Latest Herds Report

This post will summarize the latest herds report. The SPY is still under pressure downward, regardless of the big weekend we just had, so I’ll also identify any of the herds which are making money on the long side. This morning, the pop due to the central banks moving against the ECB caused a turnaround. The last time this happened, the turnaround lasted only 2 days, so keep your stops close.

Also, if anyone wants, I can publish the entire report, or if there’s some herd you’d like to know about WRT relative strength, I can comment that one. Again, relative strength of a stock is being measured against the S&P. So a RS of 2% means that ticker is better than the S&P by 2%, cumulative over the last 5 days.

This report is for a 5 day trading period. Because of the volatility of the market, it doesn’t make much sense to go beyond the current down cycle (or for other reports, up cycles). It doesn’t look like we’ll see the end of this down cycle anytime soon, but I see Bloomberg talking heads constantly talk about an upswing and Santa Rally. Just play the tape. If you want to short, look at the biggest losers in the herd report.

One more word of advice: if you play any of the leveraged ETFs like VXX or SKF or SDS or QLD, make sure you exit after the current trend is done. The math works against you in the event of a turn-around. If you don’t understand this, I’ll put together another post to show the math.

So here’s the report in the form “ticker, relative strength, slope”
The top performers:

XME 4% rising
BBH 3.3% rising
XOP 3% rising
$DJTATO 2% rising
$DJTCNS 2% rising
IBB 2% falling
KOL 2% rising
GLD 1.8% flat
IHE 1.6 falling
SLX 1.6% rising

The worst performers:
SLV –4% flat
$SOX.X -3.4% falling
IRET –2.6% falling
$BKX –2% flat
KBE –1.8% falling
DBA –1.7% falling
IAK –1.3% falling

It is interesting to note that there are 23 sectors with a falling relative strength slope, and 19 with a rising relative strength slope. If they were all valued the same (they aren’t), that would indicate money is flowing out of the market. When I look at the daily SPY, the Money Flow indicator is literally on the bottom, indicating a strong money flow out of the SPY.

The last thing I’d like to present is yesterday’s chart of the number of stocks trading above their 50 day moving average. We have a turnaround in process.

When to Invest

I think my comment was something like “the time to buy is when both the weekly and daily stochastics are oversold (20%)". That was kind of a glib comment, and Mannwich correctly questioned me on it. In fact, we can show that that’s the time to invest, and to refine the time we can use regression analysis (or SMA evaluation) to get a more exact entry point. So here’s the analysis I promised. First, the weekly SPY chart for the time period I wish to explore: April 2008-present. On it you can see the times we hit oversold.: June 2008, Dec 2008, March 2009, May 2010, June 2011, Aug. 2011, and Oct 2011. All the charts below are courtesy of TDAmeritrade StrategyDesk.



As you can see, there are only a few times where the SPY weekly hits the 20% (or oversold) point, and crosses over in the upward direction (I’m writing this from the long viewpoint because everybody hates people who short). (And I’m tired of being hated.) We’ll take a look at these.

The first one hits in June, 2008. Here’s the weekly section of the above chart for this time frame:



At the June point, the price has not gone above the 12-period SMA (blue line). Price starts to break the SMA in Dec/E but returns and doesn’t break the SMA trend line until March, 2009 (it hasn’t broken it’s down channel until that point) so the beginning of the trend reversal happens in March, 2009. Here is the daily chart for that timeframe:



You can see that during the Dec/E, we haven’t returned to oversold. So we have to wait until the daily returns to oversold before entry. The stochastics return to oversold around Jan 14, and break the SMA around Jan 28th, so that’s our entry point. However 2 days later, we have to exit because we’ve broken below the SMA, and it’s turned flat, then negative slope. We don’t get a turn-up of the SMA until March 10. That’s when I would enter again. Notice we get a pullback on the 19th, but because we didn’t drop below the 20% point on the Stochastics, I’d add at those points because of the W formations with the right side higher. See this chart for my exit point:



Your risk appetite should tell you when to exit, but I’d start taking money off the table preparing to exit when the SMA starts turning south, on May 20th. However when we break back above the SMA, I’d add again, looking at those W’s. I wouldn’t exit until June 12 or so, when we get a significant drop below the SMA, and wait for the next setup.


The next time we revisit the 20% point on the weekly is around May, 2010. We don’t start leaving that until July 2010. Here’s the weekly chart for that timeframe:




You can see we cross the SMA around the beginning of July/mid, 2010. But at that point, the SMA is not positive. So any investment entry consideration at that point should be carefully done. Here’s the daily chart:




You can see that we’re not at the oversold point at the beginning of August, so I would have to wait for the daily to return to oversold. This happens around Aug 15, and starts breaking the daily SMA around Sept. 1, 2010. That would mark my entry point. At that point, the weekly stochastics are still on the rise.


