Quick Market Check

Some time back I’d said ‘hiding out in TIPs’ was likely a good move and that I was “out of stocks” mostly. On a brief note, I’d said I expected a market drop if Obama was elected. (We’re down over 1000 points since his election). BobN and I talked about some of it in ‘comments’, so it wasn’t made blatant with something like a WSW posting, but it was said. So, I need to make a posting (even a ‘quicky’) about how things have worked out, and where we are now. Some ‘good guesses’ about where we go in the future would also be in order.

Furthermore, today we had a load of Glad Handing and Mutual Admiration Society from the Republicans and Democrats with photo-ops for all about “avoiding the fiscal cliff” (as though they can actually fix our economic mess…). So the “news flow” is all about how good that will be ‘for markets’ and we’ve had a mid-day reversal spike from ‘just plunge’ to up. So what do the charts say about that, too?

Here’s a ‘static capture’ of SPY the S&P 500 baseline ticker v.s. a selection of others:

SPY vs selected markets 16 Nov 2012

SPY vs selected markets 16 Nov 2012

First off, note that TLT (long term bonds) and TIP (Treasury Inflation Protected Securities) are both holding up much better than the stock markets, that have largely rolled over. While TLT is down from that June / July peak, at the far right side it has an ‘up tick’ on the election. TIP has just continued on a very shallow rising line, left to right. Like I said, a good place to ‘hide out’…

More interesting are the stock tickers. Generally a peak about Mid-Septemeber, then a rollover and plunge. But even a bear market has reversals. So where are we in the “drop and buck” process and where’s the end? Always hard to say in market drops. But just note that SPY is the 500 biggest stocks in America, so represents most of the market that matters.

RSI is down near 20. A ‘bear market’ typically drops to ‘near 20′, then has a ‘rolling aspect’ between about 20 and near the midline (50) for a while. Sometimes it will ‘surf down’ with each ‘dip’ being a bit lower until it reaches 20. Look back at May for an example of what it looks like as a drop nears an end. Notice that the ‘second dip’ toward twenty where it is just a bit higher, is at the actual reversal point. So RSI now is saying “This sell off is a bit overdone, and nearing a short term reversal”. Add that to the news flow on gladhanding and we likely have a reversal “soon”. It could start today if enough folks get excited (for no good reason) over political posturing.

WHEN such a ‘reversal’ happens, prices ought to return to ‘near’ the SMA stack. That’s about 5% above prices right now. That SMA stack has three lines, so pick the middle one as the ‘target’. Price may fall a bit short, or overshoot, but tends to end a run near the middle. So look at that SMA stack. It’s inverted. Price on the bottom. 24 day next above it. Then the longer cycle time lines. It isn’t a complete reversal just yet, but is substantially guaranteed to end up that way due to the present prices and what leaves and enters the averages in the next week or so. So while the 48 and 72 day lines are ‘weaving’, we’re going to end up in an ‘inverted stack’ soon. An inverted SMA stack is a ‘bear market’ or a ‘correction’. It means to be biased out of the market (and into things like bonds / TIPs) but be willing to trade back in at extreme sell off points. We are near one of those now. As it’s hard to pick the exact bottom day (though I’ve done it a few times, perhaps just luck) a better strategy is typically to use “buy if touched” orders and let the market decide for you; or ‘scale in’ over several days. Then use ‘stop loss’ orders to exit placed once price is near the SMA stack (or ‘scale out’ then and reassess). Or just ‘sit out’ in something like TIPs. But overall, the SMA stack says “bear market bias” and maybe a ‘reversal fast trade’ available.

MACD has ‘red on top’ and is way negative. That’s all ‘bear market be out’. Yet eventually that trend will end. MACD, being a Moving Average Convergence / Divergence is a lagging indicator (but not by too much). So, by definition, it will be saying “Be OUT!!!” at the reversal moment. RSI is saying ‘reversal soon’. You can wait for a MACD ‘crossover’ to blue on top (but that misses the max trade value available) or shift to a faster chart to trade more rapidly. Or just use ‘buy if touched’ and wait for the market to vote. The PSAR indicator places little red dots at the ‘buy’ and ‘sell’ suggested points, so you can use it, too. I usually just shift to ‘faster charts’.

