Call To Bloggers and More on Learning Markets

* Call to Bloggers - Thanks to the Twitter feature, which provides a blog within this blog, I'm able to link to blog posts that offer unique perspectives on trading and the markets. I'm looking particularly for interesting analytical content, not opinion pieces, emotive posts on markets and government policies, self-promotional material, or first person trading accounts. If you have a unique analysis of trading or markets (not necessarily quantitative), by all means pass along the URL and I'll be happy to link to your work. (My email address is on the blog page, under "About Me"). BTW, I just posted my 4000th Twitter post; thanks to readers for the continued interest.

* Viewing and Reviewing Markets - SSK continues to offer nice examples of learning from market patterns by reviewing charts and by reviewing patterns of successful trading via video.

* Reviewing the Week - Jeff Pietsch offers a market rewind; check out the extensive sector ETF info in the table accompanying his post.

* Learning to Trade - Ana Wang notes that it takes more than spoon feeding.

* Annoyance - When the car service isn't there to pick you up at the airport.

* Only 499 Being Offered - Sweet!

NYSE TICK, New Highs/Lows, and Testing Market Lows

Although we seemed to be headed toward a test of recent lows this past week, the cumulative adjusted NYSE TICK line has continued to show relative strength. Should we get that retest of lows, a number of indicators appear to be setting up non-confirmations. In addition to the TICK line, we're also seeing a very modest number of stocks hit fresh 20-day lows. On Friday, across the NYSE, NASDAQ, and ASE, we had 280 new 20-day highs, against 418 lows; Thursday had 297 new 20-day highs and 417 lows. Compare that to the 2564 new 20-day lows on October 24th and the 6561 new 20-day lows on October 10th. I will be watching these indicators closely to see if participation continues to wane on further weakness.
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Sector Update for November 8th

Last week's sector update found a neutral short-term trending mode among the eight S&P 500 sectors that I follow via a basket of 40 stocks (five highly weighted issues within each sector). After briefly turning bullish, the two-day decline of Wednesday and Thursday returned many of the sectors to their short-term downtrends. Here's how we stand on the Technical Strength measure, with the percentage of stocks in each sector trading above their 20-day moving averages--as assessed by the excellent Decision Point site--in parentheses:

MATERIALS: -380 (23%)
INDUSTRIAL: -200 (16%)
CONSUMER DISCRETIONARY: -140 (13%)
CONSUMER STAPLES: -140 (29%)
ENERGY: -60 (38%)
HEALTH CARE: -140 (43%)
FINANCIAL: -280 (21%)
TECHNOLOGY: -280 (18%)

We can see that recessionary concerns are weighing on raw materials stocks and technology shares. Financial stocks, after seeing a solid bounce thanks to government support, have since fallen back into a short-term downtrending mode.

The percentage of stocks above their 20-day moving average captures trending on a more intermediate-term time frame. Note that sectors that bounced well during the recent market rise, such as health care and energy, still show fewer than half of their components trading above their moving averages. Particular weakness is evident among consumer discretionary, technology, and industrial sectors--all reflecting recessionary concerns.
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The Relative Appeal of Gold

Gold is unusual in that it is both a commodity and a surrogate currency. While gold's value has fallen along with other commodities, note that it has also displayed relative strength with respect to other commodities since the mid-year swoon. The chart above depicts the ratio of gold (GLD) to the commodities ETF (DBC). When stocks made their October lows along with commodities, gold's performance relative to other commodities was breaking to new highs.

While many commodities are falling due to economic weakness (oil, industrial metals), gold may be retaining a degree of interest given the worldwide race to zero interest rates--and the monetary expansion likely to ensue if those rates prove insufficient to stimulate growth.
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Learning to Win at Trading by Learning to Lose

One of the fascinating conclusions of the research I posted yesterday is that traders learn by trading; that it is the number of trades placed--not the amount of time spent trading--that best predicts success in markets. That same research, however, finds that there is a very high attrition rate among traders; the most common learning that occurs in markets, quite literally, is that traders find out that they can't make money at what they're doing.

So we have a catch: traders need to learn by trading, but they also need to preserve their capital as they traverse their learning curves.

