Beyond Subprime: Alt-A, Option ARMs, and Weak Financial Stocks

Back in August, Calculated Risk pointed out some good news/bad news: subprime delinquencies had peaked, but the Alt-A rate resets don't peak until late 2009, suggesting that delinquencies and foreclosures could be with us well into 2010. They made the excellent point that, relative to subprime, a smaller proportion of Alt-A mortgages had been securitized. That means that vulnerable mortgages remain on bank balance sheets and are likely to weigh those down for some time to come.

A third set of mortgages, Option ARMs, also have yet to reset. These will pose significant foreclosure problems once the initial teaser rates skyrocket. Together, Alt-A and Option ARMs mortgage problems could lead to losses as large if not larger than the initial subprime mess. While lawmakers are apportioning blame for the mortgage debacle, proposals are on the table to address the foreclosure crisis, including lowering mortgage rates, extending maturities on mortgage loans, and packaging these revised loans through Fannie and Freddie with explicit government guarantees. Questions abound, however, as to whether government-mandated financing will make a difference, particularly if household incomes fall more than such financing will save.

Meanwhile, the banking index ($BKX) fell another 4% today, as the financial stocks continue to lag other S&P 500 sectors. As of Monday's close, Decision Point notes, only 23% of financial shares are trading above their 20-day moving averages, compared with 41% for NYSE common stocks overall. With overhanging mortgage concerns and no clear path for resolution, TARP has failed to rescue the stocks of vulnerable financial institutions.
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Indicator Update for December 15th

Last week's indicator review concluded that the ball was in the bull's court, as we stood at the upper end of a trading range between 900 on the upside for the S&P 500 Index futures and the lows of the prior week. The bull could not deliver the goods, and we sold off early, only to rebound on Friday and leave us very close to where we were the previous week. Once again, we're knocking on the door of important resistance and the ball is in the bull's court.

The Cumulative Demand/Supply Index (top chart) has come a bit off its moderately overbought extreme; despite Friday's rally, Supply exceeded Demand. Stock sectors remain in range bound mode for the most part, but money flow for the Dow stocks has been negative for the week and made fresh bear market lows. The number of stocks making fresh 20-day highs fell behind new lows on Friday (second chart from top), in another indication of weakness.

Still, the Cumulative Adjusted NYSE TICK (second chart from bottom) has been able to grind higher. This underlying buying interest has kept the advance-decline line specific to NYSE common stocks near its recent highs (bottom chart). Indeed, as the chart from Decision Point notes, we've seen advancing issues outnumber decliners for 11 of the past 15 trading sessions.

I continue to view this as a range market; we need to see continued strength in NYSE TICK and a renewal of stocks making fresh 20-day highs to sustain a breakout move to the upside. With the weak money flow numbers, I'll need to see confirmation of strength from other indicators before assuming such a breakout. Renewed weakness in TICK and a continuation of 20-day lows outnumbering highs would lead me to expect a test of last week's lows.

Longer term, we continue to see a pattern of lower highs and lower lows during the overbought and oversold periods in the Cumulative DSI, suggesting we haven't yet reversed the bear.
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Money Flow Update for December 14th

Recall that money flow takes the dollar volume of each stock transaction and adds it to a cumulative total if that transaction occurred on an uptick; subtracts it from the total if it occurred on a downtick. The idea is that we want to see if volume is primarily lifting offers (i.e., occurring on upticks, indicating buying interest) or hitting bids (i.e., occurring on downticks, indicating selling pressure). When we add all the transactions for the stocks in the Dow Jones Industrial Average, we get a sense for whether large cap market sentiment is dominantly bullish or bearish--and whether that sentiment is shifting.

In the chart above, we see that the Dow (DIA; blue line) remains in a multi-day range, but money flow (pink line) has now moved to fresh bear market lows. This suggests that large market participants have not yet sustained buying interest in the large cap issues of the Dow.

Over the past week, money flows were notably positive for the health care and energy sectors. Negative and particularly weak money flows were seen in the financial and technology sectors. Over the past month, financial, technology, consumer services, and industrial sectors have seen the most negative money flows. Consumer goods, energy, utilities, telecommunications, and health care have seen modestly positive flow numbers over the month.

