Technically Speaking, Market Analysis and Theory: January 2006

Tuesday, February 21, 2006

Suppertime?

Educational use only. Never intended as advice.

Part of succeeding in the markets involves accepting market action without demanding explanations. 'Zen' trading, I suppose. The markets have their own reasons, and while the financial press dedicates its energies to providing explanations, they are neither necessary, nor correct.

First, some charts, as it is a chart-based trading site.

Here's the SP500 daily, with those pesky stochastics asking us whether the 1285-1300 resistance zone will hold. The 20 day moving average provides the first support around 1275.

The Russell 2000 is asking the same question, but the levels are different.

Looking at our GICS profile (from last night) provides a very quick overview of what worked and what didn't. Our top performer from last week, TTH, lost small change. XLE led the pack, followed by XLU and XLB. XLK lost over a percent as the biggest loser.

Okay, so I'll yield to the temptation of injecting why oil got some love today. Unrest in Nigeria creates concerns, echoed by Richard Russell at www.dowtheoryletters.com about local governments (OPEC, Nigeria, Venezuela) demanding more profits for themselves at the expense of multinational oil companies. Add in the Chindia factor, and price volatility becomes the new paradigm. "This time it's different" may actually apply (not advice).

Texas Congressman Ron Paul gives us a history and economics lesson at http://www.house.gov/paul/congrec/congrec2006/cr021506.htm

Market Dynamics:

VXO 11.39 (ten day average 12.04) - about 5% below ten day average

Bullish percentage NYSE stocks 65%

TRIN5 0.94

Stochastics oversold SPX 8%, RUT 11%

New highs, new lows 198-17 (still dramatically favors new highs)

Worden T2108 (stocks over 40 day average) 67% (high, not extreme)

ETFs > 400K shares/day oversold

SMH 38.05-37.10

EWM

ETFs NR7

XLB 31.90-31.53

RKH 145.50-144.10

GLD 55.34-55

FXI 73.32-72.88

EWY 46.59-46.1

Oversold stocks (not advice)

CA 27.10-26.85

Overbought stocks (not advice)

EQR 45.70-45.07

Well, that's a start, and now it's suppertime! Call me Snoopy...

Weak Start

Educational use only. Never intended as advice.

Usually the beginning of the week is stronger than the end (statistical but mild advantage), but so far the Killer B's - breadth (negative), betas (e.g. GOOG, HANS), banks (BKX), and general 'action' haven't "paid the man."

Surprising? I guess the VXO extension (south) and 'mean reversion' theme discussed regularly have some advocates. I'd hardly call it 'mass selling however', with Oils and China (FXI) positive (up over a percent), while SMH, Cubes, IBB, MSFT, and GE all down over a percent.

Yawn.

Monday, February 20, 2006

The Answer Blog?

Our readers are terrific, and answered my son's criticism of the Fed with the Humphrey-Hawkins Act of 1978.

This is reviewed in context in the New York Times recently (guess I missed that day...)

Here are some excerpts, and the full reference:

The old-timers who tried to legislate full employment saw it not as a desirable market phenomenon — the spinoff of a robust economy — but as a civil right, on a par with the right to vote. That is still the view of a few economists, including Amartya Sen at Harvard, whose writings on famine, poverty and other injustices won him the Nobel in economics in 1998.

"I know that people get scared of inflation and Wall Street is a natural ally in this fear," Mr. Sen said. "But the real costs of unemployment are very high. Having a job confers not only income, but social recognition and self-respect, which comes with having the sense of being wanted by society."

Out of the second Congressional debate came not full employment but a fear of it. The law that Congress finally enacted, the Humphrey-Hawkins Act of 1978, set full employment as a goal — along with low inflation. Soon, however, each was viewed as the enemy of the other and full employment, defined as the right to a job, lost out.

For more than two decades, the guiding thesis embraced by economists and policy makers was this: If unemployment became too low, the labor shortage would give workers the bargaining leverage to push up wages. Employers would respond by raising prices to cover the labor costs, starting an inflationary spiral deemed to be more damaging than a rising unemployment rate.

Recognizing the shortfall in the demand for workers, the federal government generated public-sector jobs in the 70's under the Comprehensive Employment and Training Act, a program that the Reagan administration ended in 1983. Mr. Darity argues that something like CETA should be revived, not to supply make-work jobs, but to satisfy pressing social needs with projects like public school construction or a national teachers corps or high-speed rail lines.

http://www.nytimes.com/2006/02/12/business/yourmoney/12view.html?pagewanted=2&ei=5090&en=12310a8fb0bef77f&ex=1297400400&partner=rssuserland&emc=rss

Kudos to readers, educating us all.

Cycle Awareness

Friday's action. Bearish, but small...

William Hester has a review of returns during the Presidential Cycle. http://www.hussmanfunds.com/rsi/prescycle.htm

Holiday

Educational use only. Never intended as advice.

Whenever possible, I like to think as basically as possible. For example, why are most Americans overweight. The answer is simple: evolution favored it. Because the history of the planet tells us that the food supply varies, when it dried up, the ability to store fat became critical. They have a word for thin people with concurrent famine: toast. 'Fluffy' people lose weight, but survive, long enough to have children, many of whom share the Fluffy genetic predisposition. So, maybe it's not entirely our fault.

That message was another way of stating the obvious: mean reversion is the law of nature, just as the business cycle historically had a way of cleaning out inefficient companies, with the unfortunate side effects of unemployment and its consequences. Of course, in the Great Experiment of the Cult of the Central Banker, the business cycle is repealed, there is capital for everyone. The Central Bankers are hailed as heroes, of course, until they are not.

There are so many great websites out there, but I always seem to end up at www.billcara.com Bill simplifies things by pointing out an investment worldview using the Global Industry Classification Standard (GICS), which we can then use to extrapolate to ETFs.

If we look at the industry subgroups we come up with:

XLB (basic materials)
XLE (energy)
XLF (financials)
XLI (industrials)
XLK (tech)
XLP (consumer staples)
XLV (health care)
XLU (utilities)
XLY (consumer discretionary)
TTH (telecommunications)

Then we can try to apply our 'mean reversion' rules (guidelines) and see where we might go, and where we won't go. So, for the past week, Telecomm (via TTH) was up 4.6% and rising parabolically. No way, Jose'.

Basic materials was up 2.43% and looks to have an NR7 (volatility contraction pattern) setup. Could be interesting.

XLI also was up over 2% and shows a similar NR7 ish pattern.

XLV rose over 2% as well, and it will be interesting to see what it does at resistance. "Beware consolidation at resistance," so they say.

XLP made a new high for the year, and then put a nosty reversal pattern in Friday. We'll see whether they come back for the defensives.

XLU had four accumulation days in seven sessions. Not too shabby. Maybe they thought energy was coming in more cheaply. Nope.

XLF filled the old gap (down), so we'll see how they feel about it now.

XLK, is it making a double bottom or a head and shoulders top? Damn those technicians. Bear paws?

XLY? See XLK.

XLE could be holding support at 53, after trying to fall off the planet Wednesday. Unrest in Nigeria (as in riots, deaths, and kidnapping) aren't the recipe for cheap oil (long selected energy stocks).

ETFs with NR7s

29 of the 46 ETFs trading over 400,000 shares daily have NR7 setups, meaning that volatility expansion has increased probability. Anything important? Just BBH, DIA, SPY, QQQQ, IWM, HHH, GLD (long selected gold mining stocks).

Disparity from the 200 day moving average:

High end:

EWZ 39%

EEM 22%

Low end:

HHH -2%

Summary: the beginning of the week tends to offer more optimism, but perhaps geopolitical unrest (read oil, gold, etc) means more caution and easy explanations for the financial press.

Dave Landry always reminds us to 'listen to the database'. Well, my DeMark-Sen buy list is a lot smaller than the sell list. Of course, our task is not to predict what the market will do, but to react to what it does. I guess that we'll find out soon enough.

Good trading and great risk management.

Back online

Educational use only. Never intended as advice.

After a truly disastrous computing weekend (don't ask), I am back online. Let's suffice it to say that I am wiser but poorer for my trouble.

Here's a housing perspective from my son, Conor, whom I consider a first rate analyst using quantitative data, concerning 'what should a house really be worth?'

http://csen.blogspot.com/2006/02/what-should-house-really-be-worth.html

Saturday, February 18, 2006

Saturday Musings: Wise Guys and Less.

Educational use only. No setups or trading ideas contained within are ever intended as advice. All information contained herein comes ‘as is’ and should be independently verified for accuracy and validity. I am not a registered investment advisor. What I try to provide is unique information that cannot be easily found and compartmentalized elsewhere, to help sophisticated speculators form trading hypotheses.

Top Ten
You have to begin your analysis somewhere, so I thought that picking the ten most ‘important’ charts to focus on might be a start. However, I thought it might be educational to look at them in different ways.

Here's the 'Relative strength' view

You can see that Gold and Oil recently pulled back, with Gold getting support at the 50 day average, and oil something less. The strength of China (FXI) and the Russell 2000 (IWM) are also easily apparent, with the transports (IYT) rallying off of oil’s double top.

The point-and-figure view shows the power of the Dow Industrials recently in concert with the Transports. Richard Russell, the maven of Dow Theory reports that he will be surprised if this breakout holds, but acknowledges that with the market that you never know. You can also see the recent weakness in oil, the Dollar’s inverse head-and-shoulders, and the long biotech holders down move.

It’s hard to make ‘sense’ of the markets sometimes. If the economy is ‘strong’ presumably commodity demand will remain sharp, and the world’s key commodity is first oil, and of course, longer term, water. Markets teach us to respect first not what we think, but what THEY think.

Levels (support and resistance)
Jeff Saut of Raymond James has talked about the importance of the SPX 1285-1300 level, and we’ll see how impenetrable this remains, quite soon.

Core Beliefs?

How many stocks show up on the short screen? As a mean reversion trader, the number of items that show up on my ‘short screen’ means a lot to me. When the numbers drop precipitously, then short-term tops become more likely. “Lows” mean numbers below 100, especially into the 70s and 80s. The Short Scan registers 106 today.

What percentage of ETFs (Index proxies) are above their 150 day moving average? Currently, 178 of 222 ETFs trade above their 150 day average.  185 close above their 50 day average, while ten days ago 139 closed above their 50 day average. Can you say FROTHY?

How many ETFs made intermediate term highs and closed lower for the week (and vice versa)? There were 37 ETFs showing up on the ‘long’ scan and NONE the ‘short scan’ this week, in other words, long bias for this intermediate term signal. UTH, IGE, XLE, and IEF are just a few. Anybody thinking short-term ten year yield high?

Wise Guys.

A redux on Jeff Saut

John Hussman, an exceptionally bright guy. One has to wonder whether having lunch with him would be fun or baffling. I’m buying if you’re in the neighborhood, Mr. Hussman, although if you’re reading this, I’m shocked.

An older interview with Jeremy Grantham. Not always right, but worth reading.

Will a new car save you money? Requires registration. Obviously, there’s more to it than that, the differential insurance costs, sales tax, and a lot more. Note, I’m driving a 1995 Nissan Maxima (with 27,000 miles on it) so maybe you don’t want my opinion.

The Difference Between Market Tops And Bottoms: Financial News - Yahoo! Finance Mark Boucher’s recent commentary. Mark authored The Hedge Fund Edge, which I view as a must read for new investors.

Dynamics: It’s where you are

SP500: VXO ratio   high at 117

TRIN5 TRIN3  both at 0.95, fairly neutral

Put-call ratios

S&P500 weekly stochastics can they curl up? Anything can happen.

Mamis-Meisler breadth oscillator the ten day breadth indicator getting high (bearish)

Bullish percentage NYSE point-and-figure 65.

Worden T2108  69%, approaching the high end

VXO

New Highs, New Lows and more. New lows are low, and new highs remain the dominant space.

Absolute performance with controlled risk. Friday’s action was mediocre, but not terrible considering the strength earlier in the week. Traders action on Friday counts, but it isn’t the be all end all, as it’s just one day. I believe that it was Jason Roney on www.minyanville.com who observed that the President’s Day weekend isn’t historically very strong.

Hope to be back later this weekend with more charts.

Good trading and great risk management.

Ron

So what DO you want?

Educational use only. Never intended as advice.

"Mean reversion" traders want EXTREMES. Extremes of valuation, technicals, sentiment, and even allocation. As Warren Buffett put it, what you would want is lots of cash and the worst bear market imaginable, so you could get in cheap when everyone hates the market, with nowhere to go but up. In football terms, you'd want to be Bill Parcells, taking over down and out franchises with lots of cap space and draft choices, and a terrible record. If you succeed, great. If you don't, well then you move on to the next post.

So where are we? Profit margins are historically high. When companies are making fantastic profits, that creates mean reversion and COMPETITION, as everyone wants to get in on it. After all, if you married Miss America (or Mr. America), would you be surprised if the world coveted them?

The www.internetstockblog.com puts it well -

In Against the Gods, Peter Bernstein stated, “There are three reasons why regression to the mean can be such a frustrating guide to decision-making. First, it sometimes proceeds at so slow a pace that a shock will disrupt the process. Second, the regression may be so strong that matters do not come to rest once they reach the mean. Rather, they fluctuate around the mean, with repeated, irregular deviations on either side. Finally, the mean itself may be unstable, so that yesterday’s normality may be supplanted today by a new normality that we know nothing about. It is perilous in the extreme to assume that prosperity is just around the corner simply because it always has been around the corner.”

So where are we? There are many ways to look at the market, and Carl Swenlin has some sophisticated analysis (never advice) http://www.decisionpoint.com/ChartSpotliteFiles/060217_overbought.html

On a "Hierarchy of Buying Happiness" I guess we could generate a list (lumping) from dream to nightmare: (assume intermediate term)

Good valuation (by P/E, P/Sales, P/Book), oversold, sentiment poor

Poor valuation, oversold, sentiment poor

Good valuation, overbought, sentiment strong *(you are here)

Poor valuation, overbought, sentiment strong

For those wanting a name brand, try Jason Goepfert at http://www.sentimentrader.com/

I think that this captures the concepts of both relative strength and mean reversion, which of course compete for investors' hearts, minds, and dollars. John Hussman does this type of analysis weekly in his online commentary, and Jeremy Grantham does it quarterly in his www.gmo.com investment newsletters. Of course, the arguments come over what constitutes 'good valuation' and even sentiment and overbought, because timeframe is everything.