As I stressed in the Trader Performance book, much of learning in trading is pattern recognition. If that is the case, than it may be the frequency and intensity of exposure to patterns--and not the trading itself--that facilitates learning. This very much fits with my experience that traders can accelerate the development of competence by engaging in simulated trading (with live data) and by reviewing their trading via video. "Any techniques that you use in trading--whether for money management, self-control, or pattern recognition--require frequent repetition before they will become an ongoing part of your repertoire" (Psychology of Trading, p. 154).

Traders drop out of markets, perhaps not because they lack talent, but because they fail to achieve the necessary repetitions to internalize skills prior to depleting their capital.

They also fail because, even with repeated trading, they do not have a system for reviewing their performance, setting goals for improvement, intensively working on goals, and holding themselves accountable for those. Instead of a week's worth of experience, they repeat a single day's learning five times over.

The research cited yesterday, as well as this interesting study, suggest that an important component of learning to trade is learning to avoid behavioral biases in taking profits and losses. The traders who lose their disposition to sell winners early and hold onto losers are those that tend to be most successful. Ironically, turning loss-taking into routine behavior may be one of the most important learned skills in the evolution of a trader's success. The key is staying small enough, long enough to learn from the experience of losing.
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Research With Practical Relevance: Learning by Trading

I recently posted on the topic of learning how to trade. Thanks to an alert and very helpful reader for passing along this link to a recently published paper on the topic. The paper is entitled "Learning by Trading", and it draws upon an extensive database of trading results from Finland to arrive at several fascinating conclusions about how market participants learn to trade.

One of the first observations from the study is that traders learn trading from experience, but also learn from experience that they lack trading ability and thus stop trading. Attrition is common in trading, and failure to take it into account makes it look easier than it is to learn trading. There is a built-in survivorship bias any time we observe traders: we're more likely to see those who have learned how to trade than those who have learned that they are not able traders.

A second fascinating observation from the study is that traders are unusually susceptible to the disposition effect. By tracking the buying and selling behavior of the traders in the database, the authors discovered that traders are 2.8 times as likely to sell their stock after it has risen than after it has fallen. Moreover, the correlation between a trader's disposition effect in one year and in the year previous is .36, suggesting that this bias tends to persist. Most interesting of all, when traders with the lowest disposition tendency bought stock, the stock averaged a gain of 46 basis points (bp; or .46%) over the following 30 days. When traders with the highest disposition tendency (i.e., those most likely to sell winners, not losers) bought stock, their shares averaged a loss of 54bp over the next 30 days. It's a dramatic illustration of how the bias to hold losers and take quick profits damages profitability over time.

Finally, the authors come to a very interesting conclusion. They note that a subset of skilled traders does appear to "learn by doing". What could look like overtrading to an outside observer might actually be rational, as developing traders recognize that they learn from experience. Significantly, trading skill was a function of the number of trades placed, not the number of years spent trading. This has meaningful implications for the training of intraday prop traders (who trade high frequency) versus longer term hedge fund portfolio managers and investors.

There are a number of fascinating studies conducted by academic departments of finance and financial engineering that have significant practical relevance to the trading community. Unfortunately, as in other fields such as my own discipline of psychology, there tends to be a gap between what is known through research and what is applied via practice. I'm pleased to announce that I am joining the board of advisers for Kent State's Master of Science Program in Financial Engineering. It's an excellent program, and I hope my involvement will bring me closer to the world of cutting edge research--and its application to real-world trading.
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Cross-Talk: Stabilizing Debt Markets as a Priority for the New Obama Administration

A recent New York Times analysis includes economic stimulus, aid to the auto industry, and economic assistance to homeowners at the top of likely priorities to start the Obama presidency, followed by a regulatory crackdown on Wall St. Indeed, the President-Elect has suggested that the tax relief promised during the campaign will be the first bill that he introduces when he comes to office.

In his latest post, which I heartily recommend reading, Jeff Miller proposes a very different priority for the new administration: stabilize trading in debt securities. That requires a process of price discovery that will enable banks to objectively assess their vulnerability--and that of others--so that they can once again function as trusted participants in financial markets.

"Counterparty risk" is a top-of-the-mind concern for many banks and hedge funds. Concerns over preservation of capital have led them to withdraw from many credit markets. When hedge funds and investment banks are mentioned in normal political discourse, however, the focus is usually on how to punish them and hold them accountable for their greed--not on how to restore their proper functions to the marketplace.

There is no question that laws and regulations must be enforced and that proper regulation and oversight of markets must be ensured. The priority is not to "bail out" banks, but to ensure that markets function normally so that lending can proceed and reinvigorate housing, business, and the general economy.