When I look at both sector money flow and trend behavior, I'm underwhelmed by the behavior of the financial sector, given the unprecedented government resources devoted to their rescue.

Reminder: Money flow numbers are updated before each trading day via the Twitter app. Tomorrow AM I will post the weekly indicator update.
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Why the Municipal Bond Market is in Decline

Something interesting has been going on since the latter part of November: investment grade corporate bonds (LQD; blue line) have dramatically outperformed municipal bonds (MUB; pink line). Actually, the outperformance is understated in the chart above, as illiquidity among munis has left arbitrage opportunities unexploited, leading to mispricing of MUB relative to its net asset value. The underperformance of municipal bonds has been especially notable at the long end, as shown by Vanguard's fund (VILPX; yellow line), which is making fresh bear market lows, even as corporate bonds rally.

So why are municipal bonds--which already yield more than their taxable counterparts in the corporate world--widening their underperformance? Partly, it is a function of risk aversion, as investors flee uncertain investments and instead seek safety in the lower yields of Treasury instruments. Growing budget problems in such states as California and Michigan are also taking their toll on investor sentiment. Indeed, the flight from munis is so notable--the once safe and stodgy sector is down over 8% this year--that one money manager plainly states, "The muni market is not working normally."

Even muni issuers such as Goldman have been recommending the purchase of credit default swaps against the possibility of municipal defaults. This default fear has especially rocked the high-yield segment of the muni market, which has seen declines approximating 30%. These concerns, combined with the increased need for hedge funds to invest in the most liquid instruments, has led to a historic divergence in the behavior of munis relative to Treasuries. This weakness recently led PIMCO to suspend dividends in its municipal closed-end funds.

While automakers have gotten most the news this past week, the eroding condition of tax-free credit markets may pose graver problems for municipalities and the many high net worth investors who have sought shelter in tax-free instruments. The dynamics that have led to this historic weakness--a severe recession slashing state and local revenues and a flight of investors to safety and liquidity--show no sign of abating, and price declines continue to erode returns from otherwise attractive yields. Meanwhile, the Fed has explicitly stated that it cannot help state and local governments, and Treasury has denied access to TARP among municipalities, further heightening investor anxieties.
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Sector Update for December 13th

Last week's sector update found most of the eight S&P 500 sectors that I track for Technical Strength in relatively neutral modes. A number of readers have expressed interest in the Technical Strength measure as a way of tracking the trending behavior of stocks from day to day. Accordingly, I'm now updating the readings for the 40 stocks in my basket (five each from the eight sectors) before each day's trade via Twitter (subscription is free).

Here's how we look as of Friday's close:

MATERIALS: +100 (50%)
INDUSTRIAL: -200 (49%)
CONSUMER DISCRETIONARY: +60 (63%)
CONSUMER STAPLES: -60 (46%)
ENERGY: +120 (58%)
HEALTH CARE: +20 (55%)
FINANCIAL: -200 (37%)
TECHNOLOGY: +40 (75%)

Recall that these Technical Strength readings vary between +500 (strong uptrend) and -500 (strong downtrend), with zero as a perfect neutral (non-trending) level. Once again, we see that the S&P sectors are largely in a non-trending mode. Materials and energy shares have gained strength on the back of the commodities rally; financial shares have weakened.

Technical Strength is designed as a short-term trend measure; a somewhat longer-term perspective can be gained by assessing the percentage of stocks within each sector that are trading above moving averages of varying duration. This is tracked very helpfully by the Decision Point service. The percentages in parentheses above reflect the proportion of shares in each sector that are above their 20-day moving averages. Overall, the average is very close to the 50% mark, once again showing no solid longer-term trend. Financial shares are weakest over this time frame; technology stocks strongest.

Overall, we are trading in a consolidation mode, with shares ranging from last week's lows to the 900 resistance level in the S&P futures index. I am tracking shifts among the sectors closely, both to identify possible breakouts from this range and to gather of sense of leading and lagging stocks on such a move. Both Technical Strength and the percentage of stocks trading above their 20-day moving averages will be posted each morning prior to the open of markets via the Twitter app.
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Trading Perspectives for a Saturday

* A Look at Trading Screens - My recent post noted what I look at when I'm trading; thanks to several blogger/traders for sharing their screens:

- Market Rewind's screen

- CharlesTrader's screen

- BZB Trader's screen

- SST's screen

- Jorge's screen

* Collaboration - Lots of traders want it; not so many have it.

