Monday, May 02, 2016

Trading Notes for the Week of May 2, 2016

Thursday, May 5th

*  I will be taking a sabbatical during May and June to work on my next book project, which is the third volume of a textbook and an updating of short-term approaches to behavior change.  The blog will be updated on weekends and I'll continue to write the Forbes blog.

Worthwhile perspective on spotting your best trades from SMB.

*  Stocks continued weak yesterday, before bouncing in late and overnight trading.  Breadth continued to weaken, with new monthly highs expanding to 382, but fresh monthly lows also expanding to 834.  We're seeing particular weakness among Asian stock markets, with the strong currencies weighing on shares there. 

*  We continue short-term oversold, with roughly 30% of SPX shares closing above their short-term moving averages (see below).  The recent inability to rally off these oversold levels is making the current market situation different from what we've seen during the rally off the February lows, as macro weakness weighs on the rally.  Payrolls tomorrow will be a major focus.

Wednesday, May 4th

*  Looking to find new and useful books, apps, podcasts, and more?  Excellent resource: Josh Brown will offer his list on Product Hunt LIVE.

*  Stocks continued their weakness yesterday and in overnight trade today, with notable weakness among small caps contributing to negative breadth.  New monthly highs across all exchanges dropped to 304; new lows expanded to 619.  VIX once again jumped and closed above 16.  Global economic weakness has become a dominant market theme, with falling stocks and rising bonds.  Short-term we're oversold, with roughly a third of stocks closing above their 3, 5, and 10-day moving averages; on an intermediate-term basis, I still am not getting oversold readings, but market strength is waning.

*  The cumulative indicators measure tracks buy vs. sell signals for all NYSE issues across a variety of technical trading systems, such as Bollinger Bands, CCI, etc.  Throughout the rally since February, buy signals have handily outnumbered sell signals.  That looks to be changing, given the recent weakness.

*  I'm keeping a close eye on commodities, as yet another possible indication of global economic weakness.  Specifically, I want to see how commodities are behaving vis a vis a variety of currencies, not just USD.

Tuesday, May 3rd

*  Thanks to the Benzinga pre-market prep show for the opportunity to offer a few trading perspectives.

Unusually thoughtful post from Dash of Insight on the importance of understanding analyses that we read.

*  Stocks held above their Friday lows yesterday and rallied to the Friday highs before selling off again in overnight trade.  We continue a consolidation mode; new monthly highs rose to 563 and lows dropped to 397.  About 50% of SPX shares closed above their 20-day moving averages and 60% above their 50-day averages (Data from Index Indicators).  I expect those numbers to reach more oversold levels before the correction has run its course.  Note how we have been making lower highs on the breadth measure tracking the percentages of SPX shares above their short-term moving averages.

*  Sentiment, as measured by share creation versus redemption for the SPY ETF, has turned more bearish for the past three sessions, with net redemptions.  I'm watching that closely.

*  We saw buying pressure nicely exceed selling pressure yesterday on the upticks/downticks measure.  Thus far, net selling and short-term oversold conditions in the market have become near-term buying opportunities for market participants.  My continued leaning is to sell market bounces that fail to take out prior day's highs.

Monday, May 2nd

*  The best model for making trading improvements comes from understanding the drivers of your most successful trades.  Re-engineering your best trading makes you your own guru.

*  We saw a sharp selloff on Friday, with NASDAQ shares taking out their early April lows and new monthly lows outnumbering new highs, 583 to 513.  VIX hit 17 during the session before dropping on a late rally.  That rally has continued modestly in overnight trading.  On a short-term basis, we're oversold, with fewer than 30% of SPX shares trading above their 3- and 5-day moving averages.  My intermediate measures, however, are not yet in oversold territory.  My leaning is to sell bounces that cannot take out Friday's highs.

*  One concern I have about the market is the change of regimes in recent sessions.  The weak dollar is buoying commodities but not stocks, and it's growth stocks (SPYG) underperforming value ones (SPYV).  Earnings have not been impressive and we seem to be pricing in economic weakness.  It's far from clear that the move to negative interest rates has sparked either economic optimism or growth.  All that being said, I am treating this as a correction within a larger upward cycle, not as the start of a bear market.

*  Note how the realized volatility of VIX (implied vol) has hit low levels at relative market peaks and has peaked at relative market bottoms.  We are coming off a very low vol of VIX.