Wednesday, October 22, 2014

Followthrough Day Triggers for SP, NASDAQ, and Russell

The SP 500, NASDAQ Composite and Russell 2K all staged very strong price moves much greater than 1% yesterday on increasing volume from the prior session. This qualifies as a follow through day buy signal for O'Neil based growth systems.

Followthrough days (FTD) are a measure of market trend strength. There has never been a major market rally without one, but not all follow though days precede strong rallies. You can see that some fail in the chart above. And when they do, swift moves lower typically occur. FTD shows buying strength and a bullish tailwind. They suggest an internal risk on atmosphere from an intermediate term time frame.

To that end, SP 500 sector moves shows risk-on:

Short term, the market is very overbought. The NYSE McClellan Oscillator measuring advances and declines has launched to an extreme level:

I suggest that yesterday's follow through day has higher odds, very short term, of a buying climax. Internally, the McClellan is at the level of prior areas of market stall.

From a longer term trend perspective, the SP 500 has made a lower low from August. This is half confirmation of a new longer term downtrend. The other half is a lower high. The lower low itself shows longer term trend weakness. The SP 500 still remains below resistance at its 50 day SMA and a broken trend line. On the following weekly chart, I note a bullish candle and areas of overhead resistance.

Seasonally, October is historically a terrible month for US stocks. The Panic of 1907, the 1929 crash, and Black Monday of October 1987 all occurred during October. But into November and December, seasonality turns decidedly bullish. The follow-through day may be the first and earliest sign of an into-Xmas rally.

So their is is alot going on. Longer term, there is a lower low in place on the SP 500 with overhead resistance at both the 50 day SMA and the nearly two year up trend line broken early this month. Yesterday's follow through day is bullish intermediate term, as was the sharp move above the 200 day moving average which now acts support for pullbacks. Short term, the market is very overbought shown on the NYSE McClellan.

Tactically,  I am looking to add long side risk in all time new high growth leadership. I am willing to add risk on pullbacks given the follow through session yesterday. Some names sporting large fundamentals and strong technicals include RGEN, HQY, GMCR, and PANW.

Thursday, October 16, 2014

Groping for an Initial Bottom

Quick post:

Yesterday's intraday selloff nadir was frothy and emotional on the downside. The rebound was fast and hard. This morning  in preopen we have a successful test of those lows. Here is an intraday chart for further observation:

TRIN showed a spike above 2.50 yesterday while tick had another intraday spike low below 1300 for the second in three days.  Note the deep collapse in the Bloomberg Financial Conditions Index. This current collapse most closely resembles - in slope - the one from 2011 when the SP 500 ultimately dropped 21.6% from March through June.

The VIX has rocketed to 25. Note that prior crisis selloffs reached 40-45. If we blow through yesterday's low, we may be on our way to visit those higher levels. It is not my base case at the moment.

I notice NTES acts bullishly in the face of the current selloff. It's on my watchlist only.

For now, I think the market has priced the initial "worst" of this round of the ebola scare and potential fear driven consumer spending slowdown. Twenty one days is the tail end of the ebola incubation period for further sicknesses. Looking forward, this is an important window for the market. 

I am decidedly flat position-wise, sidelined, and waiting for a follow through buying session to consider adding long side risk.

Wednesday, October 15, 2014

New Low for the SP 500 Future

October is a seasonally poor month for stocks and this one is no exception.  The Spoos broke their support lows this morning on more weakness overseas and as second nurse tests positive for Ebola in Dallas.

On that front, the CDC and Texas hospital have acted like the Keystone Cops regarding safety protocols while handling the Liberian patient that lied and died here in Texas:

In a conference call late Tuesday, the nation's largest nurses' union described how the patient, Duncan, was left in an open area of the emergency room for hours. National Nurses United, citing unnamed nurses, said staff treated Duncan for days without the correct protective gear, that hazardous waste was allowed to pile up to the ceiling and safety protocols constantly changed.

