Monday, April 11, 2016

Reducing Exposure as Markets Pull Back

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Current Outlook

From my GGT perspective, we are consolidating.  The percentage of long-rated stocks has dropped a significant amount this past week, somewhat easing the overbought pressure of the prior weeks but this should be considered expected and positive behavior as long as we do not drop too far.  My Long-Cash Ratio table indicates short-term bearishness and we do not yet have any indication of strong resumption of the uptrend.  My Cumulative Tick indicator is cautionary with a very weak uptrend.

Percent "Long"-Rated Stocks

I have been writing about an expected pullback in the Percent Long value, and this week delivered what I was looking for:

Click on the image to enlarge.

The chart reflects the number of stocks in my database that are rated “long” – those that are outperforming their historical optimized averages.  We closed Friday at 64.3%, down significantly from the 76.3% value reported the week prior.  This means that 12% of the stocks in the database (net) fell below their historical, optimized upward-performance levels, so they became “cash”-rated.  The solid red line is at 63.6%, so we are entering territory where we could potentially play a bit – or not.  If history is any indicator, we tend to move lower from this level, potentially falling into the white zone or even into the lower green zone before recovery.  Falling into the green zone, then reversing upward would be an ideal situation.  Broader market index levels are directly correlated with the fall of the Percent Long value, so be aware that we may see some weakness as we roll into the start of earnings week.

Long-Cash Ratio Table

Closely correlated with the Percent Long value is my Long-Cash Ratio, which is reported in the far left column in the following table:

Click on the image to enlarge.

The LCR fell a significant amount since the last time I reported the value, which was on April 1st (3.225).  This value is a ratio of the number of stocks that are “long” rated, to those that are “cash” rated.  The latest reported value is 1.802 and the present trend is falling.  The middle/left side of the table, the area titled “Slopes of LCR EMAs”, reflects moving averages of the series of LCR values.  Despite some positive movement in the indexes on Friday, the LCR continued to fall, and as you can see, we have negative values (slopes) through the 55d moving average. 

Falling LCR values, in multiple time frames, is bearish.  I do not purchase stocks when the LCR value is falling – no exceptions.

The right side of the LCR table shows the rate of change of the left side, also known as acceleration.  You can see some green creeping in with Wednesday and Friday’s action, but in both cases neither one was strong – neither spanned all measured periods.  Acceleration (the right side) always precedes slope (the left side), so if I do not see strong action on the right side, there is little hope that the left side will confirm movement into the markets.

The tipping point I am looking for to place orders is for the 8d moving average on the “Slopes of the LCR EMAs”, highlighted in a dark border, to turn green.  Right now it is red and has a value of -0.15.  Do not concern yourself with the value, but the fact that it is red tells me that Monday (today) will not be a buying day.  We could see a sudden reversal on strength, and this could trigger me to start to place buy-stop orders as early as Monday night.

Cumulative Tick

Another cautionary signal is provided by my Cumulative Tick chart:


Click on the image to enlarge.

The top line reflects the number of 52-week new highs (52W-NH, green), the number of 52-week New Lows (52W-NL, red), and the difference (yellow).  When green is above red we are in an expanding market, with stocks trading in the higher portion of their 52-week ranges than in the lower.  We are currently expanding.

As a broad signal, the 52W-NH signal is a great overall “gate signal” to watch.  With little exception, I require that more stocks are making new highs before I enter the market.  The current signal is “long” (green above red and has been for several weeks).

The middle trace indicates algorithmic buying/selling.  The indicator resets each day.  When it moves down rapidly, stocks are being sold off and are completing the transaction at a price lower than the previous transaction (“tick down”).  When the trace moves steadily upward, stocks are being bought, with the latest price higher than the prior transaction (“tick up”).  Straight-line movement upward is indicative of sustained buying and straight-line movement downward is indicative of sustained selling.  Hence, I get a good view of the algorithms and what they are doing on a day-to-day basis by reviewing this indicator.

The middle trace shows back-forth action throughout the week.  You can see that Thursday was a really bad day – with almost sustained selling throughout the day which picked up in the afternoon and stabilized about 2:45 p/ET.  Friday started strong but faded throughout the day, ending lower than the peak.  This back-forth action shows rotation, and it also shows indecision within the markets. 

Obviously, when mixed signals exist, caution is advised.

The bottom trace is my canary on a short-term basis.  The white trace is the cumulative tick – a running total of all tick transactions that occur on the NYSE.  Movement upward of the white trace shows instantaneous buying; drop of the white trace shows instantaneous selling.  Moving averages are applied to this value to give me the ribbon presentation.

Here are my conclusions:  first of all, we are below where we started the week – this supports the observation of falling Percent Longs or a falling LCR.  We broke below the solid red moving average line on Thursday, and for me, this is a major shot across the bow of the ship.  We finished the week with a very tight spread between all of the cumulative tick moving averages, and this means that the trend upward trend, indicated by the 52W-NH dominance, is in jeopardy.

Timer Table

The table shows my timer system back to 1/7/2016.  Three timer periods are indicated:

  •        Short:  generally a week to two in length.
  •        Intermediate:  Can be several weeks to a month.
  •        Long:  several months are not uncommon.



Of course, there are exceptions at the turning points or when the market is trending horizontally and is not moving upwards or downwards with any force.  You can see this behavior between March 18th and March 31st, when some intermediate-termed weakness was observed, but it wasn’t enough to cause the short-term timer to move to Cash.

Since last week we have “whipsawed”.  Whipsawing occurs when trends are close to thresholds that would cause them to change state, and they move a little in one direction, then a little in another.  The end result is a confusion of signals, and generally frustration for those trying to follow those signals.

On Monday, April 4th, we closed the day with the timer system reverting back to a “raise-cash” state, with a target of about 67% in cash.  You can see that the recommendation has remained throughout the week.  Correspondingly, I unloaded positions that were more than -3% below my buy point at the end of any given day.  This ensures that the weakest stocks are eliminated from my portfolio, simply because it is unlikely that those stocks that I am holding at this point in the cycle will move upwards.

If fundamentals remain solid with these stocks that I have unloaded, they will be on my watch list for purchase, most likely at equivalent or lower prices.  The timer system indicates a larger percentage of cash should be my target, and this is what I am pursuing.

Strategy:

  1. Taking the day off from buying.
  2. End of day will be a re-evaluation.  I'm on my way to Denver for a day so it will be late.
  3. If overall status changes within my system I will post late tonight or early tomorrow.


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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