While it's nice that interbank lending rates have declined from their historic peaks, it is far from clear that financial institutions have the trust and confidence to use the cash from the government to resume their normal lending functions. Banks are not lending when borrowers can obtain funds from the Fed cheaper than they can in the normal market; banks are also not lending when vulnerable businesses, consumers, and homeowners look to become more vulnerable. But if banks and other financial institutions additionally won't do business with each other, then we have markets in dislocation and unable to facilitate an economic rebound.

Thus far, if press reports are accurate, Jeff Miller's suggested priority for the new administration does not appear to be on the radar. Hopefully, his efforts and those of others will correct this situation.
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Coaching Yourself: When Should A Trader Cut Size/Risk?

A reader and excellent developing trader recently brought a dilemma to my attention:

"I had on a few different positions today. None were really working. However, I saw something that I liked. I only bought half size position. I think because my other positions were not working, I was hesitant to add more. I was proud of myself for getting involved and it was a great trade, but it could have been even better if I had a full size position. How can I get myself to think that each and every position is different and not worry about the current positions I am holding?"

This is a great question, but a proper answer requires more information. What does it mean that none of the positions "were really working"? Were they scratched trades? Losing trades? Big losing trades? Marginal winners? The answer to that question makes all the difference when it comes to sizing subsequent trades.

Every intraday trader needs to have--and enforce--a "drop dead" level for the day. That reflects the maximum loss you're willing to incur in a single day's trading. If you hit that level in a day, it tells you you're not seeing the market well and, like a pitcher on a bad outing, you need to get off the mound and call it a night.

In my own trading, I have--in addition to the drop dead level--a warning level that is roughly half of the maximum loss I'm willing to incur. If I hit that warning level, I drop my size (risk) and don't return to normal-size trading until I've worked my way out of the red for the day. By heeding the warning level and dropping my size, I give myself a chance to battle back. I also give myself an opportunity to participate in afternoon moves that could make my day. Dropping the size and waiting until I see markets well keeps me in the game.

(Some traders I work with have separate morning and afternoon drop dead levels, which also serves the function of keeping them in the game if their day starts poorly.)

With respect to the trader who asked the question, if the initial trades that weren't working were putting him in the red, near a warning or drop dead level, then reducing size was a prudent measure. Yes, it would have been nice to have had full size for the winning trade, but the alternative could have been a huge loss for the day that undoes a week's worth of profits. Trading smaller when you're in a hole and waiting to regain your feel for the market is always good self-coaching.

On the other hand, let's say that the initial trades didn't make money, but didn't lose either. To cut size at that point is to let the scratched trades create frustration and a loss of confidence. The experienced trader learns to love scratched trades. Not only do they show an ability to limit losses; they also can provide useful information. If I'm long the Spooz on a breakout move, the market moves my way, and then reverses hard back to my entry level, my scratched trade has just told me that there are plenty of sellers at the top end of the trading range. That very often can set up a nice fade, reversing my position to profit from the move back to the middle or bottom of the range.

When your trades aren't working and you're bleeding capital, you're just not seeing markets well. It pays to take a break from trading, figure out what you're doing wrong, and then return with small size to regain your feel. If your trades aren't working, but you're not losing much money, then you want to extract the information from those trades and see if you can develop some good ideas that you can express with normal size. A losing trade is not necessarily a bad trade. Indeed, it's the good trades (those with an edge, that have worked well in the past) that don't pay you out that offer some of the best information. If you're getting frustrated with your trades, you can't embrace them and learn from them.
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ProShares Ultra ETF Volume: A Look at Stock Market Emotionality

A while back, I noted that volume among the ProShares Ultra S&P 500 ETFs tended to jump during market selloffs. I updated this view to express volume in the Ultra Long ETF (SSO) plus volume in the Ultra Short ETF (SDS) as a function of total NYSE volume (pink line above). As we can see from the blue line representing the S&P 500 Index itself (SPY), we've seen a steady increase in Ultra volume during the recent decline, with a particularly notable spike in mid-October, when we hit a peak in the number of stocks making new 52-week lows.

Interestingly, the volume in SDS and SSO as a proportion of SPY volume rose from about 13% in early September to over 30% during the last two weeks. Moreover, if we look at yesterday's volume among all North American ETFs, Ultra funds occupied three of the top eight positions.

