Another Whipsaw; Models Confirm Move to Cash

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Effective with the close of markets on Thursday, February 21st, my GGT model has transitioned the short-term timer and the intermediate-termed timer to CASH. The long-term timer is still long:

As indicated in my previous entry, the short-term timer whipsawed as of Tuesday, and continued to reverse again on Wednesday. I did not take any new signals on Wednesday despite looking for them in individual stocks -- a number of stocks did signal a possible Elder entry (see my earlier post) but the markets were down sharply and volume was quite poor to the upside.

From a GGT perspective, the GGT index has increased 6.19% from the entry on 12/3 through last evening (2/21), which is slightly above average for the intermediate timer. Although I acknowledge we could continue upward from here (POMO operations supporting everything), the GGT Long-Cash Ratio continues to strongly erode any underlying base of support and I believe that this advance in the indexes is purely a house of cards.

Here is the GGT LCR Slope Model table:

The LCR has fallen -22% and -25% relative to the previous day level during the last two days. Out of exactly 500 down days since September 2008 these represent the 111th and 90th strongest down days, and are indicative of warning shots being fired across our bow. We now are at a level of 1.327, down from a peak level on 1/10 of 4.212, hence we have a large number of stocks which are below their historical optimum threshholds and plenty of fuel to go higher. Although POMO could support us here I'm not overly optimistic, but that is simply my nature at this point.

IF the intermediate-termed timer remains in CASH today (Friday) the probability of it changing back to a long status decreases significantly. Like all MA-based timers, it too can whipsaw, and the horizontal nature of the markets lately causes havoc on MA and other threshold timer systems.

Related, but not often discussed, is a parallel model that I have for the Thrift-Savings Plan (TSP), which is my wife's government retirement account. It invests in what closely resembles the ETFs AGG, SPY, EFA, and VXF, and these equity values, along with their ETF proxies, all independently signaled a move to CASH last evening. There is no ambiguity here and remaining long in your TSP accounts is a poor risk/reward proposition. I had moved to cash in January, based on other R/R setups that were poor, and that move only left 2% on the table then -- I doubt you're going to get anything near 2% gains from today forward in those accounts before they significantly reset.

All of this being said, it's important to note that we're right at thresholds with respect to going short. From an ETF perspective, we had a POWERFUL short signal in the Q's last evening:

This is the dashboard view of the Q's from the ETF dropbox file, and it shows that the long and leveraged long variants on the NAS all signaled a move to CASH last evening (QQQ, QLD, TQQQ) while their inverse counterparts (PSQ, QID, and SQQQ) all signaled "NEW LONG" last evening. Volume is solid in these ETFs, so the GGT signals are going to be accurate. When we get a simultaneous reversal such as shown here the call to enter the other side is quite compelling.

In looking at the EV patterns for QQQ/QLD/TQQQ and PSQ/QID/SQQQ, the QLD/QID pair has the most favorable confirmation of TEV patterns, followed closely by TQQQ/SQQQ. I'm a nibbler/buyer of the leveraged inverse products in the Q's if they continue higher.

Note that we do NOT have across-the-board confirmation of moving short. The MF signal is not yet indicating short. The ETFs and leveraged products based on the SPY, DIA, and IWM are not all moving with the aggressiveness of the Q's, so capitulation has not occurred. Hence, we could move higher from here and a signal in the Q's could reverse to the long side.

I continue to hold my long positions, but now with tighter stops an/or with a protective put. I presently own:

BOFI, DLX, TIVO, CVLT, CRD.B, CTB, DK, GEL, NDSN, PIR and WGO. I recently have unloaded DDD, USG, ASGN, USAT, DORM, EGHT.

Regards,

pgd

Short-Term Buy Signal w/ Close of 2/19 Markets

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With the close of markets on Tuesday, 2/19, my GGT LCR model is signalling a short-term entry opportunity on the long side. Both the intermediate-term and long-term timers are still long, and by a fairly good amount, so we have green lights across the board:

I note with some caution that we have whipsawed the short-term timer 2x the past 4 trading days, and this shows we are at thresholds. Being at a threshold simply means that like a sail on a sailboat, when the winds are weak the mainsail will move around to any breeze that arises. Same condition here --- bad news could cause us to reverse the short-term signal, no news or good news could cause us to move higher.

