In the last few weeks, I've received an increased number of emails from traders interested in joining proprietary trading firms. This is particularly the case, given the growing number of prop firms that are offering training programs for their traders. For those considering joining prop firms, I recommend you review the posts on training at prop firms and prop firms, arcades, and scams. Both posts offer a few things to look for and think about when you investigate various firms.
In Illinois, where I live, we're all too familiar with "pay-to-play", thanks to allegations surrounding our governor. I'm skeptical as well of pay-to-play models of proprietary trading: models in which you must pay hefty training fees to begin trading small amounts of capital for the firm. It's not that the model can't be executed professionally and responsibly; I think there are firms accomplishing just that. But it's a model that is ripe for abuse, as what are really schools for traders can masquerade as prop firms by doling out small amounts of capital and then shutting down traders before they lose as much money as they poured into training.
This is especially the case for firms that train traders to trade very actively ("scalping"), but make money from commissions charged per trade. By starting traders out with a small stake, the traders will be very likely to lose their money in commissions during their learning curve, so that what the firm gives in capital with one hand, it can take back with the other in commissions and other "desk" fees.
So please engage in due diligence before sinking time, money, and effort into a proprietary trading firm. There are some very good, very professional ones out there, but with the growth of pay-to-play models, there will be some snakes in the grass, as well.
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Thursday, December 18, 2008
Wednesday, December 17, 2008
Quantitative Wheezing: The Difficult Search for Yield
It seems as though the post on competitive devaluation of the U.S. dollar was a bit more timely than even I expected. Ten year Treasury rates have absolutely collapsed (top chart) in the wake of announced Fed policy. As a result, the euro (middle chart) has soared about 10% versus the dollar in the past five trading sessions alone. The yen (bottom chart) is now trading at 13+ year highs versus the dollar. Gold, meanwhile, is trading at its highest level since early October.
In the wake of these events, I talked with a bank president yesterday, who was unusually candid. His bank was lowering its CD rates because it didn't need to attract more capital. Why? It is difficult to find creditworthy lending projects. The bank isn't keen to lend money for real estate-related loans, and the business climate is hardly looking good for expansion.
As Mish points out, banks can borrow money essential for free from the Fed and simply stash it at higher interest rates further out on the yield curve. Making money cheaper doesn't necessarily increasing the incentives for banks to lend. Meanwhile, I talked with representatives from two large brokerage firms, both of whom confirmed that their inventory of longer-term certificates of deposit (more than 3 years) had been completely bought out.
Retirees are going to be facing an interesting dilemma in 2009: accept government guarantees with Treasuries, CDs, etc. and face paltry yields or accept greater risk as well as return in the corporate and municipal bond markets. I notice we had a good pop in price for investment grade corporates (LQD) and municipals (TFI) today; perhaps those yields are looking jucier in a zero interest rate world. Of course, all those returns are denominated in U.S. dollars and, hidden to average investors, is the dollar devaluation of their accounts in the past week.
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Constructing and Interpreting the Cumulative Adjusted NYSE TICK
My recent post explained the construction of the NYSE TICK and related measures of short-term sentiment. Most uses of TICK are intraday, as a way of gauging whether buyers or sellers are gaining the upper hand on short-term moves. I've used short-term oscillators of the NYSE TICK of 10-20 minutes as a way of smoothing out one-minute values. I find the peaks and valleys helpful in execution, as I want to buy on countertrend dips in the TICK oscillator and sell on countertrend bounces.
Some years ago, I decided to create a cumulative line of one-minute TICK values as a way of gauging longer-term buying and selling interest. Each one minute reading was the average of that minute's high, low, and close TICK values. I added the one-minute average readings to a cumulative total, as one would do for an advance-decline line.
What I found was that the NYSE TICK, as a distribution, did not have a perfect zero mean. There was a positive bias to the series. That bias has since been reduced by the elimination of the uptick rule for short-selling. Still, at any given time, the mean of TICK values will depart from zero. This gave the cumulative TICK line a bias in slope, particularly over the long-term.