Because the Ultra funds are double-size relative to other index ETFs, they are excellent tools for assessing speculative activity in the stock market. What we've tended to see, when we correct for an ongoing rise in the popularity of the Ultra shares, is enhanced speculative activity when markets correct and a relative drying up of such activity as markets top out. From the perspective of sentiment, this may be a nice measure of market emotionality: fear/greed versus complacency.
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New Highs and New Lows: Stock Market Continues to Show Strength

Above we see the S&P 500 Index (SPY) plotted against the total number of new 20-day highs minus new 20-day lows for all NYSE, NASDAQ, and ASE stocks. Note how new lows hit their maximum point in mid-October and held well above that level as we made new closing price lows late in the month. Since that time, stocks have rebounded smartly, and new 20-day highs have steadily expanded versus new lows, confirming the uptrend. For the first time in a couple of months, we're now seeing new 20-day highs significantly outnumber new lows.
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Learning How to Trade

A key idea behind my last book is that trading is a performance field like athletics and the performing arts. This suggests that trading success is not simply a matter of finding the right indicators or formulas. Instead, trading competence and expertise develops over time, as a function of structured learning and development. Becoming a good trader is not so different from becoming an expert surgeon or a chess grandmaster: it takes certain native talents, which are honed with intensive practice and review.

In medical education, the approach is often described as "see one, do one, teach one". We learn by observing competent practitioners, by following their example, and then by crystallizing our knowledge and skills by mentoring others. The learning curve is not so different in the military, where basic training offers opportunities to "see one" and "do one" prior to entering battle. Graduation through the ranks then provides occasions to "teach one". When artists learn to paint, they typically observe and mimic their instructors, only later venturing forth on their own with original efforts, and then later supervising others: that's the hallmark of all disciplines that train via apprenticeship.

The most crying need among new traders is for such apprenticeship. There is a great deal of information on the Web, in magazines, and in books, but not so many occasions to "see one" before doing one and teaching others. Seminars can be helpful in this regard, but their brevity prevents them from truly guiding a developmental process. No one realistically thinks that someone could learn chess or painting from a week-long seminar. Performance skills typically require extended training to achieve competence and mastery.

Two sets of resources are helpful for new traders who seek to "see one" before they place their capital at risk. The first are trading videos. These illustrate a trader's approach to analyzing markets and making decisions. Outstanding in this regard are Brian Shannon's videos for the Alpha Trends site. He illustrates ideas from technical analysis by applying them each day to the major market indexes. Just as a medical student observes an attending physician to learn about the reasoning process behind diagnosis and treatment, a trader watching a video analysis of a market can--over time--internalize how an experienced trader views and trades markets.

A particularly valuable video project is offered by SSK, who provides streaming videos of "a great day trading". These videos capture the live trading process and illustrate what happens during good trading. Such an approach fits well with the solution-focused coaching methods I've described earlier: instead of focusing on weaknesses, we can learn from observing our strengths and building on those. The videos illustrate how basic auction market concepts--and indicators derived from those concepts--can be applied to the short-term trading of markets.

A second set of resources involve day-to-day mentorship with an experienced trader. Ray Barros, for instance, mentors a limited number of traders on a daily basis, taking them from the basics--identifying trends in markets--to the fundamentals of managing risk, keeping a journal for self-development, and building a trading business. He provides feedback on their trading, sustaining a learning process in true apprenticeship fashion.

A different model of mentorship is the online trading room. Here traders can observe trades being placed in real time, learning from the commentary of the trader. The idea is that, over time, traders can internalize the reasoning and trading behaviors of the successful trader, hastening their development toward competence. The Institute of Auction Market Theory, under Bill Duryea, offers a particularly noteworthy trading room that employs Market Profile concepts and the reading of short-term auction behavior in real time.

As always, these links have not been solicited from me; nor am I in any way financially linked to any of these educators. Rather, my purpose in posting this information is to continue to point traders toward resources that might be helpful for their development. This blog--and many others--can be useful in providing information and analysis. Ultimately, however, you can only learn a performance field by observing performance and by performing yourself. Increasingly, we're seeing creative online services that facilitate this learning process.

