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Tuesday continued the selling but the strength of the selling is abating, according to my views. It is possible, that with a strong positive day, we could get an initial buy signal as early as tonight. For now, no plans to buy anything on Wednesday.
Long-Cash Ratio Table
The LCR, which measures the number of stocks with a "long" rating (those that have solid volume and price appreciation) to those that have a "cash" rating (those that are falling apart in price) continued a major decline on Tuesday, falling to a low of 147/1000, or 0.147, the 72nd lowest reading since September 2008. On August 25th we got down to 0.113, which was the 52nd lowest reading. This is out of 1855 observations so these are significant lows.
The left-center part of the table is a sea of red. This measures the day-over-day trend on multiple time frames for the LCR, and succinctly answers the question "are stocks reversing and is price appreciation occurring, with volume, on any time frame?" The answer right now is "NO" and we have no signals to enter on Wednesday.
The right side of the table is showing green. This is the rate-of-change of the left side of the table, and basically, it is a leading indicator relative to the left side. Green MUST occur on the right for green to appear on the left. Make sure you understand this, and if you don't, ask.
We see green on the right. We are "slowing in the rating of falling prices". The LCR is slowing as it hits a local bottom. It is still falling downward (left side red), but the rate at which it is falling is decreasing (right side green).
I'd like to see the right side show green across the entire measured time frame. We are close -- real close. If you click on the table and look at the far right you see that the last three red cells are 0.000 -- this is within a fraction of moving positive, so we are close to calling the bottom.
A few lookback statistics:
From the August 25th low to the November 4th high (all done in hindsight) we had a GGT index change of +7.8%. Nobody can time this perfectly so this represents best case. We didn't get an actual official entry signal until 9/8, and the gains from the official entry to the local peak were 3.2%
The same thing happened in October 2014. We hit a LCR low of 0.158 on October 13, 2014, and by November 26, 2014 we had moved to a LCR value of 1.535. In the same time frame the GGT index had changed +11.4%. Again, perfect timing, and nobody can achieve this. An official entry signal was triggered on 10/16/2014, and the gains to the peak were 9.7%
I can go back and duplicate the events when we have hit lows but suffice to say, this is a good buying location WHEN THE MARKETS SIGNAL ENTRY.
Putting this in context is this chart:
Click on the image to enlarge.
All of this suggests that we should be getting our shopping lists ready.
Risk is always high at these places in the market cycle, for obvious reasons. The VIX will be high at this point, the cost of options is high, and fear is high since we've been selling as the markets drive lower and lower.
I made a mistake on the last cycle and I changed my money management (MM) methods, and was punished for it. Looking at the % longs chart above, you can see the rationale -- good buying environment, so put all the chips in and let them rise. Unfortunately, we never "cleared" the green area above (the area where we historically have transitioned to the pink zone), so losses have been heavy.
I've spent a couple of weeks, a few hours per day, looking at MM and how the losses could have been reduced and applied backwards. Simply put, returning to my short-term, medium-term, and long-term timers would have kept me out of trouble this last cycle, as it did for years prior.
Lesson learned -- don't change something that works for something that you "think" will be better. Mr. Market knows better, and he punished me (and my Collective 2 subscribers) for this.
The timer table shows that the signal of 11/25 as well as 12/29 were short lived and should have been exited almost immediately.
Ideally, this next signal will evolve like the following from 2014:
Click on the image to enlarge.
- No buying for Wednesday.
- I'll be working on getting my shopping lists ready today.