Thus began my efforts to adjust the cumulative TICK to create a zero mean. The solution I arrived at was to calculate the average one-minute TICK reading for the past 20 days (a roughly 7900 period moving average of the one-minute high, low, close average values) and subtract that moving 20-day average from each subsequent one-minute H-L-C TICK value. I called this the Adjusted TICK.
What the Adjusted TICK is telling you is whether the current TICK values are stronger or weaker than the average over the past 20 days. This tells us whether markets are gaining or losing buying/selling interest relative to their recent past. In a sense, we can think of this as relative sentiment: the degree to which short-term sentiment is departing from what we've seen over the past month.
When we cumulate these Adjusted TICK values, the resulting line is quite helpful in providing a picture of changes in market sentiment. If buyers or sellers are quite dominant, we'll see a sharp rise or fall in slope of the line. If we're range bound, we'll tend to see a flattening of the line. Divergences between price and the cumulative line suggest that buying or selling pressure may be waning over time, which has me looking for possible reversal.
I use the day's Cumulative Adjusted TICK (starting each day at zero) as a trend indicator; most my intraday trades will be in the direction of the TICK line. I also use breakouts in the TICK to validate price breakouts from ranges. Many of my past posts illustrate these concepts.
I don't know of any software that charts the Cumulative Adjusted TICK for you. Market Tells follows the indicator closely and utilizes it in its helpful newsletter and intraday trend-following service. For more intrepid sorts, the NeoTicker program enables you to create TICK indicators for any basket of stocks, sector, or index.
My own calculation of the indicator utilizes data from e-Signal, archived and charted within Excel. If the adjustment feature isn't crucial for you, you can simply observe how much time a moving average of TICK spends above and below the zero level during the day as a rough way of eyeballing the trend of sentiment. Together with the indicators I track weekly on the blog and that I post each morning before trading days via Twitter, I find the Cumulative TICK invaluable in keeping me on the right side of the market.
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Some years ago, I decided to create a cumulative line of one-minute TICK values as a way of gauging longer-term buying and selling interest. Each one minute reading was the average of that minute's high, low, and close TICK values. I added the one-minute average readings to a cumulative total, as one would do for an advance-decline line.
What I found was that the NYSE TICK, as a distribution, did not have a perfect zero mean. There was a positive bias to the series. That bias has since been reduced by the elimination of the uptick rule for short-selling. Still, at any given time, the mean of TICK values will depart from zero. This gave the cumulative TICK line a bias in slope, particularly over the long-term.
Thus began my efforts to adjust the cumulative TICK to create a zero mean. The solution I arrived at was to calculate the average one-minute TICK reading for the past 20 days (a roughly 7900 period moving average of the one-minute high, low, close average values) and subtract that moving 20-day average from each subsequent one-minute H-L-C TICK value. I called this the Adjusted TICK.
What the Adjusted TICK is telling you is whether the current TICK values are stronger or weaker than the average over the past 20 days. This tells us whether markets are gaining or losing buying/selling interest relative to their recent past. In a sense, we can think of this as relative sentiment: the degree to which short-term sentiment is departing from what we've seen over the past month.
When we cumulate these Adjusted TICK values, the resulting line is quite helpful in providing a picture of changes in market sentiment. If buyers or sellers are quite dominant, we'll see a sharp rise or fall in slope of the line. If we're range bound, we'll tend to see a flattening of the line. Divergences between price and the cumulative line suggest that buying or selling pressure may be waning over time, which has me looking for possible reversal.
I use the day's Cumulative Adjusted TICK (starting each day at zero) as a trend indicator; most my intraday trades will be in the direction of the TICK line. I also use breakouts in the TICK to validate price breakouts from ranges. Many of my past posts illustrate these concepts.