For more on "how to trade", see the contributors to my forthcoming book, as well as my linkfests, Volume One and Volume Two.
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Musings Regarding the Explosion of Treasury Debt and the Implications for Corporate Bonds

A recent article notes that the flood of issuance in the next year is likely to lead to higher yields for Treasury investors. With swelling borrowing needs in the U.S., a need to keep short-term rates low to stimulate the economy, and emerging economies (that had been aggressive Treasury buyers) contracting, a supply/demand imbalance could lead to significant further steepening of the Treasury yield curve. As short-term Treasury bill rates (3, 6 month) have moved significantly below 1%, the 10-year rate has stayed close to 4%--a notable sign of steepening.

Observe, too, that the inflation expectations built into TIPS are quite low, something on the order of less than 1% annually for the next decade. This is leading some investors to move into TIPS as an inflation hedge. What, however, if TIPS pricing is efficient and we are facing a prolonged period of low inflation, if not deflation? With rising Treasury yields at the long end and modest inflation, real returns on these government-backed securities would be quite attractive. This could have the effect of crowding out investment in corporate debt, particularly during a regime of risk aversion. In short, these immense Treasury funding needs that we're reading about may keep corporate (and municipal) bond prices unusually low for an extended period. That has real implications for the funding of the private sector and its ability to rebound from recession.

On a related note, I'm not wild about how bonds have behaved during the last week of vigorous bounce in the stock market. According to FINRA data, we saw an explosion of 52-week price lows among investment grade and high yield bonds in mid-October--the same pattern we saw among stocks. Specifically, we saw 1218 new 52-week lows among the 3432 issues traded within the FINRA-Bloomberg Investment Grade Index on October 14th. On October 16th, we hit 422 new 52-week lows among the 1008 issues traded in the FINRA-Bloomberg High Yield Index. With the bounce into the end of October--one that took almost all stocks off their 52-week lows--we still had 404 new annual lows among the investment grade bonds and 147 among high yield issues. Advance-decline numbers were especially tepid for the investment grade bonds.

A few days does not a trend make, but this relative underperformance is on my radar: even apart from the issue of looming defaults, corporate bonds may fail to keep pace with other assets, including during periods of relative risk appetite. As an increasing number of risk-free Treasuries come to market and compete for relatively scarce investment funds, the competition for yield may pose ongoing challenges for the issuance and pricing of investment grade and high yield bonds. And that is not conducive to a growing economy.
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Indicator Update for November 3rd

Last week's indicator update noted that "While I'm making note of the divergences with respect to the number of new lows from two weeks ago, enough stocks continue to behave in weak ways to make me want to see confirmation of fresh buying interest before taking intermediate-term long positions in stocks." We did, indeed, get that confirmation of buying interest this past week, as strength in the Cumulative TICK line and a positive turn in money flow led to a breakout move in stocks that was sustained into week's end on solid buying interest.

On Friday, we saw the first occasion in which stocks making fresh 20-day highs notably outnumbered those making new lows (data updated each AM before market opening via Twitter). We're not yet to the point where we're seeing stocks making significant numbers of new 65-day highs (top chart), but we've clearly pulled the majority of shares off their recent lows.

Meanwhile, for the first time since the decline began, we're getting overbought readings from the Cumulative Demand/Supply Index (bottom chart). Indeed, we're at levels similar to the August top in markets. It's not unusual to get topping out action following a sharp spike in the Cumulative DSI, with prices drifting higher, but the overbought level--combined with the significant resistance around the 1000 level in the S&P 500 Index--suggest that future near-term gains may be more constrained than they were this past week. Note, however, that this is a short-term overbought indication; the majority of sectors that I follow are not overbought on an intermediate-term basis.

Thus far, I'm viewing the current market action as part of a larger bottoming pattern that began with the momentum flush out in mid October. It is not at all unusual to see such bottoming occur over a period of weeks if not months following significant declines; this was the case in 1982, 1987, 1990, 1994, 1998, and 2002. If that is the case, we should have trouble vaulting and staying above that 1000 level in the S&P 500 Index. I will be watching the Cumulative TICK and sector strength carefully to handicap the odds of an upside breakout versus a move back into the heart of the recent, wide trading range.
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Neuroeconomics: How Brains Affect Our Gains

* How Neuroscience Interfaces With Economics - Excellent overview of the field of neuroeconomics.

* Wired for Irrationality? - This Business Week summary examines why logic takes a backseat with much decision making.

* How Brains Deal With Uncertainty - This research finds that brain mechanisms for dealing with uncertainty that develops over short time periods (as in trading) are different from those that deal with uncertainty that depends upon past learned associations. Might you be able to differentiate successful from unsuccessful short-term traders from their patterns of brain activation while making decisions?