* Learning to Win - Excellent perspective on success.

* Unique Resources - Thanks to an alert reader for posting this perspective on how trades are fragmented in their execution; thanks also for his heads up on this valuable Market Replay service from NASDAQ.

* Market Open - Here's an interesting look at where the market opens and how that might impact the day's trade.
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Interlude at Week's End

THE UNDISCOVERED LAND

Edenbridge

BY A LONG WAY WE CAME THERE
AND WE KEPT OUR EYES PEELED
WE BELIEVED IN OUR BLUEPRINT
DRAWN BY THE SLIPSTREAM OF TIME WITHOUT END

NOT ONCE WE SAW THE FALCON RISING
NOT ONCE WE SAW HORIZONS CLEAR
AND AGAIN WE HEAR THE OCEAN RUSHING
WITH ALL THE QUESTIONS AT HAND WITHOUT END

HEAVENWARD WE KEEP ON FLYING
IN THE LAP OF THE GODS WHERE WE ARE
THE LEGEND, THE KEY
THE SOLAR SEA
BINDS YOU FOREVER
ONCE IN A BLUE MOON THIS MOMENT
ON THESE BOUNDLESS TRACES WE MOVE
THE COSMIC ARRAY
WON`T LEAD US ASTRAY
AND WE STILL DEMAND
THE UNDISCOVERED LAND

WE FELT THE NARROW BOUNDS WITHIN US
THE LURKING UNKNOWN IN THE DARK
STILL WE`RE SEARCHING FOR THE PURPLE PASSAGE
PINK OF PERFECTION IN HEARTS STILL SO PURE

HERE AND NOW
BY OUR SACRED VOW
WE WILL PREVAIL

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Trading Screens and Trading Decisions: Finding What Works for You

A reader recently asked me to show a composite picture of my trading screens to illustrate what I watch when I'm trading. This is a very interesting topic, as one's screens should be tailored to two factors:

1) The information that is most important to your trading decisions;
2) Your information processing style

My experience working with traders, especially in prop shops, is that they have many more monitors--and much more information displayed--than they actually use. This is especially true of true scalpers, who generally focus on depth of market and short term charts of their markets. Hedge fund portfolio managers, on the other hand, may be carrying dozens of positions across asset classes and instruments and need to stay on top of a great deal of information, including communications from those in their networks.

One of the smartest things I did as a developing trader is limit the data I looked at. This enabled me to focus on the patterns that I actually trade and tune out everything else. That parsimony continues to the present day. Above is a snapshot of my screen from yesterday's trade. I have one chart active at a time (in the example above it's the NYSE TICK with a short-term moving average in blue; the moving average scale is at left; the raw one-minute values are scaled at right). I simply click on the quote board below and can pick up charts of sector ETFs, oil, US dollar, stock index futures, etc. (click on chart above for detail).

That's it. If I'm trading very short term, I have Market Delta running in the background for reference (volume traded at bid/offer for stock index futures). I also have a second computer (laptop) running off a separate online connection that is for execution only. Orders are written up on the laptop in advance and a single click sends them off. The second computer and connection provide me with redundancy in case something goes wrong with my desktop unit or my cable modem connection.

Most of my research (identifying market themes, relevant trading ranges, daily pivot points) has been done prior to the market open. During market hours I'm simply following ES futures and NYSE TICK on a one-minute basis, toggling occasionally to 5- and 60-minute charts, and keeping my eye on sectors, Treasury rates, and commodities. My short-term trade ideas involve updating odds of hitting particular near-term price levels (trading range extremes, R1 or S1 pivot points, prior day's high or low price). My longer-term ideas involve updating odds of hitting similar price levels from daily/weekly periods. Almost all my trades attempt to follow trends in NYSE TICK and Market Delta that are not fully evident in price movement.

I welcome reader/bloggers to share their screens and decision-making styles and send me the URLs for those posts, so that I can link. It would be interesting to see the diversity of information and decision-making styles out there.

