Monday, November 09, 2015

Trading Notes: Week of November 9th

Friday, November 13th

*  We started Thursday weak but not yet at levels corresponding to intermediate-term oversold.  The resulting strategy of selling bounces that could not take out prior (overnight) highs worked very well during the day, as we closed weak and now have traded lower during overnight hours. As I mentioned a while ago, I'm impressed  by the fact that many market moves are beginning during London hours and not during the U.S. day session.  My working hypothesis is that moves in stocks *will* be anchored in London during periods in which the primary drivers of stock prices are macro-related.  Recently, the trade in stocks has been less about earnings and U.S. economy and more about currencies, interest rates, and central bank dynamics.

*  With the recent weakness, we're much closer to intermediate-term oversold levels per the chart below, but not quite there across many indicators I track.  The risk with selling the bounces down here is that the short-covering rallies can be more violent.  Waiting for short-term overbought conditions that occur at lower highs and being nimble on exits makes sense as a day timeframe strategy.

*  One implication of the macro driver idea above is that tracking how other, correlated assets are trading (commodities, USD, rates, etc.) can give some clues as to how stocks may behave going forward.  The higher rates, stronger dollar, weaker commodity situation has not been good for stocks.

Thursday, November 12th

*  I'm spending the day at the trading desk accompanying a very accomplished trader.  Will most likely live tweet market observations.  Stock Twits handle is @steenbab.

*  We've made a couple of attempts to bounce off Monday's lows and none have been sustained.  Indeed, my breadth measures have modestly deteriorated during that time and I'm still not showing us at levels that have corresponded to intermediate-term oversold conditions.  All that suggests to me that we are vulnerable to a downside break.  My leaning is to sell bounces that cannot take out the overnight highs.

*  In general, we tend to see elevated levels of pure volatility (volatility per unit of market volume) at market lows and low levels at market peaks.  Interestingly, we're much closer to levels associated with tops than bottoms.

*  I continue to be impressed by how the vigorous rally in stocks has seemingly hit a wall in the wake of rising rates and a stronger dollar.  That dynamic is very much on my radar.

Wednesday, November 11th

*  Tuesday attempted follow-through on Monday's selling, but there were divergences among the sectors relative to being able to break Monday's lows.  The SPX held above those lows in a market noted yesterday to be short-term oversold.  That led to late day buying which has continued overnight.  I'm viewing this as part of a topping process and would be surprised to see a strong, fresh bull leg here.  Buying weakness that holds above overnight and previous day's lows in anticipation of testing recent highs makes sense as a short-term strategy.  I would lighten up on strength that leaves us with upside divergences.

*  Where I'm finding some of the best short-term trading opportunities in the stock indexes is when we get overbought or oversold conditions followed by an inability of stocks to continue their upward or downward trajectory.  At such points bulls or bears are committed and the market cannot move further in their direction.  That leads to selling or short covering that benefits traders buying at the oversold points that can't go lower or selling at the overbought points that can't go higher. 

Tuesday, November 10th

*  Monday's market was anything but rotational, as early, broad selling persisted through the morning. An important way of recognizing such a shift is by tracking the early distribution of NYSE TICK values, which gauge the number of upticks versus downticks among all NYSE shares.  When that distribution is skewed to the downside and SPX stays persistently below its opening price even during periods of upticking, it's an early sign that sellers are in control.  Another "tell" for weakness is tracking how the various sector ETFs are trading relative to their opening prices.  If they are dominantly trading down from their opens and advance-decline numbers are weak, you know that this is a broader selloff and not part of mere rotation.

*  The selling has left us short-term oversold, with fewer than 20% of SPX shares trading above their 3 and 5-day moving averages.  It is not at all unusual to get a bounce from such oversold levels.  Should we test yesterday's lows, I will be watching breadth and TICK values closely to see if selling pressure is continuing or waning.  Meanwhile, we are not oversold on an intermediate-term basis, per the chart below, which tracks the number of SPX stocks making fresh 5, 20, and 100-day new lows.  (Raw data from Index Indicators).  My working assumptions are that this correction has further to go but also that the bull leg from late September has further to go.  

Monday, November 9th

*  How do we make changes in our lives?  In our trading?  In our emotional responses to trading?  In our relationships?  If it was as easy as setting goals and motivating ourselves with positive thinking, the psychology and self-help sections of bookstores would be quite a bit smaller.  I believe the recent Forbes post is one of my more important ones.  The idea is that, in a sense, we never really change ourselves.  Instead, we learn to replace one set of motivations--the ones that lead to undesired actions and consequences--with an existing, stronger set of motivations.  In other words, we change by become more of who we already are.  

*  We continue with a rotational market, with some sectors recently strong (financials, small caps) and others weak (interest rate sensitive utilities and consumer staples shares).  (See the graphic from FinViz below).  Across all stocks, however, we're seeing an increasing number making short-term new lows.  Friday saw 752 stocks across all exchanges register fresh monthly highs, but also 540 make new monthly lows.  That's the most new lows since early October.  Longer term, a rotational correction that does minimal damage to the overall indexes would be a plus for stocks.  Short term, I suspect this correction has further to go.  My leaning is to sell bounces that cannot take out prior overnight and previous day's highs, but I also plan to fade weakness that cannot yield fresh price lows and expansion in the number of stocks making new lows.  In short, I'm treating this as a rotational, range market until demonstrated otherwise. 

*  A large part of the rotational dynamic, of course, is the recent move higher in interest rates and in the U.S. dollar on the heels of strong economic numbers and growing conviction of a Fed rate hike.  Watching the currency and rates markets will be important in gauging moves for stocks overall and for the sectors most impacted by rates.  My best guess is that the markets are doing the Fed's hiking for it, that December will bring an uber-dovish hike, and that we will continue with central bank uncertainty into 2016.  It is not clear to me that the Fed will want an extended move higher in the dollar if a goal is to keep growth and inflation on target.