I don't know of any software that charts the Cumulative Adjusted TICK for you. Market Tells follows the indicator closely and utilizes it in its helpful newsletter and intraday trend-following service. For more intrepid sorts, the NeoTicker program enables you to create TICK indicators for any basket of stocks, sector, or index.
My own calculation of the indicator utilizes data from e-Signal, archived and charted within Excel. If the adjustment feature isn't crucial for you, you can simply observe how much time a moving average of TICK spends above and below the zero level during the day as a rough way of eyeballing the trend of sentiment. Together with the indicators I track weekly on the blog and that I post each morning before trading days via Twitter, I find the Cumulative TICK invaluable in keeping me on the right side of the market.
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Tuesday, December 16, 2008
Three Stock Picking Resources on the Web
Here are several resources that might be of interest in selecting stocks for trading or investment:
Alpha Clone - This is a new site that pulls stock holding information from the filings of money managers, so that you can see what the pros are investing in. You can calculate performance metrics for various portfolios and "clone" the strategies used by your favorite investors, such as Warren Buffett. The site is offering a free guest pass to interested traders;
StockPickr - This site includes stock selections from both professional money managers and a community of users. One very nice feature for active traders features trading systems, including system trades of the day. There are spotlight portfolios that highlight specific themes and updated lists of top rated portfolios;
StockScouter - This site from MSN rates stocks across both fundamental and technical criteria, creating a 1 -10 rating system. You can follow a portfolio of the top ten rated stocks or create your own portfolios from the ratings. The site also features portfolios from MSN Money contributors and categorizes top rated stocks by sector;
If you have other favorite stock-picking tools, please share them in a comment to this post.
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Alpha Clone - This is a new site that pulls stock holding information from the filings of money managers, so that you can see what the pros are investing in. You can calculate performance metrics for various portfolios and "clone" the strategies used by your favorite investors, such as Warren Buffett. The site is offering a free guest pass to interested traders;
StockPickr - This site includes stock selections from both professional money managers and a community of users. One very nice feature for active traders features trading systems, including system trades of the day. There are spotlight portfolios that highlight specific themes and updated lists of top rated portfolios;
StockScouter - This site from MSN rates stocks across both fundamental and technical criteria, creating a 1 -10 rating system. You can follow a portfolio of the top ten rated stocks or create your own portfolios from the ratings. The site also features portfolios from MSN Money contributors and categorizes top rated stocks by sector;
If you have other favorite stock-picking tools, please share them in a comment to this post.
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A NYSE TICK Primer: How to Assess Intraday Sentiment
Although I've posted details in the past, I decided to respond to recent questions about the construction of the Cumulative Adjusted NYSE TICK with two dedicated blog posts. This post will explain the basics of the NYSE TICK. The second will explain my use of the Cumulative Adjusted TICK. For those interested, here is a link to many past posts on the topic of the TICK, many of which explain how I use the indicator in intraday trading.
So let's start at the start. In an auction market, we have buyers who would like to acquire stock at a relatively low price and sellers who would like to part with their stock at a relatively high price. When all buyers and sellers are assembled in the marketplace, we have an established bid price for the stock (the highest price that buyers will pay) and an established offer price (the lowest price that sellers will accept). The spread between the bid and offer will be quite narrow for actively traded issues; wider for less liquid instruments. Market makers provide liquidity to the market by actively buying bids and selling offers, profiting from the spread.
A patient buyer will work an order in the book below the prevailing price, bidding for the stock or futures contract at a price that he/she considers to be a good value. A patient seller will work an order above the prevailing price, offering the stock at a price that he/she considers to be a good value. As a result, there are always resting orders above and below the market. The number and volume of these orders, arrayed by price, is what is known as depth of market. Market makers and true scalpers (those whose trades last a minute or so or less) often rely on shifts in depth of market to identify when the market is skewed toward buyers or sellers.
