Paul