RoseAnn DeMoro, executive director of Nurses United, refused to say how many nurses made the statement about Texas Health Presbyterian Hospital, but insisted they were in a position to know what happened.
So there will likely be many more infected - viruses have exponential growth curves.  How many non-hospital people came into contact with the dead guy Duncan when he was left in the open? Doe they have fever? Ugh. Dallas is four hours up the road from us.

Ebola cares not for politics or incompetence. Unfortunately, both support the spread and we are up to our eyeballs with both from the Obama Administration (is the president on the back nine yet and under/over par today?), CDC, and sterilization procedures at the Texas hospital. 

Back to the market. The Spoo future left another long wick yesterday by the close showing strong selling pressure hammering buyers yet again as price was repelled and closed under the key 200 day SMA. What had been roughly a twenty five handle move higher has completely dissolved into a symmetrical 24 point move lower pre-open as I type. This is a powerful downtrend underway.

The market is very oversold and remains extremely weak. Odds have greatly increased for a fast capituation move lower. These occur from deeply oversold conditions where the market has repeated rallies that fail (leave long wicks). I provide perspective on trend support and an important measure of capitulation below.

Treasuries have a rock solid bid. So do defensive utilities while crude broke its long term uptrend I mentioned yesterday. Black gold/Texas tea has followed-through with another new low this morning. At best crude shows disinflation, at worst outright deflationary pressure. The BKX bank index teeters on its support trend line as well. I would expect a break of it this morning given pre-open equity weakness. If/when this happens, it is another bearish confirmatory break in the key financial sector.

Note the continued sharp move higher in the credit default swap (CDS) index. This confirms selling pressure seen in the equity averages.

While its ugliest at the bottom/darkest before the dawn during market selloffs, today's break below the reversal lows of the past two sessions deserves respect for what it has achieved given how wound up bearish sentiment has become (see yesterday's post).

I leave the reader with one last chart. Net new highs (or greatly expanding lows in this case) with a trendline and indicator target for the Wilshire 5000. Sharp expansion in new lows is a solid measure of capitulation. The chart below shows the broad market has moved through the extremes since 2012 and gives perspective on the next lower extreme from 2011.

Tuesday, October 14, 2014

Nearing Capitulation

By yesterday's close the SP 500 future blew through support at the 200 day SMA. If you inspect a candlestick chart of the SP 500 future, you will notice the last two days have left long upside wicks with closing  prices at the lows of the session, well below the prior low, and making new lows for the move down. The wicks show heavy supply hitting the demand bid and forcing price back down into new lows despite the market's oversoldness. Volume remains extremely heavy the past three sessions since the follow-through day failure on October 9th.

This morning's preopen shows a strong and sharp rally in the Spoo future. (The strongest and sharpest rallies occur during downtrending markets.) Yesterday's low is REALLY important to hold today. If price breaks yesterday's low after this sharp rally higher given the oversold condition I mention below, it shows an eye-opening amount of selling pressure and yet another long wick candle rally failure, the third in three days. The "third times the charm" rule enters the fray.

Note, the risk/reward on the short side is really, really stretched. The percent of SP 500 stocks with RSI less than 30 in the following chart. The standard deviation extreme is off the chart and nears three year spike level extremes.

A nice contrarian indicator is blogger sentiment compiled by Lazlo Birinyi. I've followed it for a number of years now. It is at a two year extreme on an absolute basis.

The bank index, although weak, still remains above a major trend line.

The Bloomberg Financial Conditions Index shows a very large pickup in credit stress which confirms the move down in equities, though conditions still remain positive above normal (zero is normal). It nears support at zero, the July 2013 low.

Oil sits on major trend line support (my expectation is it holds). Lower oil prices are a disinflation/deflationary barometer. This is a very large line in the sand.

Crude impacts the XOI oil index. The XOI index trends towards strong positive correlation to the SP 500. The XOI looks climactic in its selling and nears a major low - both near term bullish/supportive signs. This coincides with crude holding the long term trend line above.


My expectation is to see a major low within the next week given the aforementioned factors and how wound up sentiment has become. If price violates the major trend lines in the prior charts, it would add credence to the idea of a forced de-leveraging underway of larger magnitude (not my base case). Think highly levered funds caught out on this decline.

