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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Site Seeing Excursion for a Sunday Eve

* More Linking to Come - When I began the Twitter "blog within a blog", about 200 traders signed up for the free subscription and I was quite pleased. Now that the Twitter "tweets" include market stats, links to market themes, and links to relevant blog posts, the subscription level has risen to above 1200. I'm always happy to help showcase good work; if you are a blogger writing on themes of special relevance to Trader Feed readers, by all means email me the URLs and I'll include in a Twitter blast.

* Reviewing Performance - Here's an instructive example of a professional trader's end of month review. See also this post on avoiding overtrading.

* A Bear Market Look - How the current market stacks up with mega bear markets of the past.

* Resistance Overhead - Trader Mike reviews the markets after a week's rally.

* Metal or the Miners? - Jeff Miller takes a fresh look at gold.

* Market Views - Ray Barros has been drawing upon Austrian economics to offer his market views.

* Good Reads - Market at fair value, 10-year yields and risk aversion, and other market themes.

* Monitoring Credit Markets - The Learning Markets site explains the LIBOR-OIS spread.
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A Look at the Week's Stock Market Rally

Hats off once again to the fine Decision Point site, which separates out the common stocks from all the other NYSE issues for analysis. Above we see the advance-decline line (bottom pane) for NYSE common issues; clearly it's bounced nicely off its lows. The site also reports that 54% of NYSE issues are now trading above their 20-day moving averages and 18% are above their 50-day benchmarks. The latter is the highest percentage since the October market drop.

Friday also saw the number of NYSE, NASDAQ, and ASE stocks making fresh 20-day highs exceed new lows by 304 to 120. I will be watching those numbers closely; despite Friday's gains, we did not see an expansion of new 20-day highs. Friday's money flows were slightly negative for the Dow Industrial stocks at -$15 million, though the week's flows were modestly positive at $33 million. We will need to see continued expansion in new 20-day highs and continued positive money flow numbers to keep the rally going.
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Themes of Recession and Deflation Continue to Dominate Markets

As the charts from the excellent Barchart site indicate, anticipations of quantitative easing moved ten-year Treasury note yields below 3% last week, sending prices soaring (top chart). Interestingly, with so much pumping of liquidity, we continue to see a relatively strong U.S. dollar (middle chart) and weak commodity prices (bottom chart). These themes continue to be deflationary, or at least anti-inflationary. Money continues to seek relatively safe havens, including--amazingly--the U.S. dollar. Investment grade bonds continue to outperform high yield issues; the currencies of developed economies continue to greatly outperform those of emerging markets.

Among equities, the best performing industry group according to Barchart is "soap and cleaning products"; mining and steel bring up the rear. Defensive, recessionary themes remain dominant.
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Electromagnetic Pulse (EMP) Threat: No Bailouts For This Crisis

"You never hear the one that gets you," snipers say. A bullet traveling faster than sound will impact and wreak its damage before the brain can process what is happening. That little piece of military lore ran through my mind upon reading the Report of the Commission to Assess the Threat to the United States from Electromagnetic Pulse (EMP) Attack. An April, 2008 update of a 2004 report, this report outlines the near-instantaneous effects that an electromagnetic bomb would likely have on the nation's power, telecommunications, banking/finance, fuel, and other systems.

Tightly coupled systems are particularly vulnerable to breakdown, catastrophic failure, and disruption. This is one lesson from the recent subprime-induced meltdown of our financial system. A lengthy breakdown of a country's electrical systems, shutting down everything from the power grid to computers to electronics systems in automobiles, trains, and planes, would have significantly greater impacts than the financial crises we currently bemoan.

The attacks in Mumbai are a stark reminder that rogue groups possess the will to disrupt modern society. The threat assessments from the recent reports cited above suggest that it is only a matter of time before they also possess the means. Research is under way to protect vulnerable systems and the cost of hardening new components and systems is not prohibitive. The cost of retrofitting and hardening existing systems is significant, and that leaves much of our infrastructure vulnerable--and almost all of us unprepared.
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Stock Performance of Banks Continues to Show Geographic Disparities

A couple of months ago, I made note of geographic variation in the performance of bank shares. Specifically, banks located in regions that had seen greater real estate boom and bust were performing significantly less well in the stock market than banks in real estate markets that had seen no such bubble.