On a positive note, we are definitely strengthening in terms of stocks "resetting" and beginning to move higher. If you look at a table view of the Long-Cash Ratio moving averages, which is a view of the aggregate behavior of over 3000 stocks, we see higher highs and higher lows over the past two weeks, although the LCR slopes *just* started to move positive:

Note specifically the emergence of the "green" on the right side of the table -- this is acceleration, and it shows that over the past 5 trading days that more stocks are starting to flip to their long side than to their cash side. The right side of the table LEADS the left side (why? bonus points to whomever can answer this), so seeing green on the right side of the table is a positive development.

On the left side of the table, the strength of the move yesterday caused all the LCR moving averages through the 8d EMA to turn positive. Historically, coming out of a solid "red" area like is shown, has been a constructive SHORT TERM buy signal.

For those of you who have trouble visualizing table values, here is another presentation of the LCR slopes -- the left side of the table:

Again, note the higher lows and the transition above the "red" line to positive territory.

This pattern is not without precedence. We did the same thing back in late 2009/early 2010:

Of significance here is that after the turn, where the % Longs in the database stopped dropping then moved positive, we continued higher in the GGT index for some time, and the % Long value was a good indicator. In fact, as long as the % Long indicator remains above present levels I think we can maintain our positions, although I will be the first to state that any % Long value over about 0.63 has a greater statistical chance of failing over the next 4 weeks than values below this level. Hence, we simply must be careful.

The question then becomes "which stocks are good entry candidates?". Depends on your approach. If you like my quality GGT stocks with favorable effective volume setups, then the list here should give you a good idea of candidates. The list is sorted most favorable at the top descending.

Alternatively, the following stocks are showing really good localized behavior as measured by firing pocket pivots yesterday:

MDAS
CXW
WDR
CTB
SMP
HTZ
DORM

Many of these have fired pocket pivots over the last few days consecutively, so are worthy of watching.

Finally, if you like Elder's methods at setups/entries (enter on renewed strength off of a short-term pull-back in a long-term uptrend), then this list will interest you:

Here is the symbol list to save you time:

BLC
BOFI
CAMP
CPTS
DK
DXPE
FBRC
HTZ
MOV
MTZ
NTE
OCN
PJC
PRAA
VMED

For the Elder table shown above, RT13 and RT34 are the price slopes (13d and 34d) for the respective equity. FI2 and FI13 are the 2d and 13d Force Index values for the equity, and note, I DIFFER SIGNIFICANTLY in signalling the setup -- YOU WANT THE 2D TO BE NEGATIVE on the day of the setup and THEN ENTER IF AND ONLY IF the price takes out the previous day's high plus a few pennies. I typically will do this only if we have good volume at the time the alert goes off, e.g., it appears that we are going to be at 150% the 20d volume level by the end of the day.

So, good luck and happy hunting.

Remember, you are responsible for your own investment decisions, and I am not. Do your own diligence, and take ownership for your actions.

Regards,

pgd

The energizer bunny keeps going and going and ...

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I've received a few notes over the past week asking different questions along the same theme:  why I pulled out of the TSP market a few weeks ago ( http://ggt-tsp.blogspot.com/2013/01/signal-change-effective-january-11-2013.html ), why I called a top a week ago, and what I think in the face of folks like Minervini and others who are still fully invested.

The last question is easy -- MM has a risk tolerance far different from mine.  I simply can't invest when my personal indicators are telling me to start to lock in profits and/or buy protection on my existing positions.  It's important to have a plan, have metrics, and stick with your plan when the winds try to change your direction.

Nothing major has changed for me in the big picture.  The number of stocks in the GGT database (3098 to be exact) which are long continues to pull back from the peak a few weeks ago:

Right click on any image in my blog to open it in a new tab or window.

With the exception of the 2d EMA of this value the 3d through the 21d EMAs are all with a negative slope, e.g. the day-over-day change is negative, meaning more stocks are moving to a "cash" status on these time frames than are moving long.  I call this a contracting database, and when the database contracts it simply is not a good idea to enter stocks on the long side.

