Thursday, January 21, 2016

Continuation...

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Summary

The Long-Cash ratio continues to move lower in the single-digit range, indicating that whatever stocks are left on the long side (235 out of 3023) are falling apart in terms price.  Volume was extraordinarily high on Wednesday, perhaps pointing to capitulation.  We had a "V" shape occur on the Cumulative Tick which supports an intraday reversal, so we have more signs of buying stepping in.

Despite all of this, risk is extraordinarily high.  Sidelines are king, at least for now.

Long-Cash Ratio

Click on the image to enlarge.

Out of 1860 observations since 2008, we are at the 31st lowest reading in the LCR ever recorded.  We have always rebounded from here, but note, it could take a week, a few weeks, or a couple of months.  See my post from a few days ago -- we had one event last 70 days until the number of stocks hit parity (equal number of Long/Cash-rated stocks in the database).

The value of 0.084 means that 8.4% of the database is rated "long" -- the remaining stocks are in "cash" or "avoid".  This number can continue to drop, although it becomes harder and harder because rotation begins to appear as people bottom-feed.

The middle of the table shows the continual "sea of red", indicating that on a day-over-day basis, the number of stocks that are rated as "long", or worthy of consideration in this market, is dropping.  Put another way, "cash" rated stocks are dominating, and movement out of stocks that are rated cash continues (as evidenced by increasing supply and subsequent dropping prices).

Nothing in the middle of the table tells me that Thursday is a buying day.  Take it off.

A note came in yesterday asking "whether the LCR acceleration is pointing to a bottom?  If so, when should we consider buying?  If not, what is the LCR showing that is useful?"  The LCR on the right is showing more green -- in fact, we've had two consecutive days where we have solid green on all measured time frames.

Remember, the LCR measures the transitions of stocks from "long" ratings to "cash" ratings and visa-versa.  It implies (by the sheer number of cash-rated stocks) that prices are dropping.  A falling LCR indicates that prices can continue to drop -- keeping the stocks in a "cash" rating.  When we get to extremely low levels, like now,  the day-over-day change in LCR will actually begin to slow, showing that the NUMBER of stocks making the transition is abating.  This is where we are today.  There simply isn't a great deal of fuel left to transition from "long" to "cash", hence, we have an abatement of the transitions.  Is this calling a bottom?  Sure, to a degree.  Can prices continue to fall?  Absolutely, and they are.  As long as the "net" -- the sum of the New Long and New Cash values on a day-over-day basis favors the New Cash side of the assignments, then it's a fair bet that database prices are falling.

The following chart may help to better understand:


Click on the image to enlarge.

The chart shows the daily assignments of "New Longs" (blue), "New Cash" (red), and the resulting GGT database average price (green).  If you look closely you see that when red (New Cash) falls, blue (New Longs) typically rises, and the result is that the database price (green) also rises.  This makes sense -- the number of stocks that are jumping from a cash rating to "New Long" implies that price and volume are increasing across the board, hence the GGT database price increases.  The converse is true too:  the number of stocks transitioning from a "long" rating to "New Cash" implies that prices are dropping across the board, and of the pool of remaining "long-rated" stocks, fewer and fewer remain to make the transition to "New Cash".

Here's another chart that makes the point a bit clearer:

Click on the image to enlarge.

This chart shows the same data except I've netted New Longs with New Cash values.  The net will be negative (below the solid red line) when New Cash > New Long.  Conversely, the net will be positive when New Long > New Cash.

As you can see from above, we still have a net negative (New Long - New Cash), so the value is negative.  BUT, you also see that the number of day-over-day transitions is abating -- indicating that we are approaching a bottom of some sort.  You also can see that the GGT price is continuing to fall, indicating falling prices.  Because people are bottom feeding we have some "New Longs", and because the market as a whole is falling, we have some "New Cash" assignments.

Remember, there are 30 lower values of LCR in the database out of over 1800 observations -- we can certainly continue to drop.  This being said, the data doesn't support it -- we're seeing people step in and buy the dip, which is the definition of a bottom.

If this isn't clear send me a note and I'll try to explain a different way (lots of ways to address the question!)

Cumulative Tick

The CT showed an interesting "V" reversal that started about 12:50 p/ET:


Click on the image to enlarge.

The reversal needs to be sustained -- futures are all over the map as I write this, so your crystal ball is as good as mine for what is going to happen today.  Suffice to say though that this is the first step in achieving a local bottom, so we'll simply have to wait and see.

Note that the level of 52-week New Lows (top plot) dominates everything prior -- some would call this combination with the "V" reversal capitulation, some would simply say it was a severe down day.  Both are correct, and only time will tell what the correct descriptor is.

Note that buying/selling was an equal bull/bear war into the close (horizontal white line).  This isn't ideal -- what I'd like to see for a continuation pattern is that we have strong buying into the close.

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Strategy:

Sitting on the sidelines on Thursday, getting ready for our blizzard on Friday/Saturday.  By some models we're going to get 2-3' (yes, feet) of snow in the Northern Virginia area.  Denver can handle it -- we can't.  Can you say paralysis?  Fired up the generator yesterday so it's working.  Have over a cord of seasoned wood ready to go, and will move the snow blower to the main level and get it primed.  Bring it on....

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New Meeting Announcement

We will be holding a face-to-face meeting on 2/13/2016 for all interested parties at the following location:

Burke Centre Library
Room: Burke Centre Meeting Room 116K
Address: 5935 Freds Oak Rd, Burke, VA 22015
Library Phone:(703) 249-1520
Time: 10:00 AM to 1:00 PM
Meeting Start Time: 10:00 AM

I will attempt to stream the meeting audio, and perhaps video, as per past meetings, via GotoMeeting.  Attendance via GotoMeeting is limited to the first 25 call-ins.  The ability to do this is completely controlled by the library and I have no say in Internet access.

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

Regards,

pgd