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?

Open Thread

Ok, so Thor stole my day.

My day.

Like I never did it to him.

:-)


“I’ve been down so God Damn long that it looks like up to me” Doors

Bloomberg interviewed Tom DeMark. A smart man, no doubt. He predicted the latest rise to 1255, and hit the timeframe exactly. This may be a misinterpretation of what he said, but this is what I got out of it.

DeMark’s looking at 1973, and a repeat of those trading times, where in 1973 there was an August 23rd low, and an 18% rise in the same timeframe that our Oct 1 low to now exhibited.

He’s saying that he’s looking for several higher closes than yesterday, (now when you read this, day-before yesterday) then back down to 1206.

Still in our trading range, but we got a little higher on the high side. I thought we might have a little higher high because of the commitment volume we had on Aug 3-6. DeMark was saying that the 4-6 sequential higher closes to come in the next few days will be a bulltrap. He also said the fall in Nov 1973 was a sharp downside move.

Me, I’ll just trade the tape. Right now, the tape is telling me we’re headed lower. See the VXX chart below. The MACD is rising, the stochastics are heading higher, we’ve crossed the (blue) short term resistance line convincingly with not enough volume for me to believe there’s conviction here. If I saw a lot of volume, then I’d say look out below. Without that volume, DeMark is likely correct we’ll see some higher closes.



DeMark’s prediction may be right. After a couple of down days, we could see a turnaround and go back up to the 1255 range and have a few higher low closes.

This coincides with Mannwich’s belief that money will be flowing from the Eurozone into the US markets and treasuries (maybe gold too). That money will peter out, and then we go lower. That coincides with DeMark’s stuff, That money may cause a few slightly up days, and when it’s done, we thump back to 1206. Remember the market is like the Queen Elizabeth—it takes some time to reverse course.

These churn markets are really hard to make money. Maybe I should get my day job back. (ha).

The last chart that Thor wants to throw up (*burp*) is the 3LB of the SPXA50 from Stockcharts. This is the chart which shows how many stocks are trading above their 50 day moving average. Looks like it’s at the top. Maybe time to start a reversal?



Well, we had a 4 hour warning on the turnaround. See this updated VXX chart:

On AAPL

AAPL is suffering under the same malaise as HP and Dell. Notebook sales are down, and repairs are up. A lot. People are fixing rather than discarding and buying new. AAPL’s problem is the use of Gorilla glass and the requirement for a special clean room to do the repairs, so only their manufacturer can do it. If they qualify other sources, you’ll see the repair time go down dramatically and yet even more reduction in NB sales.

AAPL needs to find more revenues with good margins this quarter. Even the forecast for phones won't keep their revenues and margins growing, they need margins from Notebooks or other revenue sources.

A multi-billion dollar organization that has a hands-on design and marketing capability and forced focus from the CEO is extremely unusual. This fundamental is probably the main reason for AAPL’s success, and I’m thinking that the consensus approach between marketing, sales, design, product and project management will cause the demise of this success. Steve Jobs, being the tyrant, where it was his way or the highway, kept focus and complete faithfulness of his subordinates. This is AAPLs success. Now the question is posed: how far out of the grave can Steve Jobs’ single-mindedness and control reach?

Could Steve forsee the market trend changes? I don’t think so, because AAPL missed earnings estimates (even though the earnings were stellar), and this miss happened too soon after Steve’s death for any changes to be brought about by his successor(s). I’m thinking Steve did not have a plan to overcome shrinking notebook sales.

So what’s next for AAPL?

Maybe we could use the comments section for ideas, and perhaps if one is good, somebody could forward it to them.

Here’s my $.02.

I used to tell my management that if we wanted to show growth, all we had to do is take a tiny piece of the big guy’s market through either targeted design or marketing initiatives. Even though AAPL’s visibility is high, they really have a very small piece of the smartphone market, which is owned by RIMM and various Android providers. Can they kill RIMM by providing multiple database connectivity and encrypted email (a targeted design)? And perhaps other RIMM features, to replace them in the market.

You know the old saying, “Kick ‘em when they’re up, kick ‘em when they’re down”..

Perhaps the Sprint penetration is the first of several targeted marketing initiatives to come to capitalize in this area.

Exit overnight?

Beyond the research on the relative strength of the herds, I did an analysis of overnight trading.

