Thursday, February 4, 2016

A Tale of Two Mindsets

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Summary

The Long-Cash Ratio (LCR) value continues to strengthen, indicating that buying is occurring, driving both individual price and volume upward.  The buying is selective though, because average prices are not in sync.  This is a cautionary indicator which supports the present call of being on a short-term buy signal but longer-term "raise cash" signal.

Price Slopes

As you probably can imagine, I have numerous indicators with the system that I don't expose on a daily basis -- not because of anything proprietary, but simply because too many indicators causes too much noise.

In the end, price is what matters -- it's what we bank, it's what we retire with, and in the end, it's the end goal despite the myriad of ways to get to higher prices.

One of my indicators is a parallel of the LCR table -- it's a price slope table.  The construction is simple:

1) take the average, equal-weight prices of all the stocks in the database.
2) apply various exponential moving averages (EMAs) to the price series
3) look at the slopes (rise, fall) of the individual EMAs
4) look at the rate-of-change of the slopes, which is also known as acceleration.

Doing all of that magic, we have the following conditions:

Click on the image to enlarge.

The left side presents the slopes of the moving average of prices, and the right side presents the rate of change of the slopes.

For the left side, green means a positive (upward-trending) slope, which means prices are increasing.
For the right side, green means a positive acceleration upward in the rate of change, compared to the previous day, which means that if the right side has lots and lots of green, we will start seeing green on the left.

We don't have this scenario.  What we do have is a bunch of noise -- some days prices move forward, some days they move backwards.  You can see this on the left side of the table.  This being said, the right side looks relatively solid -- lots of attempts at moving higher, but only to be negated the next day or so.

As a comparison, here is a chart from 2014.  This is 2014, 2 years ago:


Click on the image to enlarge.

The key takeaway here is that the red/green at the top of the right side of the table eventually set up the sea of green on the left side of the table (area "1" led to area "2").  Note that during the period of rising prices (area "2"), we saw the right side of the table go back and forth -- this is normal market behavior as the market digests gains (area "3").

Again, we don't have this.  Prices are struggling to move higher, despite the attempts of the market to force things higher off the lows.

As I stated above, the rally off the bottom is selective, not broad.  How do we know this?

Long-Cash Ratio Table

The LCR table measures the number of stocks in a "long-recommendation" state, e.g., they have price and volume growth, relative to the number that are in a "cash-recommendation" state, e.g., those that have decreasing prices with or without volume.

Here's the LCR table:

Click on the image to enlarge.

Of significance here is that that despite the market's gyrations in price, we now have had 10 consecutive days of day-over-day gains in the LCR.  If you look back at 1/21/2016 you'll see that the LCR was at 0.085, which means that I was recommending that only 238 stocks in the database were worthy of our hard-earned money, while 2785 were in some form of decline below their historical performance records.  Note that 1/21/2016 is one day off the bottom as I measured it, and we've climbed steadily since.

We are now at 769 to 2243 stocks, or a LCR value of 0.343.  25% of the stocks in the database are now in a "long" status, and this value has been growing on a day-over-day stance.

Here's the "so what?":

The LCR gives us a view that stocks are either being acquired or sold.  Right now the growth of the LCR, as shown on the left (increasing green in the slope portion) tells us to actively be acquiring stocks.  In fact, I'd say that we're a bit deep into this present cycle so we may be a few days late for the initial entry.  That being said, note that the RIGHT side of the table showed a whole-bunch-of-green before the LEFT side of the table turned.  I've written over and over about this -- we have a view that we can enter the market at turning points -- and the LCR gives us this view, independent of what we see the major indexes doing.

(I hate the major indexes, just like I hate my own GGT average.  NONE of the price indexes, including my GGT average, give the full picture.)

Cumulative Tick

The CT resumed it's upward trend, indicating broad buying on a short-term basis:


Click on the image to enlarge.

Wednesday started relatively ugly with a jump of new 52-week lows (upper trace).  Mid-day the algos started buying the dip, resulting in sustained buying that pulled sentiment around (middle trace).  The CT (white) and the longest moving average of the CT (heavy red) are positively trending upward, pulling the other moving averages upward with a positive slope, so there is a clear indication that folks are buying, ON THE SHORT TERM, this market.

Of course, today could see a reversal.  Your crystal ball is as good as mine.

Strategy

Having established that a) the indexes and GGT price index is flat and choppy, that b) the market is being bought as far as selective stocks, and c) the market is resuming an uptrend, now what?

I'm buying what I consider quality stocks with good fundamentals.  My combined holdings, in all portfolios, are with the following stocks:


Duplicative symbols appear because they are in separate accounts.  Note my entry into NHTC is probably an error in judgment on my part -- we'll see.

I also own some CSPs, which are doing okay:

Symbol                     Position Open P/L %
WBA 160219P70     Short            0.00%
FSLR 160219P57.5     Short            77.84%
BURL 160219P44     Short            35.29%
ADBE 160219P85     Short            31.69%

These expire in February and I still have time to decide what to do with them.  I purchased these at the recent market bottom when the LCR was in single digits but we saw lots of green developing on the acceleration portion of the LCR table, giving me some indication that the local-bottom was forming.  These positions allow me to collect some premium to boost overall performance.  I would not mind if these stocks were put to me when we hit expiration, but I think the likelihood is very low at this point (except for WBA).

For those of you who are following the "greenfield" methodology that I've developed and read the blog from a few days ago, here is the greenfield presentation for my holdings:


Click on the image to enlarge.

Note that I've included estimated earnings report dates/times, and sorted the list accordingly, so be careful if you consider any of these stocks for purchase.  Do your own homework -- I'm not recommending that you follow me at all.

Field descriptors for the greenfield chart above can be found on this blog entry.  CTWS is the only one that has marginal volume -- all the rest meet my overall criteria.

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Here's how to find me:

Stocktwits/InvestFeed/Twitter:  grems8544

Greenfield Dividends: https://www.collective2.com/details/94780986
Greenfield Accel Sales, EPS, and Pre-tax Profits:  https://www.collective2.com/details/95702992

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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