For my purposes, I'd consider low dividend yields as important in the valuation scheme (thought your GM dividend was safe?), and I publish a variety of 'dynamics' data almost daily. Although I'm biased towards my proprietary indicators (blew it with SUN this week, based not on indicators but trading), but stochastics oversold, the percent of stocks above certain averages (10, 40, 50), and longer-term (e.g. weekly) stochastics all have meaning for me.

And another thing.

Is the impact of options expensing priced into the market? Frankly, I doubt it. Companies will attempt to obfuscate the truth (good for stock prices) and the last to the party will get snookered. That, of course, is "The Wall Street Way."

Well, I'm off to do the "medical thing" today.

By the way, congratulations to the Melrose Lady Raiders hoop team, that finished the regular season 20-0, their third undefeated regular season in four years, winning the Middlesex League title for the seventh consecutive year. The league All-Star game is Sunday, and I'm very proud that both Karen and Paula were named to the All-League team.

Friday, February 17, 2006

Reductio ad absurdum

Educational use only. Never intended as advice.

Friday wasn't that great, with the 'Three Day Rule' as one framework and something else working.

Here's the quick and dirty, the VXO, that got more than 10% extended south of its 10 day average, and is oversold by Bollinger Bands (touches bottom and top band turns down), oversold by stochastics, and retraced more than 0.618 off its most recent high to prior low. Statistically, this makes volatility expansion more likely, also more likely associated with a decline in an overbought market.

Foolproof? No. Foolhardy? Depends on the strategy and the risk management. All of our portfolios are the sum total of individual trades, some of which are working, and others that are not. If our methodology (edge), trading (execution), and adherence (discipline) are proper, we should gradually succeed, with drawdowns and outperformance.

Yesterday, I commented that sticking to one's discipline doesn't guarantee success, but few of us have enough intuition to select trades randomly.

More later this weekend, time permitting.

Good trading and great risk management.

Patience a Virtue

Educational use only. Never intended as advice.

The bulls are fighting fiercely to protect their turf, against the 'Rule of Threes' discussed yesterday.

Patience is paying off as there's a bid behind the microcap value (shhhh) space today, plus some wind at my back concerning gold, energies, and the avian flu space (e.g. BCRX - long BCRX via options).

I still believe that avian flu will become a dominant theme over the next two years, because of the ferocity of the disease (40-50% case fatality rate). I hope that I am wrong, but as a medical community, we cannot handle this, and use Katrina as my model of domestic crisis preparedness.

Thursday, February 16, 2006

Rule of three?

Too Good to be True?

Educational use only. Never intended as advice.

Breadth 2:1 positive on the NYSE, with a low TRIN (0.66), and wind at the sails for everyone. Ooh-rah! Bandwagon pulling out of the station, and I'm sure the criminal hypsters are out in force everywhere.

Meanwhile, behind the smoke and mirrors, volatility contracts to about 10% extended from 10 day average (VXO), the TRIN3 is the lowest 0.83 in a while, and if the economy is roaring, then an oil correction will uncorrect, along with commodities, right?

All of which means that traders must pay attention to everything, and notice that there is no such thing as a free lunch or easy money.

I'll stick with my themes of mean reversion with market timing, water, homeland security, gold, and microcap value, trying to remember Soros words about conviction and its consequences.

Wednesday, February 15, 2006

More of the Same

Educational use only. Never intended as advice.

Like Punxatawnee Phil, Princeton's Fed Chair Professor came out of the shadows today, proclaiming:

"In sum, achieving price stability is not only important in itself; it is also central to attaining the Federal Reserve's other mandated objectives of maximum sustainable employment and moderate long-term interest rates."

My son, Conor (with a degree in Economics, and market experience beyond his years) wondered, is "maximum sustainable employment" really one of the Fed's mandates, or is that something the Greenspan Fed started? As I recall, the Fed was chartered to provide liquidity for the needs of business and regulate the currency, not to delve into every facet of the economy. Although it's not explicitly stated in this morning's text, it sounds like Bernanke actually wants to set GDP growth, inflation rates, long-term interest rates, the unemployment rate, the severity of a housing correction, and who knows what else. What's next, the quantity of toothpaste on supermarket shelves? Doesn't sound that different from the old Soviet Union to me."

One very astute market observer replied: "It's no different. And no, such "mandates" were not part of the original fed legislation. Far from it..."

A hedge fund manager added:

The Fed's members have written 14 papers over the last few years describing unorthodox methods to force consumers to accept the credit that they offer (continuation of the credit expansion is essential now to economies). The least drastic is buying risky assets as described above. The most drastic of these ideas is negative interest rates: penalize savers for not spending money by making any saver who hold cash required to pay interest instead of receive it.

Our fore-fathers warned about giving government the ability to print money (no control or restraint on credit). They understood that giving this power to the government is the ultimate power and that it would eventually end in tyranny: massive control over the populace by a few in government. It saps the will from the populace to get produce (look what happened to the Soviet Union and communism): if the government owns everything, than why work?

We are witnessing an economic revolution right before our eyes and no one is saying anything about it.

What we have is not intervention, but desperation, acts of the managers of a system run by credit, and yet still with slowing velocity of money. Debt and spending run amok, the Federal Reserve aims to repeal the business cycle and create a new economic paradigm, based on, what?

But don't worry, people, the market kind of liked it, at least today.

Here's the Brazil ETF (EWZ) Weekly...looking like a bearish wedge?

Here's the SPX, weekly, on the steady climb, also with a 'bearish' wedge gradually creeping upward. I imagine the Elliotticians must be tripping over themselves calling this a Wave 5 extension, with lots of gloom and doom ahead. The problem for bears has been only one, making money off what some see as mispricing.

Chart wanderings and such.

The Dow Industrials now has 70% of its members over their 50 day average, rate hikes and misses aside.

16% of SP500 stocks and 19% of Russell 2000 stocks are oversold by stochastics, so we're in the middle (low range 6-8%, high range 30+%).

72% of SP500 stocks are above their 10 day average, compared to 65% of Russell 2000 stocks.

The Worden Brothers TC2000 T2108 indicator shows that 64% of stocks are above their 40 day average. However, the Bullish percentage chart of NYSE stocks remains stuck around 65.

There are only 2 ETFs with oversold conditions by my proprietary indicators (XLE and OIH).

There are 8 ETFs showing NR7 patterns (narrowest range of 7 days) suggesting possible volatility expansion moves. Some include:

VTI 127.22-126.45

DIA 110.83-109.99

FXI 72-71.46

BBH 192.94-190.69

Summary: The market says everything is beautiful, in its own way. The balance sheets are robust, and consumer spending bountiful, and interest rates relatively low, and inflation low. Who am I to argue? Helicopter Ben says that policy will depend on data. Who is he kidding? To quote Richard Russell, it's "inflate or die," the VIAGRA ECONOMY.

Good trading and great risk management to all.

Ron

Tuesday, February 14, 2006

Absolute performance, controlled risk

Proprietary techniques (home grown)

Stochastics (e.g. buy crossing 20 line from below)

Candlestick techniques (e.g. narrow range bars at the end of a move)

Volatility bands

DeMark exhaustion buy or sell techniques DeMark Sequential (tm)

Cooper reversals, e.g. lizards High range open and close at the end of a move; Cooper describes trading these by entering above the high and using a one point stop

Bollinger Band reversal techniques for example here

Dynamics: It’s where you are

SP500: VXO ratio breaking out?

TRIN5 1.02  with  TRIN3  1.03 (neutral)

Put-call ratios  looks like a sell signal to me

S&P500 weekly stochastics 73 with 1260 as support

Mamis-Meisler breadth oscillator 10 period average below the zero line

Bullish percentage NYSE point-and-figure “hold that line

Worden T2108  62%

VXO now below the 10 day average (minimally)
Stochastics oversold: Dow Industrials 10%, SPX 19%, RUT 18%

Stocks over 50 day average: Dow 63%, SPX  58%, RUT  62%

New highs rallied today

ETFs Narrowest range of 7 days (volatility expansion, doesn’t predict direction
OIH  139-136
PPH   71.47-70.94

ETFs Oversold (proprietary)
XLE  52.25-51.28
OIH

DeMark-Sen tops: inspired by Tom DeMark’s work, but with my innovation

These are selected from my overall list, but not the ‘A’ game.
PH   78.72-76.27 (net short via options)
RAVN  32.73-32.17

DeMark-Sen lows: inspired by Tom DeMark’s work, but with my innovation

Likewise, these are potentially good candidates, but not necessarily the best.
YHOO  32.83-32.05  (net long via options)
DSX    11.22-11.09

What I try to be about: absolute performance with controlled risk.

Good trading and great risk management.

Ron

Feel the Burn

Educational use only. Never intended as advice.

The yoyo continues, with indicators becoming more useful with rangebound trading. With higher oversold stock percentages, and at least the 'enthusiasm' generated by "solid" support, the market rallies. At least for today.

Of course, if it goes up after Helicopter Ben speaks, then it's because the market believes in his policy. If it doesn't then, Bernanke fails. Right.

From a 'band' perspective, SPX is doing pretty well today, better than MDY and just a bit better than the Russell 2000.

Meanwhile OIH is oversold ...(net long OIH)...as Bill Cara might say, "just the gnomes".

Bands on the Run

Educational use only. Never intended as advice.

Selected Volatility Bands for Valentine's Day

BBH 2.1
DIA .65
EFA .43
FNM .94
IYR .62
IWM .76
IWO .80
MDY 1.13
NEM 1.11
OIH 2.90
RKH 1.07
RTH .78
RUT 7.21
SPX 7.81
SPY .83
SUN 1.67
UTH 1.05
UTX .055

Most oversold ETF by 'Mandelbrot' analysis: HHH (no position)

An FYI; one of the best analysts I know took a long position in physical gold and physical silver yesterday. (long selected gold stocks)

Monday, February 13, 2006

Short and No So Sweet

Educational use only. Never intended as advice.

Could have been worse. That's a damning endorsement.

Is this a Weinstein Stage III top forming on the SPX? Back below the 50 day moving average, but not by much, and at 1263, it's clinging to that 1245-1260 support zone.

Dynamics:

TRIN3 at 1.19, mildly bullish.

Stochastics oversold: SPX 22%, RUT 22%

New highs only 67, new lows 43

CBOE Put call ratio (1.01) high

VXO 13.10, ten day average 12.56 ( <>

There isn't a lot of analysis to be done tonight. It was a lousy day, with poor breadth, and optimists will say (true enough) that volume was light. Of note, only 17 Dow Indy stocks were negative, two gained at least a percent and six lost at least a percent.

Eight ETFs trading over 400,000 shares a day are oversold using proprietary data, including XLE, IJR, and six foreign holders.

Jeff Saut at Raymond James called it, "the only question now is whether you lose money quickly or slowly."

http://www.raymondjames.com/inv_strat.htm

I'll be looking predominantly at managing existing positions, and calculating the volatility bands for the indexes, ETFs, and selected stocks that I follow closely.

Happy Valentine's Day to you and yours tomorrow.

Good trading and great risk management to all.

Mediocre but not average

Educational use only. Never intended as advice.

Breadth is negative, and energy stocks have bounced a little.

The market continues to do little, perhaps waiting for the Helicopter Man to speak later this week. These are the doldrums of the market, and I continue to look for some mispricing 'events' in the small cap value sector, while mostly sitting on my hands.

The 'overbought' space has done some mean reversion, while the best mean reversion candidates have done little, although 'outperforming' (losing less) than the NDX.

Sunday, February 12, 2006

Bottom line. Who has the edge?

Educational use only. Never intended as advice.

Bottom line? I'm waiting!

Bearish 'indicators'
New highs decreasing
T2108 (stocks over 40 day average) - 62% relatively high
Bullish percent of stocks NYSE - 66% (Bear correction status)
21 day average equity put-call ratio turns up (negative)

Neutral 'indicators'
6 week highs or lows with reversals (e.g. close below open if high) - no advantage

Stochastics oversold (SPX 20%, Russell 2000 22%)
Close > MA50 (SPX 52%, Russell 2000 60%
VXO 12.21, ten day average 12.40, at 200 day average

Bullish 'indicators'
TRIN 5 - slightly overbought at 1.14
SPX has held 1260 challenge
End of week positive price, NDX and SPX both in upper half of range

I have my own 'index' that measures where we are on the 'Wall of Worry'. Doesn't make me right, but I'm pretty much standing at the midcourt line, ready to throw up the jump ball for the bulls and the bears. There are plenty of arguments longer term that we've visited to suggest negative to neutral action (Grantham, Dr. Marc Faber) and of course there's the Wall Street spin machine which is uber-positive.

All of which makes it worthwhile to look for a tiebraker. Here's Jason Goepfert's 'global' analysis http://www.sentimentrader.com/ , that is, er equally noncommittal. So maybe, we wait.

Good trading and great risk management to all.

Sunday Morning Coffee Session

Educational use only. Never intended as advice. I am not a registered investment advisor.

Technical biases don't preclude a larger worldview, meaning consideration of global trends and their domestic impact (commodities, homeland security, water) and the importance of epidemiology (study of health and disease in populations) on market behavior. I'll start with the latter.

AVIAN INFLUENZA

Avian influenza, caused by the serotype H5N1 (hemagglutinin 5, neuraminidase 1) versus the more conventional H3N1 strains, is guaranteed to become a global problem. There are other serotypes, but for now, I'll confine the discussion to H5N1. Not speculated, guaranteed. All of which makes the race to develop effective prevention and treatment essential. Bird to human transmission was first documented in 1997, and the virus is spreading rapidly, having moved across Asia into Europe and Africa.