The next time we hit the 20% point on the weekly is (arguably) June 2011. Here’s the weekly chart:



We don’t break out over the SMA until October, 2011. Here’s the daily chart:




As you can see around Oct 7 the stochs are on their way up, and we break out over the SMA, so that’s our entry point. I won’t tell you how to manage your risk, but we cross back round Nov 16, so that was my exit point.

This concludes my approach for buying when both the weekly and daily S&P hit oversold. I hope this answers Mannwich’s question adequately.

Remember, I’m not so much a risk taker. I remember my losses vividly. Some people buy as the market goes down. Not me. I am a trend-follower. The last thing I’d like to mention is that you can invert the above analysis if you wish to short.

"Under Pressure"

The daily SPY’s stochastics are oversold. Here’s the chart(Courtesy TDAmeritrade StrategyDesk):




The weekly stochastics are headed down. Remember, when they are both oversold, that’s the one time in the year you need to buy. They only hit oversold maybe once or twice in a year.

I still see some downward psychological pressure on the market. The media is full of the European contagion, but no one has mentioned what happened to the value of the sovereign debt that was purchased 6 months ago. I’m sure the smarter banks have tried to unload that, but I doubt there were many takers. We’ll see what happens when the MSM starts raising this issue. Banks’ values and capitalization are sure to suffer.

Our Super Committee failed, and should be named “Stupor Committee”. I think since they can't be fired for failing, they should be forced to return their salaries and campaign contributions received for the period they were "serving".

More downward psychological pressure: S&P says that we may see another downgrade of US debt. Corporations have figured out how to be profitable even though GDP growth is poor at best and Europe is in a recession. The way these corps may be profitable is through accounting tricks. But job growth in the US is on a rise—tiny, but on a rise. So there are some mixed psychological signals along with somewhat unbelievable fundamental signals.

On the technical side, we see some reasons to pressure the market upwards. Europe hasn’t capitulated even with Italian bonds trading at 7%, and a terrible German bond sale. Germany is under pressure as one of the main support columns for the Euro. If it backs out (Merkle says she wants a fast modification to the treaty, but it’s not likely to happen) the Euro is toast. That’s not gonna happen, don’t look for a UUP boost because of that anytime soon. Also, the daily stochastics for the S&P are oversold (see the above chart). Also, the $SPXA50 from Stockcharts.com shows that the number of stocks trading above their 50 day MA is at a low, and may be ready for a turnaround. (Chart courtesy of Stockcharts.com).



The biggest aspect of the market pressure is from the headlines. What will the headlines give us over the next week or two? If we do see a dip down toward the 1080 floor, I expect a quiet FED will turn a little more lionish and start buying MBS’s and other mortgage derivatives, in hopes that will spur common people to buy homes. It won’t. Common people are still afraid. But that headline will pop us upward for sure. You won’t see the politicians and PM’s do anything, so there won’t be any major headlines on those fronts.

Financials are supposed to lead the market. What happens to the financials, happens to the market. I think the financials are toast. Unknown regulation, and costs associated with it. It seems their bets may be coming home to roost: no more prop trading. Pretty much the only way they have to make money is loans, and nobody is borrowing. Inflation is upon us, feed prices are rising, farmers are making money, and we are all paying them for it. So nobody will want to borrow. You may see some headlines on these issues and more that affect the financials. Look at GS: it’s at 90. That’s the point I’ve seen targeted to take it private.

I will be playing the market on the short side, selling the blips. Because of the costs of borrowing shares, I play the short ETFs like SKF, REW, SRS, SDS, SMN, DUG DUST QID. If it looks like a significant upswing in progress, and I get stopped out of my short plays, I might buy some DIG QLD ROM USD. Saves on the borrowing costs.

Also I will be going home long SKF. Putting my money where my mouth is.

Rock's Thanksgiving

This Thanksgiving, I'm going to have about 10 friends for dinner. I hope they taste good.

Normally, I would post some sage financial analysis junk to make everybody think I know something I truly don’t. But this time, I’m going to post another kind of sage. Here’s a little ditty I wrote about how to prepare a turkey feast. I left out the list of materials, you can ferret it out from the directions.

(I can’t resist it: go look at GDX and ANV—I like them both. (Disclaimer I just entered ANV long. I think their levered cash flow is negative because of the investment they’ve just made in a new mine.)