I don’t understand how such tiny volumes overnight can affect the market at the open in such huge ways. I’ve looked for articles and books that explain it, and haven’t found any. That’s huge leverage, and I’m wondering how the SEC isn’t investigating how this happens. I think it gives less credibility to the market, and influences the small investor to go find something else. Anyway, that rant over, here’s the information:

Since Sept 1, we’ve had 3 cycles on the S&P. From Sept 1-9 there was a down phase, 12-16 an upswing, 19-21 a down phase, 22-26 an upswing, 27-Oct 3 a down phase, and from Oct 4 to now an upswing. I recorded the overnight change for each day during those three cycles in the SPY and in SKF. Here are the results.

1. In any individual down or up phase, there is no trend in the overnight spreads. One might expect in a down phase, for example, the overnight spread to be down. It is not.
2. The SPY is flat from Sept 1 to today. The summation of the pop up overnight total is 12.08, and down is 13.88. So basically, it’s flat.
3. The SKF is up $2, from 72.81 to 74.95 today. That’s pretty flat, with just a $2 increase. However, the summation of the pop up overnight total is 31.65, and the down is 23.15, the standard deviation is .34, which is significant.

As we know, the SPY is an average of 500 stocks. The SKF is an inverse ETF of the banks, and is therefore a small (inverse) segment of the SPY. The data trend might indicate that if you invest in a small sector ETF, you need to stay in overnight in order to realize a net 0 gain, however if you invest in a broad-based ETF, it doesn’t matter if you stay in or get out to realize a net 0 gain.

A sample of 2 ETFs is too small to prove any theorem, and I’d love to continue this study, but it takes a lot of time to do all these calculations. If anyone knows of an automatic way to do it, let me know in a comment.

One more thing I’d like to mention in this post. My favorite indicator, which based on earlier analysis leads the market price, the $SPXA50 from Stockcharts,com is trending up. Based on where we are, it seems the market will extend higher. Here’s the chart:



I had commented earlier that at the turnaround on Oct 4, if we saw volume follow-through the next day or two, I believed we would get a higher high, and may break out of our trading range. We did see significant volume, and Based on the SPXA50, these seem to reinforce this probability.

I was looking for a turn-around, but I’m usually early. The SPXA50 says I’m early again.

Weekend Open Thread

Popping up in our trading range

I see the SPY support confirmed, by big volume, after our dip below 1115. If I see volume follow through in here, then I think the next move upward will have commitment and will be looking for a higher high (that is, above 1195). If I don’t see volume follow through at the 1115 area, I think the next leg up will see a lower high. All that’s assuming we stay in our trading range.

However, If Cobra's right, and with bad news out of Europe (they're saying recession now) we see 1000, then I think the next move up will fail and we'll ultimately go still lower. Lower highs, lower lows, combined with a weak earnings season would give me that feeling. Probably lower by the end of the year; we've had a downtrend in December 2 of the last 3 years. The one year where the trend was up was because the market was held up by the Bernank’s weakening of the dollar.

There's a lot of support at the 1115-1120 area. Look at the volume 8/05-8/11 and 9/21-9/23. If this leg downward goes below that, with all that committed volume holding it up, I think Cobra's going to be proven correct.

If we go to 1000, look for policy makers to do something to move the market up.

We're still in the trading range. I don't think we'll break out, even on a weak earnings season. I saw a report on Bloomberg that said that money has pretty much stopped coming out of the market. The report said that with no money coming in means we’ll stay in the range. It said the movement is typically a result of share buybacks by corporations, that this is the source of new money coming in to the market.

So here’s an interim herds report.

First, over the last 20 days, we haven’t made any money long. However, several ETFs have performed better than the S&P, showing strength.

RTH: 5.5% is the best. RTH is mostly retail. The homebuilders ETF is in the pits. So I'm wondering how retail is doing so well.

$DJULTC and XLU: 5% Utilities are safe havens during downtrends. People look to them for dividends as the value drops.

SMH, XLK: 3.9%. Tech. However, the NASDAQ has not been leading the SPY, which is bearish. So they’ve still participated in the downtrend.

Then we have BBH at 3.8%, IGV at 2.6%, and ITA at 2.5%.

The worst are TAN at –44%, SLV at –27%, KOL at –25%, and XME at –21%. These may be oversold now, and perhaps an investment in First Solar or Alcoa (who hit a 52 week low the other day) could pay off. But that’s gambling, I’d rather invest in strength as we go up.