Tuesday, December 22, 2015

Trading Notes: Week of December 21st

Wednesday, December 23rd

*  After seeing breadth weakness dry up per the last post, we finally saw buying come into the market yesterday afternoon, with some relief in oil and credit markets.  While this is not looking like a vigorous rally thus far, it has continued into overnight trade and is not yet running into significant intermediate-term overbought conditions.  

*  I have an experimental measure that takes a look at the relationship between expected VIX and actual VIX, based upon factors such as realized volatility and volume.  I'll be writing more about that measure in an upcoming post.  It has entered a range that has seen negative average returns over a two-week horizon.

*  Here's another unique measure that I've found helpful.  It takes a moving average of buy signals vs. sell signals for several technical trading systems across all listed NYSE stocks.  It's been a good overbought/oversold measure.  Interestingly, essentially all forward returns in stocks over a two-week horizon have either come from momentum (when this measure is quite strong) or from mean reversion (when the measure is quite weak).  In other words, when we get very strong readings, it's not unusual to have short-term follow through to the upside.  When we get very weak readings, it's not unusual to get a bounce over the next two weeks.  We are coming off a very weak reading.

Tuesday, December 22nd

*  Here's what I found when I studied the most successful traders I've worked with--and here's what it could mean for your trading performance in the coming year.

*  We've had a few recent bouts of selloff in the stock indexes.  Interestingly, new monthly lows across all stocks peaked on December 14th at 2025.  On Friday we closed lower in SPY but there were only 1131 new lows.  Yesterday, new lows peaked at 867.  My intermediate term indicators continue in oversold territory.  With continuing weakness in oil and high yield markets, rallies have been fleeting.  Breadth measures, however, are not weakening.  With a late rally yesterday, it's the bulls' turn to show what they can muster.  It is difficult for me to envision a solid rally without strength in oil, weakness in the dollar, and firmness in those high yield bond markets.  I continue to watch those markets closely.

*  Here's a chart you won't see elsewhere:  It's a cumulative running total of buy signals minus sell signals for the Commodity Channel Index (CCI) across all NYSE stocks.  Note the steady deterioration in net strength for most of 2015, which has accelerated recently.  A similar picture can be found when tracking cumulative buy vs. sell signals for other technical systems.  Quite simply, more stocks are demonstrating significant weakness than significant strength.