DMI / ADX is a lagging / slow indicator as well. Best for confirmations and looking for ‘inflections’. We’ve got ‘red on top’ again with DMI- beating DMI+ and ADX is at about 25, so saying ‘reasonably strong trend, use MACD for trades rather than Slow Stochastic’. This argues for waiting for a MACD crossover to blue on top before committing to a trade (and definitely for a longer term investment. So some caution on “buying the dip”… Now look back at the May / June reversal. Notice how MACD had a ‘wobble’ head fake at the bottom? (“Head Fake” is a hockey term. It means to look and turn your head one way, then send your body and the puck in the other, misleading your opponent…) Now look down from that ‘almost but not quite a reversal on MACD’ point. Notice that DMI- has an ‘inflection’ down, then hits a ‘crossover ADX black line’ at the actual bottom. That’s what you are looking for, most of the time. Now look at present ADX / DMI- …. Hmmm…. no inflection down yet in DMI- (but it could happen tomorrow of the next day) and certainly no crossover of ADX any time soon. We’ve got time…

Now, remember that this is ONLY the S&P 500. It says little about other stocks. ANY individual stock can have a different chart and different timing. It DOES tend to call the ball on overall market mood and the direction of most stocks and money (as it’s the core of the whole market). So it sets our “mood” or “bias”, then we go looking for ‘other ideas’ that either pick up more of that mood, or move in the other direction. So “trend trade” enhancement or “counter trade” options. Like that TIP line.

OK, on to the “other tickers”. A quick look at other USA market averages shows “about the same”. (They substantially always do). DIA is 30 biggest stocks, so moves more slowly, but doesn’t grow much. It’s “uninteresting”, but similar to SPY. RUT is the 2000 largest stocks, so includes a lot of ‘not so large’ stocks. Often moves faster and further, so more volatile. Look back in Feb. It was above the rest of the market. Now it’s below. It often moves ‘outside’. So ‘the broader market’ is falling apart faster. Still a ‘bear market’ and not something to embrace long term (yet). Nasdaq 100 tends to have more growth as it is in newer tech companies (to some extent). Notice that it has ‘grown’ more over the very long term, but is much more volatile too. Folks can choose to just buy a Samsung Galaxy instead of an iPhone… So it was well above the pack in September (as too last May…) and is now dropping faster. Overall, not a lot of surprises. But in a ‘down market’ you want to be more in staid things and much less in the RUT and QQQQ of the world. Few people decide to stop buying toilet paper or food to save money…

But “no surprise” doesn’t tell you where to find a surprising gain, so while ‘nice to know’, it isn’t all that ‘excess profit’ rich. Lets press on.

There are some other lines on the chart (other than US stocks or hiding in bonds / TIPs). Emerging Markets has two tickers. One, EWZ, has been a great ride in prior years (decades?) but a real stinker since they elected a more activist Socialist. Looking at it, it remains a stinker. Where it used to lead the EEM Emerging Market basket (and the USA too). Back in the May window, it lead too, but in a break to the downside… (It’s the green line). In July it lagged on the reversal / recovery. A ‘stinker’ tends to be that way. Not so good if you own it near the top; but useful for a ‘late to enter’ at a bottom. But overall it’s saying “Brazil is crummy” and emerging markets in general might be a problem. Now look at EEM. Golly, it’s not dropped nearly so much. As Brazil is part of EEM, something in that basket must be doing well. So that’s a “dig here” to find who’s that winner… (Likely later tonight…) EEM is the ‘charcoal’ line near the middle. Underperformed the US markets (to date), but dead flat at the right side as our markets fell apart. Since part of that basket is Brazil that was dropping, something good is hiding in that average. Note, though, that at the far right it’s dropped. That happens when folks start to worry… so never trust an Emerging Market to stand up in times of worry…

USO is the dark black line at the bottom. An economic downturn causes oil to drop. Present high production in the USA / Canada has also pushed oil down. That drop has flattened this last month. If the market starts to rebound on ‘happy economy’ news, oil usually rises. This is a ‘watch this space’ so we need to do an oils and related posting…

GLD gold is the gold colored line ;-) and isn’t looking all that thrilling. It has not kept up with the SPY, but has more or less made ‘turns’ in sync with it. Note that this is NOT the same as the actual Gold Price. GLD is a financial instrument with a price tied to gold but can have slippage. At any rate, it’s showing signs of ‘reversal’ to the upside, but not strongly. Still, a ‘precious metals’ chart is likely needed now. While ‘exciting’ to trade; as a ‘place to hide for safety’ it has been soundly beaten by TIPs. Part of why I’m not all that ‘in love’ with GLD and Gold Bugs get grumpy at me when I’m lackluster about it. Oh Well. You can make money fast trading it ( I like a 10 day hourly chart) but as the ‘price fix’ in London happens before market open in the USA, it really is an advantage to be in the EU / Asia and a ‘hard trade’ if in the USA. Frankly, trading it from Australia (and waking up late ;-) is likely the best place to be. At any rate, it has NOT been the best place to hide nor has it been ‘safe’ in that it’s both highly volatile and underperformed both SPY and TIP.