With disease in humans, the concerns become differences in pathogenicity among strains, diagnosis and treatment, and the potential for human-to-human transmission. The symptoms of avian flu (fever, sore throat, cough, and muscle aches are obviously non-specific, and two of the four agents available to treat influenza A (rimantidine, amantidine) are no longer recommended because of resistance. The individual case fatality rate exceeds 50%!

Avian flu also shows some resistance already to the most common treatment, with oseltamivir. Human-to-human transmission has rarely occurred, but in my opinion this is likely to change with the inevitable increase in human transmission.

Market impact:
The obvious impacts of developing widespread avian influenza would be on the travel and tourism market (for example airlines and hotels), and the likelihood of decreased willingness of people to congregate where transmission would be more likely from close contact. This would presumably impact some retail operations, public transportation, and sporting events.

Although there is no reason to believe that avian influenza would be spread via processed food, there would inevitably be concern over the safety of poultry products.

The medical community would be impacted in multiple ways, ranging from more visits for diagnosis, and the desire for more testing and treatment for even the possibility of flu. Research imperatives on avian influenza vaccine and treatment candidates would also accelerate.

There are numerous small and large cap biotech companies developing products in the avian flu sphere. The best known is Gilead (GILD), manufacturer of Tamiflu, currently trading at 34 times earnings, over thirteen times sales, and almost 9 times book value. So, it's neither undiscovered or cheap. Many of the other companies are development stage, with no earnings, and a high degree of risk. Because I have small positions in a number of them, I will leave it up to interested readers to begin their own searches, rather than 'hype' my positions.

WATER STOCKS

While gold, platinum, silver, oil, and natural gas all have advocates, everyone needs water. Louise Yamada told the water story in Market Magic, with less than 2 percent of global water potable, and less than half of that available. Promising companies (like Ionics) tend to get snapped up by big players. The threat of ecoterrorism also gives water purification and production companies a bid. In the event of a crisis, there would obviously be multiple points of emphasis - conservation, collection and storage (rainwater), and purification.

I keep a list of 37 'water stocks', although there are far more, if you count megacaps like GE. Many water stocks, particularly the utilities carry both high multiples and high short interest, which makes them higher risk in my mind. It is noteworthy that among those on my list, only 12 remain above their ten day average, 28 are priced above their 50 day average and 150 day average. I'm virtually always looking to buy companies on sale, so the water stocks aren't working for the most part.

Many of the group, ITRI, SZE, IDXX, and so on, are quite extended. The only position I have in the group is in a thinly traded small cap, so I will defer discussion further. However, I would encourage investors to be like Santa Claus, making a list and checking it twice.

HOMELAND SECURITY

Tom DeMark gave me some great advice last summer. If you want to talk money and stocks, great. If you want to talk politics, don't confuse that with business. People who may respect your business opinion can only disrespect your political opinion, no matter where you stand. As I've written before, the Cold War has morphed into the Hot War, and homeland security stocks are the beneficiary. The Philly Defense Index is at an historic high, and 35 of my 64 security stocks are above the ten day average. 40 are above the 50 day average and 32 above the 150 day. Only 10 are oversold by stochastics, and I own (for now) three of them, with all of the others on my 'interest' list.

There is absolutely no reason to believe that interest in this sector and group will diminish. Long-term and short-term investors alike should consider investigating this sector.

COMMODITIES

Global demand for hard commodities (e.g. energies and metals) with limited supply and increasing demand, puts upward pressure on commodity prices. Add in geopolitical instability and currency debasement (see yesterday's von Mises references) and commodities could easily be the bull market of the next decade. Investors have a wide spectrum of ways to speculate, and I predict ETFs may be among the most important, among favorites like IGE, GLD, OIH, XLE, and IAU. Mining companies give additional leverage over the underlying metals in some instances. With the dollar at relative highs, that may explain some recent commodity weakness, as well as investor concerns over yield curve inversion. Richard Russell of www.dowtheoryletters.com reminds us that the difficulty with bull markets is that they seldom give you the opportunity to get in, and the temptation to get out is great when you've had gains.

Well, I'm off to 'work' on some catch up reading, for now Barrons and later Jim Rogers book Hot Commodities.

Meanwhile, we've got blizzard conditions here in Boston, so we'll settle in, 'cause we're not able to go anywhere.

Saturday, February 11, 2006

The Whole Chart and Nothing But

Educational use only. Never intended as advice.

WEEKLY chart of the CRB (Commodity Research Bureau). This is a pullback within the channel, not the end of the world, at least for chartists.

Here's the Dow Transports WEEKLY chart. Looks like a rising wedge, which a bearish formation. What will oil prices do? Is the total inversion of the yield curve a predictor?

GS (Goldman Sachs) I guess the simple answer is 'do as 'da bankers and 'da brokers do. Could this be a 'high range' flag forming? Of course, it could. Another stock that I'll keep on the radar screen (not advice).

Merck (MRK), looks like Bill Cara at www.billcara.com was right on this one. MRK is consolidating above support and has a nice MACD cross above the zero line. I'm not on this one, but I'll be watching it. (not advice)

Here's JP Morgan (JPM), right at trendline resistance. I suppose that the gap at 40.5 is calling, but I'm not going to take the risk for 1/2 a point, especially with Fannie Mae possibly reporting at the end of month. Remember the House of Morgan is derivatives. Is the biggest financial crisis in US history looming? I doubt it, but I wouldn't trust the FNM gang as far as I could throw 'em. (net short FNM via options).

Here's the US Dollar Index. Overbought? Stochastics at about 92ish. That doesn't make it a sell, but you know the drill.

YHOO - I'm all about mean reversion, and I use proprietary algorithms to decide when 'enough is enough'. Of course, sometimes I'm right and sometimes I'm wrong. Top panel is price, middle is MACD (crossing up) and bottom is a combination of relative strength (brown) and my Mandelbrot screen (named after Benoit Mandelbrot, a Yale math professor).
Even with all this mumbo jumbo, I'm long via options, which defines risk.

Good trading and great risk management.

Confessions of A Small Stock Trader

Educational use only. Never intended as advice.

Confession was definitely good for the soul this week. And I’ve added another blog to the sidebar, Penny Trader. So I’m in need for more confession. I spend a certain amount of time (and energy) in this swamp. The microcap space has disadvantages concerning commissions, liquidity, and often a large news vacuum (that may be an advantage).

Because I usually monitor about 40 of these ‘dogs’, I often ‘feel’ that I have some advantage from a tape reading/supply and demand perspective. If something trades in the shadows, and you lurk there, you might have some subtle edge. Or not.

The moral of the story likely remains that the more expert you can be on your area, the more likely you are to be able to truly exploit your edge.

Assess the risk first

Educational use only. No setups or trading ideas contained within are ever intended as advice. All information contained herein comes ‘as is’ and should be independently verified for accuracy and validity. I am not a registered investment advisor. What I try to provide is unique information that cannot be easily found and compartmentalized elsewhere, to help sophisticated speculators form trading hypotheses.

Give a little bit
Give a little bit of your love to me
Give a little bit
I'll give a little bit of my love to you
See the man with the lonely eyes
Take his hand, you'll be surprised
-- Give a Little Bit, Goo Goo Dolls

Levels (support and resistance)
Levels are just ‘decision zones’ not numbers on stone tablets. The NDX has been able to hold 1630, the Dow is close to scraping back up toward 11,000 (expiration week coming, watch for pins at key strike prices), and the SPX has fought the battle around 1260, but is living within a range of 1245 to 1290.

Core Beliefs?
It’s not the news, it’s the reaction to the news that counts. It’s not what we think, it’s what ‘the market’ thinks. The market is always ‘right’, but the market revolves around ephemeral concepts of value, driven by psychology, that is, emotion.

How many stocks show up on the short screen? As a mean reversion trader, the number of items that show up on my ‘short screen’ means a lot to me. When the numbers drop precipitously, then short-term tops become more likely. “Lows” mean numbers below 100, especially into the 70s and 80s. Everybody has to have their ‘thermostat’. The Short Scan registers 145 today.

What percentage of ETFs (Index proxies) are above their 150 day moving average? Currently, 170 of 222 ETFs trade above their 150 day average. 147 close above their 50 day average, while ten days ago 192 closed above their 50 day average.

How many ETFs made intermediate term highs and closed lower for the week (and vice versa)? There were only 6 ETFs showing up on the ‘long’ scan and 3 on the ‘short scan’ this week, in other words, totally inconclusive.

Does the 'yield curve' mean anything? A Ph.D dissertation on yield curve inversion. “During the boom phase, the monetary injections drive all prices higher. However, toward the end of the boom, input prices rise faster than output prices. When the monetary authority tightens policy, a credit crunch develops. Firms without investment grade bonds scramble for financial capital to complete their projects. As a consequence, short-term rates are driven up. The yield curve inverts with short-term rates rising and long-term rates remaining stable…those firms who are unable to obtain these funds at these higher rates are forced to liquidate.”

Wise Guys.

Guruvision with Marc Faber. Comment: Dr. Faber is another one of these naysayers, who has been around for a long time and has his hands firmly on the wheel of reality.

Inflation is a monetary phenomenon! There is empiric evidence for this. For those with insatiable curiosity. It all began, as usual, with the Greeks - Mises Institute Ludwig von Mises on Money and Gold. I suggest that we read this carefully.

Dynamics: It’s where you are

SP500: VXO ratio

TRIN5 TRIN3

Put-call ratios

S&P500 weekly stochastics

Mamis-Meisler breadth oscillator

Bullish percentage NYSE point-and-figure

Worden T2108 61%

VXO

New Highs, New Lows and more. New lows are low, but new highs have been ‘drying up’ as well.

Absolute performance with controlled risk. We’ve gotta keep our eyes on the target. Assess the risk first. More later this weekend, God willing.

Good trading and great risk management.

Ron

Thursday, February 09, 2006

Risk increased, Reliability Decreased

Educational use only. No setups or trading ideas contained within are ever intended as advice. All information contained herein comes ‘as is’ and should be independently verified for accuracy and validity. I am not a registered investment advisor. What I try to provide is unique information that cannot be easily found and compartmentalized elsewhere, to help sophisticated speculators form trading hypotheses.

Although I intend to maintain the rationale (mean reversion) for many of my trading strategies, I will only post Mandelbrot ‘data’ for stocks after I have taken a position. The reason? I am seeing an awful lot of coincidental gap openings in these positions, and although I can’t imagine why anybody would want to be front-running me, I’m not going to cut my (considerable) nose off.

So, for example, today, I entered PH with some puts after the stock rallied out of congestion. Parker Hannafin was forming a (bearish) rising wedge, and moved out to about 1.5 volatility bands, where I bought some March puts (defined risk). Hey, I’m a tiny fish in the ocean. So, it came back in to the trading range, and could make a move to either 75, or (if I’m lucky) 72 and change.

Levels (support and resistance)

These often ‘stand out’ on point-and-figure charts.

Dow Industrials
Transports
SPX
NDX breakdown
Housing Index (why the split?)
Bank Index
Semiconductor Index
Biotech Index at resistance
Retail rallies to resistance
North American Telecomm Index - good to go?
Defense Index - best offense a good defense?

When is a top established?
Everyone wants ‘big picture’ information that suggests a top ‘has been’ made. There isn’t any uniform opinion on this, but a host of guidelines exist. W.D. Gann wrote that the longest countertrend action (weeks) will presage the end of the trend.  A lot of what Gann writes seems apocryphal, but he’s pretty clear on this point.

William O’Neil’s stuff is voluminous, but I like this quote, “after an advance, heavy volume without further advance signals distribution.”
Investors Business Daily also makes the point that if a stock has been below the 50 day moving average for 15 days, that’s very negative.

Dave Landry writes about downsloping moving averages with ‘daylight’ between the average and price indicating trendiness.

In Secrets for Profiting in Bull and Bear Markets, Stan Weinstein looks for the end of stage 3 (topping) with distribution to follow in stage 4 (decline).

Gary Kaltbaum likes to see stocks and groups breaking down, with a rally to resistance. Brunswick looks like it might do.

Finally, in When to Sell Justin Mamis writes about price breaking the 150 day moving average, often in conjunction with a head-and-shoulders top. This is particularly ideal if the market is overbought and ripe for correction. On the longer-term basis, the market is overbought, although shorter term less so.

I’m more of a DeMark advocate, as I want the stock to have run up ferociously, and then just run out of gas. Markets are about rotation, which is why GOOG, EBAY, AAPL, and the like come in. I don’t want to play the absolutely hottest stock in town however.

Dynamics: It’s where you are

SP500: VXO ratio 20 day EMA as resistance?

TRIN5 1.13  with  TRIN3  1.17

Put-call ratios  looks like a sell signal to me

S&P500 weekly stochastics 79.73 with 1260 as support

Mamis-Meisler breadth oscillator rolling over but ‘always’ above zero

Bullish percentage NYSE point-and-figure “hold that line

Worden T2108  62%

VXO would you ‘buy’ this chart?

New highs rallied today, but markets closed with a whimper.

ETFs Narrowest range of 7 days (volatility expansion, doesn’t predict direction
EWG    21.93-21.79

ETFs Oversold (proprietary)
XLE   54.95-52.62
BBH  192.46-188.96
EWJ   13.76.13.63

DeMark-Sen tops: inspired by Tom DeMark’s work, but with my innovation

These are selected from my overall list, but not the ‘A’ game. I bought UTX with this them today. My son Conor likes the theory, but advocates far more volatile stocks.
JLL
MGLN
TMI
CP

DeMark-Sen lows: inspired by Tom DeMark’s work, but with my innovation

Likewise, these are potentially good candidates, but not necessarily the best.
APPX
HHH
MTG

The motto for this blog and traders who come here must always be: absolute performance with controlled risk. Right now the risk seems increased and the reliability decreased.

Good trading and great risk management.

Ron

Fear No Evil

Educational use only. Never intended as advice.

Breadth is positive, metals are shining again (weaker dollar?), and everyone is happy again on Wall Street.