0. The night before, tear up the bread into pieces no bigger than ¾ inch square, into the black turkey pan while you watch the football game. There may not be a live one, so be sure you’ve got one on tape. Football is necessary. Put the top on the pan, but don’t seal. We want the bread a little stale. Bake the pumpkin pies. Use the recipe on the back of the Libby’s can, but substitute dark brown sugar. Add extra pumpkin pie spice, maybe 2X the amount on the recipe. Mix one package of Lipton onion soup with the sour cream. Cover and refrigerate until tomorrow.

1. Get up at 6:00. AM. This is a requirement. Without doing this, it won’t be Thanksgiving.
2. Pour 2 ounces of Vodka in a glass. Add Ice. Sprinkle Tobasco sauce. Fill with Bloody Mary Mix. Open one pack of celery. Cut off the end of a piece, and stir the mix. Drink..
3. Turn on the oven to 350. Bake the Costco apple pie for 1 hour on a cookie sheet.
4. Open the turkey and wash it out. Remove the giblets and boil for about 20 minutes. Watch out, because they boil-over really easy! Don’t boil the neck. Save the water, but throw the giblets away. You’ll use the water in the stuffing..
5. While the giblets are boiling peel and chop the onions and about 12 stalks of celery. Mix with the broken bread in the black pan. I guess for the 2 loaves of bread, about 5-6 cups of chopped onion and 3-4 cups of chopped celery is about right. I like more onion than celery.
6. Add seasoning. I start with one heaping tablespoon of Bell’s for each ½ loaf of bread. If you used both loaves, that’s 4 heaping tablespoons of Bell’s. Add 1 teaspoon of salt, and ½ tablespoon of pepper. Mix well. Pour in some of the water you’ve saved from the giblets, and make the bread squish together. It takes less water than you may think, so start slowly and mix as you go until you get everything to kind of stick together. Don’t make it soupy, but too dry isn’t good either. Taste. Add salt, pepper and Bells as you think necessary. I usually end up adding more of everything. When the flavor “dances” on your tongue, you’ve got it right. Don’t add butter, it will be just fine. Don’t add raisins, don’t add nuts.
7. Repeat step 2.
8. In the sink, stuff the bird’s butt end first. Pack the stuffing in pretty good. Cookbooks you read tell you to pack it loosely, but don’t. It should use about ½ the stuffing there. Sew it closed with the laces or needles. Stuff the bird’s neck end second. Use ¼ of the stuffing there. Sew it closed.
9. Put the rest of the stuffing in a Corel or glass pan. Sink the turkey neck in the middle, and make little “dimples” with your thumb. Fill the dimples with marjorine. After you get some juice from the turkey, squirt it in to this pan. Cover with foil and bake for 1 hour.
10. Preheat the oven to 450 (hopefully you’ve removed the stuffing and the pie you were baking—if not, repeat step 2). Rinse the black pan. Put the turkey in, baste the outside with butter, cover loosely with aluminum foil. Leave a small hole , don’t cover completely to let some of the steam escape.
11. Put the turkey in the oven. Lower the temp to 350. It’s best if you close the oven door.
12. Repeat step 2.
13. Repeat step 2.
14. Bake the bread, use the breadmaker and just pour in the mix.
15. Repeat step 2. Bring out the chips and dip, and mix ½ the jar of horseradish with a rice-bowl full of seafood sauce, and put out the shrimp. Turn on the football game.
16. I baste the turkey with the juices about every hour. They make these “bulbs” that will suck up the juice, and I squirt that on the turkey. Replace the aluminum foil as necessary to keep it covered. I bake it for about 25-30 minutes per pound. Actually, I bake it until one of the legs relaxes and separates from the body. If it’s not brown, remove the aluminum foil for 20 minutes or so. Mine always browns up just fine when cooked covered.
17. Wash and peel the potatoes, cut into ¼ or 1/5. Boil until tender (25-35 mins)
18. Put the green beans in a glass dish, and mix in the can of mushroom soup. Add some water to make it moist, but not too “soupy”. Salt and pepper to taste. Bake at 350 for 15 minutes after the bubbling starts. Sprinkle the French’s fried onions on top and bake until they brown, and everything’s bubbling.
19. Boil the peas. Salt. If not Green Giant brand, add butter.
20. Cook the squash. I don’t remember how, but I don’t care. Anyway, add a little dark brown sugar. It helps.
21. Drain the potatoes, add a lot of melted butter and about ¼ cup of warmed milk (microwave) and use your mixer to whip the potatoes. Cover and salt and pepper to taste.
22. Repeat step 2.
23. Remove the turkey. It will probably take 2 people, with 2 pancake turners each to get it out. Don’t worry about leaving some behind, it helps the gravy. Cover the turkey with aluminum foil. Mix 2 heaping tablespoons of cornstarch in a glass of water, and add slowly to the turkey drippings. Add ½ teasponn of salt, and 1 teaspoon of pepper, and cook for a few minutes (10 or so), constantly stirring. This actually accomplishes 2 things: it helps get the stuck stuff off the pan so washing’s easier later, and breaks up the leftover stuffing and turkey to mix in the gravy. Taste, add more salt and pepper to taste. Taste often. It’s fun.
24. Sit down and eat. Eat more. Serve the pies with Ice Cream and Reddi-Whip.
25. Let somebody else do the dishes.
26. Repeat step 2, and excuse yourself, closing the bedroom door behind you.