* Intriguing Review of Cognitive Neuroscience Research - This article suggests that a variety of disorders have, at their root, a dysfunction in how neural activity in different areas is coordinated: "The impairments of neural synchrony observed in schizophrenia, autism, and AD [Alzheimer's Disease] are consistent with current theories that emphasize a disconnection syndrome as the underlying pathophysiological mechanism. According to these theories, cognitive dysfunctions as well as the overt symptoms of these disorders arise from a dysfunction in the coordination of distributed neural activity between and within functionally specialized regions of the cerebral cortex." Might it be the case that some individuals have exceptionally well developed neural coordination, accounting for distinctive cognitive performance?

* Risk Seeking? - In this study, monkeys are a choice between two alternatives: both lead to the same mean reward, but one choice has higher variability than the other. Like some traders, monkeys show a preference for the risky (high variation) choices, and an area of their brains responsible for the processing of rewards is implicated.

* Prepare for the Worst? - This study finds that, when people are led to expect visual stimuli that are pleasant or unpleasant, they activate the parts of the brain appropriate for each. When they are led to expect unknown stimuli, however, they activate the areas appropriate for unpleasant reactions. Such a "pessimistic bias" make may sense, as the authors note: "Since we do not know what future holds for us, we prepare for expected emotional events in order to deal with a pleasant or threatening environment. From an evolutionary perspective, it makes sense to be particularly prepared for the worst-case scenario." Might we see a different pattern of activation among problem gamblers and addictive traders?
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Evaluating Market Strength, A Rant on a Rave, and More

* Is the Market Strong or Weak? Is it Getting Stronger or Weaker? - Two questions I ask in my own short term trading are whether the stock market is strong or weak in an absolute sense, and whether the most recent day's market is stronger or weaker relative to the day previous. The first question starts to address the issue of intermediate-term trend; the second question looks for whether markets are picking up strength/weakness or stalling out. Three indicators I use for addressing these questions are: 1) the number of 20-day highs and lows being made by stocks across all U.S. exchanges; 2) the number of stocks closing above and below the volatility envelopes surrounding their short-term moving averages (Demand/Supply); 3) the percentage of stocks closing above their intermediate-term moving averages; and 4) the stocks within eight different sectors that are trading in intermediate-term uptrends, downtrends, or neutral (Technical Strength).

At a glance, I can tell if markets are overbought or oversold (very high number of highs/lows; very high number of issues closing above/below their envelopes; very high/low percentage of stocks closing above their moving averages; very high proportion of stocks trading in uptrends/downtrends), but also whether strength or weakness is changing from one day to the next. This is very helpful in framing market hypotheses (for example, the likelihood of the market's taking out levels of support/resistance). The excellent Barchart site tracks the number of stocks making new highs/lows; Decision Point tracks the percentage of stocks above and below moving averages--and much more. As for Technical Strength and Demand/Supply, alas those remain proprietary measures, but I do update them frequently on the blog, including each morning before U.S. markets open via the Twitter app. I typically post to Twitter before the market open and after the close; the last five "tweets" appear on the blog page; the complete list can be found on my Twitter page (where free subscription is also available).

* Getting Old - Usually you can date with some precision the point at which people make the transition from being young to being old. It's the point at which they stop listening to new music and simply stick with the "classics" of their growing up years. F*ck that. Here is Ferry Corsten's new one, among the many beautiful, highly amplified tunes that fill my head while I'm reading, blogging, trading, driving the fast car, etc.

* Buying Strength, Selling Weakness - The Buyside blog replicates a study I did on the U.S. markets with FTSE data. That hasn't been a pattern that's worked so well in recent markets, however, with the persistence of the downtrend earlier this month.

* Trading Indicator Convergence - Market Rewind explains trading when indicators move in sync.

* How U.S. and Asian Markets are Connected - Excellent series of posts from an excellent site.

* Buying and Selling Momentum - The Ripe Trade blog explains trading with pivots to improve performance.

* Adapting to Part-Time Trading - It becomes easier with automation, as the Lawyer Trader notes.
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Sector Update for November 1st

With the market's sharp bounce this past week, I thought I'd take a fresh look at the major S&P 500 sectors and their trending behavior. The basket of stocks that I follow include five highly weighted issues from each of eight sectors. I use a measure that I call Technical Strength as a way of quantifying trending behavior; it is somewhat akin to the slope of a goodness of fit regression line. Ratings near zero suggest no trend; a perfect uptrend would be scored +100, and a perfect downtrend receives a -100. Since I sum the scores of the five stocks for each sector to derive a trend rating for that sector, a maximum (perfect uptrending) score would be +500; a minimum (perfect downtrending) score would be -500; and a neutral score would be between -100 and +100.