Yesterday's MMM call was a good one, and I'm long some UTX and BBH (options) and short some PH via options on a Mandelbrot call.

Are you right or wrong? If the portfolio is making all-time highs, you are right.

Wednesday, February 08, 2006

Portfolio Development

Educational use only. Never intended as advice.

Want to test out your investment theories? Go short? At www.tradeover.net you can do just that, and get a score...

Here's my current score (I've been in this for not too long), but I'm feeling good about my strategizing with a 9/974 ranking of all players this month. That's why they call it "The Loser's Game." It's fun and it's free.

Ping Pong

Educational use only. Never intended as advice.

Nothing like confession (yesterday) to make one do better. Today, it was back to the drawing board, paying attention to the dynamics (not just ignoring them). Nothing like a rising tide to lift a mostly long portfolio. On the other hand, that also meant not even thinking about taking anything short, which also made sense.

So here's the SP500 (volume not shown), whipsawing up through the 50 day average that it pierced downside yesterday. 1260 seems to be the action point for trying to take trader's money.

Meanwhile, here's the OIH (above), with support at the 50 day average around 140, with my Mandelbrot Oscillator (middle) showing some nastiness, and the relative strength (to SP500) at the bottom, showing some question marks about oil as well. Bill Cara yesterday at www.billcara.com argued that it's just the 'Gnomes' at work, and I'm not going to dispute that, as I accept the theory that a paradigm shift is underway, but that doesn't preclude short term trading opportunities. I had some OIH long positions that I got out of on the rally today.

And since I'm not a one trick pony (maybe one trick horse's derriere?), I'll add that the www.stockcharts.com point-and-figure chart on OIH also gave me more than a little pause here, with a sell signal (not advice).

Here's the Russell 2000. Yes, technical analysis is ambiguous. Is there support at the 20 day EMA (green), or will the MACD Rollover be the key? Note, the Bands are 10 period 1.5 standard deviations.

Amex Gold Bugs (HUI) even though the HUI has come back in, it's still 37% above the 200 day average, a whopping powerful (or excessive move).

Dynamics:

VXO 12.41 (ten period average at 12.25)

TRIN5 1.16 (mildly overbought - bullish)

Worden T2108 62% (overbought, but reversed slide)

Stochastics oversold: SPX 29% RUT 19% (mildly oversold on the SPX)

Looking around:

Short scan ideas 144

ETFs > 400,000 shares 0versold - six (Proprietary) -selected

EWW 38.59-37.39

GLD 55.08-54.41

BBH 193.76-190.68

IYR 67.71-66.91

ETFs NR7 - narrowest range 7 days, possible volatility spike

UTH 114.07-113.53 (also at 150 day moving average)

By the way:

Did anybody notice Alan Greenspan spouting off today?

Feb. 8 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan suggested at a private dinner yesterday that short-term U.S. interest rates may need to rise further, a person briefed by a participant at the meeting said. The person, who declined to be identified, said Greenspan told about a dozen clients of Lehman Brothers Holdings Inc. in New York that low long-term rates were limiting the Fed's ability to manage the economy. Homeowners are borrowing more against the value of their homes to finance spending, the person said. In order for the Fed to gain traction in its efforts to keep the economy from overheating, it might need to raise short-term rates more, Greenspan went on suggest, according to the person, who's seen a summary of the meeting by one of the participants. Greenspan didn't say how high rates would climb, the person said.

Mr. Greenspan, you aren't in charge anymore. Haven't you created enough economic havoc with your liquidity infusion already?

Good trading and great risk management to all.

Ron

Attention, but not Paying

Educational use only. Never intended as advice.

Breadth is mildly negative, but the 5 minute advance decline shows breadth above the 20 and 50 period average. Okay, so it's magical, but you gotta follow something.

The BKX is mildly positive (Helicopter Ben at work?), and I'm in 3M on a markedly oversold trade...long at 70.75 (stop at break even). I think it could easily 'run' to the 71.50-72 range (not advice).

Breadth is now breaking toward positive (1210).

Tuesday, February 07, 2006

Mea Culpa, My Bad, Aarrgghh

Educational use only. Never intended as advice.

Even 'experienced' traders remain vulnerable to mistakes. That was the story of my day, with poor comprehension of or attention to the market dynamics. Breadth was poor, the TICK indicators I monitor were generally negative, as was the TRIN. The market 'schooled' me today, so I'm afraid I let some folks borrow my money.

The fact that the NDX, SPX, and Dow Industrials closed down is no excuse. Period.

Where are we? The SPX broke through the 1260 level and couldn't crawl back. 80 ETFs are oversold by proprietary criteria, including 13 that trade over 400,000 shares a day.

Here's some of the list:
QQQQ 40.93-40.44
BBH 197.77-193.78
EFA 62.13-61.43
IWF 51.41-50.82

ETFs NR7 (volatility expansion setups)
None

Dynamics:
Worden T2108 61%
Stochastics oversold: SPX 31%, RUT 18%
Stocks over 10 day average: SPX 22%, RUT 30%
Close over 50 day average: SPX 45%, RUT 61%
VXO: 13.06 (ten day average 12.25)

"Oversold" - proprietary - not advice
WSM 39.22-38.41
YHOO 33.10-32.32
AGIX 16.95-16.55
MMM 71..29-70.57

Overbought - selected - not advice
TNT 95.39-92.51
JLL 67.30-66.46
IGT 36.33-35.90

Summary: "Plan your trades. Trade your plan." Today, I had the plan, and failed to execute properly. That's why traders must keep a journal, to reinforce the good, the bad, and the ugly.

On the brighter side, the Melrose Lady Raiders clinched at least a tie for their 7th consecutive Middlesex League Basketball championship. Paula was sidelined with a fever, but twin sister Karen fired in 17 points including 7 for 8 from the stripe to help lead the team to a 68-46 road victory. Congratulations girls.

Risk Defined, Reward?

Educational use only. Never intended as advice.

An early test looms for the "Helicopter Man", as he attempts to fend off deflation as did Cinderella Man, Alan Greenspan.

My proprietary indicators suggest that the SP500 is oversold. 25% of the index stocks are now over the ten day average and as of 3:30 about 32% of the stocks contained within are oversold by stochastics. The 1260 support initially crumbled and we'll see what's up next.

So what have I elected to do? I already have some March dated MDY puts, so I've bought some February SPX options (calls) in the event that reversal happens. Today hasn't been a very pretty day overall for my portfolio.

Another great example

Educational use only. Never intended as advice.

Oil is getting hit hard today, and is the market ramping? No. Academic studies do not show any 'stoichiometric' correlation or inverse correlation between oil and general index price.

Often, there is inverse correlation between transports and energy price, but even the Airline Index is down today.

Monday, February 06, 2006

Problem Focused

Educational use only. Never intended as advice.

In medicine, we do evaluations that are 'health maintenance' focused, and others that are 'problem focused.' In the interest of time, I'll try to make this the latter.

Field Position:

Longer-Term
NYSE Bullish Percent by point-and-figure 69% (overbought)
Mamis-Meisler 10 and 30 day averages of NYSE breadth: 204,300 (moderately overbought)
Stochastics: SPX weekly (79,74) overbought

Shorter-term
TRIN5 1.18 (mildly overbought-bullish)
VXO 12.33, 12.20 (ten day average) -yesterday made 8 period high and reversed
Stochastics oversold: SPX 27%, RUT 15% (getting bullish on SPX)
Proprietary: SPX oversold

When the short-term indicators are flashing 'green', then I'm going to focus more on finding long positions. I will only use counter-signal action using volatility band trades when this occurs.

ETFs active (> 400K shares) oversold (proprietary)
QQQQ 41.01-40.59
XLV 31.90-31.62 (assess impact of new Federal Budget)
EFA 62.36-61.89
XLP 23.28-23.13

Proprietary Oversold
MMM 71.30-70.99
DT 15.70-15.36
TIF 36.55-35.95
ADSK 36.10-35.18 (Mandelbrot -64)
XMSR 24.55-23.42 (Mandelbrot -64) long XMSR
YHOO 33.95-32.78 (Mandelbrot -50)
SYMC 16.97-16.57 (Mandelbrot -44)

Most overbought (Mandelbrot Inspired) These have the hardest to fall but marked momentum
ATI 53.86-50.84 Mandelbrot 164
BRCM 70.40-67.81 135
AMD 41.23-39.84 127
X 62.50-57.12 121
NUE 88.38-83.73 102

That's the lineup, mathematically speaking. Key index at support, with greater short-term risk (not advice) on the short side from the confluence on indicators.

Good trading and great risk management to all.

It's a Long Way to the Top

Educational use only. Never intended as advice.

Ridin' down the highway
Goin' to a show
Stop in on the byway
Playin' rock 'n' roll
Gettin' robbed
Gettin' stoned
Gettin' beat up
Broken boned
Gettin' had
Gettin' took
I tell you people it's harder than it looks
It's a long way to the top if you wanna rock 'n' roll
It's a long way to the top if you wanna rock 'n' roll
If you think it's easy doin' one night stands
Try playin' in a rock roll band
It's a long way to the top if you wanna rock 'n' roll
--It’s A Long Way to the Top, AC/DC

SP500 Cash Index: 1260 is support, and the MACD is making lower lows and the histogram has crossed below the zero line. Who wins the battles for now? The bulls by holding 1260 or the bears with a takedown? The key to being a successful trader isn’t in caring which happens, but in identifying the decision zone and determining the winner. My suspicion is that the financials will get support this time, and the SP500 will rally. I don’t have a stake in this fight yet, beyond my BKX calls.

More later.

Sold out?

Educational use only. Never intended as advice.

I hate the term 'stock picker's market', because it implies that the rest of the time the game's just so easy. However, it does 'feel' that way. Also, my son Conor says it's so, ergo it's so.

A lot of 'stuff' just feels sold out to me, and coincidentally, some of the proprietary indicators are saying so as well. All of which means, time to close down SOME short positions (not the outright hedges).

I'd still keep the eyes on the BKX (long BKX calls) as the early warning sign, and it's worth noting that the BKX has traded dry today. My HHH position got stopped out meekly and I have taken a small XMSR position at 23.50 as price has been savaged here (technical mean reversal sought).

As Todd Harrison would say, "you can try anything, but control the risk."

Believe what you see

Educational use only. Never intended as advice.

Thus far, a rather 'disappointing' Monday, considering the short-term oversold conditions. I believe that the key lies in the Banking Index (BKX), that is definitively oversold by my criteria (long BKX calls today)...

Breadth is neutral to minimally positive, the Tick characteristics I follow are oversold but improving. FXI and EEM have attracted a bid, and some oversold medical plays (BEC, MDT, and AGN) have not. XMSR is another deeply oversold stock that hasn't gotten back on its feet as yet, with a volatility band of .59 and currently down .19.

As predicted

Educational use only. Never intended as advice.

...an upgrade for selected Internet stocks..."plus ca change, plus c'est la meme chose."

Not advice.

Sunday, February 05, 2006

Weekend reading

Educational use only. Never intended as advice.

Weekend reading.

John Hussman's always worth a look. The snail story’s a hoot.

Do you know Jack? Rothstein, that is.

Googlephiles. Something for you.

Tim Knight looks at Google from a Fibonacci perspective.

Is inflation a monetary phenomenon? If it is, then we have plenty.

Bill Cara explains the foreign 'carry trade' and international global economic imbalances. This effects us all, no matter what the bureaucrats tell us.

He's brash, arrogant, and often right. Mark Cuban on investing.

Grantham speaks. You must register at www.gmo.com.

Enjoy the weekend.

Housing bubble deflating.

Educational use only. Never intended as advice.

For something actually worth reading, it looks like the housing market bubble has finally started to burst.

Q. and A. Why read this column?

Educational use only. Never intended as advice.

Keywords: investment strategy, technical analysis, risk management, capital preservation, mean reversion

Investing. It’s not rocket science. Rocket science has a predictability based on principles of mathematics and physics. To an extent, investing does, too, in a pseudoscientific way. Market mavens proselytize overvaluation and undervaluation, but few (like Jeremy Grantham, Richard Russell, Mark Boucher, Jeffrey Saut and the like) have the breadth of experience and track record worth heeding. Grantham’s article in this week’s Barrons is a fine example.

Why read these columns? From time to time, the great Richard Russell of www.dowtheoryletters.com presents question and answer sessions (he generates the questions and the answers) to enlighten his readers about why he thinks the way he does. I’ll try the same, with apologies to Russell, whom I’d love to take to lunch someday.

Q. What are you selling?

A. Nothing. I have no sponsors and intentionally do not accept advertisements (yes, I’ve had offers). I do show a variety of ‘trading setups’ for informational purposes only. This site is purely educational.

Q. What are your investment biases?

A. I believe in the advantages of small cap value stocks, the importance of asset allocation, market timing using a confluence of indicators, and hedging your bets. I strongly believe in mean reversion to determine higher and lower risk opportunities. Ignoring the importance of market psychology and the reality of the day (“the price is right”) bring investors to ruin (“never let a trade become an investment.”) Of course, risk management in order to achieve capital preservation comes first.

Q. Do you have any core trading ideas?

A. Yes, I believe in trying to determine macro trends, and studying how to take advantage of them.

Q. Who are your investment ‘thought leaders’?

A. I’m an eclectic investor. I’ve mentioned several above. Tom DeMark inspires me, as do the guys at www.minyanville.com , particularly Todd Harrison and John Succo. I also think Louise Yamada, author of Market Magic has great ideas, as does Larry Connors who wrote Street Smarts with Linda Bradford Raschke, and Dave Landry (trend analysis) and Kevin Haggerty (volatility bands) of www.tradingmarkets.com Jim O’Shaughnessy, author of What Works on Wall Street has very powerful quantitative ideas. Stan Weinstein (Secrets for Profiting in Bull and Bear Markets) and Gary Kaltbaum (The Investor’s Edge) deserve attention. My son, Conor Sen, with economics and computer science background, has a depth of research and computer skills, coupled with innovative technical market ideas that make his opinions and mathematical constructs valuable to me. Conor cut his teeth on Boucher’s The Hedge Fund Edge and had the advantage of growing up during the recent bear market. Conor co-authored (did the research) How Markets Really Work with Larry Connors, and I wouldn’t be surprised to see Conor be the Richard Russell of short-term trading in the future. Really.

