Monday, April 18, 2016

Trading Notes For The Week Of April 18, 2016

Friday, April 22nd

*  Excellent post from Jesse Felder questioning the wealth effect from recent central bank policy.

*  Stocks pulled back in Thursday's trade, with fewer than 50% of SPX shares closing above their 3 and 5-day moving averages.  Despite the pullback, even my shorter-term measures remain in overbought territory, as seen below:

*  Note how the pullback in bond prices (rise in yield) was accompanied by drops among consumer staples (XLP), utility (XLU), and real estate shares (IYR).  Because these sectors offer enhanced yield and because government bonds offer so little yield, rate views are playing out in these stock sectors.  This is a very relevant dynamic for traders/investors.

*  Retail (XRT) and technology (XLK) shares have been underperformers lately; much of the recent strength has come from commodity related sectors (XLB, XLE, XME).  Strong commodities (DBC) are another macro theme playing out within stock sectors; the relative performance of stock sectors has been important's not just risk-on, risk-off across all sectors.

China underperforming recently amidst concerns about credit defaults.  On the radar...

Thursday, April 21st

*  Rob Hanna shares historical market patterns on the Quantifiable Edges blog.  Also check out Rob's work with Scott Andrews on the InvestiQuant blog.  Lots of good ideas here.

*  Stocks continued their move higher on continued positive breadth.  Across all exchanges, we had 1205 stocks make fresh monthly highs against 192 lows.  As noted earlier, it's the absence of distinctive weakness in any of the sectors that is noteworthy in the recent market strength.

*  Here's a valuable perspective on supply and demand in the US stock market.  It's a 10-day moving average of upticks versus downticks among all NYSE shares.  Note that, since the February lows, that average has never dipped below zero.  Most recently this strength has been due to the low level of downticks; quite simply, we are not seeing sustained selling from institutions and this has kept stocks aloft.

  *  Here's a look at what's been relatively strong and weak among stock sectors from the FinViz site.  Note the unusual strength among commodity related shares--a complete reversal of the weakness we saw early in the year and through a good chunk of 2015.  Renewed strength among commodities has been the clearest indication that markets are no longer pricing in deflationary forces and that's been good for global stocks.

Wednesday, April 20th

*  Looking for a sketch pad for quantified patterns in stocks and ETFs?  Great screener on Kora Reddy's Paststat site.

*  Stocks moved to new highs for this run, with significantly expanded breadth.  Across all exchanges, stocks making fresh 3 month highs vaulted to a new peak.  (See below).  The general rule is that peaks in breadth/momentum tend to precede price peaks for bull cycles.  While breadth is stretched here--and indeed we've pulled back in overnight trade--we continue to see dips at successively higher price lows, which is what makes for bull moves.

*  A different way of looking at breadth tracks the number of NYSE stocks giving buy versus sell signals across a variety of technical trading systems.  I keep those stats as a cumulative running total, which has also displayed unusual strength in recent sessions.  (See below).  What is equally noteworthy is that few shares are giving sell signals, which is a reflection of the low level of selling pressure evident in the upticks/downticks data.  Bottom line, I'm not seeing signs of deterioration in this market at the present time.

*  Note also the breakout strength among international equity indexes (EFA).  We've seen broadening international strength in stocks as the US dollar has weakened. 

Tuesday, April 19th 

*  Limited notes next few days;  working with traders in London. 

*  Breadth continues strong,  with over 1000 fresh monthly highs and over 80% of SPX stocks closing above their 3, 5, and 10 day moving averages. 

*  The measure of upticks and downticks continues to show unusually low selling pressure. Stocks are unlikely to sustain weakness if institutional participants are not selling. 

Monday, April 18th

One of the greatest life risks we take is playing it safe.  Life is too important to be wasted on inconsequential goals.

*  Recently the hit rate on my trades has gone up.  That's because I'm not *trading*.  I am entering positions like an investor and exiting like a trader.  Waiting for things to line up across different time frames provides the good entry.  Defining a significant move for a given volatility regime and exiting when that is achieved provides the good exit.  Slow to get into trades, quick to get out when the market gives good prices.  Perhaps the edge in such a method lies in making *not trading* the default.  All I can say is that my interest in markets has redoubled ever since I got away from screens.  Frequent trading is like frequent eating: nothing could be worse for the palate, stomach, and appetite!

*  Stocks opened the weekend lower on the heels of the inability of the OPEC meeting to produce an agreement over production cuts.  Since the early trade, oil and stocks have rebounded a bit; I'll be watching the correlation between oil and stocks to see if we re-enter the regime that was bearish for both, as well as for high yield bonds.  A resumption of a strong dollar trade would fuel such a regime; in the absence of the dollar trade, the correlation between oil and stocks may be less certain.

*  Breadth dipped on Friday, with 795 stocks making fresh monthly highs and 137 registering new lows.  My volatility measures have hit low levels that have been associated with market tops, including the "pure volatility" measure that tracks the average volatility per unit of trading volume.  So far, we haven't seen a significant expansion of selling pressure in the uptick/downtick measure or in the new lows data; I'm watching those closely.  My "pure correlation" measure, tracking the correlation among stocks specific to given volatility regimes, also is at (low) levels historically associated with subnormal forward returns over a several week period.

*  My measure of intermediate term strength, assessing new highs versus lows across all SPX shares, has fallen toward neutral levels even as price has moved higher.  While a few measures look toppy, it would surprise me if this bull move were to suddenly morph into a bear.