If a buyer is not patient and feels that the market is headed higher right now, he/she will not work a bid below the market. Rather, they will "lift the offer": they'll place a market order and accept the best price offered by a seller. When this occurs, the stock or futures contract will typically trade on an uptick, at the offer price in the bid-offer matrix. The motivated seller thinks the market is primed to move lower right now and "hits the bid", accepting the best price offered by a buyer. This transaction will occur on a downtick, at the bid price in the bid-offer matrix.
Over time, we can look at how many transactions across all stocks occur on upticks versus downticks as a way of assessing whether buyers or sellers are more motivated. This statistic is called the NYSE TICK. It is calculated by the exchange 10 times per minute (every six seconds), typically under the symbol $TICK. A TICK value of +500 means that 500 more stocks traded on upticks than downticks in the most recent six second period; -500 would mean that 500 more issues traded on downticks than upticks. We can track changes in the TICK over time to see whether buyers or sellers are becoming more aggressive on a short-term basis.
A different view of very short-term sentiment is Market Delta. Instead of looking across a range of stocks to see how many are trading on upticks versus downticks, it calculates the volume of shares or futures contracts traded at the market bid versus offer for a single instrument. This is very helpful when the instrument may be imperfectly correlated to the broad stock market. Many times, for instance, we can see a neutral Market Delta reading in the ES futures when NYSE TICK is quite positive or negative. Most often, this means that sentiment is neutral among large cap issues, but more positive or negative among the large number of small cap issues that are part of the NYSE TICK universe.
Finally, we can use the same logic as TICK to construct measures of money flow. We multiply the price of the stock or futures contract times the volume traded for each transaction. This gives us the dollar volume of the transaction. If the transaction occurred on an uptick, we add the dollar volume to a cumulative total; if it occurred on a downtick, we subtract the dollar volume from the cumulative total. This money flow measure identifies whether large market participants (those trading larger volumes) are predominantly lifting offers or hitting bids.
These are among my favorite market indicators, because they are grounded in the actual auction market behavior of participants. They do not rely upon esoteric interpretations of chart patterns, oscillator readings, or market waves. The minute-to-minute readings of TICK and Market Delta help intraday traders understand whether markets are becoming stronger or weaker. When we cumulate these readings over time, we can assess sentiment shifts over longer time frames.
In my next post in this series, we'll look at how you can cumulate the NYSE TICK and use the data for an understanding of market trends. Please note that I update the Cumulative Adjusted NYSE TICK every Monday in my weekly indicators post; I post money flow numbers for the Dow stocks each morning prior to the start of trading days via Twitter.
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So let's start at the start. In an auction market, we have buyers who would like to acquire stock at a relatively low price and sellers who would like to part with their stock at a relatively high price. When all buyers and sellers are assembled in the marketplace, we have an established bid price for the stock (the highest price that buyers will pay) and an established offer price (the lowest price that sellers will accept). The spread between the bid and offer will be quite narrow for actively traded issues; wider for less liquid instruments. Market makers provide liquidity to the market by actively buying bids and selling offers, profiting from the spread.
A patient buyer will work an order in the book below the prevailing price, bidding for the stock or futures contract at a price that he/she considers to be a good value. A patient seller will work an order above the prevailing price, offering the stock at a price that he/she considers to be a good value. As a result, there are always resting orders above and below the market. The number and volume of these orders, arrayed by price, is what is known as depth of market. Market makers and true scalpers (those whose trades last a minute or so or less) often rely on shifts in depth of market to identify when the market is skewed toward buyers or sellers.
If a buyer is not patient and feels that the market is headed higher right now, he/she will not work a bid below the market. Rather, they will "lift the offer": they'll place a market order and accept the best price offered by a seller. When this occurs, the stock or futures contract will typically trade on an uptick, at the offer price in the bid-offer matrix. The motivated seller thinks the market is primed to move lower right now and "hits the bid", accepting the best price offered by a buyer. This transaction will occur on a downtick, at the bid price in the bid-offer matrix.