Q. What sources of information do you rely upon for trading?

A. I trade with Interactive Brokers, use Worden’s TC2000 for end-of-day data and screening, and Qcharts from www.lycos.com as my platform. I’m always willing to listen to other peoples ideas, and I wish I had more time (and monitors).

Q. Do you have any other core investment beliefs?

A. I’m sure that quantitative approaches have advantages, provided there is adequate risk control. O’Shaughnessy’s work, and the performance of his funds proved that. I also believe that Wall Street has its own interests above those of the average investor, so that individual investors ultimately bear responsibility. Even simple systems, such as go long the SP500 if it closes above the fifty day average and close out if it falls below for two days have greatly outperformed buy-and-hold.

Q. Are there particular areas that you believe will prosper going forward?

A. Geopolitical tensions, commodity-based reality, and the rise of Chindia (China and India) can’t be ignored. That means the importance of homeland security stocks, metals, energy, and water. I want to own them, but I want to buy ‘em when they’re on sale, not when they’re marked up.

Q. Do you have any other expectations for investors going forward?

A. I expect the balance of power between hedge funds and mutual funds to tilt toward hedge funds. Mutual funds are about relative performance, while hedge funds produce absolute performance. I also expect dramatic growth in exchange-traded funds over time. Blogging will gain in importance, and more blogs will become subscription-based, provided there is ‘value added’ content.

Q. Do you have any final comments?

A. Final, are you kidding me? I love to write. Seriously, our financial system has become dominated by manipulation, driven by debt-based growth, and we are ultimately at the mercy of our creditors. Buffett reminds us that “debt is a dagger aimed at the heart of a corporation” and the US has become the merchant of debt.

Good trading and great risk management.

Best,

Ron

Caveat Cramer?

Educational use only. Never intended as advice.

Whom do you trust? CXO Advisory group takes an objective look at the High Priest of the Cult of Telinvesting: Jim Cramer. Is Cramer ‘Simply the Best’ or the Master of Self-Promotion? Judge for yourself.

Saturday, February 04, 2006

Decisions are what we do, not who we are.

Educational use only. Never intended as advice. All information contained herein comes ‘as is’ and should be independently verified for accuracy and validity. I am not a registered investment advisor and have never taken any securities licensing courses or examinations. What I try to provide is unique information that cannot be easily found and compartmentalized elsewhere, to help sophisticated speculators form trading hypotheses.

Decisions, decisions. As speculators, we make decisions.

Traders often look for how the market resolves ‘supply and demand’ issues around key ‘decision zones,’ which might include previous highs and lows (resistance and support in varying time frames), well-watched moving averages, round numbers (for example the Dow’s brief capture of 11,000). What does this have to do with value? Nothing and everything. Chartists argue that price encapsulates everything known about an investment vehicle, so price embodies both the ‘value’ that fundamentalists prize and sentiment that technicians also consider. In reality, the best traders look at everything, fundamentals, technicals, sentiment, and asset allocation.

Levels (support and resistance)

These often ‘stand out’ on point-and-figure charts.

Dow Industrials
Transports
SPX
NDX breakdown
Housing Index (why the split?)
Bank Index
Semiconductor Index
Biotech Index at resistance
Retail rallies to resistance
North American Telecomm Index - good to go?
Defense Index - best offense a good defense?

Dynamics: It’s where you are

SP500: VXO ratio will it make a lower high?

TRIN5 1.16  with  TRIN3  1.14

Put-call ratios  shakeout or fakeout?

S&P500 weekly stochastics 84/77

Mamis-Meisler breadth oscillator overbought

Bullish percentage NYSE point-and-figure overbought and at resistance

Worden T2108  66% and falling

VXO would you ‘buy’ this chart?

New highs still dwarfing new lows, but falling dramatically.

Extremes, the feeding ground for ‘mean reversion’ traders (not advice)

Note. The sell side (brokerage industry) has a way of upgrading its favorites after it has placed its bets. So, let’s say “Acme Brokerage” run by CEO Wile E. Coyote, sees that the Internet sector, led by GOOG, YHOO, and EBAY for example has gotten smacked down. Acme takes some big positions, e.g. futures in the sector, and comes out Monday with an upgrade on valuation for GOOG and EBAY on ‘valuation’. Frankly, I expect that very soon. After they’ve made their kill, they move on. If you want to win, you have to understand how they play.

Can you predict the future? The market is a discounting mechanism.

The Defense Index (weekly) Despite a huge run, the chart isn’t showing a breakdown…yes, there could be a stochastics divergence, but relative strength is good. I don’t have a ‘homeland security index’, but my sense is that it would be at least steady.

PowerShares Water Index (PHO) This relatively new index has come back in, and 18 of the 37 water stocks that I monitor have stochastics over 70, so I feel that the group is somewhat overbought. Only 4 of the 37 are oversold by stochastics.

Selected ETF Breakdown by stochastics oversold

DIA   10/30
IGE (Ishares Natural resources) 12/111
EFA (Ishares EAFA)  6/43
EEM (Ishare Emerging Markets)  8/54
IYR (Real Estate)   5/76
IBB (Nasdaq Biotech)  17/121
PPH  (Drugs)
RKH (Regional Banks)  6/19
RTH (Retail)  3/18
XLB (Basic materials)  3/32
XLF (Financials)  25/75
XLK (Tech)  17/85
XLY (Consumer discretionary)  21/81
XLV (Healthcare)  10/47
XLP (Consumer staples)  10/35

Screenable findings

Short scan candidates   126 (low but rising)

DeMark-Sen tops versus DeMark-Sen bottoms. Tom DeMark had nothing to do with this proprietary screen except inspire it, so don’t blame him. Currently, using the entire TC2000 database I find 93 intermediate-term ‘extension’ tops and 18 bottoms. Using just the ‘Generals’ mostly SPX, NDX, and selected ETFs, I find 5 tops and no bottoms.

Saturday night special. The markets will spend this weekend digesting last week’s pronouncements. Data and the incredible strength of the gold market argue that inflation lives. For speculators, price matters. Years ago a well-known market analyst wrote that all that matters is buying great companies, like CSCO, which was trading in the 60s. Via email, I argued that great companies at excessive valuations were not necessarily great investments. She replied something to the effect of ‘what do you know?’

The more that I know, the more I realize how little that I actually do know, which could actually be an advantage. When I’m wrong, I can get out. I wrote son Conor earlier this week that my attitude would be ”he who panics first panics best”, and I had a successful week. For the trader, the only performance that counts is absolute performance.

Good trading and great risk management.

Ron

Charts First, Analysis Second

Educational use only. Never intended as advice.

I was really fortunate to have my best month ever in January, which upon further review (as they say in the NFL) came about because of two simple facts: 1) I had an analytical edge and 2) I adhered to the discipline of using that edge, sticking to a few strategies.

Worst trade 'miss' (not taken) of the week:

Clean miss. Here's ILF, price chart. ILF made a narrow range bar Wednesday (narrowest range of the past 7 days) and was hugely overbought. As everybody here knows, I'm not a 'full-timer', and I just missed the trade. The stock sold off hard. As Todd Harrison reminds us, "it is easier to make up opportunities than losses." If you trade a lot, then you hit some and you miss some. Mickey Mantle struck out 1710 times in 18 seasons, but when he wasn't striking out, he hit 536 homers, batted .298, had a Triple Crown, was MVP three times, and was on seven World Series champions.

The most important charts are weekly charts.

Here's the Paris CAC, weekly, making a Connors 'Undeniable' pattern, a minimum of a six-week high with a close below the open for the week. When Larry Connors described this, he reported that it had (as I recall) about 60 percent reliability as a reversal marker. Of the ETFs trading at least 400,000 shares a day, 14 show this pattern, while 1, TLT, shows at least a six week low with a close above the open. From an intermediate-term perspective, this is a negative...as trader-investors SEEM to be seeking the safety of bonds versus the risk associated with equities.

MDY (Midcap Spyders) shows the same pattern. The weekly chart with 10 week (orange) and 30 week (blue) moving averages, and Bollinger Bands set at 10 periods, 1.5 standard deviations. This prompted me to buy some March MDY puts (which I considered ridiculously cheap) as a hedge (against my long positions). I also sold off my DIA puts on the Dow weakness as I considered the Dow too likely to stage a reversal short-term, and my puts were short-dated. In effect, this was a rollout.

Why did I think that way? Well, technically, the financials are incredibly important. Here's the XLF, with five days of lower highs and lower lows, although there's one day in the middle that closed above the open. My son's work shows that the financials often lead the SP500. When the financials turn, then the SP500 follows. "As the twig is bent, so grows the tree." The market manipulators will do everything in their considerable power to keep the market from going down, and protecting the financials is first on their agenda. So, even with gold spiking, hourly wage pressure rising, and productivity falling, all of which are big negatives, 'they' will try to prop the financials. That's how the game is played.

So, Friday's tells were Citigroup (C) and Bank of America (BAC), that both closed down and are hideously oversold. They are due for a bounce (not advice), and Monday being the best day of the week, that's what I'd expect.

Okay, so maybe the market is saying that insane bipartisan government spending (choose your poison, er programs), deficits, massive ramping of the money supply, and a slowing economy aren't so 'robust'. That only matters when it matters, and many of us play day to day. In the NFL we might call it 'salary cap' problems, but they play the game Sunday, and salary caps are year to year problems.

As always, I hope to be back throughout the weekend, with charts and looks at where the 'mean reversion' opportunities might be.

Thanks for reading and have a great weekend.

Ron

Friday, February 03, 2006

Morning call...first look. Be prepared.

Educational use only. Never intended as advice. You own your investment decisions

Morning call…first look.

Here’s a partial look at my “Daily Trading Plan”, although decisions ultimately happen (the trader’s job is decision-making) based on active dynamics superimposed on the background of longer-term action (Dynamics outlined in daily reports)

Water stocks
Nothing expected long, Suez very overbought

Homeland security stocks
Manage existing positions (not disclosed as low volume equities)

Proprietary markedly overbought
USG
ARS
ESL
FLR

Proprietary marked oversold (today’s market tells)
BAC
C

ETF Oversold (proprietary)
RKH   141.15-140

ETF/OEX  Narrow range trade setups
TIP 102.69-102.45
BDK  86.06-85.16

Observations:
Futures relatively neutral pre-market

85 of 218 ETFs have made at least 6 week highs and are now priced below the open of one week ago (negative – Connors’ undeniable)

18 of 45 ETFs trading over 400,000 shares per day show the same pattern

Bullishness by point-and-figure charts into overbought zone again

Volatility bands (selected)

BBH 2.12

DIA .65

ICF .72

IWM .72

IWO .79

MDY 1.06

NEM 1.26

OIH 2.91

RKH 1.05

RUT 6.63

SPX 7.60

UTH .99

BAC .36

C .43

Good trading and great risk management.

Ron

Thursday, February 02, 2006

When you get lemons, make lemonade.

Educational use only. Never intended as advice.

Well, I’m ticked. My connection to blogger.com crashed mid-message, so maybe it’s an act of God.

Summary of strategies:

Mean reversion (buy and sell) of oversold and overbought investment vehicles, preferably ‘enhanced’ by intraday extensions

Monitor markets for overbought or oversold status

Monitor intraday using breadth, ‘beta’ action, financials, TRIN trend, and pure price action

Hedge long positions with appropriate index options at market ‘extremes’

Develop and test original strategies based on the work of Tom DeMark, Mark Boucher, Dave Landry, Kevin Haggerty, Larry Connors, and James O’Shaughnessy

Adhere to a predetermined discipline of accepting loss, commissions, and slippage as an integral part of trading

We’re closing in on the 1260 level of SPX support. Note Stochastics rolling over. Conor thinks that the SPX is headed back to test 1240. I think that the 1260 test will hold, because the powers that be demand it.

Dynamics: It’s where you are

SP500: VXO ratio will it make a lower high?

TRIN5 slightly overbought at 1.12, with TRIN3 at 1.25

Put-call ratios show calls livin’ large

S&P500 weekly stochastics still threatening divergence

Mamis-Meisler breadth oscillator again getting overbought

Bullish percentage NYSE point-and-figure overbought and at resistance

Worden T2108  70%

VXO would you ‘buy’ this chart?

New highs still dwarfing new lows.

Screenable findings

Short scan candidates   111 (low but rising)

There are a number of inquiries concerning my ‘Mandelbrot’ algorithm. Because it is proprietary (and I believe truly original) suffice it to say it is a confluence of overbought and oversold indicators, but one I have automated for easy calculation. There is no ‘oscillator’ component to it, as I have developed it solely from price.

What I will do is periodically list the top and bottom few, none of which should come as any great surprise. I don’t apply it to small or microcaps, because I don’t think that the intensity of the signal is meaningful or reliable.

Here are the Dow Cats and Dow Dogs of Mandelbrot:

CAT 67

T 30

PFE 30

XOM 24

AA 23

Dow Dogs

INTC -46

DD -27

C -23

MMM -20

JNJ -19

For what it’s worth, I’ve gone heavily to the sidelines, awaiting further developments. My protests of what I (and others in the financial community) see as flagrant and dangerous intervention with market forces suggest to me that we are in for very difficult trading.

Good trading and great risk management.

Ron

Pity the Fool, the 'Greater Fool'

Educational use only. Never intended as advice.

Periodically, usually when the market is greatly overbought, the market teaches the incurably optimistic a lesson - mean reversion. The 'Greater Fool' theory says (and recent markets have proven it), or implies that you need a greater fool to take the stock off your hands, especially an overvalued one.

Coming into today, I had a fully hedged position, and got a gift from CLWT (an oversold water stock), and I sold some of my IWM puts into the rally.