Another good metric I use to gauge whether I should be stepping in is the slope of the 8d EMA of the Long-Cash Ratio (LCR). Out of all the values I watch this one has the highest correlation with the GGT index movement.  This means that if the GGT price movement is positive on a day-over-day basis there is a high probability that the 8d EMA of the LCR is moving up too.  The same thing applies on the down side too.

When these two are not in sync something is wrong and I take note -- generally by moving out of the markets.  We're not in sync right now and this is important to me.  Here's a view:

The 8d EMA of the LCR started moving with a negative slope on 1/16.  On 1/22, 1/23, and 1/25 it moved positive (you can't see it easily with the eye since the movements were small), and all other times it has been significantly negative in slope.

Take a close look at the chart above and you'll see that when the 8d EMA of the LCR is falling that prices generally follow fairly quickly.  This time they are not, but that doesn't mean that we're home free.

My LCR table provides a table view of the 8d LCR slope, as well as many other EMA values of the LCR:

The left side of the table shows the slopes of the 2d, 3d, 5d, etc. out to the 65d.  The right side of the table shows the "slope of the slopes", and for you science-minded folk, this is acceleration.

We need a considerable amount of green on the RIGHT side of the table to turn the LEFT side green.  Conversely, red on the RIGHT will eventually lead to lots of red on the LEFT.  Look carefully at this table and you'll see that acceleration ALWAYS precedes velocity in color -- hence the nature of using this table to understand where we are going.

Friday 2/1/13 was a strong day in terms of the markets and price action.  The Dow closed over 14,000.  The Russell is in new high territory.  Talking heads are saying the sky's the limit and that everybody should jump into the markets.  Their crystal ball is as good as mine, but I will say that we are due for a pullback to digest all these recent gains.

In terms of the LCR, Friday's action was constructive but not nearly as powerful as the prices of the markets would have you believe.  The LCR moved up +4% from 2.885 to 2.995, which in the big picture is not very strong.  You can see that we stopped the bleeding on the 2d and 34d slopes of the LCR -- and this is the right direction if we are to sustain an up move.  In terms of acceleration we had all measured time frames showing positive -- another requirement that is constructive for the bulls.  So yes, we've had some recent weakness, the markets were up Friday, the LCR acceleration is attempting to move upward on all time frames, and ...

... well, your crystal ball is as good as mine.  I have no idea if we are to continue on this path (moving higher in prices) or if we will drop lower in the LCR, or both (a negative divergence).  I'm simply being very careful right now.

Note that time frame is important.  Note that the 65d EMA slope of the LCR is positive.  Stocks are still moving long into the database on a 65d scale faster than they are leaving.  This is a LONG-TERM (13w) uptrend.

All down trends start with a short-term pullback.  Short term for me is anything less than 34d in length.  We barely touched the negative 34d slope as shown above so we're right on the fringes.  Intermediate length for me is the 34d and 55d.  If these move negative, as well as my Intermediate-term Elder timer, then it gets interesting.

Here's my timer status, and it shows that on a short-term basis we're contracting, but on the intermediate-term and long-term scales we are still bullish:

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There's no question that we could continue to move higher.  Take a look at this link:  http://www.newyorkfed.org/markets/tot_operation_schedule.html, which is for February (when I post this), and then compare this schedule to the previous month.  Only $1B in difference between the two.  With an unprecedented safety net like this if we do pull back I doubt it will be very deep.  We may not pull back at all -- hard to know.

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My primary strategy is as follows:

• I want to see the 8d LCR start moving higher (as viewed in the graph and LCR table above) before I will consider entering ANY positions.
• I will only use stocks from my *current* leader's list (available here) as consideration.  These are quality stocks.
• The stock must have a favorable effective volume pattern on multiple time scales on the day of entry.
• I will only enter a stock if it breaks out higher on projected higher volume for the day.

