Wednesday, January 13, 2016

Selling continues, but approaching a bottom

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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

Click on the image to enlarge.

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.

This chart is like the LCR but it simply shows the percentage of stocks in the database that are rated "long".  The value is 12.8% and as you can see, we are testing the lows of August 2015.  We have to go back to the summer of 2011 before we could dip down into the single digits.

All of this suggests that we should be getting our shopping lists ready.

Money Management

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.

Note that this is 2014, not now.  Note how the left side (short-term timer) starts in the green, and the cash target drops from 100% to 66%.  Then, as the medium-term timer matures and turn green, the cash target continues to drop from 66% to 33%.  Finally, when the long-term timer moves green, we have a cash target of 0%.

This "Combo Timer", as I call it, has relatively solid statistics since 2009:

Click on the image to enlarge.

The values are measured using the GGT index, which looks like the ETF "VTI" (Vanguard Total Index) most of the time.  

Not considering commissions, the compounded rate of return is 11% per year, with only being in the market 44% of the time.  Put another way:  with less than 50% exposure, the gains match the historical performance of the S&P 500.

You can read the rest of the statistics.

This is the timer I'm sticking with going forward.

  1. No buying for Wednesday.
  2. I'll be working on getting my shopping lists ready today.
I will not post shopping lists here -- they are for my Dropbox subscribers (which is free and has been for 7 years).

The stock lists are posted in a daily file that I attempt to share by the following morning with all subscribers. To review the stocks that you are holding and see how I evaluate them, as well as to see my new shopping lists, you need to be a member of my Dropbox.  Send an email to pduncan [ a t} v _ t (dot] e du, fixing the address of course, with the word "DROPBOX" in the subject and I'll add your email.  I attended Virginia Tech many moons ago and it is my alumni address, so it should be easy to see how to fix the address -- simply use "".  I also ask that you subscribe to this list using the link to the left, as it's the only way I can communicate with Dropbox users, if the need arises.

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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.


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.