These differences in bank performance continue to be dramatic, despite government efforts to shore up both banks and real estate. The excellent Barchart site tracks the relative performance of industry groups. Banks located in the southwestern and the northeastern regions of the country currently rank #5 and #7 in stock market performance out of over 150 groups. Midwest banks rank #43, southeast banks are #49, and banks in the west rank #98.

By way of comparison, the stocks of 6 out of 15 listed banks in the Southwest are up on the year; 27 out of 80 in the Northeast are green for 2008. In the West, only 4 out of 55 banks are showing annual stock market gains. Indeed, 12 of the 55 banks in the West are down more than 70% for the year. Only 4 of the 80 banks in the Northeast are down that much.

The economic recovery, when it comes, may display significant geographic variation, as weakened banks find themselves more unable to lend money and spur economic activity than banks less saddled with bad loans.
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Thoughts on Giving Thanks

Researchers have identified several components to psychological well-being, including our overall happiness, our energy level, and closeness in social relationships. Another important component to well-being is contentment: one's satisfaction with life. The literature finds that contentment is different from happiness. The former reflects a global appraisal of one's life situation; the former is an emotional experience. We can do many things that make us happy and yet not achieve overall life satisfaction and fulfillment.

Too many traders equate contentment with complacency. They are afraid of being satisfied, because they assume that this will reduce their motivation to move ahead. As a result, they never find contentment; they are never satisfied.

In my own experience, I trade best when I have reached a particular point of peace within myself. If I miss a move or exit a trade too soon, it's no more that a temporary frustration. There will always be other opportunities. I don't need to catch each move in its entirety to be OK with where I'm at in my trading and in my life.

When I fail to find that internal peace, wanting to succeed becomes need to succeed. I find myself trading out of that need, chasing moves and overtrading. I'm not trading from a position of emotional well-being; I'm trading to try, vainly, to find well-being. But no happiness from winning trades can sum up to life satisfaction.

The content trader operates in a universe of plenty. The trader lacking satisfaction operates in a universe of scarcity.

Thanksgiving is more than a day in the year; it's a state of mind. And I suspect it's a state that has much to do with long-term success. The contentment of giving thanks is not laziness or complacency; it's the state that clears our minds for creative insights and the perception of opportunity.
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Sector Update for Thanksgiving

Last week's sector update found a highly oversold situation across all the S&P 500 sectors followed. With the powerful rally this week, the Technical Strength numbers for the sectors have changed, and we are seeing patterns of relative strength and weakness among the sectors:

MATERIALS: -120
INDUSTRIAL; -20
CONSUMER DISCRETIONARY: +60
CONSUMER STAPLES: 0
ENERGY: +280
HEALTH CARE: -180
FINANCIAL: -120
TECHNOLOGY: -80

We can see that the sectors are nowhere near overbought, but are much closer to neutral trending levels in their technical strength. The most interesting shift is in energy, which has turned decidedly bullish. I'm watching commodities in general, gold and energy in particular, vis a vis the U.S. dollar, as the government progresses in its shift toward quantitative easing.
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Sustaining Innovation: Perspectives From Andrew Hargadon

An interesting thesis of Andrew Hargadon's book How Breakthroughs Happen is that creative breakthroughs in organizations are more the result of innovation than invention. Organizations that stay ahead of the curve foster collaboration that leads to recombinant innovation: ways of assembling old things in new ways. "For these companies," he explains, "innovation isn't a process of thinking outside the box so much as one of thinking in boxes that others haven't seen before" (p. 13).

What kills creative breakthroughs is insularity and a lack of communication. Teamwork fosters innovation by helping participants think in unnoticed boxes. This is particularly the case when team members can "broker" information across disciplines.

One of the greatest threats to trader success and longevity is isolation and insularity. Without the free flow of ideas from different sources and perspectives, individual traders become trapped in limited ways of viewing and doing. Hargadon argues that creativity requires both bridging and building; it is a fundamentally social process. Perhaps that is why I have consistently found that successful traders and portfolio managers have well-developed networks of contacts.

One of the great challenges of the online medium is to create virtual networks that can sustain one's own creative processes. In the right kinds of networks, participants serve as knowledge brokers, combining and recombining ideas and perspectives. If one's trading is a business, it is helpful to understand how successful businesses innovate. A large part of success is situating oneself in the right social networks.
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Using the Short-Term Moving Average of NYSE TICK to Trade Range Days

The previous post showed the distribution of the 10-minute moving average of the NYSE TICK during an uptrend day. Today (above) we saw a very different market.