RELEVANT POSTS:

Trading Using NYSE TICK

Identifying Sentiment Trend

Trading and Information Processing
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Making the Breakout Trade: Co-ordinating Time Frames

Selling the S&P futures this afternoon was the kind of trade that can make your week; so far, it's helped mine. If you click on the top chart (ES futures, 60 minute bars), you can see the repeated support at the 885 area. I haven't been impressed with money flows and didn't like the action in financial and housing stocks today; it seemed that the only thing holding the market up was the commodity-inspired strength among energy issues.

If we look with a little more granularity in the bottom chart (ES futures, blue line; cumulative NYSE TICK pink line), you can see that *before* we broke through the 885 area a little before 2 PM CT, we had already established a downtrend in the cumulative TICK for the day. That suggested that the highs would not hold and that we had a decent chance of breaking below the 885 support.

When that break occurred, it was on very weak TICK, meaning that a large number of NYSE shares persistently traded on downticks. This is characteristic of valid breakout moves. One-minute volumes in ES also picked up significantly on the breakout, suggesting that institutional participants were unloading their shares.

What's important here is the coordination of time frames: the identification of the range market on the 60-minute chart; the recognition of the downtrend in TICK at the intraday level; and the confirmation of the breakout with the one-minute TICK and volume levels. I generally find that my best trades occur when I develop my ideas at a longer time frame and then execute them on a shorter time frame. The big picture provides the idea, but it pays to wait for the short-term action to get you into the trade--and then keep you there.
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Competitive Devaluation of the U.S. Dollar on the Way?

The U.S. dollar has moved to multi-week lows vs. the euro (top chart) and is challenging longer-term lows vs. the yen (middle chart). Meanwhile, this morning, gold (bottom chart) is also challenging multi-week highs. This dollar weakness has breathed a bit of life into commodity prices this week.

A recent report suggested that China is keeping the yuan undervalued as part of a "beggar thy neighbor" policy of competitive devaluation. We're also seeing aggressive devaluation of the ruble, amidst warnings that high tariffs and competitive devaluations were instrumental in turning recession into depression in the 1930s.

But might the U.S. seek a policy of beggaring its neighbors? Let's go back to Federal Reserve chief Bernanke's famous speech, in which he outlined how the U.S. could extricate itself from a future deflation. He emphasized that, "a principal message of my talk today is that a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition...A central bank, either alone or in cooperation with other parts of the government, retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is at zero."

How is a central bank to expand demand and economic activity in a deflationary, zero-interest rate world? "By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so," Bernanke asserts, "the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."

"Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today," Bernanke assures listeners, "it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly."

Thus far, Bernanke's speech has been an accurate blueprint of the government's actions during this financial crisis, as we've seen efforts to drive interest rates to zero and stimulate the economy. With recent U.S. dollar weakness, we may be seeing the start of the use of exchange rate devaluations as a "weapon against deflation".
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Midweek Site Seeing Excursion

* Self-Coaching: A few good reads on developing yourself as a trader;

* Trading Patterns: Kevin looks at using non-confirmations in trading;

* Life Lesson: Market Speculator finds a trading lesson in poker;

* Lies, Damn Lies, and Statistics: Buyside looks at an asset allocation hoax;

* Weekly ETF Review: Excellent resource from Market Rewind; he is beta testing a new service based on the concept. I'll keep you posted;

* Trading Strategy: MarketSci takes a look at trading the RSI;

* Follow Through: Do follow-through days in the market hold bullish returns in bear markets?
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Turning Goals Into Consistent Habit Patterns

My recent post took a look at setting effective trading goals. Properly formulated, these goals focus our development, bridging our real selves--who we are now--with our ideals. Setting goals, however, is easy compared with acting upon them over time. Many of us set well-meaning goals at the start of a year, only to forget our resolutions.

So how do we make goals actual tools for self-development? One answer that I came to in writing my new book is that goal setting must be a process of emotional commitment, not just an intellectual exercise. "The secret to goal setting," I note in the book, "is providing your goals with emotional force. If your goal is a want, you'll pursue it until the feeling of desire subsides. If your goal is a must-have, a burning need...it becomes an organizing principle, a life focus."

In Alcoholics Anonymous, the goal is sobriety. Members spend a great deal of time sharing their stories of lost relationships, lost jobs, and lost health. They openly talk about the horrors of their relapses. Why? Because this keeps them emotionally connected to their goal. AA focuses on the reasons for the goal; every single meeting members remind themselves that they are alcoholics, powerless against alcohol. They can only find sobriety in their connectedness to others and in their relationship with a Higher Power. Next to that, everything else seems inconsequential.

