Friday, November 6th
* Today's early trade promises to be dominated by the payrolls data. Trade overnight slowed down ahead of the release, but I expect it to generate a good deal of activity, given the focus on whether the Fed will hike rates in December. What I'll be looking for out of the release is how rates, the dollar, and stocks respond--and whether they move thematically, in sympathy. Any early move is more likely to be sustained if it's part of a thematic macro trade.
* That being said, I don't have a great deal of conviction going into the report. I thought the inability to sustain an overnight bounce yesterday was significant, as was the bounce off the morning lows. All in all, we're overbought longer term, oversold shorter term. I would need to see yesterday's lows hold on any selling pressure in order to be a buyer.
* Most people are familiar with VIX, the measure of volatility implied by options markets. Fewer people track implied correlations: the correlations reflected in options pricing. While VIX has not moved tremendously from the start of the calendar year, the implied correlation among stocks has collapsed. We're pricing in very low correlations, reflecting a relatively differentiated, rotational environment. We had a decent sized drop in implied correlation yesterday, such large drops have generally been bullish 3-5 days out. I'll be sharing more research on implied correlation in coming days. The index symbol is $ICJ.
Thursday, November 5th
* Yesterday's post noted concerns over risk/reward and Wednesday's trade offered a pullback, as we closed with fewer than 50% of SPX stocks above their three-day moving averages. We closed near levels that have been associated with short-term buying opportunities (see chart below) and have bounced higher overnight, so buying weakness that holds above the overnight lows and at least testing the recent highs is a reasonable strategy.
* Yesterday's move higher in rates in the wake of the Fed chair's statements contributed to USD strength, commodity weakness, and weakness in stocks. That pattern is worth keeping an eye on going forward. When markets trade thematically--multiple asset classes moving in a coherent pattern--that trade is generally supported by large institutions and will have some legs, short-term. Only watching the instrument you're trading loses a lot of information.
* I'm also increasingly cognizant of how many directional moves get off the ground during European and Asian hours. Indeed, the median move from open to close in SPY has been about the same as the overnight move during 2015. Anyone limiting stock index trading to U.S. hours effectively cuts the opportunity set in half.
Wednesday, November 4th
* Stocks generally continued their strength on Tuesday, moving to new highs for this move. I used the occasion to take profits. It's not that I think the bull run has ended for good. Rather, I'm not in love with the risk/reward here after a solid move higher. Specifically, we are not only overbought on my breadth measures (more than 70% of stocks above their short and medium term moving averages), but yesterday displayed waning breadth relative to Monday for the SPX shares.
* With respect to breadth, it's noteworthy that we registered 410 stocks making fresh three-month highs yesterday, which is still below the number of new highs seen last week. One reason I'm not overly concerned by this seeming breadth divergence is that so few stocks are making fresh three month lows--only 65. Returns in SPY tend to be best when the number of stocks making new lows are very high and very low. You need to see an increasing number of shares displaying weakness before the market as a whole turns over. We're not seeing that so far. What we're seeing is a rotational market, with formerly weak sectors, such as energy shares, now perking up.
* Below is a chart of breadth for the SPX stocks. It captures the percentage of stocks trading above their 3, 5, 10, and 20-day moving averages. (Raw data from Index Indicators). Note that after a breadth thrust higher following the late September lows, we've generally stayed above 50%. Pullbacks in the breadth measure have been good entries on the long side. As long as we get dips in the breadth measure occurring at successively higher price lows, I consider the uptrend to be intact.
Tuesday, November 3rd
* Yesterday's post noted the possibility of broadening buying in stocks and that is exactly what we got, with small caps catching up to larger caps and SPX making new highs for this move. Indeed, yesterday was a poster child for an upside trend day, with a skewed positive distribution of NYSE TICK values through the day. Here's a post that outlines four keys to an upside trend day. Recognizing those days relatively early in the session can be very valuable.
* Below you can see the breakout in the cumulative uptick/downtick line (red line; 9/25/15 - present), which represents upticks minus downticks for all stocks, all exchanges. As long as we're making new highs on that measure, I continue to lean to the long side.
* A breakdown of upticks vs. downticks for yesterday's trade found that what was so significant about the trend day was the near total absence of selling pressure, rather than a huge jump among buyers. (This was also evident in yesterday's relatively modest volume). Indeed, since 2012, I've seen only 21 days with similar levels of low selling. Five days later, SPY was up 17 times, down 4 for an average gain of +.51%, though, interestingly, there was no particular edge for the next day.
Monday, November 2nd
* Stocks experienced a late day selloff on Friday and extended the selling overnight before stabilizing a bit. We continue to see large cap shares (SPX) make higher lows and higher highs and, so far, the recent selling does not change that pattern. Meanwhile, the Russell 2000 Index of small and midcap shares has shown relative weakness, but all of that might be part of an extended, flattish correction (see below). Should small cap strength join the larger caps, in keeping with year-end seasonals, we could see a melt-up in stocks. I don't hear many people talking about that possibility. My job as a trader is to be aware of a variety of scenarios and the evidence that would support each; not to impose my predilection on markets. I have been operating with an assumption that we've already seen a momentum peak for stocks, but I'm open to revising that view--and renewed interest in smaller caps would certainly spark such a revision.