For the week ended 10/31/08, we had 23 stocks in the basket trading in uptrends, 5 neutral, and 12 in downtrends. This is a marked improvement from last week, when--at one point--all 40 stocks traded in downtrends.

Here are the summed ratings by sector:

MATERIALS: -180
INDUSTRIAL: +120
CONSUMER DISCRETIONARY: +200
CONSUMER STAPLES: +40
ENERGY: 0
HEALTH CARE: +60
FINANCIAL: -20
TECHNOLOGY: +20

What we can see is that most the sectors are trading in a relatively neutral mode. Consumer discretionary shares, which had been among the most beaten down during the decline, have rebounded relatively well during the past week. Materials stocks continue a bit weaker than the other sectors, reflecting continued recessionary concerns. I will be tracking these numbers closely to see if we can break out of the neutral status to the upside, or if the recent strength is only part of a larger and longer bottoming process for this market.
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Global Reversal Patterns at the End of October

In a recent post, I noted that the most beaten up stock market sectors were rallying the most at the end of October. We also have seen a recent reversal of downtrends in several asset classes. Above, we can see similar reversal patterns among global equity ETFs. The S&P 500 Index (SPY) declined the least during the market drop from September through October 27th (blue bars) and now has rebounded the least (red bars). We had a greater decline among stocks from Europe, Australasia, and the Far East (EFA), and now also a greater rebound. By far the largest market drop was recorded among the emerging markets (EEM), and now they have doubled the rebound of the U.S. stocks.

These days, it seems as though there are only two trades: you are either long risk assets (long stocks, long commodities, long euro) or you are selling them (long U.S. dollar, long yen, long Treasuries). Meanwhile, relief is slow in coming to the high yield corporate market, where yields backed up on Friday to near 20%. Impressive rallies notwithstanding, there appears to be a limit to investors' risk appetites.
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Further Signs of Stock Market Strength

Money flow for the Dow 30 industrial stocks recently turned positive, adding to the evidence of buying support for the current market. Across the NYSE, NASDAQ, and ASE, Friday registered 505 new 20-day highs against 194 lows--the first time since the decline began that we've seen more new highs than lows. My measure of Demand (an index of the number of stocks closing above their volatility envelopes) was 205 on Friday; Supply was 22. That means that over nine times as many stocks displayed significant upside price momentum as downside.

Throughout the decline, periods of positive money flow have been brief and have led to renewed selling. So far, the market has been able to feed on strength. While this action isn't sufficient to rule out future price weakness, it does constitute one necessary element in a bottoming process.
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Two Perspectives on Recent Stock Market Activity

I recently posted on the topic of record volatility in the stock market. Volume and volatility tend to be highly correlated; it takes the participation of large institutions to move markets. As we can see from the top chart, depicting the S&P 500 ETF (SPY; blue line) and the 20-day moving average of volume in SPY (pink line), volume has also greatly expanded with the recent decline and bounce back.

Meanwhile, we continue to see a bid underneath this market, as the Cumulative NYSE TICK line moves to new highs. For an explanation of the recent divergences between the TICK line and price during the market bottoming, check out this post.
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Historic Stock Market Volatility and the Concentration of Ownership in Stocks

Here's an update from an early October post; it helps illustrate how the recent stock market's volatility has been qualitatively and quantitatively unlike anything we've seen in years. Indeed, this is the highest level of 20-day average true range for the S&P 500 Index since my data began in 1962. That means that we've seen higher volatility than during the 1987 market crash and higher volatility during the major declines of 1970 and 1974.

The recent bout of extreme short-covering in Volkswagen stock is an illustration of the volatility that can result from a concentration of shares in institutional hands. According to recent estimates, institutions account for over three-quarters of all stock market ownership. By contrast, individuals owned 94% of stocks in 1950 and 63% of stocks in 1980. With the recent liquidations forced upon hedge funds, mutual funds, pension funds, insurers, and other financial institutions, we've seen historic levels of volatility as a function of historic levels of concentration of ownership among institutions.
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