One of the most important tasks for a daytrader is to identify, as early in the day as possible, the likely day structure. That means trying to differentiate a likely trend day (i.e., one that will close far from its open and near its high or low for the day) from a non-trending day (one that trades within a range). I find the distribution of the NYSE TICK, which continuously measures the number of stocks trading on upticks vs. downticks, to be quite useful in that regard.

On a candidate trend day, I want at least a piece of my capital entering in the direction of the trend early in the day and riding the move throughout. On shorter-term trades, I will trade almost exclusively in the direction of the trend, entering on countertrend moves in TICK.

On a candidate range day, I want to be as nimble as possible. Very often I'm buying pullbacks in TICK and selling bounces. Not infrequently, we'll see "support" and "resistance" levels for the TICK MA on range days, as both buying and selling are relatively contained. That showed up today, with most bounces and dips contained within the range of +400 to -400. Because I'm not expecting a trending move, I'm quicker to take profits on a range day: buying when the TICK MA goes negative and selling when it goes positive often provides a good short-term trade.

When we see relatively constrained values--upside and downside--for the TICK MA during the first hour of trading, and when we see the TICK spending a relatively even amount of time above and below its zero line, that's when we start to think of the day as a candidate range day. False breakout moves are common on those days. Knowing that we were in a range environment, for instance, helped keep me from selling the price lows a little after 1 PM CT.

For reference, the 10-minute moving average of TICK shown above comes from e-Signal data; it is a simple 10-minute moving average of the one-minute high/low/close values for TICK. The chart is in Excel, but the TICK MA can be charted directly within e-Signal.
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Trading With A Short-Term Moving Average of NYSE TICK

I find that a 10-minute moving average of the NYSE TICK removes much of the noise from the one-minute values. In the chart above of Monday's trading, a few things stand out:

1) We can often identify strong days to the upside and downside when the first hour's TICK is persistently positive or negative. This means we have skewed sentiment, with stocks aggressively trading on upticks or downticks. When TICK MA pullbacks can't even go into negative territory, you know that the sentiment is quite positive. That's a hallmark of a trending day.

2) At a glance we can see if the 10-min. MA of TICK is spending more time above or below the zero line, which tells us that the Cumulative TICK is running positive or negative. Consider the possibility of a trend day when we're persistently above or below the zero line in the TICK MA. The moving average of TICK also helps us identify intraday turns in sentiment and trend, when markets shift from primarily above/below zero to primarily below/above. Non-trending markets will generally spend more balanced time above and below the zero level.

3) In a strong market, pullbacks in the 10 min MA of TICK are often good short-term entry points; in weak markets, bounces in the 10 min MA are candidates for selling. I generally find it useful to wait for these countertrend bounces, so as to not get whipsawed buying highs and selling lows. Even in a market that is about to change direction, we'll often get a retest of previous highs/lows after one of these TICK pullbacks/bounces, making it much easier to scratch trades. Good execution counts for a meaningful share of profitability.
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A Trading Performance Insight From Ziad Masri

Dear Readers,

I thought this email from reader and commenter Ziad Masri was so insightful, that I asked for his permission to share with others. His key observation, that it's not how long you trade, but how many patterns you observe and act upon, that determines the learning curve helps explain how active traders can develop expertise in far less time than is commonly observed in other performance fields.

Notice also the emotional tone of Ziad's communication. To sustain enthusiasm and learning during the most challenging markets is a real accomplishment. Without that drive, the learning curve stalls out. Many people love trading and love making money. Not so many like the things you have to do to learn markets and make good trades.

Brett


Just thought I'd write and share an observation with you. A trader friend of mine and I were talking recently and it occurred to us that the recent market environment not only is giving incredible opportunities for some large profits, but it is also giving incredible opportunities for accelerated learning. With volatility running at all time highs, what used to take 2 weeks to transpire is now taking one day (like you alluded to in your ATR study). As such, and with the abundance of trends that we're seeing, there are literally hundreds of more patterns appearing in a given time-frame than we used to see before. I remember early last year I'd sit there and watch the market for hours as it moved in a 6 point range with nothing happening. Now it's almost non-stop action. The effect of all this extra exposure has been accelerated learning.