Weak days tend to end weakly and strong ones strongly, and the former has applied today. The cause? Some will say a productivity report, but does one number rule the market? Absolutely not. Those who had enjoyed this runup bolted to the sidelines (sideline play) waiting further guidance.

This is not fear, with a TRIN of 1.3 and VXO of barely teenage years.

Learn every day, and make the other guys and gals pay for their mistakes.

Wednesday, February 01, 2006

Just the Facts

Educational use only. Never intended as advice.

ALWAYS CLICK ON CHART TO ENLARGE. Here's a chart of the Russell 2000. At the bottom of the chart is the white Relative Strength line, with a 15 period 3 standard deviation band around it. The orange line is what I call a Mandelbrot derivative, a mathematical construction of overbought and oversold. Res ispa loquitur.

The market can do anything. I believe that today's action in the wake of Google's 'hiccup' indicates manipulation, pure and simple. How do I know? I don't. What I do know is that debts and deficits are spiralling out of control, and that eventually, this spells trouble. Does that mean 'get short and get creamed?' No. But if one is bullish at tops and bearish at bottoms, which is of course, the American Way, then one will underperform the indexes.

Richard Russell has a chart similar to this on his site, comparing Gold to the 30-year bond. His point? The market is making a relative bet concerning gold and domestic paper, which is a strong statement.

Mandelbrot numbers.

Mandelbrot numbers are what I call my relative overbought to oversold numbers. Looking amidst the Generals' stocks, at the high end (positive) are:

ATI 198
AMD 173
BRCM 159
X 124
HAL 105
MNST 102
NEM 95

At the low end:

JNPR -80
TSN -59
CBS -53
BSX -46
INTC -35

Do I believe in this stuff? Absolutely. Above is the chart of Geron (GERN) which I bought today at 7.70, with a Mandelbrot number of -27 at the end of the day.

Among the ETFs trading over 400,000 shares a day, only 3 have negative Mandelbrot numbers, TLT at -4, HHH at -4, and SHY at -1. EWZ is 80, OIH 66, EEM 58, GLD 48, IWM 30.

Looking at the Russell 2000 holder (IWM) another way, it is almost 4% above its price 13 days ago and over 12% above its 200 day average.

Could the RUT go higher? A lot. Even the stodgy SPX got almost 14% over the 200 day average in 2003-2004. Everything is relative.

Dynamics: SPX = SP500, RUT = Russell 2000

TRIN5 1

VXO 11.99 with ten period average of 12.66

Stochastics oversold: SPX 16%, RUT 8%

Worden T2108 75%

Close > Moving average 50: SPX 60%, RUT 76%

Close > Moving average 10: SPX 57%, RUT 71%

First of February, so there's new money, and old gamesmanship at play. What's your edge? Are you disciplined enough to adhere to it? Do you accept the verdict of the market, or does the small voice inside you say, "no, I am right." If you are right, your account should validate you.

Good trading and great risk management to all.

Keys to the Kingdom

Educational use only. Never intended as advice.

The "Plunge Protection Team" renamed by one hedge fund manager as the Price Management Team is out in force today, as predicted, in the wake of the Google fiasco.

Unfortunately for the market, maybe, I have proprietary sell signals (sell is not equivalent to short) on IWM, IWN, IWO, and others, and my mantra is going to be 'he who panics first panics best'.

Breadth has been mildly positive, TRIN checks in neutral at 0.96, and the financials are mildly negative. My son informs me that the futures market is pricing in a 40% chance of a rate rise as high as 5%. My view as a person who has never taken an economics course is:

1) The Fed raises rates to protect the dollar
2) The Fed is the principal source of inflation via monetary policy (wreckless monetary expansion)
3) The Fed pays lip service to fighting inflation (via rate hikes) while promoting inflation to minimize the impact of massive deficits, including spending that is 'off budget'

Market forces always rule in the end, but eventually this 'intervention' collapses. As Todd Harrison would say, "the difference between intervention and manipulation is communication." Moves like eliminating publication of M3 data tell you the answer.

Tuesday, January 31, 2006

Google Gored

Educational use only. Never intended as advice.

Google failed to deliver the goods, and got rich-slapped after the close, down over 50 points. What, if anything, will that mean for tomorrow?

First, I wish I hadn't sold off some of those RUT puts today, but it could have gone the other way, too. Second, the Cayman Islands Hedge/Federal Reserve/Plunge Protection Team will be out there protecting your not-risk protected portfolios, so you should be able to sleep soundly. Helicopter Ben's first act will be to inject more liquidity into the system. I mean, why shouldn't you feel entitled to make money hand over fist, regardless of whether you do anything except buy Google?

Liquid or Hyperliquid ETFs oversold:

None

Liquid ETFs NR7

EWY
XLE
HHH (no wonder this one wouldn't bounce)

Dynamics: chinstraps ON

SPX/VXO 105
SPX weekly stochastics 86/82
TRIN 5 1.04 (neutral)
Stochastics oversold: SPX 14% RUT 7%

There's no need to say a lot here. First, prepare for damage control, however you do it. Many times, the market will gap down, only to recover somewhat in the 15-30 minutes after the open, then resume the downtrend. Be aware of narrow-range bars that traders might key off, as well as tick patterns.

I'm not really good at managing these reversals, so I'll probably just try to stand clear and manage existing positions. How GOOG will effect metals, energy stocks, etc. is unknown until tomorrow. However it turns out, it's hard to imagine that some bull meat won't be served up tomorrow, even with Federal Reserve intervention.

"Rules in a knife fight?"

Educational use only. Never intended as advice.

As Dave Landry would say, trade like the Thermos, keep hot things hot and cold things cold.

So, make up some rules, even if they're arbitrary.

1. Don't lose money.
2. Don't buy at the top.
3. Don't chase.
4. Consider who's on the other end of the trade.
5. "Never short a dull market."
6. Don't be in a hurry to 'make money.' You'll probably lose that way.
7. "Enter in mild times, exit in wild times."
8. "Never look a gift horse in the mouth." If the market gives you a windfall, you should take it-if you're trading.
9. If breadth is positive, don't be negative.
10. If the market is strongly overbought (by whatever your criteria), statistically it's likely to come back in.
11. Trade because you love it, not for something to do.
12. If you have a strong emotion attached to a trade, it's probably wrong, unless you're fading the emotion.

The Least Important Price

Educational use only. Never intended as advice.

Price. There's market price, bid, ask, support and resistance, round numbers, moving averages, Fibonacci levels, your target price, your stop price, and the price you actually bought the 'vehicle' at.

The LEAST important price, by far, is where you bought. The market doesn't care where you or I bought; that price is irrelevant. Some tiny piece of our psyche doesn't want us to be 'losers', but I recall what Marty Schwartz wrote in Pit Bull, "I learned how to win when I learned how to lose."

"A small loss is a professional loss." "Cut your losses and let your winners run." That is our daily challenge, our weekly challenge, our monthly obligation. "Blow out your losers."

Monday, January 30, 2006

Prepare for Takeoff, or Landing

Educational use only. Never intended as advice.

Every day we trade, we get the opportunity to learn, from our successes and from our mistakes. Linda Raschke’s comment about ‘the market will do the most obvious thing in the least obvious way always seems to ring true.’ There isn’t any secret to making money in the market, but it revolves first around not losing money.

Crosscurrents always frustrate the trader, because there is always an economic report, options expiration, end-of-the-month, and of course, a Federal Reserve willing to step in and manipulate the market. As we collectively accumulate a mountain of debt, risk increases, silently and dangerously, debt that cannot be wiped clean with the stroke of a pen, or the barrel of a gun.

Dynamics: It’s where you are

SP500: VXO ratio will it make a lower high?

TRIN5 neutral at 0.96, with TRIN3 mildly oversold (slightly bearish at 0.89)

Put-call ratios show calls livin’ large

S&P500 weekly stochastics still threatening divergence

Mamis-Meisler breadth oscillator once again getting overbought

Bullish percentage NYSE point-and-figure overbought and at resistance

Stochastics oversold: SPX 12%, NDX 16%, Russell 2000 6%

Stocks over 50 day average: SPX 63% Russell 2000 74%

Worden T2108 75%

NYSE McClellan Oscillator and Summation Index getting overbought

VXO 11.54 with ten day average at 12.23

ETF watch:

12 of 26 ETFs (hyperactive) trading over 1M shares/day are overbought by stochastics

17 of 45 ETFs (active) trading over .4M shares/day are overbought by stochastics

Active ETFs oversold: 1 TLT (90.50-90.24)

Important note: 22 of 45 ‘active’ ETFs made NR7 (narrowest range of 7 days) patterns today, a harbinger of likely volatility expansion

16 of 26 ‘hyperactive’ ETFs made NR7 patterns today

13 of 26 ‘hyperactive’ ETFs are at least 10% above their 200 day average

6 of 26 ‘hyperactive’ ETFs are at least 20% above their 200 day average-
EWZ 41%
OIH 37%
EEM 27%
GLD 23%
EWJ 22%
XLE 21%

Screenable findings

Short scan candidates 84 (very low, contrary indicator)

Proprietary Oversold (DeMark-Sen, named in honor of Tom DeMark) – no connection to any known published work of Mr. DeMark, and NOT ADVICE

OSTK 25.67-24.42

Proprietary Overbought – always trade with risk management principles- that is advice

FLS 46.29-45.3
UBS 107.39-106.85

Many energy stocks…personally, I would only short these via ‘defined risk’ plays, e.g. options, AND ideally when they have ramped via intraday volatility bands

Some big earnings reports later this week, including GOOG, which could be a springboard in either direction.

Good trading and great risk management.

Ron

Humbling Professions

Educational use only. Never intended as advice.

Overbought...becomes more overbought. My number one oversold stock going into today was Mattel...too bad I didn't own any.

The small and microcap genetics stocks seem to have a little bid and mirabile dictu, (see previous posts) the Russell 2000 seems to be underperforming a tad. Not surprising with its 3 band stretch for 15 days (long microcap value stocks and long RUT puts).

How much does luck have to do with trading? There's no way to know, but I am hoping that it's not all luck, because I've had a terrific run of consistency with my hedged portfolio, BUT both medicine and trading are humbling professions and there is no defeating losses in both.

AND I really like my trading as a highway journey analogy yesterday...I can only hope it was original.

Good trading and great risk management to all.

Sunday, January 29, 2006

ETF observations

Educational use only. Never intended as advice.

Every chart can't talk to you, but a lot of charts speak loudly and clearly. For the sample, I'm picking from ETFs that trade at least 1 million shares daily. CLICK CHARTS to ENLARGE 'EM.

OIH (Oil Service Holders) - above all key moving averages, and has held support at the 50 (orange) and 20 (green) period EMA (arrows).

GLD (Gold) - well, we have 'black gold' in oil, and then regular gold above. Looking a little tired, but I'm not betting against gold with Helicopter Ben at the throttle starting next week.

IWO (Russell 2000 Growth) "sucker bet?" There's a little divergence appearing top, a possible MACD cross, and at the bottom, the relative strength chart versus the SPX with a 15 period 3 standard deviation band around it.

IYR (IShares Real Estate Fund) investors undaunted, with a breakout...ahem...on light volume. Is this another case of 'prebuying' the breakout? Not advice.

XLP (Consumer staples) rallied back to last Friday's high (arrows)...and who says price has no memory?

MDY (S&P Midcap) tail up into the blackness. Three clear distribution (increased volume, decreased price) days in the past seven sessions, and the RS bands are way overbought here. Careful, careful. Oh, wait, it's okay, the Federal Reserve is printing money like a banana republic, AND a Princeton guy will steer the financial ship of state.

Enjoy the day.

Fish Story

Here's son Conor (risk analyst and co-author of How Markets Really Work) at the www.minyanville.com investment conference last summer in Ojai, California. Yeah, he was on the winning team.

Here I am (batteries not included with the shirt) with Tom DeMark at Ojai. Tom's books include The New Science of Technical Analysis, New Market Timing Techniques, and DeMark on Day Trading Options. Tom's ideas are not 'intuitive', are very innovative, and proceeds from his books go to charity.

I haven't heard exactly when or where Minyans in the Mountains III happens, but I'm planning on circling the date on my calendar.

Charts don't lie, they Fib?

Educational use only. Never intended as advice. Not a registered investment advisor. But I did get a good night's sleep last night.

Mike had a good observation about Sandisk (SNDK). The computer peripherals company ran up from 45 and change to almost 80, and has almost exactly retraced 50% to 62 ish. On the point-and-figure chart at the left you can see where it broke down (dotted line) which is 'obvious' resistance. Fibonacci identified numerous 'coincidences' in nature, using the 'Golden Mean'. For traders, as identified by Gann and others, stocks frequently retrace 3/8ths, 1/2, or 5/8ths. Kevin Haggerty, former Head Trader at Fidelity and a regular contributor to www.tradingmarkets.com notes that many conservative traders will target .618 (5/8ths give or take) retracements, in concert with favorable dynamics (breadth action, price action, etc.).

The reality of 'support' and 'resistance', round numbers, levels, well-watched moving averages (e.g. 20 period, 50 period, 200 period), trendlines, channels, and the like are that they constitute DECISION ZONES where many traders make buy and sell decisions. I think about it as driving along a highway, and periodically there are exits, rest stops, gas stations, and so on, and drivers decide whether to continue or exit. If you continue, and find that you took the wrong exit, do you drive another fifty miles or look for the first exit?

Mark Douglas of Trading in the Zone reminds us that 'the market can do anything.'

Thanks to readers, new and regular for stopping by.

Shopping List

Educational use only. Never intended as advice. But you knew that.

So the market's gotten really frothy; what's a playa to do?

This data's a little old (from MarketGauge) but you get the picture. Buying pressure waxes and wanes. Of course, we're looking at the end-of-the-month gamesmanship/commission running from certain folks, and retail types have to figure that into the equation, too.

