Monday, October 26, 2015

Trading Notes: Week of October 26th

Friday, October 30th

*  Stocks continued their upside, hitting new highs for this leg even as we continued to see some continued lagging from small cap shares and from interest-rate and commodity-sensitive issues.  Still, with respect to the SPX, corrections are occurring in relatively flat fashion, creating launching pads for fresh moves higher.  As long as pullbacks are occurring at successively higher levels and we continue to make fresh price highs, buying weakness continues to be the favored strategy.

*  I recently compared cumulative upticks/downticks for the Dow stocks versus the NYSE Composite.  The Dow ticks have been powering to new highs, whereas the cumulative NYSE ticks have remained flat.  It's yet another indication that the bull move is most robust among large cap issues, with smaller cap issues lagging. 

Thursday, October 29th

*  Stocks began the day quite strong, with an NYSE TICK distribution skewed to the positive side.  When we get multiple readings > +800, it's generally an indication of institutional buying, particularly when accompanied by above normal volume.  That strength returned following the reflex selloff after a Fed announcement perceived as hawkish, with solid breadth and an expansion of strength to the small caps.  Once again it's a situation in which short-term pullbacks that take the majority of SPX shares below their short-term moving averages end up providing good long side entries.  Those pullbacks are also occurring at successively higher price lows which, as noted yesterday, gives the benefit of the doubt to the bulls.

*  I'm keeping an eye on the strong USD, as a firm Fed and an ECB and BOJ still in QE mode should contribute to further USD strength.  That puts pressure on EM countries tied to USD, essentially tightening their conditions even as their economies are slowing.  That could pose further challenges for China in particular.  Note overnight bearish price action in Asia today.

*  Tuesday saw 460 stocks touch fresh monthly lows; yesterday we had the strong price action and 306 lows.  If the rally truly is broadening, we should not return to these levels of new lows; that's something I'll be watching closely.

Wednesday, October 28th

*  I'll be tweeting from the QuantFest conference tomorrow; I like what InvestiQuant is doing with identifying edges at the intraday, overnight, and swing levels and look forward to having something to report this weekend.

*  Tuesday saw some further correction on further slow trading, with continued breadth divergences among larger and smaller cap stocks.  Looking at the data from Index Indicators, we can see that about 67% of Dow stocks closed above their five-day moving averages but only about 23% of small caps and 34% of midcaps.  Yesterday was the first recent day where more shares actually touched monthly lows than highs.  While I do think we could see further price strength from here (I give benefit of the doubt to the bulls when short-term oversold conditions are occurring at successively higher price lows), that strength is likely to be selective, accompanied by divergences.  

*  My working hypothesis is that we've entered a "Nifty Fifty" kind of environment where, amidst slowing global growth, investors seek safe large caps that offer prospects of growth and yield and avoid everything else.  Hence the strength in the Amazons and Googles and avoidance of retail, energy, and smaller cap shares.  I'm watching breadth closely to see if that hypothesis is supported over time.  In general, my leaning is to be long the large caps on short-term corrections and lighten up on short-term strength. 

Tuesday, October 27th

*  Thanks to Michael Covel for a stimulating podcast interview.  I'll post the link once it's up.  His archive of 390 podcasts is an impressive body of work; very worth checking out.

*  Monday was an unusually narrow trading day, with volume in SPY slowing to its lowest level in weeks.  Given anticipation of a Fed announcement on Wednesday, we could see further standing aside in today's trade.  So far the market has been rising on superior volatility and volume and correcting on lesser volatility and volume, creating relatively flat corrections.  That, of course, is what helps sustain uptrends.  We have a good amount of economic data out this week, on top of the Fed and Bank of Japan meetings.  I don't expect the slow trade to continue throughout the week. 

*  I remain unimpressed with the action of small caps (IJR) and midcaps (MDY), as reflected in the recent failure of the Russell 2000 Index (IWM) to make fresh highs.  Note also the recent weakness in oil and in energy shares (XLE), as well as the weakness in retail shares (XRT).  I become concerned about the upside when the rising tide is not lifting all boats.

*  Here's an interesting statistic:  During 2015, when fewer than 30% of SPX stocks have traded above their five-day moving averages, the next five days in SPX have averaged a gain of +.76%.  All other occasions have averaged a five-day loss of -.21%.  (Raw data from the excellent Index Indicators site).  Waiting for short-term strength before entering on the long side has been a losing strategy, and waiting for short-term weakness to enter on the short side has also lost money.  That's a good reason why the trade based on fear of missing moves has been so deadly.

Monday, October 26th

*  If I were building long-term positions in companies as investments, I'd select companies that achieve a high degree of engagement with employees.  This is why.  If your trading is your business, you are both manager and employee.  Does your management truly engage you?  Vitally important topic.

Great list of takeaways from the recent Stocktoberfest conference from Howard Lindzon.

*  Stocks continued their strength on Friday, as we hit new highs for the recent upleg and fresh three-month highs expanded to 483, the highest since June.  This suggests that momentum continues strong and that increases the probability that we will ultimately see new highs in stocks as part of the current cycle.  We have pulled back from Friday highs in overnight trading and some short-term corrective activity can be expected after the recent strong performance.  So far, however, dips have been bought aggressively.  The last two occasions in which more than half of stocks dropped merely below their three-day moving averages have resulted in strong buying.

*  Ultimately two factors appear to be leading stocks higher:  solid earnings (most recently from large cap tech names) and very accommodative monetary policy globally.  That, combined with the perception that the Fed is unlikely to raise rates, has resumed the QE trade.  Of course, as financial conditions improve, the Fed becomes more likely to raise rates in December, so we could see interesting year-end dynamics.

*  During this most recent move higher, the measure of upticks/downticks that I track for all U.S. stocks (red line on chart below), not just NYSE issues, has remained relatively flat.  This is because we've seen recent relative weakness among small cap issues.  I will be watching that closely early this week, as an expansion of small cap strength would broaden out the rally and support the idea of a continued upside, whereas a broadening of weakness (larger caps following small caps lower) would signal more significant potential for correction.