This was all brought home to me when I noticed starting a couple of months ago that my trading skills seemed to make an instant leap. I was suddenly seeing the market differently and being able to sense moves to a much better degree. I couldn't understand the reason for this, but now I see it was the result of accelerated learning given the market conditions of late. Quite literally, it's as if I just got 2 years of added experience compressed within 2 months. Realizing this has not only been interesting, but it has also benefited me indirectly because I was starting to doubt how my results could be so good. I was thinking this is too good to be true for it to be happening so fast (which can be a form of self-sabotage), but now I realize that the length of time I've been trading can be deceiving as it's not the length of time itself that determines learning but how much exposure we have to patterns during that time. And from that point of view, there's never been a better time to learn and grow as a day trader... this market, far from just offering ample opportunity, is offering a crash graduate course. And I'm happy to be enrolled!
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Indicator Update for November 24th

Last week's indicator review concluded that "while recent selloffs have not been as broad and sustained as in early October, neither are we yet getting indications of sustained buying interest. Until that occurs, it is premature to assume that a durable intermediate-term bottom is in place." What followed in the past week was a broadening of the decline and a move, not only to new bear market lows, but also below the bear lows of 2002/2003.

Sentiment, as measured by the Cumulative NYSE TICK, has been quite bearish during the past week; price weakness has extended to all major sectors. The Cumulative Demand/Supply Index, which generally does an excellent job of tracking intermediate-term market highs and lows (top chart), is back at levels from which we've typically seen intermediate-term rallies. Note, however, that we continue to see a pattern of highs and lows in the Cumulative DSI corresponding to lower price highs and lower price lows. That is typical action in a longer-term bear market.

The number of NYSE, NASDAQ, and ASE stocks registering fresh 65-day lows expanded dramatically last week (bottom chart), hitting its most extreme level since the second week of October. Once again, the weakness was quite broad. On Thursday, for example, almost 1100 NYSE common stocks made fresh 52-week lows; 300 of the S&P 500 stocks and 323 of the S&P 600 small caps also made annual lows. The advance-decline line specific to NYSE common stocks and the line for the two S&P averages all made fresh bear market lows this past week; money flow for the Dow Jones Industrial stocks was negative on the week.

In short, 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. To begin a bottoming process, we need to first see a sustained rally on solid breadth, cumulative TICK, and money flow prior to any further testing of lows. To this point, rallies have been short-lived and have not been accompanied by sustained, positive money flow. We saw a solid money flow rally late on Friday, and we are trading higher today as I write. I will be tracking the indicators closely each AM via Twitter to see if this rally differs from the ones previous.
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Bearish Stock Market Sentiment Continues

In general, I have found that my best short-term trades have been in the direction of the Cumulative NYSE TICK Line (blue line; chart above), but executed on contratrend bounces/dips in TICK. Since we tested the 1000 level in the S&P futures (pink line), intraday sentiment has been consistently bearish, with more NYSE stocks trading on downticks than upticks. We've taken out the October lows in the Cumulative TICK Line, which confirms the new lows we've been making in the advance/decline line for common stocks within the NYSE universe. It is difficult to see signs of bottoming in these indicators; thus far, weakness has led to further weakness, with oversold markets becoming yet more oversold and selling pervading all sectors.
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Trading Systems and Quantitative Insights Into Markets

* Going Public - Nice to see that system developer Henry Carstens has started his own hedge fund with his portfolio of trading systems.

* Developing a Trading System - Excellent post from A Dash of Insight, with links to useful tools.

* Articles from a System Developer - Here are free downloads from the Breakout Bulletin, featuring Mike Bryant's work.

* Sharing Quantitative Insights - Here are a few popular blogs that feature worthwhile market research. Please feel free to add others in the comment section for this post; thanks!

Bespoke Investment

CXO Advisory

Market Rewind

MarketSci

Quantifiable Edges

Ripe Trade

Trader's Narrative

Vix and More

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Sector Update for November 22nd

Last week's update found the S&P sectors in moderate downtrends. A look at the current Technical Strength readings shows that the downtrends have intensified:

MATERIALS: -420
INDUSTRIAL: -280
CONSUMER DISCRETIONARY: -320
CONSUMER STAPLES: -300
ENERGY: -260
HEALTH CARE: -300
FINANCIAL: -460
TECHNOLOGY: -300

These are some of the weakest figures of the year. In the recent past (2007/2008), such extreme negative readings have tended to precede intermediate-term bounces. This last occurred late in October. I'll have more to say about this in Monday's indicator review.