For example a 5x levered fund undergoes a 1% decline in asset price and gets hit with a 5% loss to their book. These players get forced to either meet margin calls from their prime brokers or sell aggressively  to avoid the margin calls. Ironically, they end up selling their winners where they have liquidity and hold their losers where their is no liquidity. This is the meaning of the phrase: "Sell what you can, not what you have to." This is when back office information for the major prime brokers pays handsomely for their prop trading departments.

Monday, October 13, 2014

SP 500 Future Finds 200 day SMA Support

Just a quick note this morning. The SP 500 future gapped down last night below the 200 day moving average and has since rallied back above and well into the green prior to the open. The 200 day and overnight low are both important technical "lines in the sand" for bulls.

The percent of SP 500 stocks with RSI below 30 is just above five standard deviations. The same is true for the NASDAQ NDX. These are highs of a few years.

This is obviously extreme. The market is severely oversold. Finding support for a bounce here at the 200 day is logical. If the market blows through the 200 day and overnight low, a strong bid best manifest or down again for another head dunk the market likely goes. This is not my expectation. Initial resistance lies at the 1920/30 level.

More charts later this week.

Thursday, October 9, 2014

Followthrough Nullification

That didnt take long.

Today's selling in the major market indices has wiped out yesterday's follow through day gains. This action nullifies the follow through buy signal that occurred yesterday.

This fast failure bodes bearish.

Followthrough Day

Wednesday provided a large upside reversal on heavy volume for the major market averages. Both the SP 500 and NASDAQ generated follow through rally sessions which are gains of at least 1% on increasing volume from the prior session. These are buy signals. The NDX closed above its 50 day SMA while the NASDAQ Composite and SP 500 remain below. However, yesterday's action was flat bullish and drew a strong support line in the sand for the SP 500 at the 1925 level for future reference.

Growth leaders include: KITE; SHPG; PANW; ACT; REGN; GMCR; AMBA; ANET; XRS

Wednesday, October 8, 2014

VIX Breakout

As of Tuesday's close, the VIX broke significant closing resistance at the 17.03 level that has capped prior selloffs since April.

The SP 500 broke a long term uptrend last week but managed to end the week above it. This week it has once again broken it as the market has immediately tested the low of last week's large volume reversal. This is bearish action and shows a heavy market. A strong market would be rallying further off last week's reversal or consolidating those gains in a well supported range. Instead, the market made a closing low yesterday for its move down on increasing volume from the prior session.

I suggest that the breakout in the VIX gives credence for an SP 500 move to the 1890-1900 level or the confluence of the 200 day and a large round number.  Also note the enormous bid, once again, at the Treasury long end. ZROZ are right back near their August high. This strong bid is equity negative. It shows flight to safety in a seasonally weak month. Lastly, crude has broken its uptrend from April of 2013. This has slowdown overtones.

For perspective, this selloff is getting quite extreme. The following chart shows the percent of SP 500 stocks with an RSI below 30 (oversold). It is at a 5 standard deviation extreme. In 2012 it spiked much higher than current levels.  I suggest strong support lies at the aforementioned 1890-1900 zone.

Thursday, October 2, 2014

Crude, 5yr Breakeven Inflation Rate, and SP 500 Hang on Key Trendlines

Disinflationary overtones in the first two charts below:

Note the 5yr breakeven inflation rate (blue) in the next chart. Since June 24, it has collapsed and broken support at the 1.6% level. I plotted WTI Crude in red to show the general positive correlation by inspection.

That is a fast move down for inflation concerns. I wonder when the FOMC will blink, jawbone, and "release the doves." Since the SP 500 broke its 50 day SMA yesterday decisively, maybe later this morning? Or does it need to break this trend line first to garner jitters at the Fed?

Tuesday, September 30, 2014

Credit, Dollar Index, and Equity Net New Highs Update

In yesterday's post I mentioned a few things including the CDX credit default swap index and the dollar. The CDX index broke out to a two year high yesterday on continued strong upward momentum. This is an equity headwind as it shows credit stress rising - albeit from an absolute low level. But is headed in the wrong direction with momentum for equities.