Over time, we can look at how many transactions across all stocks occur on upticks versus downticks as a way of assessing whether buyers or sellers are more motivated. This statistic is called the NYSE TICK. It is calculated by the exchange 10 times per minute (every six seconds), typically under the symbol $TICK. A TICK value of +500 means that 500 more stocks traded on upticks than downticks in the most recent six second period; -500 would mean that 500 more issues traded on downticks than upticks. We can track changes in the TICK over time to see whether buyers or sellers are becoming more aggressive on a short-term basis.
A different view of very short-term sentiment is Market Delta. Instead of looking across a range of stocks to see how many are trading on upticks versus downticks, it calculates the volume of shares or futures contracts traded at the market bid versus offer for a single instrument. This is very helpful when the instrument may be imperfectly correlated to the broad stock market. Many times, for instance, we can see a neutral Market Delta reading in the ES futures when NYSE TICK is quite positive or negative. Most often, this means that sentiment is neutral among large cap issues, but more positive or negative among the large number of small cap issues that are part of the NYSE TICK universe.
Finally, we can use the same logic as TICK to construct measures of money flow. We multiply the price of the stock or futures contract times the volume traded for each transaction. This gives us the dollar volume of the transaction. If the transaction occurred on an uptick, we add the dollar volume to a cumulative total; if it occurred on a downtick, we subtract the dollar volume from the cumulative total. This money flow measure identifies whether large market participants (those trading larger volumes) are predominantly lifting offers or hitting bids.
These are among my favorite market indicators, because they are grounded in the actual auction market behavior of participants. They do not rely upon esoteric interpretations of chart patterns, oscillator readings, or market waves. The minute-to-minute readings of TICK and Market Delta help intraday traders understand whether markets are becoming stronger or weaker. When we cumulate these readings over time, we can assess sentiment shifts over longer time frames.
In my next post in this series, we'll look at how you can cumulate the NYSE TICK and use the data for an understanding of market trends. Please note that I update the Cumulative Adjusted NYSE TICK every Monday in my weekly indicators post; I post money flow numbers for the Dow stocks each morning prior to the start of trading days via Twitter.
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Monday, December 15, 2008
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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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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Sunday, December 14, 2008
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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Saturday, December 13, 2008
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:
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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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%)
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:
* 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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* 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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Friday, December 12, 2008
Interlude at Week's End
THE UNDISCOVERED LAND
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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Thursday, December 11, 2008
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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Wednesday, December 10, 2008
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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* 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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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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Tuesday, December 09, 2008
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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Monday, December 08, 2008
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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Sunday, December 07, 2008
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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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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Saturday, December 06, 2008
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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Friday, December 05, 2008
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
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Thoughts On Goal Setting for 2009
Note: The following was written, relatively stream of consciousness, during an airline flight home from a road trip with traders.
It’s that time of year when traders and portfolio managers begin to look ahead to holidays and the winding down of their trading years. That inevitably brings thoughts of the year ahead and the goals that greet a fresh slate.
Too often the look forward is not accompanied by a sober reflection on the year past. An excellent place to start with 2009 goals is to revisit the visions for 2008 and the degree to which those were realized. Properly formulated, goals are a bridge between the real and the ideal, psychological devices by which one keeps feet on the ground and eyes on the horizon. To the extent that goals guide daily and weekly efforts at development, they keep us grounded. If they also provide us with wide horizons and a view of ourselves at our best, they also keep us energized. When we revisit the goals of 2008, we can determine the degree to which they generated perspiration and inspiration.
Sadly, most goal setting fails at both of these functions. Goals are not specific enough to truly influence daily activity, nor do they speak to our greatest strengths. Items on a checklist that bring a temporary lull of satisfaction, such goals are orphans soon after New Year’s passing. Many a coach is hired to adopt these goals and serve as their minder. That, however, won’t do. To be realized, any goal must be internalized. Lose the horizon and you also lose the grounding.