So, I start making my shopping list. Short candidates are down to almost nothing (on my screens), and I start there first, along with keeping up on the volatility bands. Yesterday, I showed that concerning relative strength of the Russell 2000 to the SP500, it's at almost three standard deviations for a 15 period sample. Trees growin' to the sky, and bacteria ruling the earth. Statistically, not happening.

VFC - has had really mediocre relative strength, is below the 50 and 150 day averages, and rallied a bit recently on light volume. I don't like outright short positions, so if I were going there, I'd either look to buy in the money puts or spreads to define the risk.

BF Goodrich (GR) - maybe they should get a blimp?

GPC (Genuine Parts) this one almost looks 'too' obvious.

DRS (DRS Technologies) some kind of ugly on Friday.

Okay, so let's change gears, to some narrow range bar stocks over 50 dollars. These could break either way.

Here's JEF (Jeffries Group)...I wonder what Tom DeMark would say about this one. Actually, I'd like to see two more days of higher highs, higher lows, and higher closes for an even better setup for exhaustion.

Here's slugging percentage, I mean SLG, a.k.a. punish the bears. Do I smell an exhaustion gap here? These always seem to open down a buck and a half, so I'm throwing down the gauntlet to the bulls. Take it up. Make my day (just kidding). No position.

So that's your Sunday morning coffee 'roll'. I'm going to check to see whether my prints are back, so there's something to look forward to.

Good trading and great risk management.

Ron

Saturday, January 28, 2006

Saturday Chart Fever

Educational use only. Never intended as advice.

Amgen (AMGN) The BBH hasn't been strong. No wonder with AMGN crashing the 200 day average on big volume. Does prior support (around 73) become resistance?

Dell (DELL) is oversold, but resistance is around 30. Not worth the psychic energy for me (not advice).

XLB (Basic materials) at resistance and with a narrow range setup (volatility expansion)...can 'they' break it out or down? Interesting but unpredictable.

Nucor (NUE) bubblicious, broke out of the triangle (weekly) and is approaching resistance.

Lucent (LU) Am I the only person in America who doesn't trade this stock? Will it break the trendline and go up 20 cents? Ugh.

Fannie Mae (FNM) weekly. A company with no financial reports, incalcuable risks (forensic accountants can't untangle their derivative mess) that 'is too big to fail' in the setting of declining home affordability and demand. Okay. (net short via spreads)

Chart from son, Conor. Housing affordability (that would be low)...

Chart from son, Conor. Housing supply (months of units available). Supply high, affordability low. Answer: hint for Professor Bernanke. Print money like crazy. Problem solved?

Your tax dollars at work. Doing what? Printing money. During the last 6 months, the Fed is increasing the money supply (their data) at 9.1% annualized. (Source - Federalreserve.gov). AND there's no inflation. Evidently nobody at the Fed studied Austrian economics.

As I've reported before, Greenspan wrote that hyperliquidity created the problems of the Great Depression. But as Fed Chairman, he's done exactly that. Legacy? The Great Destroyer.

Frothy the Snowman

Educational use only. Never intended as advice.

Whether you’re right or wrong, you need to have a core philosophy to become a successful trader-investor. Define success? Success means first capital preservation and second absolute return. For an individual investor, beating a losing average (and losing) achieves nothing. They’ll erect a statue on Wall Street to you if you always outperform your bogey, but a loss in a trading account won’t pay rent, tuition, or car payments.

Readers here know that the ‘core philosophy’ is mean reversion. Yes, I’ll confess to trend reversion tendencies in tribute to Dave Landry, but I believe in 1) mean reversion, 2) hedging your bets, and 3) am spending time trying to improve my asset allocation.

The Week in Review

The final arbiter is price, traders putting their money where their mouth is. Steel producers were up over 15 percent for the week, the Semiconductor Index almost 7 percent, Japan and Silver over 6 percent, Nanotech 4.6 percent, the Russell 2000 3.45 percent, the Nasdaq 100 2.1 percent, the Dow Industrials and Retail Index 2 percent, and the S&P500 1.6 percent. The Dow Industrials managed to close above last Friday’s high, which the S&P500 could not.

Utilities and the Volatility Indexes both made six week highs and closed below their open (Connors Undeniables), while the Dollar, Insurance Index, and S&P Bank Index all made six week lows and closed above their open (bullish).

ALWAYS CLICK CHARTS TO ENLARGE. So, you don't think the market is 'frothy'. Here's a view of the Russell 2000, with a relative strength line (below) with 15 period 3 standard deviation Bollinger Band around the relative strength line.

Expressed in other ways, the Russell 2000 is over 12 percent above its 200 day average, and 4 percent above its 20 day average. (disclosure: long numerous small and microcap value stocks, short RUT via put options)

Dynamics: It’s where you are, not where you’ve been

SP500: VXO ratio headed back up to stratospheric

TRIN5 neutral, with TRIN3 mildly oversold (slightly bearish)

Put-call ratios still living bullish (hasn’t turned up)

S&P500 weekly stochastics divergence?

Mamis-Meisler breadth oscillator once again getting overbought

Bullish percentage NYSE point-and-figure overbought and at resistance

Stochastics oversold: SPX 14%, NDX 10%, Russell 2000 7%

Stocks over 50 day average: SPX 64%, NDX 67%, Russell 2000 78%
Stocks over 10 day average: SPX 64%, NDX 70%, Russell 2000 78%

Worden T2108 76%

NYSE McClellan Oscillator and Summation Index getting overbought

VXO getting oversold, although now below 200 day average

Well, that’s the weekend warmup, hope to be back throughout the weekend.

Good trading and great risk management.

Ron

Thursday, January 26, 2006

Lotta believers, at resistance

Educational use only. Never intended as advice.

Financials the lead dog. The Philly Bank Index erupted for a 1.6% gain, strong along with the Russell 2000 and the Semiconductor Index.

The cause for all the excitement? Some speculated the undoing of the yield curve inversion created the buzz that spurred on the financials.

Ch-changes. The HUI is up over 6 percent in 4 days, Mexico up about 5%, the Soxx 4.7%, Airlines 4%, the Dow Transports about 3.6%, Cyclicals 3.3%, while the VIX is down over 14%, Dow Utility Index 1.5%, and the Amex Oil index down about 0.4%.

ETFs oversold: never, ever, ever advice
TLT  90.60-90.05

ETFs NR7 (volatility expansion can get you in trouble or keep you out of trouble when you know it’s coming)
IYT   77.14-76.38
OEF  57.62-57.32
IBB   79.90-79.09

OEX NR7
HET  73.85-72.99
FDX  102.20-101.14
IP  32.75-32.51
CI  113.68-112.48

“Reversal springs”
DADE   40-38.45
BEC     57.86-56.99
WGR    46.94-45.15

Screen-Oh
Low priced new highs   24
Short Scan Ideas     93 (low)
“DeMark-Sen Top” (proprietary-Tom D. has nothing to do with this, but his work stimulated the concept, so I include his name…it’s not advice)

here’s a sample chart Oregon Steel Mills

Interesting Biotech Charts: not advice
BioCryst
Hemispherx
Bioenvision
Biogen Idec
Seattle Genetic (long SGEN)
ARIAD
Entremed
Hollis-Eden (long HEPH)

Dynamics:

TRIN5 at 1.24, it’s hard for me to get seriously bearish
VXN retreats to 10 day average
The Mamis-Meisler breadth index won't stay down
New highs dwarf new lows.
Stochastics oversold: SPX 18%, Russell 2000 7% of stocks
Close > 50 day MA: SPX 62%, RUT 76%
Worden T2108:  75%

Summary:

It’s getting pretty frothy, with Brazil (EZA) now over 41% above its 200 day average, ILF 34%, OIH 32%, EWY 27%, EEM 26% and so on. “Round and round and round she goes, where she stops, nobody knows.”

Good trading and great risk management to all.

Ron

Wednesday, January 25, 2006

Wise Men and Wise Guys

Educational use only. Never intended as advice.

I’m listening on Napster to some Bon Jovi, Green Day, and Jo Dee Messina while trying to decide what to discuss tonight. So, off we go.

Volatility: John Succo explained the ‘volatility paradox’ today at www.minyanville.com . Professor Succo is a wonderful educator and I feel fortunate to have met him. Yield-starved investors are turning to funds selling options trying to crank out yield. Managers buy ‘safe’ stocks, then sell puts and calls, trying to rake in the time premium, ‘hoping’ that the massive liquidity will keep a floor on prices. Of course, this is no guarantee, and longer-term creates more ‘potential energy’ in the system.

As a mean reversion trader, I’m looking for positions contrary to big run ups, with defined risks. I like directional butterfly options, although ratio spreads might have more merit in some instances.

Today, I was interested in shorting EZA, which is extended almost 33% from its 200 day average. Of course, the stock was unavailable for borrowing from my broker (and others’ I’m sure). I have some ‘condor-like’ options on the OIH long some 120 calls, short 130s and 140s, and long 150s, looking for mean reversion. Not going to get rich quick on this type of speculation, but it can work. OIH is still about 31 percent above its 200 day average.

It is what it is. Yesterday, I mentioned that the market hasn’t shown enough clarity for me to make much of a move, so I am focused on managing existing positions. Today was a great example of the LACK of correlation between oil action and market action. The OIH got hammered, out to about two standard deviations, but the market just ‘fiddled and diddled.’ The Dow showed some signs of a bearish flag on the sixty-minute chart, leading me to buy some DIA March 110 puts at 3.20 earlier in the day, which I then turned over later from 3.40 to 3.70. I still have a core position in DIA puts. Another instance in which I credit Tom DeMark who emphasizes defined risk, even when dealing with the exhaustion of buying or selling.

For what it’s worth, the Dow Industrials showed a Doji (indecision) candle…on large volume. Not sure which way to go, but excited about it. The Nasdaq100 was more declarative, with negative price action and increased volume. Can the NDX hold 1670? We should find out. Meanwhile, the Russell 2000 looks a tad tired, and I held onto my RUT puts as hedges against the ‘junk’ that I own (small and microcap value).

Mad Scientist at Work: Professor Mandelbrot from Yale has some great ideas about markets and I’ve tried to adapt some of his work to my ideas. I call it my ‘Mandelbrot’ number program, which looks at ‘stretch’ which is the precursor to ‘mean reversion’ (not advice).
Here are some raw numbers to ponder:

EWZ          70
EZA           67
OIH            57
ILF             56
GLD          52
EEM          49
FXI            36
IYT            15
MDY          14
SMH           6
SPY           4
QQQQ        3
DIA            -1
BBH          -8

And for the SP100

ATI           162
SLB           89
BHI            70
HAL           60
ROK          51
GM            43 (yup, GM)

It’s pretty easy to see where the froth is.

ETFs oversold: never, ever, ever advice
XLV    31.97-31.64
SMH   37.62-36.83
TLT     91.57-90.79 (see the TNX chart below)

Dynamics:

SPX/VXO ratio is 103   you can’t keep a good bull down
TRIN5 at 1.25, it’s hard for me to get seriously bearish
VXO back at the 200 day average
The Mamis-Meisler breadth index won't stay down
The Cindy Lauper Put/Call Ratios “Calls just wanna have fun.”
New highs dwarf new lows.
Stochastics oversold: SPX 24%, Russell 2000 9% of stocks
Lowry’s > 10 day average: SPX 42%, RUT 62%
Close > 50 day MA: SPX 57%, RUT 70%

Obviously, last Friday didn’t matter. Fuggedaboutit?

Wise Men:
Hussman's weekly message. Hussman makes me feel really dumb.
Jeff Saut says it another way.
Be like Mike, Trader Mike
Bill Cara is our friend from the North.

"Inflation is well controlled." Bonds disagree.

Finally, here’s a quote by a man well-respected in the financial industry from a treatise he wrote in 1966:

"The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed."

Thank you for your insight Mr. Greenspan, you Wise Guy. Where were you when we needed you to prevent history from repeating itself.

Good trading and great risk management to all.

Ron

Tuesday, January 24, 2006

IBM Two Views

Educational use only. Never intended as advice.

Charts are just a way to look at supply and demand.

Here's a daily chart of IBM, with arrows at the 'shoulders' of the head-and-shoulders picture. The 'neckline' is at about 81. Some technicians think that H&S patterns are good 'breakdown' patterns, and even estimate distance-from the neckline to the top of the head (here about 8 points). At the conference in Ojai, California, Tom DeMark mentioned that sometimes at inflection points, what you think will happen, doesn't and traders 'prebuy' breakouts or 'presell' breakdowns. I don't have enough experience to comment, other than call attention to the possibility.

Here's an alternative (point-and-figure) view of IBM. If you can expand the chart, you'll see a 'sell signal' if it reaches 80, with the nearby support at 77 and then 72.

Charts are tools, framework for technical types to use. They aren't carved in stone, or even soap. I've just never been able to use freestanding fundamental analysis for profit, so, the charts. I hope this helps.

Wasted Youth

Educational use only. Never intended as advice.

I'm pretty 'beat down' from being on call for three days over the weekend, sleep- and humor-deprived, so I'll be brief.

Walmart gets an upgrade, with nearby resistance. I wouldn't bet on a ramp here.

The US Dollar. Not pretty, with a 'head-and-shoulders' top looking kind of chart.

There's been a lot of talk about IBM's date with destiny (81). Support holds or cracks? Is this a 'DeMark failure', that is, a fakeout, as traders 'pre-sold' the breakdown?

Retail followed Walmart's 'lead' with sector rotation. Lots of overhead resistance, so I'm not excited (not advice).

Here the FTSE, which I've heard called 'the canary in the coal mine.' I guess the 20 period average will be the first test.

There isn't a lot to tell traders what to do now. So, when in doubt, sit it out. I guess I'll try to manage existing positions until there is more clarity. "He who fights and runs away, lives to fight another day."

First Cut

Educational use only. Never intended as advice. Learn every day.

Nothing works every day, but mean reversion works more than a lot of alternatives.

