Monday, November 30, 2015

Trading Notes: Week of November 30th

Friday, December 4th

*  Well, ECB did end up giving us a surprise and it was as much in the tone of the press conference as the content of the decision.  My take is that the central bank sent a message that they will not be bullied by markets and all the commentary on how the bank "needs to deliver."  The message from the press conference was that they are delivering the promised monetary stimulus, that this is enough, and that we should be patient and let it work.  Markets were positioned for more aggressive action and we had quite the selloff in the euro and in stocks and bonds.  We have the payrolls report this AM and then the Fed enters a quiet period ahead of its meeting.  All in all, with a moderate ECB and a Fed poised to hike, there isn't a big central bank tailwind for stocks.

*  Yesterday I noted the deterioration in breadth and that clearly extended yesterday.  We had 350 stocks across all exchanges register fresh monthly highs against 699 lows.  That was the highest number of stocks making monthly lows since November 16th.  We're extended to the downside on a short-term basis with fewer than 20% of stocks trading above their 3, 5, and 10-day moving averages (raw data from Index Indicators), so a short-term bounce is quite possible.  As the chart of overbought/oversold SPX stocks indicates below, however, we are not yet at an intermediate-term oversold point.  That has me in the mode of selling market bounces.

Thursday, December 3rd

*  So far, no great surprises from ECB; press conference coming up.  I'm not sure there's anything to change the broader dynamic of low rates and weak currency in Europe.  If we see a dovish rate hike from Fed, 2016 could bring more QE-style trade to stocks and shares with yield could find some support.  It's a theme I'm mulling over for the new year.

*  That being said, yesterday traded quite weak.  Note on the relative volume chart of yesterday's trade below how the attempted bounce from the early selling found little interest.  We bounced overnight, but we're overbought on an intermediate-term basis.  That has me selling bounces that cannot take out overnight and prior day's highs.

*  I was struck yesterday by the fact that we had 54 stocks make 52-week highs and 78 register annual lows.  Not impressive breadth.
Wednesday, December 2nd

*  From the start of Tuesday's session we could see fresh buying flows enter the market, with elevated NYSE TICK readings.  This was a clear break from recent action and ultimately led the market to new price highs for this move.  The number of stocks closing above their upper Bollinger Bands hit their highest level since November 2nd and breadth was solid (see chart below).  If this is the start of a genuine leg up, we should stay above the recent trading range and add to yesterday's gains.  The response to tomorrow's ECB action may play a role in that.  Given generally overbought levels in my cycle measures, I'm not wedded to the upside breakout idea, but will be watching breadth closely.

*  I continue to implement the change in my trading in which I view the hours in Asia, Europe, and U.S. as distinct trading "days".  All positions are opened and closed within their "days", so that there is no assumption of continuity across time zones.  I find the flows and price patterns to be quite different from one time period to the next, but do find consistency within each zone.  This has helped risk management and has also helped me become more flexible in trading ranges.  The emergence of the buying flows early in yesterday's U.S. session was a good case in point.

Tuesday, December 1st

*  We saw weakness in stocks yesterday, followed by late day strength, only to fall back into the range in overnight trade.  During this extended range, we're seeing overbought levels in my cycle measures and breadth has been waning (see chart below; raw data from the excellent Index Indicators site).  Trading the range (fading short-term overbought/oversold readings) has been what's been making money so far and it's been a make it/take it market.  With all eyes on ECB on Thursday and payrolls on Friday, I suspect we'll have plenty of volatility to break the range.  As we get to the upper end of the recent range, I'm not enamored with the risk/reward.  I'm also not inclined to take big bets ahead of events later this week, which might be the sentiment of other market participants...and that could keep us in the range near term.

*  Here's a study that I've undertaken that I believe will be of value in 2016 performance.  I'm looking at the trajectory of my winning and losing trades.  How quickly do the winners turn into winners?  How quickly do losers become losers?  If a trade is not profitable after X minutes, what is the likelihood it will be profitable at all?  If a trade is under water after X minutes, what is the likelihood it will come back?  What is the trajectory of the market after my exits?  Is my entry and exit execution providing value?  My initial findings are that losing trades pretty much start out as losing trades.  If I don't get stopped out after a period of time, the best course of action is to add to the trade.  Winning trades don't always start as winning trades, but often start as not-losing trades.  In other words, a market may bounce around in a range before going my way.  That does give opportunities for adding to positions.  Tracking the added value of those added positions is yet another study I will be undertaking.  More on this soon to come--

Monday, November 30th

How far can we take performance if we work with very tuned minds and bodies?  Most of us assume that we have to work hard and work long hours and this means work must take a toll on mind and body.  But if we prioritize mind and body, might we work much better and smarter?  Might we live happier and more fulfilled lives?  Perhaps we're going about development and performance in entirely the wrong way...

*  Stocks bounced off early lows in Friday's partial session, but remained below recent highs.  I continue to be underwhelmed by market breadth thus far.  The maximum number of new monthly highs registered last week was 589 on Wednesday, well below the 953 achieved in the first week of the month.  We have ECB on Thursday and the last jobs numbers on Friday before the Fed meeting this month.  I will be watching closely for evidence of the recent market strength broadening vs. rolling over.  My measure of intermediate-term market strength has not yet crested for the current cycle, per the chart below.

 *  High yield bonds continue to struggle per the chart of JNK below.  At some point, I suspect this will take front and center stage.  It's not a bull market dynamic.