Did Hercules seek adventure because he was a hero, or was Hercules a hero because he embarked upon adventures? What sustains a heroic consciousness, providing the daily adventures that bridge real and ideal? Can one sustain the pursuit of heroic annual goals while mired in a state of daily emotional and physical mediocrity, will as flabby as the midsection? The New Year calls for a new self, a fresh start. For a few luminous moments, when we define the goals that capture our most cherished horizons, we are alive to ourselves. To sustain that consciousness as inspiration and compass; that is the essence of the heroic.
Thursday, December 04, 2008
Thoughts for Thursday Eve
* Sector Themes - Housing stocks (top chart) have rallied on news of lower mortgage rates. Meanwhile, oil continues to make bear market lows. On the way up during 2007, the story was expanded demand from developing nations and peak oil. The extent of the drop in prices--roughly $100/barrel!--is one indication of the demand destruction wreaked by global recession.
* Sentiment and Blog Traffic - Lately has been at levels more typical of intermediate-term market tops than bottoms. I've been hearing more talk of market bottoming than market washout; I don't find fear levels all that high, surprising, given that we're trading more than 40% below market highs. For those interested, 38% of traffic to this blog comes from outside the U.S. Where does the traffic come from? Over 15% of blog viewers daily come to the site via Google searches; no other referral source accounts for more than 1.5% of traffic.
* Organizing Yourself - The Impact Oven site organizes your online financial research; you can register for a free trial while they're in beta by using the registration code: decemberbeta.
* Using Moving Averages - Market Sci takes a look at a 5-10-20 strategy.
* Tracking a Track Record - The Strategic Growth Model has been posting trades live to their site.
* Trading With TRIN - VIX and More has a couple of good posts on the Arms Index and its use.
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Sector Update for December 3rd
Last week's sector update found a mixed picture of Technical Strength among the eight S&P 500 sectors that I track via a basket of 40 highly-weighted stocks. Here's how we look as of Wednesday's close:
Scores between +100 and -100 indicate a nontrending environment; scores of +300 or more represent a solid uptrend; scores of -300 or less occur during a solid downtrend. On a short-term basis, we're seeing a very mixed, non-trending picture for stocks. I will be watching the stocks and sectors closely for hints as to a breakout from this consolidation. This has been a tricky trading environment for traders expecting breakouts and trending moves, with sharp intraday reversals sustaining range bound conditions.
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MATERIALS: -200
INDUSTRIAL: -80
CONSUMER DISCRETIONARY: +160
CONSUMER STAPLES: -120
ENERGY: -100
HEALTH CARE: +120
FINANCIAL: -80
TECHNOLOGY: -40
Scores between +100 and -100 indicate a nontrending environment; scores of +300 or more represent a solid uptrend; scores of -300 or less occur during a solid downtrend. On a short-term basis, we're seeing a very mixed, non-trending picture for stocks. I will be watching the stocks and sectors closely for hints as to a breakout from this consolidation. This has been a tricky trading environment for traders expecting breakouts and trending moves, with sharp intraday reversals sustaining range bound conditions.
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Wednesday, December 03, 2008
Bond Returns and Other Market Ideas
* A Look at Year-to-Date Returns - These stats from the Wall St. Journal are for the year through the end of November. What we find is that total returns on short-term taxable bond funds was -6.3%; on intermediate funds was -7.8%; on long-term funds was -11%; and on high-yield funds was -29.5%. Similarly, total returns on short-term munis was -.1%; intermediate munis was -2.2%; long-term munis was -8.9%, and high-yield munis was -19.3%. It's a dramatic illustration of how the recent market has rewarded quality and punished higher risk/reward strategies.
* Good Readings - Difficulty living on credit, buyouts going bust, and other timely readings from The Kirk Report. A moving average crossover system and other market ideas from Abnormal Returns. Some views on economic depression and other updated links from Trader Mike.
* Learning by Video - SSK has posted his daytrading videos for November.