Looking at ETFs, here are the 'disparity' percentages for the lead group of players most extended from their 200 day moving averages:

EWZ 38%
OIH 36% (net short via directional butterflies-risk defined)
EZA 33%
ILF 32%
EWW 26%
EEM 24%

Same concept, OEX stocks:
ATI 58%
SLB 47%
BHI 37%
HAL 36% (love that dirty water)
BNI 32%

Same, NDX
SNDK 79%
JDSU 60%
JOYG 59%
AMLN 53%
RHAT 51%
AAPL 48%

Same, Dow stocks
HPQ 20%
CAT 16%
MCD 12%

Same, selected indexes:
HUI 38%
OSX 34%
NIKI 21%
Silver 19%
Dow Transports 14%
Russell 2000 10% (long selected RUT puts)
NDX 7%
S&P500 4%
DJIA 2%

It's all good, right?

Drifting

Educational use only. Never intended as advice.

My sense is that there's more drift than direction today. Breadth is positive but not 'dynamic', and it's been minimally favorable for the small fry relative to the Dow/SPX.

Some of the possibilities (like AIG and RE) haven't done much of anything either (no position taken in either).

Oil is a tad weaker, favoring my mean reversion butterflies, but nothing to get excited about.

I've picked up a few RUT puts to offset my long positions in the microcap junk.

Catalysts? Could be in either direction. The big name stocks haven't exactly impressed thus far. Of course, we know that time wounds all heels.

Selected volatility bands January 24, 2006

Educational use only. Never intended as advice.

HamFon Volatility Band reference

Selected volatility bands for Tuesday January 24, 2006

AIG  0.70

BBH  2.2

DIA  0.67

EFA  0.39

HHH  0.81

IWM  0.67

IYR  0.37

MDY  1.06

NEM  1.19

OIH  2.95

RE  1.24

RUT.X 6.53

SPX.X  7.84

SPY  0.79

UTH  1.03
.

Good trading and great risk management.

Monday, January 23, 2006

The Next New Reality Show - Trading!

Educational use only. Never intended as advice.

Frank at www.tradeover.net alerted me to their online trading game, that has a lot of possibilities.

So, you don’t own an expensive trading platform or backtesting software, but you want to experiment with ‘real-time’ asset allocation and trading. The folks at Tradeover make this possible, with opportunities to develop a portfolio of currencies, bonds, US and foreign equities, including your favorite tech stocks, and they’ve added ETFs as well.

Maybe they’ll even add commissions and slippage to make it even more reality-based. So if you’re tired of ‘Survivor’, ‘American Idol’, and the like, there’s a new reality trading game in town.

I’m going to use it to explore my theories about asset allocation and portfolio management. Sure, you can allocate all of your play money to Google if you want, but does that help you learn to trade and develop your game?

I think it’s an opportunity worth exploring.

The Hardest Task for the Trader

Educational use only. Never intended as advice.

ALWAYS CLICK CHARTS to enlarge them.

The Dow Industrials made the proverbial dead cat bounce today, as Friday's tall dark candle overpowered the feeble rally attempt, with the DJ30 closing in the bottom third of its range.

The SP500 sang pretty much the same tune, with an almost identical harmony.

ETF action:
Seven ETFs (> 400K shares) are showing initial buy signals using my first proprietary screen: I then look at where price is relative to my initial 'target' buy point

BBH 4.52
QQQQ 2.8
IWF 4.24
HHH 0.35
XLI 2.52
XLY 2.50
XLK 1.1

Obviously, HHH is the closest to the 'target' buy point. I also note that the volatility band for HHH was about .80 cents, and file that as a reference 'decision' zone as well. Today, HHH came into my decision zone, and I took the trade, but it didn't follow through, so I exited with a small gain.

ETF volatility expansion (NR7 trades):
Three ETFs setup as adequate for possible volatility expansion-
IYR 67-47-67.05
UTH 119.23-118.40
XLI 31.11-30.95

Beaten and left for dead
There are a number of items that are oversold by multiple criteria that I'll be watching-
HOV 50.63-49.27
AIG 67.07-66.33
TSCO 49.50-48.50
RE 96.29-94.88

Will they come for them? No idea. But, borrowing Todd Harrison's tells, 1) breadth, 2) performance of beta-max stocks, 3) action in the financials and 4) key stock performance (e.g. Citigroup, JPM, Goldman Sachs) I'll try to decide

Professionally speaking: Jeff Saut talks about Mr. Market, and warns about taking out December lows. http://www.raymondjames.com/inv_strat.htm

Special interest:
Water stocks about 60% rose today; almost 75 percent are at stochastics over 50%, and 60% over stochastics 70 - in other words, too frothy for me

Homeland security stocks - held up well prior to 'State of the Union'

Dynamics:

VXO 13.06 with ten day average 11.76
VIX5 1.29
Mamis-Meisler NYSE breadth above the zero line (overbought)

Summary:
It's always a good time to play defense. The Steelers and the Seahawks know that. Profits will not necessarily be easy to come by, and sentiment remains relatively optimistic for the degree of performance delivered. Some levels held and my overbought-oversold parameters (like Mr. Saut's in his message) are not flashing buy.

The hardest task for the trader is embarrassingly simple: to see the market as it is, not as she wants it to be.

Good trading and great risk management.

Predictable but weak rally so far

Educational use only. Never intended as advice.

As written yesterday, a TRIN close over two is ALMOST synonymous with a reflex rally. So far, the markets have rallied but weakly.

The standard deviation volatility bands for today were 8.12 for the SPX and 6.56 for the Russell 2000. As of now the SPX is up 3.60 and the RUT 2.90. HHH, oversold almost to the DeMark 'Tier 2' retracement, showed very little power and in the red.

I'm reluctant (no adamant) that I'm not getting short in front of the State of the Union message, which understandably will be about optimism tempered by the need to address the rebuilding of New Orleans, cut more taxes, improve healthcare for Americans, and so on. I'd much rather short an overenthusiastic reaction (based on breadth and so forth) than get short and get anxious on the runup.

That's just me.

I had a fairly big position in GNBT and sold into the rally ("enter in mild times and exit in wild times") and still like homeland defense stocks a lot in front of the Presidential missive. Being an election year, a successful party will run with what worked for them. That's good politics.

Sunday, January 22, 2006

Swensen versus the System

Educational use only. Never intended as advice.

Just for a digression, I'm still monitoring a 'David Swensen' like portfolio consisting of US equities, represented by SPY and IWM, real estate with IYR a surrogate, foreign equities (EFA and EEM), and T-notes, comparing it with an actively managed portfolio, which is currently 100%in cash.

Both portfolios began with 100,000 in cash. As of Friday, there's not a lot to choose, with 'Swensen' at 102156 and 'The System' at 102058. For what it's worth, none of the ETFs represented (SPY, IWM, EFA, EEM, and IYR) are flashing 'buy' signals under criteria I've established for buys, and if they were, I would have taken 'half' positions, as the market is overbought by the 'Mamis-Meisler' oscillator criteria that I've discussed before. So now you know.

"Bill" of Goods

Educational use only. Never intended as advice.

Was 'Bill' Shakespeare a trader? His writings certainly raise some trading philosophies:

“It is not in the stars to hold our destiny but in ourselves.” Translation: you own your trades.
"This above all; to thine own self be true." Translation: plan your trades and trade your plan.
"Passion, I see, is catching." Translation: control your emotions.
"The best safety lies in fear." Translation: he who panics first, panics best.
"Our doubts are traitors and make us lose the good we might oft win, by fearing to attempt." Translation: although good trading may be effortless, good trades are not necessarily easy ones.
"To do a great right, do a little wrong." Translation: a small loss is a professional loss.

These messages become my trading journal, a constant reminder of what I have done right, but more important, of what I have done wrong. There is no 'easy' path to riches in trading. No grail, no formula; it's probably like hitting in baseball. You come with a set of tools, strengths and weaknesses, 'holes' in your strike zone. Pitchers, like the market, adjust. In turn, so must we.

First, what are our themes? As a physician, I believe in biotechnology, so I like to look at biotech stocks and biotech charts. But I want to look in the context of 'enter in mild times, and exit in wild times.'

Here's Illumina (ILMN). I don't know anything about this except I'd be awfully late to the party to be jumping in, but that's a 'statistical' approach.

Conversely, Hollis-Eden (HEPH) is chugging along forming a base, incubating. This tweaks my curiosity.

As a traveler on the planet, I believe in WATER. Water-related stocks will eventually be a vital part of our survival. I have thirty-seven water stocks that I check out from time to time. 16 of the stocks in my 'Water Watch' have short interest over 10 percent, and as a group, the earnings multiples are awfully high. For example, York Water (YOR), sells at almost 7 times sales, over thirty times earnings, yields 2.4%, and has very low short interest. I'm just not excited about paying up. Cott (COT) trades at 0.57 sales, has no dividend, too much debt for my taste, and over 10% short interest. Some of the ones I'm interested in are too thinly traded to discuss here, but do your own research.

Homeland defense stocks are also an area that I believe will get continual interest from both investors and from the government. As a society, we have transformed from the Cold War to the Hot War and there is no reason to believe that we will not be fighting this battle for time immemorial. In ninth grade, we learned about the Battle of Tours and the victory by Charles Martel, but the 21st century shows us a less definitive outcome. The security industry encompasses everything from biodefense, to defense electronics, and much more, and surely there are some big winners to come from here.

Exchange Traded Funds.

These vehicles will give us tremendous opportunities for short and long-term moves, with ample liquidity to allow easy access and egress. There's no question that these will cannibalize an increasing portion of what mutual funds consider is rightfully theirs. This industry is in its INFANCY, and traders are flocking to ETFs. 46 ETFs now trade over 400,000 shares daily and 26 over a million shares daily. OIH in particular now trades over 34% above its 200 day average, and although I understand why, I don't see any tree growing to the sky.

Interestingly, after Friday's carnage, only one of the 46 over 400,000 shares a day has an 'NR7' (volatility contraction - narrowest range in 7 days pattern), TLT.

Four trade at least 4% below their price 13 days ago, EWY, EWJ, HHH, and BBH. We'll see if traders come back for them.

Exciting days ahead for traders with the possibility of volatility expansion, and economic imbalances compressing possible diamonds out of carbon.

Good trading and great risk management to all.

Boulevard of Broken Dreams

Educational use only. Never intended as advice.

I walk a lonely road
The only one that I have ever known
Don't know where it goes
But it's home to me and I walk alone

I walk this empty street
On the Boulevard of Broken Dreams
Where the city sleeps
and I'm the only one and I walk alone
---Boulevard of Broken Dreams, Green Day

Where’s the crowded trade now? Larry Connors told me once that one of James Cramers’ strengths was that he seemed to be able to identify market turns better than most. Traders and strategists have to be asking themselves whether Friday marked the end of the trend or was just an anomaly sparked by disappointments in several key stocks. The easy answer is that we will only know in retrospect.

Each trader must formulate her own hypothesis and analyze ‘real-time’ whether price action supports it, via the market, sectors, and their favorite ‘tells’. Really, it’s no different tomorrow than any other day.

The bulls argument will continue to be the strength of the broad market. The bearish arguments vary, from mean reversion, tiring of a protracted cyclical bull market, global economic imbalances, and if everything is so great, why must the Federal Reserve print money like it’s going out of style? Traders shouldn’t care about the arguments, rather how the market is resolving it.

Let’s start with some assessment of the Dynamics. There isn’t one overarching number to watch, so let’s check the field.

New high, new low: 240, 43…on the surface this appears astonishing, but is it? 102 of the new highs came from energy, and 35 came from metals and mining. I wish I knew what intermarket technical analysts like John Murphy said about that.

SPX/VXO 90…the SPX/VXO ratio fell below 100 for the first time in over two months. And I thought that markets only went up.

TRIN3 1.44 (bullish), with a close at 2.14…TRIN closes above two almost always lead to mean reversion buying. Almost makes me wish that I’d picked up a few calls at the close Friday.
Stochastics oversold SPX 16%, NDX 10% (not extended)

NYSE Bullish Percentage Index 68%
Worden T2108 66

Lowry’s stocks above ten day average: SPX 25% (low)

Close > 50 day moving average SPX 56% Russell 2000 62%

VXO & Ten day average 14.09 11.56 (extended high – bullish)

Mamis-Meisler NYSE A-D breadth oscillator this breadth-based oscillator recently peaked and doesn’t appear close to a bottom.

NFL Sunday: running good routes (never advice)

There are 69 ‘Generals Stocks’ that are above their 200 day average, that opened in the top 10 percent of the range and closed in the bottom 10 percent.
Some traders may be looking for some that are at ‘well-watched levels’ of support, such as the 200 day average, round numbers, or Fibonacci levels.

RKH, the Regional Bank Holders might be one such stock.

Tom DeMark looks at Fibonacci retracements differently, but I do think he’s on target. Let’s just say that DeMark Fib levels sometimes come into play and I’ll be watching some of them.

EWT (Taiwan) could be one

Dave Landry (Reviews of "Dave Landry On Swing Trading" by Dave Landry) looks for trending stocks that pullback, waiting for momentum to resume, buying above the high (usually)

I don't trade Apple (AAPL) but it has pulled back to a support level, so you can be sure that at least a few traders will be using defined risk with support as their entry. Apple is sitting right on the 30 day exponential moving average which often seems to have ‘magical powers’ (not advice) with tech stocks.

Screen-Oh:
Low priced new highs (20) – some of the small fry jumped out of the water early, but twelve of twenty were slapped down and closed below their open
Short scan ideas (111) trending up

It’s out there.
President Bush will present his State of the Union this week, expensing stock options is coming. It’s always about the reaction to the message rather than the message itself.

Concerning options expensing, this is not solely about transparency, but counting compensation as the expense it is. Financial reporting and education can vary from outstanding in the mode of Herb Greenberg, Peter Eavis, Gretchen Morgenson (now subscription from the New York Times), and others, to superficial.

It should be a fascinating battle this week as the bulls try to hold the line and the bears try to press their recent attack. What will the market look like six months from now? I haven’t a clue but I hope to continue to walk the Boulevard of Broken Dreams.

Good trading and great risk management.

Tuesday, February 21, 2006

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