Opposing Forces

Here’s the first chart I’d like to show: The SPY



I’d like to point out that the volume is falling, which my trainer told me that means the price action is not justified. Fewer people are being involved, so there is no commitment on price direction. Additionally, look at the MF (money flow). It’s headed to the lower boundary, meaning money is flowing out of the trade action. Disclaimer: I don’t have the math behind the MF chart. So I’m not completely sure what it is, other than the user’s manual for my StrategyDesk software says that’s what it is.

Now here’s a chart of IWM. As you know, the theory is that IWM leads the way. As you can see on Jul 7, the money flow is out of IWM, which started a fall. The fall was over around July 18, when the money flow was turned around and into IWM. Then on July 22, we again see the money flow start coming out of IWM, and the fall was not over until August 9.



Now shift your observation over to today (the right side of the chart). You see that the money flow is on the bottom, but the price has held up. Interesting. My theory (and I believe Mannwich also) is that the reason we’ve held the price up since around Oct 27 is the new money coming in from Europe (although the preference is the bond market, some spill over into risk is inevitable).

So we have the SPY’s pennant with decreasing volume indicating a break lower. We have IWM with the money flow already at the bottom and Euros heading our way, indicating a move higher. Who’s going to be the winner of these opposing forces?

Let me now look at one of my favorite leading indicators, the 3LB chart of the number of stocks trading above their 50 day MA.



As you can see by looking at July8-Aug8 peiod on this chart, a fall was tracked, and the actual fall started on the July 4 bar. That indicator is before the MoneyFlow was indicating money was coming out of the market. I think we have that again, that around Nov 1, we see the SPXA50 start to fall, and the MF follow around Nov 8.

OK, Rock, what’s your conclusion? I think the fall’s not over yet. I think we’ll see the SPXA50 chart go down to around 150. I think the MF chart will stay below it’s lower line, and money will come out of the market. So I think when we get to the end of the pennant, we’ll break lower.

Here’s one more short-term data point. Mutt’s estimate for a high proved out, but look what happened to the TRIN the last hour. Wow! This is quite bearish, and the aftermarket action confirmed this. I expect a pop down in the morning, making this a Turn-Around-Tuesday.



This is contrary to all my pressure indicators, including Relative Strength. So my regular charts are telling me we’re going higher. Maybe that’s why I haven’t been successful in my setups and trades. So now I will be playing the tape with a lower bias. I’ll take my profits today from the long side, and wait for a setup to the short side and start trying to make money with shorts.

Monday Open Thread

New Herds Report

I'm stealing somebody's day. I think it's D'astro's but he hasn't been around for awhile, so, too bad.

Time for a new herds report.

This report will be a little different than the previous ones. This one will include a new datapoint, called profits. It’s good to have relative strength greater than the market, but it’s even better to have profits.

Of course, with relative strength, you can feel good about your picks even when the market goes down, right? I mean, I lost less than the market, so I feel really good.

Nope.

Need profits. Gotta feed that insatiable hunger in my 40 pound overweight belly that increased in size while I was in Singapore (excuses, excuses…….)

So how do we get profits? Do we invest in individual stock names and pray for no bad headlines to take the wind out of our sails? Nope. Not me. I was doing that, being very very careful with my trades, and found that last year (2010) I increased my net worth 90%, but this year (for the first half year) only about 15%. After about May, I started to trade on volatility (still on individual stock names). I made a little more, but not enough more to make all that work worthwhile.

So I have a new theory. Go long ETFs with strength. Hence the herds report.

