Quick Pre-Election Market Check

It’s been a while since I’ve done a financial posting. So this is a ‘quick check’ on markets just before the election. Why have I not done much financial posting lately? Couple of reasons. First off is the election. A great big “catalyst” for market movement that can not be predicted. It is a coin toss at present. Two or three weeks ago it was Obama all the way, now it is Romney in the lead, next week? Who knows…

Second was that I’d reached the conclusion that the markets were likely ‘going nowhere’ as major institutions and traders ‘stepped to the sidelines’ to plan what to do next. Why fight them? Add in that there was a generalized global slowdown underway (while not strong, it wasn’t ‘recovery’ either) and that the EU was doing its best to implode the economy, well, just not seeing a lot of “go juice” for much of anything.

Finally, there were a couple of “day zero” major security “issues” popped up (one in Java) that let hackers take over your computer even if you had ‘the most up to date’ release. As I’m not keen on handing the keys to my retirement money to some guys in China, I needed to make a more secure platform from which to do trading. I’ve now got that working ‘well enough’. So with that ‘time suck’ ramping down and the election closer, time to revisit ‘things set aside’.

So what was the “move” over the last 2 or 3 months? What great trend happened that I missed? Lets look at the “one stop chart” from here:

http://chiefio.wordpress.com/2012/06/04/a-very-useful-one-stop-investment-chart/

Though I’ve taken JJG, grains, off of it. About 4 months back they had a spike, then have ‘dribbled down’ some since then. That causes a compression of all the other lines on the graph. The move was very fast and not something a ‘weekend warrior’ could trade, and once it was up, the ‘dribble down’ was not very tradable either. Perhaps some derivative trades (things like shorting food buyers and meat producers) but not a lot of ‘usable’ information in that line. It is in the live chart further down. This one lets us see the rest of the lines more clearly. I’ve also shortened the time window to 6 months to make it easier to see ‘what happened lately’:

Trade Chart 31 Oct 2012

Trade Chart 31 Oct 2012 daily ticks 6 months.

General impression is that “things are more like they were 3 bars back than not”. The two exceptions on this chart are JJC Copper and USO oil. (Oil is the darker grey line near the bottom) Oil has had a price drop lately, but the context is a plunge 6 months back, jump DCB, and drop. At 4 bars back the price is almost the same as now. Copper had dropped, did a jump on recovery speculation, then dropped again on poor China data. So there were a couple of news driven ‘one week trades’ possible if you lived and breathed a particular commodity. Not exactly easy trading. For “home gamers”, likely better to sit on the sidelines. For folks who trade daily, and watch closely, my posting things here is not going to be your driver anyway, so no big loss in my not posting. (IF you trade shorter than monthly, you need to be doing your own charts; part of why I explain how to read them and put live charts in postings…)

THE best place to ‘sit it out’ on this chart was TIPS. Treasury Inflation Protected Securities (which I’ve advocated a couple of times now). For an ‘honorable mention’ we have GLD being roughly a ‘market match’ to SPY. Not very exciting, but might indicate that stocks really have not moved at all. In gold terms, it is unchanged. Perhaps it is just the dollar that wandered…

So my ‘general conclusion’ is that the “things I missed” over this period of relative inactivity were some ‘day trades’ and maybe a ‘swing trade’ or two in volatile commodities (JJG grains, USO oil, and JJC Copper). As the commodity trades are hard at the best of times, I’m not that bothered at “not playing”.

One other ‘exception’ is that bonds have dropped. The upper light grey line is TLT – longer term bonds. Notice that about 3 bars back they start to erode. Aug Sept Oct all dribbling down. Shorting bonds would have worked. However the way that the typical small player can trade that is via an ETF Exchange Traded Fund that does options and futures. Those funds have “slippage” compared to the actual tickers due to the nature of options and futures contracts and the need to ‘role over’ positions. So TBT is that ticker. It’s the red/plum line near the bottom of the chart. Notice it has some fast ‘spikes’ (likely on interest rate news or Fed meetings) but the ‘trend’ in it is nearly flat. So “news driven event” trades would work, but “buy and hold for a month or two” as bonds erode doesn’t overcome the slippage costs. That’s the problem with those kinds of instruments. The “volatility” of the underlying asset matters as does the time value of options. It’s a complicated instrument that ‘slips’ against the base asset, so only for short fast trades, not long term holding.

