Monday, March 28, 2016

Trading Notes For The Week Of March 28, 2016

Friday, April 1st

Top 20 people to follow on Stock Twits and Twitter for great market content.  Of course, Ivaylo is too modest to include himself, so I'll nominate him here both for his blog content and his books

*  We've pulled back from recent highs, as my measures of realized event time volatility continue lower--a situation that, in the past, has been associated with subnormal forward returns.  Stocks making new monthly highs across all exchanges declined from 1221 to 822; monthly lows ticked up from 106 to 137.  So it's hard to say that we have weak breadth.  As noted yesterday, my measure of upticks vs. downticks has continued positive.  Yesterday was positive, but total institutional participation contracted to the lowest level since the rally began.  Again, this has been associated historically with subnormal returns.  Institutional participation is a measure of total upticks and downticks across all NYSE shares (not volume traded).  The low volume and volatility make me not particularly bullish; the absence of new lows and downticks make me not particularly bearish.

*  My cycle measure continues in positive territory but off its highs.  Many of my breadth measures look this way:  positive, but off their peaks.  Note how we've stayed positive for much longer than during recent cycles--again a tell that this has been more than a bear market rally or even a bounce higher in a range market. 

*  Are there microtrends within the market and are these tradeable?  Hell, I have no idea, but I'm researching it.  Will let you know what I find.  This will be a purely systematic implementation.  My other research project is identifying longer term cycles in the stock market, with data going back to 1980.  This is based on a unique implementation of the event time concept.  Basing event time on volume doesn't work because of the secular differences in volume over the period of decades.  If you're not innovating, you're stagnating.  Too many traders pat themselves on the back for doing the same thing again and again and calling it discipline.  A disciplined implementation of an outmoded approach will lose money with admirable consistency.

*  If you look at stocks outside the U.S., such as the EFA ETF, the longer-term picture is pretty unimpressive.  It is not clear to me that negative rates are having the desired impact overseas.  If this is the case, we could see more aggressive central bank stimulation of economies, particularly if those indicators of deflation--strengthening currencies, weakening commodities, etc.--become more problematic.  

Thursday, March 31st

*  Is the housing market strong or weak?  See It Market notes mixed signals amidst supply constraints.

*  Oil and commodities overall (DBC) have been lagging stock price gains recently; keeping an eye on that relationship.  I'm also noticing high yield bonds (JNK) lagging recent price gains in stocks.  These relationships were key during the period of market weakness.

*  Stocks rallied nicely early yesterday, again posting fresh rally highs before pulling back.  Breadth once again expanded, with over 1000 stocks across all exchanges posting fresh monthly highs.  My measure of upticks vs. downticks continued quite strong; below we can see a 10-day moving average.  As mentioned before, volume has not been impressive, but the volume traded has been quite skewed toward the buyers:

*  One of my pure volatility measures continues at levels more consistent with market highs than lows.  Note VIX now trading a bit above 13.  This has the potential to significantly constrain directional movement across all time frames.  There is less volume traded, *and* each unit of volume moves price less.

*  Note the continued strength of liquid, high quality corporate bonds (LQD).  In a world of low and even negative rates, any yield becomes a safe haven.  Hence the environment in which stocks and bonds have been jointly outperforming (the risk parity trade).

Wednesday, March 30th

*  New Trader U highlights 22 bad trading habits.  Notice how many of them boil down to not being rule-governed, where the rules reflect trading strengths and identified best trading practices.  That suggests that traders are suffering, not just because they don't study markets, but because they haven't truly studied their own performance.

*  Stocks liked the statements of the Fed chair and that has lifted us to a new high for this rally.  Interestingly, across all stocks on all exchanges, three month new highs versus lows are lagging their peak from a couple of weeks ago (see below).  Among SPX shares, however, fresh 100-day highs vs. lows did hit a marginal new peak.  I would become concerned about the uptrend if stocks making fresh new lows were to expand from here.

*  Once again, we saw buying pressure completely dominate selling pressure via the uptick/downtick measures.  This lifted the cumulative uptick/downtick measure to new highs (see below).  As noted yesterday, volume has not been stellar (though it picked up yesterday), but what volume has been there has been strongly skewed to the buyers and that has been associated historically with favorable near-term returns (upside momentum).

Tuesday, March 29th

*  How can you find trade opportunities that others miss?  Here is a process that can help you become better at perceiving opportunity.

*  Meh.  Volume has been quite lackluster, and that is more typical of market tops than bottoms.  We remain in relatively oversold territory on my swing measures and my measures of upticks vs. downticks remain strong.  So my base case remains a continued move higher, but I can't say I'm particularly impressed with recent action.  Financial and energy shares have been relatively weak and I continue to keep an eye on small caps.  Perhaps month end/quarter end flows will bring some life to the market.  Stocks making fresh monthly highs did uptick yesterday and I'm not seeing an influx of selling at all.  Of the (low) volume present yesterday, buyers were dominant.

*  Put/call ratios were low yesterday; shares outstanding for SPY have been modestly elevated.  Bears are relatively absent.

*  We're working off quite an overbought level, per the intermediate-term strength chart below, which tracks the number of SPX shares making new highs vs. lows on multiple time frames.  To the extent that we can do so with minimal price damage, it is supportive to the bulls.

Monday, March 28th

*  In case you missed, here's my latest podcast; thanks to Chat With Traders.

*  We've bounced from a swing oversold level and, as we can see below, are not yet at an overbought level.

*  Buying interest hit a new rally high with this most recent bounce.  This measure tracks upticks versus downticks for all listed stocks, not just those on NYSE.  

*  The one fly in the ointment that I see is the low volume and volatility, which are associated historically with subnormal forward returns over an intermediate-term horizon.  My measure of cumulative upticking and downticking is not yet at such a low point that would suggest poor near-term returns.  As a rule, bull moves die with an absence of buyers.  It's something I'm monitoring daily.