Money flow was quite positive for all sectors on Friday, but the Dow Jones Industrial stocks still finished at -$165 million for the week. The weakest flow numbers were seen among the health care and consumer services stocks; the strongest readings came from telecommunications, energy, consumer goods, and utilities.

For the month, money flow was weakest for consumer services and financial stocks; strongest for telecommunications and health care. As has been the case for a while now, monthly money flow among Dow stocks remains in negative territory.
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A Historically Oversold Market

This past week, the Dow Jones Industrial Average traded about 34% below its 200-day moving average. This eclipses the oversold conditions from the post WWII era. Indeed, as the chart above indicates, since 1902 we've only had one period of greater oversold conditions: the Depression market of 1932. Looking for market bottoms using historical analogues from modern markets has been hazardous to investors' wealth.
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Three Market Relationships

Here are a few relationships that have been on my radar:

1) Gold, unlike other commodities, has been performing well relative to stocks (top chart). Should we see a weakening of the U.S. dollar, this could get interesting.

2) Banks have resumed underperforming stocks overall. The reversal by Treasury, deciding to not use TARP to rid banks of their bad debt as was first planned, has been one catalyst in the banks' swoon.

3) Consumer discretionary stocks continue to greatly underperform consumer staples issues, in a classic recessionary relationship.

Many good trade ideas follow, not just what is moving, but what is moving relative to other things.
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Quick Takes for a Bear Market Friday

* Finding an Analogue - People have compared the current market to other bear markets, including 1987, 1974, and even the markets of the 1930s. I find it interesting that many of those comparisons implicitly equate the current year with the years in which past bear markets made ultimate lows. In many ways, the current market is acting like it did in 1973, which was the one year since the 1960s in which huge numbers of stocks making fresh 52-week lows did not lead to intermediate-term rallies going forward. We stair-stepped down in volatile fashion, and did not see an ultimate price low until late 1974. It's the inability of the market to find buyers and sustain rallies even amidst extreme weakness that is most troublesome about the current market.

* Do Bonuses Work? - Thanks to an alert reader for noticing this New York Times article on how incentives can actually lead to poorer performance. When we want something too much, our need interferes with our performance--something we see when traders too desperately need to make money.

* Lowry's Perspective - Excellent market overview from Trader's Narrative.

* Insider Buying - It hasn't been a good indicator of late, but interestingly it's been rising considerably as the market has weakened and now is at post-1987 crash levels, according to the excellent Sentimentrader service.

* Finding Market Themes - MarketSci follows up with a look at the relationship between SPX and the Consumer Discretionary shares.

* Extremity - Quantifiable Edges takes a look at how extreme this market really is.
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New Lows, New Opportunities: Themes for Thursday

* Finding New Lows - Ten-year Treasury note yields broke below their 2003 levels today (top chart), as the S&P 500 Index (bottom chart) also broke the lows from the previous bear market. The last decade has resulted in a more than 33% drop in stock prices (November, 1998 to November, 2008), a crushing blow to those who have relied on buy-and-hold for their retirements. Add to that corporate bond prices that are priced for default and housing values that continue to fall and you begin to see the destruction of wealth that will affect the economy for years to come.

* Where There Is Opportunity - I was interested to see that retail traders opened a large number of accounts and increased their trading at E*Trade, even as customer assets dwindled. This pattern also manifested itself at Ameritrade and at Schwab. Indeed, according to one report, eight of the ten busiest days at Scottrade were during October, with the number of new accounts running three times the average level. It appears that volatility is bringing out the speculative sentiment among individual traders. Perhaps in response to the growing interest in trading, Scottrade has begun a program of free trader education at their branch offices. It's an interesting venture; over time we may see retail brokers developing their customers much like prop firms develop their traders.

* Figuring Out Bloggers' Personality Type - Thanks to a very helpful reader who found the Typealyzer app, which categorizes blogs by the personalities of their authors. Mercifully, the categories of "narcissist", "idiot", and "antisocial" are not part of the scheme.

* Thematic Trading - Here's an interesting idea that's held up well in the recent, difficult market from the MarketSci blog.

* When to Get Out - Worthwhile investigation of the performance of different exit strategies from the RipeTrade blog.

* Trading Sentiment - A followup on a promising trading system idea from the Buyside blog.
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