We’ve had a run since October 4th. I feel it’s time for a little rest before all the money coming in from Europe takes us higher again, so I’m looking for a pullback of maybe 5%. Well, rather, I’m hoping for a pullback of maybe 5%, because I’m only long at most one position at a time, primarily due to the volatility. I was hoping we’d hit the bottom of the trading range again, but I don’t think so anymore. I think the money flowing in from Europe will push us UpUpandAway again. So here’s my analysis: (the profit picture is since Oct 4) (the relative strength is based on the last 20 day period)

UYM, DIG > 50% profit, relative strength of 18%, RS slopes positive
USD > 40% profit, relative strength of 8.66%, RS slopes positive
UXI > 40% profit, relative strength of 10.2%, RS slopes slightly positive
XOP > 40% profit, relative strength of 14,5%, RS slopes positive
XES > 30% profit, relative strength of 10.2%, RS slopes high and flat
KOL > 30% profit, relative strength of 10.9%, RS slopes slightly positive
UYG > 30% profit, relative strength of 10.5%, RS slopes down
URE > 30% profit, relative strength of 12.9%, RS slopes down
SLX > 30% profit, relative strength of 9.4%, RS slopes slightly positive
XME > 30% profit, relative strength of 9.4%, RS slopes slightly positive
ROM > 30% profit, relative strength of 5.1%, RS slopes flat

If anyone’s interested in weakness (short weakness) I can post the weakest ETFs. It’s just that it’s really hard to short, and everybody hates you if you do.

Or, if anyone’s interested in a particular ETF, I can quickly run the analysis and give the results. I don’t monitor every ETF, so if you’ve got a favorite, let me know.

An update: Here's one of my favorite leading indicators. You know the last 6 days were up, right? But it looks like the 3LB of the number of stocks trading above their 50 day moving average is down.

Weakness

Here’s the chart on which I was basing my suspicion that there was impending weakness in the market. Again, I had no idea that hot, steaming Grease would fall into my lap. I never get that lucky. (please ignore the Relative Strength lines on the chart below, because this is a chart of the SPY and the SPX is the reference for calculating Relative Strength, so the deviations from 0 are due to the rebalancing times necessary for the SPY ETF to buy/sell the index.)



See the Blue line labeled Support/Resistance. Remember from a long time ago, I said that Farley said that if you find many factors then that will make the S/R point stronger. Here we see an overnight pop, good volume, buyers coming in and the price holding, and we see the Stochastics hitting the 80% point. All good indicators for strength.

Then see on the 31st, where the convergence of the price move and the moving average was happening. Also we see the stochs starting to fall and the MACD plummeting. All weakness signs.

I was watching that weakness, trying to decide whether to gamble going short, when we broke the Moving Average short and medium term lines (the blue and black wavy lines) with an overnight pop on the 31st. We held the Support/Resistance line for 5 hours, but no buyers came in to move the market back higher, even though on the daily chart it looked like the market was on an UpUpandAway move. Then, we see for the last 2 hours of the day, we broke convincingly that Support/Resistance line, with increasing volume. Definite weakness. Look at yesterday’s comments, I posted a comment that I saw weakness in the market.

Then I woke to our overnight pop, when I was expecting a short move to around the support line at 125. Because we had broken the Support/Resistance line at 126.50 with committed volume, I didn’t expect my overnight VXX move would be to the positive side. Reward was high, risk was low.

Where to now? Italy will be making headlines, and the market must price that in. There is a resistance line around 123 which seems to be holding with reasonable volumes, so I went long the vxx again there (at 44.90). Until we cross that Resistance line around 123 with good volumes, I’ll believe we are in a (temporary) decline. I’ll be watching the MA’s and will reduce my positions as we get convergence (like we saw around the 28th.

What will move this market in the short term higher? US Earnings are good to OK which is a stabilizing factor, but I believe investors are bailing out of Euro bonds and into “risk assets” like the stock market, and also into the US T’s. I think they’re likely to choose the US market, as opposed to Brazil or Korea, or Japan markets. So at some time (maybe around 1140 (I don’t think we’ll see 1110 again)) we’ll see the new money come in.

The other thing I’d like to mention is that SKF has been falling from 97 to 59. Have a look at the daily chart. So, with the impending default of Grease and Italy, and maybe Spain, do you think the banks are going to take it on the chin? Do you think you might see a move of SKF, maybe to 80 or so? Or even higher? They can’t dump their bonds after all, who would buy them? So they’re toast. And the US banks won’t be making profits anytime soon because the US Government won’t let them. I shorted the banks before when evertybody said they were in trouble, and made a lot of money.

Trade the tape, and keep your stops tight. There's no shame in getting out and back in again.

Here's a chart of the VXX. Notice any similarities to the chart above?