* Rates in South Africa - Ronnel Z. Bird offers background on LIBOR, South Africa, and more.
* Technical Analysis - I've gotten a couple of emails asking about books on technical analysis. Brian Shannon's text immediately comes to mind. If you have other recommendations, please leave them in the comments section for this post. Thanks!
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* Good Readings - Difficulty living on credit, buyouts going bust, and other timely readings from The Kirk Report. A moving average crossover system and other market ideas from Abnormal Returns. Some views on economic depression and other updated links from Trader Mike.
* Learning by Video - SSK has posted his daytrading videos for November.
* Rates in South Africa - Ronnel Z. Bird offers background on LIBOR, South Africa, and more.
* Technical Analysis - I've gotten a couple of emails asking about books on technical analysis. Brian Shannon's text immediately comes to mind. If you have other recommendations, please leave them in the comments section for this post. Thanks!
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Tuesday, December 02, 2008
Historical Patterns and Regimes: A Look at Bearish Momentum Days
One of the chapters of my new book (due out in the first quarter of 2009) explains how I use Excel and historical market data to identify possible short-term trading edges. Unlike some traders, I do not use these historical patterns as mechanical trading signals. Rather, I treat them as hypotheses based on recent market action. If I see markets setting up during the current day in a way that corresponds with the hypotheses from the historical studies, that helps me frame trading ideas for the day.
The recent sharp decline in the stock market has made historical market studies quite difficult, as the current market conditions are quite different from the ones that existed in recent years.
Let's take a simple example. Monday was a very weak day in the market. As those who follow my morning Twitter posts know, I track an indicator called Demand and Supply. Demand is an index of the number of NYSE, NASDAQ, and ASE closing above the upper volatility envelope surrounding a short-term moving average. Supply is an index of the number of stocks closing below the lower volatility envelope. On Monday, Supply exceeded Demand by more than a factor of 10; we had more than 10 times as many issues closing below their envelopes as above.
Such strong bearish momentum has only occurred 16 times since I began collecting these data in October of 2002. To broaden the number of observations for my historical study, I included all occasions since October, 2002 in which Supply exceeded Demand by five times or more (N = 108). What we find is that, after these very bearish momentum days, the S&P 500 Index (SPY) has been up by an average of .31% five days later (64 occasions up, 44 down). The average five-day change for the remainder of the sample was flat (789 up, 763 down).
But not so fast. If we break down those bearish momentum days by when they occurred, different patterns emerge. Since mid-year 2007, we've had 40 days in which Supply has exceeded Demand by five times or more. Five days later, the S&P 500 Index has averaged a loss of -.18% (19 up, 21 down). Interestingly, that five-day average loss followed an average next day gain of .46% (25 up, 15 down).
Prior to mid-year 2007, we had 68 instances of bearish momentum days. The S&P 500 Index averaged a gain of .60% (45 up, 23 down) five days later, with a next day average gain of only .09% (38 up, 30 down).
In short, what we see is evidence of regimes, not universal market patterns. Strong bearish momentum days led to favorable five-day returns from 2002-mid 2007. Since that time, however, strong bearish momentum days have led to one-day snapback rallies, followed by resumed weakness.
When trading historical patterns, it's not only necessary to view market history, but also to look for shifts within that history. Those changing regimes offer fertile hypotheses to traders who can flexibly adapt their thinking.
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The recent sharp decline in the stock market has made historical market studies quite difficult, as the current market conditions are quite different from the ones that existed in recent years.
Let's take a simple example. Monday was a very weak day in the market. As those who follow my morning Twitter posts know, I track an indicator called Demand and Supply. Demand is an index of the number of NYSE, NASDAQ, and ASE closing above the upper volatility envelope surrounding a short-term moving average. Supply is an index of the number of stocks closing below the lower volatility envelope. On Monday, Supply exceeded Demand by more than a factor of 10; we had more than 10 times as many issues closing below their envelopes as above.