* On a six month and one-year basis, raw materials shares--stocks related to the commodity sector--have been the weakest by quite a margin. Interestingly, however, over the past month, those raw materials stocks have been market leaders, per the chart below from the excellent FinViz site. Commodities are sensitive to patterns of global growth, so I'm watching those--and commodity related sectors such as XLB and XLE--quite closely.
* Today's early trade promises to be dominated by the payrolls data. Trade overnight slowed down ahead of the release, but I expect it to generate a good deal of activity, given the focus on whether the Fed will hike rates in December. What I'll be looking for out of the release is how rates, the dollar, and stocks respond--and whether they move thematically, in sympathy. Any early move is more likely to be sustained if it's part of a thematic macro trade.
* That being said, I don't have a great deal of conviction going into the report. I thought the inability to sustain an overnight bounce yesterday was significant, as was the bounce off the morning lows. All in all, we're overbought longer term, oversold shorter term. I would need to see yesterday's lows hold on any selling pressure in order to be a buyer.
* Most people are familiar with VIX, the measure of volatility implied by options markets. Fewer people track implied correlations: the correlations reflected in options pricing. While VIX has not moved tremendously from the start of the calendar year, the implied correlation among stocks has collapsed. We're pricing in very low correlations, reflecting a relatively differentiated, rotational environment. We had a decent sized drop in implied correlation yesterday, such large drops have generally been bullish 3-5 days out. I'll be sharing more research on implied correlation in coming days. The index symbol is $ICJ.
Thursday, November 5th
* Yesterday's post noted concerns over risk/reward and Wednesday's trade offered a pullback, as we closed with fewer than 50% of SPX stocks above their three-day moving averages. We closed near levels that have been associated with short-term buying opportunities (see chart below) and have bounced higher overnight, so buying weakness that holds above the overnight lows and at least testing the recent highs is a reasonable strategy.
* I'm also increasingly cognizant of how many directional moves get off the ground during European and Asian hours. Indeed, the median move from open to close in SPY has been about the same as the overnight move during 2015. Anyone limiting stock index trading to U.S. hours effectively cuts the opportunity set in half.
Wednesday, November 4th
* Stocks generally continued their strength on Tuesday, moving to new highs for this move. I used the occasion to take profits. It's not that I think the bull run has ended for good. Rather, I'm not in love with the risk/reward here after a solid move higher. Specifically, we are not only overbought on my breadth measures (more than 70% of stocks above their short and medium term moving averages), but yesterday displayed waning breadth relative to Monday for the SPX shares.
* With respect to breadth, it's noteworthy that we registered 410 stocks making fresh three-month highs yesterday, which is still below the number of new highs seen last week. One reason I'm not overly concerned by this seeming breadth divergence is that so few stocks are making fresh three month lows--only 65. Returns in SPY tend to be best when the number of stocks making new lows are very high and very low. You need to see an increasing number of shares displaying weakness before the market as a whole turns over. We're not seeing that so far. What we're seeing is a rotational market, with formerly weak sectors, such as energy shares, now perking up.
* Below is a chart of breadth for the SPX stocks. It captures the percentage of stocks trading above their 3, 5, 10, and 20-day moving averages. (Raw data from Index Indicators). Note that after a breadth thrust higher following the late September lows, we've generally stayed above 50%. Pullbacks in the breadth measure have been good entries on the long side. As long as we get dips in the breadth measure occurring at successively higher price lows, I consider the uptrend to be intact.
Tuesday, November 3rd
* Yesterday's post noted the possibility of broadening buying in stocks and that is exactly what we got, with small caps catching up to larger caps and SPX making new highs for this move. Indeed, yesterday was a poster child for an upside trend day, with a skewed positive distribution of NYSE TICK values through the day. Here's a post that outlines four keys to an upside trend day. Recognizing those days relatively early in the session can be very valuable.
* Below you can see the breakout in the cumulative uptick/downtick line (red line; 9/25/15 - present), which represents upticks minus downticks for all stocks, all exchanges. As long as we're making new highs on that measure, I continue to lean to the long side.
Monday, November 2nd
* Stocks experienced a late day selloff on Friday and extended the selling overnight before stabilizing a bit. We continue to see large cap shares (SPX) make higher lows and higher highs and, so far, the recent selling does not change that pattern. Meanwhile, the Russell 2000 Index of small and midcap shares has shown relative weakness, but all of that might be part of an extended, flattish correction (see below). Should small cap strength join the larger caps, in keeping with year-end seasonals, we could see a melt-up in stocks. I don't hear many people talking about that possibility. My job as a trader is to be aware of a variety of scenarios and the evidence that would support each; not to impose my predilection on markets. I have been operating with an assumption that we've already seen a momentum peak for stocks, but I'm open to revising that view--and renewed interest in smaller caps would certainly spark such a revision.
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