This is also the case for the JNK junk ETF. It's attempting to bottom over the past two sessions both of which made new intraday lows for the move down.  Given the strong GDP number just released, it's more than interesting to see junk credit get taken to the woodshed anyways. It trades like something is amiss.  The ETF hasn't been the same since this article was released in June. I first mentioned it here.

The dollar index has boomed higher and broken huge four year technical resistance. Note the importance of this breakout in the weekly chart below. The length of time of the resistance is huge. The number of times its touched is huge (six). And the thirteen week run to it has been vertical (and huge.) Despite all this, price just sliced through what "what should have been" an obvious consolidation stopping point. It shows profound momentum - granted stops have been run this morning as shorts squeeze out and long trend players enter.

Nevertheless, strength in the dollar index negatively impacts multi-national US corporation's foreign earnings (the euro is worth less). Moreover, a ramping dollar has disinflationary overtones. Those overtones, I suggest, are being driven from across the pond with a profoundly weak euro and EU economy. Continued ramp in the dollar from here may have more to do with growing financial instability concerns as the driver  (economic and geopolitical concerns dovetailing) versus only economically driven interest rate differentials. EU driven problems blow back into US equities. While the tail may be wagging the dog, Fido ends up shaking nonetheless.

In US equityland, the total market net new highs chart continues to show expanding new lows and the 10 day SMA of net new highs sits right on critical support below zero.

I suggest that the foundation for equity rallies may be more prone to abortive characteristics given the aforementioned issues.

Monday, September 29, 2014

Signs of Initial Credit Stress

The Credit Default Swap (CDX) index has shown the first signs of a sustained uptick. It has broken through neckline resistance at the 350 level after stalling at that area over the past eighteen months (roughly).

It's absolute level remains low, which is a positive. If prices meander/stall here, this would relieve equity pressure. If the breakout has legs and the ramp continues with strong upward momentum,  this will be a risk-off issue for equityland.

Elsewhere, junk credit takes in on the chin with the JNK ETF making a new low for its large move down since late July. The BofA ML US High Yield Master II Option-Adjusted Spread shows stress.

Again, it is at an absolute low level which is a positive for stocks. However, if the rate of change higher continues at its present pace, the strength of the "risk-off" rally will pressure equities.

Last Thursday saw a very sharp down day with very high downside volume as the SP 500 broke and closed below its 50 day SMA. It triggered a Lowry's 90% down session (90% of net advancing/declining issues with their respective volume were down). These are pregnant technical moments. They can engender either washout lows sewing the sees of rally or intermediate term trend change. Friday saw a relief rally with the SP 500 closing above the 50 day.

This morning the Spoo future has once again broken the 50 day to the downside ahead of the open. There is near term (important) support at the intraday spike lows of last Thursday/Friday between 1956-1965. A new low and or close below the 50 day I view as bearishly tilted. There is a large support trendline at the 1940-45 area. It wouldn't surprise me if the market made has an appointment this week with the 1940 level. Everyone knows the McClellan Oscillator is extremely oversold and in "bargain hunting bounce land." But this morning's fast failure of Friday's rally, despite the oversoldness, tilts bearish. It shows continued, heavy supply at very oversold levels. 

Growth names showing relative strength include FB, LRCX, SWKS, and GPRO. GPRO is in the midst of a climax move. It has recently broken out from a bull flag pattern which targets the 95 level (possibly 100 due to the nearby round number.) Biotech names showing high relative strength include BDSI and CMRX.

Internationally, I direct your attention to the collapsing Russian ruble. It is a geopolitical and economic barometer. Last week, word out of Russia came that they were creating legislation to seize foreign assets in retaliation to US/EU sanctions. Quite an elegant economic, dictatorial strategy by Putin. Et tu EU? The MICEX index ETF RSX will be making a new low for its large move down today. Geopolitical instability is a bearish world equity headwind. EU equity bourses remain under heavy pressure.