An effective trading journal is like an AA meeting. It is an emotional communication that reminds the trader why he or she is seeking particular goals. The vision of success, the horrors of going through massive drawdowns, the feelings of disgust at missing opportunities due to a lack of nerve or discipline: these keep us connected to our goals.

Once you're emotionally connected to a goal--clearly seeing its necessity--discipline is not necessary. You will automatically gravitate to doing what you know you need to do. It's a bit like the procrastinator: when the assignment is due in several weeks, there's no urgency. When the assignment is due the next day--with one's bonus on the line--the drive to work kicks in with full force.

It is when the perception of "Reach your goal, or else!" arises, that we act decisively. Often it's the "or else"--the clear awareness of the consequences should we not fulfill our aims--that helps turn goals into consistent actions. The man who has had a heart attack may have struggled with his diet for years. Now, aware of his mortality, he has no problem following a heart-healthy regimen. His goal, under the pressure of necessity, becomes a habit pattern.

It helps to clearly visualize what would happen should we fail to meet our goals. What would happen to us? How would we feel about ourselves? Many a drive for greatness was sparked by the hatred of mediocrity. We will ourselves forward only when stasis becomes more uncomfortable than the efforts demanded by self development.
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Credit Markets: Quality Still Counts

We're seeing a nice contrast in performance between investment grade corporate bonds (LQD; top chart) and high yield corporates (HYG; bottom chart). Since October, investment grade corporate bonds have attracted buying interest, moving to two month highs. High yield corporate bonds, however, continue to languish at their bear market lows. The spreads between high yield and investment grade bonds offer a nice sentiment gauge regarding expectations of default vs. recovery. So far, the emphasis on quality in the bond market suggests that expectations of defaults have not abated.
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Money Flow Lagging the Stock Market Rally

Above we see that cumulative money flow for the Dow Industrial stocks (top chart; pink line) has not been making new highs, even as the Dow (DIA; blue line) has moved to a 20-day closing high. (For an explanation of money flow, see my previous post on the topic). Monday's flow reading of +$437 million was clearly strong, and that strength was underscored by the tally of stocks making fresh 20-day highs vs. lows (1394 highs vs. 343 lows). (Note: both money flow and new highs/lows are posted prior to each trading day via Twitter). The question, however, is whether strength can attract further buying to sustain an intermediate-term rally.

As we see from the chart of the Dow vs. the four-day moving average of money flow (bottom chart), forays into positive flow territory have tended to be brief since early October. The good news for bulls is that the November lows, both in price and cumulative flow, have held on last week's weakness. If we can sustain positive flow numbers from here, it would represent the first uptrend in flow since the start of the market's decline. A return to outflow numbers would lead me to expect a return to recent rangebound action.
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Interesting Looking International ETFs

China's ETF (FXI; top chart) has vaulted impressively above its November lows, now leading most world indexes in intermediate-term relative strength.

Japan's ETF (EWJ; middle chart) has tried to pierce the $8.00 level on three separate occasions in October and November and never hit that level on Friday. Though its downside resilience has been impressive, it remains far from its November peak, still thus far tracing a pattern of lower highs.

South Africa's ETF (EZA; bottom chart) has also shown nice downside resilience, but remains below its November highs.

Most U.S. sectors remain below their November peaks; one that is close is the housing index ($HGX). With relative strength in China and U.S. housing, it's fair to say that the current market has gained a bit of risk appetite.
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Indicator Review for December 8th

Last week's indicator review noted, "If we cannot sustain new 20-day highs exceeding new lows in the coming week, I will expect a test of recent market lows. I would look at a sustained break above 900 in the ES futures as intermediate-term bullish for stocks, particularly if accompanied by a meaningful expansion in the number of issues making fresh new highs." As we can see from the new highs/lows (middle chart) we were not able to sustain a surplus of new highs following Monday's sharp decline. Interestingly, however, the S&P 500 Index futures found repeated support in the 810-820 region, well above the bear market lows. Friday was a particularly significant day in that we sold off on very bad jobs news, but once again could not pierce the S&P support. The market rallied late in the day, bringing us to a neutral level in the Cumulative Demand/Supply Index (top chart).