If you have questions you can post them here, my private email if you have it, or you can find me at StockTwits at http://stocktwits.com/Grems8544 

Regards,

pgd

Slope of the 13d EMA of the Long-Cash Ratio Now Negative

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With the close of markets on Monday, January 28th, the 13d EMA of the LCR has transitioned negative. All of the slopes -- 2d through the 13d -- are now negative and have a bearish acceleration downward.

The LCR is a measure of the internals of the market -- making higher prices on a lower LCR value means that a disproportionate amount of stocks are doing the work, and as Pascal noted today (Daily Commentary, http://www.effectivevolume.com), higher prices were not confirmed with a higher money flow (just the opposite).

Here's the LCR table:

As with all my images, right click on the figure to open in a new tab or window.

The raw LCR values are on the far left; when these are decreasing it historically has not been a good time to enter stocks, good EV patterns notwithstanding.

If you have trouble visualizing the table, here are the curves of the same:

Although we are still in a long-term uptrend (LCR 65d EMA still positive), the accelerations of the EMAs (right side of the chart) are negative, and so we're slowing on all major time frames. As I said in my other post, "Let's be careful out there".

Finally, I think the following graph needs no supplemental commentary -- it's a graph of the number of "long" rated stocks in my database:

Regards,

pgd

LCR Keeps Dropping Despite New Highs in Major Indices

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The GGT Long-Cash Ratio is exactly that: a ratio between two values. Understanding how these two values are derived is the key to understanding the power of the LCR.

GGT is an optimized system -- it constantly optimizes, day over day. It SELF optimizes at the stock level -- each stock looks at its own price, volume, and price rate of change performance, and if the values are above some threshold, then it gets some form of a "long" recommendation. Conversely, if the values are below this magic threshold, then the recommendation is cash.

When we take about 3100 stocks and do this calculation, we can separate stocks into two main groups: those with a long recommendation, and those with a cash recommendation. Hence, the LCR.

I've been doing this daily since September 2008 and the LCR is a powerful indicator of what is occurring in the database. It does not predict, it does not forecast, it only tells us what is happening up to the data it has been given. BUT, when combined with momentum, projections can be made that have a high degree of correlation to the SLOPES of different moving averages, as well as SLOPES OF THE SLOPES on the LCR.

For those of you who paid attention in Physics 101, you'll recall that slope is rate of change, or velocity. It's a measure of how fast something is going, and in the case of the LCR, the slopes of different moving averages tells me how fast in stocks per day are becoming long (positive values of LCR), or alternatively, how many are moving to cash (negative values of LCR).

If you really paid attention in your college days you'll also remember that the slope of the slope was the rate of change of velocity, or acceleration. For my purposes, a positive acceleration with respect to LCR means that we're starting to become more optimistic, and conversely, a negative acceleration means more pessimistic.

Take a look at the following figure:

Right click on the figure to open in a new tab or window.

On the far left, next to the date, is the raw LCR value. We closed Thursday down another -4% at 3.638. This means that for every 36 stocks that are long-rated, 10 are in cash (or 363/100 or ...). We peaked on January 10th at 4.212, and we've been slowly unwinding our way down to the 3.6 level ever since. 

Note that we took a few pauses and jumped back up to 3.9 and change a couple of times. Good, solid, healthy bull market.

What is concerning to me is that we are dropping in the LCR values but we are making new highs on the S&P500 and Russell 2000. GGT index also, but you're not as familiar with that as I am. This is a divergence, and it's not necessarily sustainable. Think about it. In order for individual indexes to go up the constituent stocks must be going up, but if an increasing number of those stocks are underperforming (dropping LCR), then the stocks that are performing well must have to disproportionately increase to keep pushing the indexes higher. 

The conclusion here is that if the same number of stocks were present on 1/10 (the LCR high) that are being calculated now on 1/24 (market highs), and the indexes are higher but more of these stocks are underperforming (lower LCR than on 1/10), then fewer and fewer stocks must be pushing the indexes higher and higher. This is a problem and is not sustainable.

Take a look at the slope fields. We have bearishness creeping in to the 2d, 3d, 5d, and 8d. The 13d is 1% away from flipping to 0. The negative value of the 8d slope is telling you that 3% of the stocks in the database (3098 * 3% = 93 as of 1/24) are moving to cash status every day, yet we continue to make higher markets day over day.