I note the dollar index has stalled at its highs dating back to 2011 and just under the key 86 handle. The move to this level has had huge momentum. A strong breakout above this level, I suggest, will be clearly bearish for equities given the continued large rate of change it implies. A higher dollar negatively impacts foreign revenues for US large cap multi-nationals. And at a very strong, continued rate of change higher, a ramping dollar begins to have deflationary-like overtones.

Thursday, September 25, 2014

Thursday: Three Bearish Indicators Suggesting Higher Odds of Continued Selling

Note the selling in JNK. It's back at its beginning of August nadir. Junk debt is a blunt equity barometer. Now onto equity technicals:

Yesterday's rally off the 50 day SMA (roughly) in the Spoo future with the McClellan so deeply oversold "should have been" plenty to either sustain more rally or - at least - a consolidation of yesterday's gains. Instead, relentless selling causes the SP 500 to erase yesterday's gains and make a new low for this move down. Note the NYSE McClellan:

The second bearish indicator I present is the relentless pickup in net new lows:

Third,  note the collapse of the volatility based Bollinger Bands for the SP 500. Markets go from quiet and tight (low volatility) to periods of high volatility. This typically happens to extremes on sell-offs, but uptrends can show volatility pickups. The collapse of the bands suggest the current move down has higher odds of being violent in its absolute move lower and/or the trading ranges that develop.

Lastly, I notice growth stocks are really taking it on the chin today. High relative strength growth stocks letting go is a warning sign. To paraphrase a famous Livermore quote: When you can't make money from the leaders, you can't make money long the market. All growth is getting hit today.

Protect capital.

Thursday, September 11, 2014

Quantitative Asset Allocation Portfolio Management

My postings have been and will remain very infrequent due to my work on quantitative system development.

I am using robust Trading Blox software to develop an asset allocation program that offers a much better risk adjusted return than buy and hold across equities, fixed income, spot currencies, and commodity ETF's. The latter two provide diversification in certain forms of non-correlation. Some can act as surrogates for inflation exposure. Others have very positive trend characteristics that have little to do with US markets. The program has initial capacity to a half billion AUM.

The core system is tactically binary between long and cash. The enhanced system provides short exposure in very selected instruments for taxable accounts. For retirement/pension accounts, enhanced uses non-leveraged (non-volatility based) and very select inverse ETF's for exposure to intermediate term down trending markets.

The system uses simple and robust technical indicators to tactically time entry/exit of individual portfolio vehicles. The system uses fundamental factors for overall allocation between asset classes. When major fundamentals shift, allocation between asset classes shift with it. Additionally, clients can custom allocate depending on their needs, desires, and economic concerns. Any asset allocation portion or individual component is available a la carte.

The equity portion of the allocation is diversified across markets, geography, and capitalization.
It includes a portion devoted to my application of William O'Neil's US growth equity CANSLIM system. Additionally, it includes the Dow winning tactical switching study "An Intermarket Approach to Beta Rotation: The Strategy, Signal, and Power of Utilities."

However, I have improved on that great base system. That program is always long and takes the full brunt of 2008 and 2000-2003 style bear markets. For example, in 2008 the drawdown in the Vanguard Total Market Index neared 60%. The Utilities index was cut in half at its nadir. Both went down together. Ouch.

If you are going to run with that always invested system, you must be able to handle this level of draw-down when it comes. Which means: you must accept this upfront and always accept it while you participate in this system. Most intentionally forget about the risk and/or never accept that level of risk. Failing to accept this level of volatility, the investor will jump off the system into the maw of the draw-down and be too scared to rebuy. That's the psychology. I don't make these rules. However, I see them clearly and help others to follow them.

Personally, I want to avoid this level of drawdown in favor of a smoother ride. So to the MTA's Dow Award winning study, I have added a robust technical overlay to this switching system that is positive skew friendly and negative skew hostile. It adds much value and avoids major drawdowns with always long investing systems. These comprise the bulk of the "store-bought" methodologies available from Registered Investment Advisors. This is where I add large systematic value.

Stay tuned. More details coming.

Monday, September 8, 2014


The chart below shows the percent of NASDAQ NDX (leading index) with RSI greater than or equal to 70 as a measure of overboughtness I like to use. The market is entering a near term climax/froth zone if it moves higher from here.