Nor is the inability to drop on bad economic news the only bullish indication for this market. The Cumulative Adjusted NYSE TICK line (bottom chart) continued to grind higher through the week, indicating that more stocks were transacting on upticks than downticks, despite the repeated testing of Monday's lows. Too, we closed the week with 53% of SPX stocks trading above their 20-day moving averages, a healthy jump from the week's lows. While we've rallied nicely, neither the Cumulative DSI nor the percentage of stocks above their moving averages are anywhere near overbought levels.

To be sure, we have yet to see fresh 20-day highs exceed new lows; as I updated in my Twitter post, we had 355 new 20-day highs on Friday against 765 lows. Money flow for the Dow stocks, which I also update via Twitter each AM prior to trading days, was also negative on the week and only modestly positive on Friday.

In sum, the ball is in the bull's court. We made several runs at the lows this past week and held at higher lows. We rallied off bad economic news and now are testing resistance at SPX 900. As noted in the quote above from last week's review, a strong close above 900 with an expansion of new 20-day highs would confirm an intermediate-term uptrend. Failure to remain above the 900 level would keep us in a range bound market and, ultimately, would lead me to expect a test of last week's lows at minimum.
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Setting Effective Trading Goals

In my recent post, I described goals as bridges from the real self to our ideals. Research in psychology suggests that goals serve as tools for self-regulation, helping us control and direct our actions toward desired ends. Properly set, goals fulfill several purposes:

1) Motivation - Goals can inspire us to take the efforts needed to improve performance;

2) Learning - When goal-setting is followed by feedback and then by further goal-setting, we create loops that accelerate our learning;

3) Self-Efficacy - When we set challenging, but attainable goals, we build our sense of confidence and competence.

Research has found that goal-setting increases performance in sports and it can similarly enhance trading outcomes. A far-reaching review finds that how goals are set very much impacts their effectiveness. Effective goals must be important to the performer and must inspire commitment. While absolute outcome goals can be inspiring (such as setting a P/L goal for the year), more immediate process goals that pertain to day-to-day trading are most likely to generate feedback, review, and learning.

Among the most important process goals for traders are:

1) Risk management goals - Goals pertaining to trade sizing and drawdowns;

2) Idea generation goals - Goals pertaining to the process of generating sound trading ideas and formulating these into plans;

3) Execution goals - Goals pertaining to implementing trade ideas/plans so as to maximize reward and minimize risk;

4) Position management goals - Goals pertaining to the management of positions once they're entered, including hedging and scaling in/out;

5) Portfolio management goals - Goals pertaining to achieving good diversification among ideas and allocating capital effectively to those ideas;

6) Self-management goals - Goals pertaining to maintaining a constructive mindset for optimal decision-making;

7) Personal, non-trading goals - Goals that reflect desired outcomes in areas of life outside trading that might spill over into trading performance, including physical fitness, relationships, spirituality, etc.

Not all these goals will apply to all traders, but these are the ones I encounter most frequently in my work. Each goal, to be effective, must be grounded in a vision of one's ideals, so that performance can be measured and steps can be taken to address shortcomings. Effective goals are more than good intentions: they are emotional commitments to cultivate the self.
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Warnings for Investment Advice

It would be nice if investment advice came with warnings like pharmaceuticals. After all, the malpractice of advisers is every bit as dangerous as, say, erections lasting three hours or more.

What brought on this rant (and my creative rendering above) was an article in a recent magazine published by one of the larger brokerage firms. The article described case studies of clients managing their retirements and featured a mid-50 year old couple "leaving a margin of safety" by placing only 80% of their money in stocks. This, by the way, was referred to as the firm's "moderately aggressive" asset allocation model and was rationalized as protection against inflation.

Nowhere in the article was it mentioned that this strategy either has left or would have destroyed at least a third of the baby boomers' savings. Also not mentioned were deflation or the prospects for the portion of the portfolio devoted to fixed income at a time when record high rates of default are being priced into markets.

The only mention of this ruinous path was a single quote from the boomer/investor: "The recent market turmoil may result in a postponement of some of my plans, but I still have the peace of mind that I have some time for my investments to recover."