Now lets look more closely at those stock chart lines. The main ticker here is SPY. Nice run up from June through July and August. Then mid-September it tops. It has whacked into that top 3 times now and is starting to dribble down some. The blue line (RUT Russel 2000) is below it. The “broad market small stocks” often run up faster (note it is above SPY in early July as that run got going) and often show weakness first. It is saying “folks leaving thin stocks are moving their prices down”. More worrisome is the green line, QQQQ Nasdaq 100. It has been the market leader for a while now, to the upside. It is showing even more breakdown now than the SPY or RUT. (Some of that comes out of Apple being a large part of it and having had a bit of bad news with executive turnover, but some of it is large numbers of folks ‘headed for the doors’ trying to take profits). When the market leadership is ‘turning’, it’s time for a ‘re-think’….

On To Indicators

For SPY, we have the RSI indicator having a ‘near 80′ peak followed by ‘lower highs’. The peaks are headed down. Typically that means the run is over. In this case we need to allow that on a Romney win, that could change very fast. So I’d not short anything. Neither would I own stocks now. Cash or TIPS.

Looking at MACD, it is “red on top” and headed to “below zero”. The “Trade out” call was a month back when it went “red on top” and started down. Now, with that zero crossing, it says “get ready to short” and is indicating a general bear market context.

Next indicator down, the ADX / DMI lines, has ADX near 20. That says any trend is weak, so we ought to be doing trades on a 10 day hourly chart or using Slow Stochastic on this chart. Trying to catch those ripples. When it broke from over 30 to under 25 back at the end of September, that was the call to leave the ‘trend trade’ higher in SPY and go to “swing trades” of the ripples with faster charts. Now, we have DMI- (the red line) on top. For about a week. A confirmed negative indication. (Though still with a weak trend, but trends can change.)

OK, the Simple Moving Average lines all converged (not shown on this chart) and price has dropped below the 50 day SMA line (that is on this chart). We’ve got ‘red on top’ for both MACD and DMI, with MACD below zero, and in the context of preceding “RSI near 80, lower highs”. All classic “be out” indications. Add in ‘news flow’ of lower production of goods in China, lower sales in EU and USA, and generalized global economic slow down (reflected in those USO and JJC lines) and inflation (that JJG rising food costs) and the package is “not good”.

If Obama wins, expect this ‘roll over’ to turn into a crash. If Romney wins, expect a bit of a ‘relief rally’, but the basic economy is still lousy, and he can’t change that in less than a year, so once the euphoria wears off, don’t embrace “The Story”. Let the charts be your guide.

Me? I’m most likely to do small trades in selected positions (i.e. stock picking) and faster swing trades on 10 day hourly charts until the election is past and a trend stabilizes. Most money in things like cash and TIPS. Looking for things that are less tied to the US election cycle and China (but those are pretty darned rare…)

Live Charts

Here’s a recapitulation of the “one stop chart”:

For what it’s worth, I usually start any one day with a look at this chart.

It has a broad swath of “things” on it. A bit of oil, some grains, gold, stocks, bonds, copper, etc.

In one look you get a quick “feel” for what’s moving and which way.

The Chart at BigCharts.com where you can customize the settings

A live version:

Broad Markets on One Chart from BigCharts.com

Broad Markets on One Chart from BigCharts.com

It is possible, in Windows, to set that chart as your “Wallpaper” and have it automatically update every so often. ( I had mine set to about 10 am each day, once opening volatility was out of the way and a reasonable ‘trend’ indicate was possible). Then if you see something interesting, hop over to BigCharts.com and explore related tickers.

SPY  - S&P 500 - the Benchmark for all other tickers
GLD  - Gold ETF - Fear and Inflation index
RUT  - Russel 2000 index ETF - Broad market and small caps
EEM  - Emerging Markets ETF basket
JJC  - Copper ETN -  Broad manufacturing indicator
TIP  - Treasury Inflation Protected bonds - Benchmark safe haven.
USO  - US Oil ETN - energy sector AND broad economic indicator
QQQQ - NASDAQ 100 - Tech indicator - more consumer sensitive less financials
JJG  - Grain ETN - Ag proxy and weather sensitive
TLT  - US Treasuries long duration - "Flight to safety" indicator and moves more than TIP

Here’s the same chart with GLD as the main ticker (so I clicked on the Bigcharts link, then just changed the main ticker to GLD as it looked interesting on the basic chart):

One Stop Chart with GLD as main ticker

One Stop Chart with GLD as main ticker

Tea Leaves

So looking at the individual tickers tells a lot. Is oil plunging? Longer term that’s good for the global economy, but usually means the economy is tanking right now. Has oil taken a spike? Maybe a war breaking out somewhere or news of economic growth starting.