Because slope of the slopes must change before the slopes (why? ask if you do not understand), seeing as much red on the right side of the table across all measured time frames is worrisome. Continued red on the right side tells me that the day-over-day change is more negative, e.g., we are accelerating day-over-day downward in the number of stocks transitioning to cash (underperforming). Again, not the view we want to see.

To get your head around this, look back up at the presentation around 11/19. Look at the slopes, which were JUST beginning to move positive, but look at the slopes of the slopes, which were green long in advance.  We have the converse developing now.

We're turning more and more red in the slopes of the slopes, and this is not good for our profits.

All of this being presented, we certainly can continue to grind higher. POMO injections, irrational behavior by the retail market ($DDD), all can fuel us higher. As long as the LCR continues to drop but we keep making new highs in the indexes we are getting on thinner and thinner ice.

I strongly suggest that you tighten stops, take some profits, whatever makes you feel good about the work you've done since November. Sure, you may leave a few percent on the table. It's better than giving it up in one day and hoping that the markets have overreacted and will continue upward.

My 3 cents (jumping off my soap box).

Regards,

pgd

Continued Bearishness Creeping Into Markets - We're Slowing

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Like a ball thrown upward, we're still moving upward, but suffice to say, we're nearing the apex.

I base this statement on the LCR Slope Model, which continues to stubbornly exude increasing bearishness in the face of prices grinding higher. Although we put prices in the bank, the LCR tells me what the underlying market is doing on a stock-by-stock basis, much like Pascal Willain's money flow indicator, and right now we're getting increasingly bearish.  Recall that the LCR is the Long-Cash Ratio -- and I take 3000 stocks, separate them into 2 primary groups (Long, Cash), and then based on past performance, equate their present performance to above or below historical normals.  The model continually self-optimizes and adjusts for market changes because each individual stock is self-optimized in terms of it's ranking:

Right-click on the image to open in a new tab or window.

Ignore the LCR values on the far left for the moment, and look at the slopes of the LCR side of the table. You see 3 days of the 2d, 3d, 5d, and 8d slopes all negative, and Friday was more negative than Thursday. On the right side of the table, you see far more red, but also, note that there is some green appearing. This side (the right side) is the slope of the slopes, e.g., acceleration, and we're bouncing around.

Hence, my interpretation is that we are kind of floating at the apex of the curve -- noise may push us higher, and certainly some leaders will continue to see a push higher -- but in general, the tide is starting to turn (to mix metaphors).  As further evidence, the % longs falling in the database is falling from a peak:

Again, right-click on the image to open in a new tab or window.

Further, the short-term timer remains bearish (e.g., do not buy stocks when the LCR/short-term timer is contracting), and hence, I'm raising capital but am ready to move in if we have a strong day:

Finally, as evidence of the slowing nature of the markets, note my HGSI chart:

Of interest is the MACD and 13/34d slope plots -- they are getting ready to turn bearish with crossings from above, so certainly, the writing is on the wall.

Regards,

pgd

Short-term GGT Timer Signals Exit as of Close Monday January 14

With the close of markets on 1/14, my GGT short-term timer has signaled that positions opened since 1/3/13 should be closed.

This timer call is based on the 4d SMA of the GGT Long-Cash Ratio (LCR), which is a simple average of 3101 stocks with respect to their overall Long/Cash status. A stock gets a "Long" rating if it is outperforming it's historical, optimized, moving average, rate of change of price, and volume action. It gets a "Cash" rating if it's price action falls below the optimized moving averages of price. 

The database started a deceleration on Friday, continued Monday, and has fallen from a LCR of 4.126 to 3.916. This is a 2-day reduction from the peak of 4.212 and is indicative of a short-term pullback. Short-term pullbacks can turn into long-term pullbacks so positions opened recently will be underwater fairly quickly.

This short-term signal call resulted in a gain of the GGT index, which closely resembles the performance of the VXF, of 1.08%.

If you have questions please post them in the comments field below.

Regards,

pgd