If I recall my stages of grieving, denial comes early in the process, not toward the end. I suspect we'll see an end to the secular bear market when investors lose the peace of mind associated with buy-and-hold.
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Advance-Decline Line Strength and a Look at Technical Strength

A nod to Decision Point, which tracks the advance-decline lines specific to various sectors and indexes. What we see is that, despite very bad economic news--including Friday's dismal jobs report--the advance-decline line for S&P 500 stocks (bottom panel, above) continues to grind higher. A similar pattern can be seen for the advance-decline line that extends to all NYSE common stocks. Indeed, we've seen advancing issues outnumber decliners in eight of the last ten trading sessions.

The 900 level in the S&P 500 Index looks like the important resistance to tackle in coming sessions. We've seen recent important support in the low 800 area, as the market has traded in a volatile, choppy fashion that has delighted daytraders and frustrated longer-term trend followers. I'm finding that my Technical Strength measure, which quantifies the degree to which a stock is trending up or down over a short time frame, is useful in identifying these range bound markets.

We can think of Technical Strength as a kind of goodness-of-fit measure to a regression line. A stock that shows little variation around an upward or downward regression line can be said to be highly trending. A stock that shows high variation relative to its degree of slope can be said to be non-trending. In constructing the Technical Strength measure, I artificially assign a score of +100 to a near-perfect uptrend and -100 to a near-perfect downtrend. A score near zero denotes a non-trending stock.

I calculate Technical Strength scores for each of forty stocks in my basket: five highly weighted issues across the Industrial, Materials, Energy, Consumer Discretionary, Consumer Staples, Financial, Health Care, and Technology sectors within the S&P 500 Index. These forty stocks give me a good snapshot of the large cap stock universe.

What I've found to be helpful is categorizing each stock as either neutral, weakly up/down trending, or strongly up/down trending based upon its Technical Strength score. During my recent sector review, I found that only a mere handful of stocks in the basket were either strongly uptrending or downtrending. Every other stock was either neutral or weakly up/down trending. When I cumulated the scores for the five stocks in each sector, *no* sector was strongly trending up or down. That was a great tell that we were not in a trending market, which means that fading moves to range extremes--not playing for breakouts--was the most successful short-term trading strategy. Friday was a great example of that.

I've found that the morning Twitter posts are an effective way of blasting indicator information to interested readers. The subscription is free, and the "tweets" also include links to articles and blog posts that pertain to market-moving themes. I will be adding regular Twitter updates regarding Technical Strength to the indicators I regularly follow before each trading day. That should help traders identify trend/non-trend markets, but also catch the shifts from one environment to the other.
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Help Myke Find A Home for Storm

Myke Hideous of the legendary Empire Hideous band is actually far more benign than his picture might suggest. After all, not many people would use the online medium to reach out to fans in an effort to find a home for a gentle Rottweiler. Myke rescued the dog and arranged for her surgery; soon it will be time for Storm to find a home. I'm using this post to pass along Myke's message below and help him finish his good deed. If you or anyone you know might want a furry friend for a holiday present, please let me know, and I'll help put everyone in touch. My email is listed on the blog page under the section "About Me". To sweeten the pot, I will send a free signed copy of my new book and arrange a free trading psychology/coaching consultation for the person who finds Storm a good home. Thanks for opening your heart at holiday time.

Brett

From Myke:

I'm quite pleased to announce that last week she had a successful operation conducted by the Humane Society veterinarians of Newark, NJ, to adjust her dislocated, back femur. She is currently recuperating nicely, but her dilemma is not over yet. With the surgery now over, the next step is to find her a home and get her out of the HS. She will be in recovery for the next 2.5 - 3 weeks, until the HS is ready to move her from the medical building to the adoption kennel. According to a rep at the HS, a photograph of Storm will not be made available until she is ready for the adoption program. (Apparently, these are the HS rules.) As I mentioned in my last bulletin, I would have gladly adopted Storm myself, however, after pleading for the opportunity to do so, I was informed that my building now has a "no dogs allowed" policy. Nevertheless, I swore it my duty to do whatever it takes to find this abused animal a good home. This message goes out to everyone interested in adopting Storm, or willing to help find her a place to live. Please pass this information on to anyone that can help this neglected animal. 1.5 year old, loveable Rottweiler mix. Strong,large body, well tempered with people. From my experience while helping her that night, she seems to be the devoted type.
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