Is copper falling? Not much stuff being sold / manufactured.

Are grains rising or falling? Drives food costs, drives Ag Industry sales, even impacts restaurants and meat prices.

How do Emerging Markets, RUT 2000, Nasdaq 100 and SPY compare to each other? Emerging markets often move first and furthest, RUT right behind.

GLD TLT and TIP make a “Flight to Safety” and “Relative Fear” indication. TIP vs TLT is also a bit of an inflation indication. TIP has an inflation index ticker so rises when inflation erodes TLT. TLT bounces up more on fear moments and Federal Reserve Bank actions. Gold is largely driven by Central Bank buying and selling, but with about 25% being gold sales into India. When India is in recession, that’s a problem. When Central Banks are scared, they buy gold, and that props up the price.

So you can look at this one graph, and get a quick feel for fear in the market, fundamental inflation in real terms, Oil Shocks and what they might be doing – or oil glut in recessions as they approach, food pressures and Ag status, along with general demand for manufactured goods and a broad economic indication. Then compare the stock indexes ( SPY, RUT, QQQQ, EEM ) and see if the more volatile / sensitive ones are leading in a direction you like… or are they approaching an inflection point? Also these things together indicate: is it time to go “Risk Off” into a “Flight to safety” asset, or “Risk On” into stocks and other risk assets.

One quick look and you are rapidly “oriented” to the situational awareness of the global markets.

In Conclusion

Gold is not moving all that much, but has been moving down lately. Industrial commodities in general are weak, but food costs are up. Stocks are shaky right now and likely to drop more, especially if Obama is elected. We are approaching an ‘inflection point’ of the election that is likely to catalyze some trades, so right after the election all these trends can change. Check the charts before taking a new position and above all else, do not embrace “The Story”, whatever it might be.

I’m mostly going to cash and TIPS while I work out more detailed faster trades. Post election will be a new ball game and so a more detailed look then.

Update: Added Volume Volatility RateOfChange chart

This chart looks at the same tickers, but with volume, volatility and Rate Of Change as indicators.

Trade Chart 31 Oct 2012 Volume Volatility Roc

Trade Chart 31 Oct 2012 Volume Volatility RateOfChange

On this one you can see how the Rate Of Change indicator is generally ‘above the line’ during ‘time to be in’ and generally below the line on “time to be out”. (On my “someday” list of things to do is a moving average of ROC indicator that basically filters out the little blips. Maybe a 2 day SMA? )

Also notice how volume and volatility are fairly low about end of August, early September as the market reached a peak. Look back to the start of the chart, about mid to end of May. Volume and Volatility high while ROC is down hard, but inflecting back toward the line. Right at the bottom of that dip. Classic.

Back over at ‘recently’ we have had that very low volume and volatility start to pick up a little, just after that top, while we had a minor peak in ROC then that has now turned lower. This again says “time to be out of SPY” (and US stocks in general).

As you can see, there’s more than one indicator that can tell this tale…

Live version of the same chart, with a one year time window:

Trade Chart SPY with Volume Volatility and Rate Of Change, one year

Trade Chart SPY with Volume Volatility and Rate Of Change, one year

Link to BigCharts where you can play with the settings.

I think it is easier to see bottoms using these indicators than to see tops (that it starts ‘calling’ about a month early but with some slop). But coupled with the other set of indicators you can fairly accurately get a ‘read’ on market conditions.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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3 Responses to Quick Pre-Election Market Check

  1. BobN says:

    I agree, the election ill be an inflection point. Up if Romney, Down if Obama. I am heavily shorted on the box and today was a gap down. I think I will lighten up based on poll trends. Trying to decide what Sandy will do to the market. Its New York, so it has to be perceived as bad for the world.

  2. E.M.Smith says:

    @BobN:

    Not only is it New York, but Lower Manhattan is still without power and will be for a while. So the Creme de la Creme are in the worst shape. That means not only will it be ‘bad for the world’ but “Worse than ever!!” ;-)

  3. bruce says:

    any thoughts about the oil service sector, playing on a R&R win?

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