Such strong bearish momentum has only occurred 16 times since I began collecting these data in October of 2002. To broaden the number of observations for my historical study, I included all occasions since October, 2002 in which Supply exceeded Demand by five times or more (N = 108). What we find is that, after these very bearish momentum days, the S&P 500 Index (SPY) has been up by an average of .31% five days later (64 occasions up, 44 down). The average five-day change for the remainder of the sample was flat (789 up, 763 down).
But not so fast. If we break down those bearish momentum days by when they occurred, different patterns emerge. Since mid-year 2007, we've had 40 days in which Supply has exceeded Demand by five times or more. Five days later, the S&P 500 Index has averaged a loss of -.18% (19 up, 21 down). Interestingly, that five-day average loss followed an average next day gain of .46% (25 up, 15 down).
Prior to mid-year 2007, we had 68 instances of bearish momentum days. The S&P 500 Index averaged a gain of .60% (45 up, 23 down) five days later, with a next day average gain of only .09% (38 up, 30 down).
In short, what we see is evidence of regimes, not universal market patterns. Strong bearish momentum days led to favorable five-day returns from 2002-mid 2007. Since that time, however, strong bearish momentum days have led to one-day snapback rallies, followed by resumed weakness.
When trading historical patterns, it's not only necessary to view market history, but also to look for shifts within that history. Those changing regimes offer fertile hypotheses to traders who can flexibly adapt their thinking.
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Monday, December 01, 2008
Cumulative Money Flow for Dow Stocks
Recall that money flow takes the dollar value of each trade and multiplies that by the trade volume. This dollar volume is added to a daily cumulative total if the trade takes place on an uptick; it is subtracted from the daily total if it occurs on a downtick. When heavy volume is hitting bids, we see a very weak money flow; when heavy volume lifts offers, we see strong money flow numbers. By cumulating money flow for each of the Dow 30 industrial stocks, we can arrive at a sentiment gauge for the large cap market. This money flow figure is posted by the Online Wall St. Journal.
I've created a cumulative line of the daily money flow numbers for the Dow stocks. Note that it tracks price pretty well and certainly indicates that sentiment has been largely bearish since the start of October. You can see that we're testing the bear market lows in the Cumulative Money Flow line (pink line above). Note also how Monday's steep decline was preceded by up days in the Dow that showed negative money flow. I've generally found such divergences worth paying attention to. Note, for instance, the tepid Flow readings in early November when the Dow made a fresh peak, and the positive divergence in late October, when the Dow rebounded from its low.
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Indicator Update for December 1st
Last week's indicator review concluded that "we have been quite weak, we are at oversold levels that have corresponded to intermediate-term rallies, but so far the indicators are in clear bear market modes." We did indeed see such a rally, and now the key question is whether or not we have exited the bear market mode. While advancing stocks clearly led decliners for the week and the vast majority of issues rose from their bear lows, markets continue to anticipate deflation and recession. My Technical Strength measures show sectors in only modest uptrends, and money flow for Dow stocks on the week was only modestly positive.
The Cumulative Demand/Supply Indicator (top chart) moved to neutral levels during the week; it is not close to overbought levels that have recently corresponded to intermediate-term market tops. New 65-day highs and lows (middle chart) find relatively few new highs (only 34 issues made 65-day highs on Friday), but far fewer new lows than last week (only 68 stocks registered fresh 65-day lows on Friday). When we look at 20-day highs and lows, these stalled out on Friday; we had 304 new 20-day highs against 120 lows. This low level of new highs suggests that the market rally of the past week has not yet been able to place stocks in intermediate-term uptrends.
The rally was accompanied by significant buying interest, as the Cumulative NYSE TICK (bottom chart) rose through the week. Note, however, that the Cumulative TICK line remains below its recent November peak, which is also the case for the advance-decline lines and the Cumulative Demand/Supply Index. In short, while the rally has been substantial, we continue to see a pattern of lower highs and lower lows in the stock market. 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.
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