In Conclusion

While not all excited about anything in particular, nor buying anything today: It does look like a ‘reversion to the means’ (or ‘bounce to the SMA stack’) trade is shaping up. Likely ‘news driven’ for the next 45 days. If we hit the SMA stack just about the time a ‘Fiscal Cliff’ deal falls apart (or even ‘is made, but is a bad deal’), be ready to ‘run for cover’…

There are ‘hints’ of some places to make money. So I need to actually get off my duff (or ‘stop playing with Linux on LiveCDs’) and do a full WSW posting and some “Momentum Money” looks. (That one is way out of date as I had AAPL as one of the things it found with excess momentum, while AAPL has now turned down hard…) For now, still hiding out in currencies and / or TIP are the better strategies, but it looks like an inflection point is ‘soon’ for some trades in equities. IFF the global economy starts to actually grow, industrial commodities like oil and copper will turn, so time to put an eye back on them, too. A ‘fiscal cliff’ deal will likely cause some euphoria driven bump up in them.

All in all, ‘time to start watching more closely’ and likely time to make some more trades to the ‘long side’. That also implies time to sell those ‘puts’ bought back when they were cheap at the low volatility top. As we’re at a higher volatility bottom, this is a ‘not so good time’ to be buying options. Selling ‘covered calls’ can be good. If a rise doesn’t develop fast, you get the premium. If a rise does happen, you get the rise and the premium up to the ‘strike price’ then get some cash from selling the stock to roll out of less interesting positions into more interesting ones. (Put the strike price toward the SMA stack middle for max probable gain ;-)

So time for me to get back to work on markets. I’m still more engaged with ‘the story’ of Obama as a very bad impact on the American Economy long term, and I’m still pretty sure that any ‘fiscal cliff’ deal will be more bad than good for ‘the folks'; but “It’s not about ME” and “There’s ALWAYS a ‘story'” apply. The charts say everyone else is not noticing, so voting with their dollars. The news flow is all in favor of the “fiscal cliff fix”, so will love it … until it fails. So bet with the herd, and just don’t be in front of them when they run off the “cliff of conclusion”.

Here’s a live version of the above chart so you can watch it over time, and a 10 day hourly chart:

Live SPY vs other markets

Live SPY vs other markets

Fast ‘trader chart':

SPY vs other markets 10 day 15 Minute trader chart

SPY vs other markets 10 day 15 Minute trader chart

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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...
This entry was posted in Economics, Trading, and Money and tagged , , . Bookmark the permalink.

15 Responses to Quick Market Check

  1. DirkH says:

    Get back in on the 22nd.

  2. philjourdan says:

    So you think Currencies and TIP are the place to be? What about metals? I am out of the market and looking for a parking place.

  3. vukcevic says:

    Hi Mr. Smith
    I am sure you know more.

    where do you think 16 year cycle comes from?
    I could not find any astronomy or solar links.

  4. E.M.Smith says:

    @Vukcevic:

    Ah, yes, the Demographic Generation guys… They tend to have ‘variable time scope’ on what is a generation (changing it from time to time so as to always be ‘right’ … in the rear view mirror…).

    There is some truth to the ‘demographics is destiny’ mantra, but not to what they choose as a ‘generation’.

    So the very first question to ask is “IS THERE a 16 year ‘cycle’ in the stock price data?”:

    http://bigcharts.marketwatch.com/advchart/frames/frames.asp?show=&insttype=Fund&symb=spy&time=20&startdate=1%2F4%2F1999&enddate=8%2F21%2F2011&freq=2&compidx=aaaaa%3A0&comptemptext=spy&comp=spy&ma=4&maval=25&uf=16&lf=2&lf2=4&lf3=1024&type=4&style=320&size=3&timeFrameToggle=false&compareToToggle=false&indicatorsToggle=false&chartStyleToggle=false&state=15&x=55&y=19

    That’s an ‘all data’ chart on SPY. Not as long as I’d like, but ‘good enough’. Notice that there are two bottoms in the SPY. 2003 and 2009. That’s a 6 year cycle. Oh Dear!

    There are other crashes / bottoms. the “tech bubble” bust and 1987 come to mind.

    But it is NOT a consistent 16 years.

    (There’s a bit more of a presidential cycle lock, and there’s a ‘solar output’ partial link in that during low sunspot times things in general get bad and agriculture in particular has problems. There’s also a tendency to a lot of destructive wars.)

    So right out the gate, I reject that they have ‘done the math’ to prove their cycles exist in the stock price data…

    But is there anything of value in the “Generational” idea? Yes. “The Greatest Generation” was dedicated to lot of practical ‘just make it work’, so we had spectacular growth. The “Boomers” had a bit more “I just wanna have fun” so we had more boom and bust and less ‘tending the business’. Now the Gen-X, Gen-Y, Millennials, etc. are more into “what’s in it for me?” and “feel good don’t make me think” tweets. That’s typically when “envy and tyranny” rise. So not a good time for private ownership and stocks.

    So it can set a basic “mood”. And, as the election showed, that reflects in the political actions that reflects in the economic performance. It will take a long time to ‘educate’ the Gen X/Y/Z/Millennials that “they did not choose wisely”. Will that be 16 years, or 20? I choose to let charts be my guide as to when they are showing understanding with their dollars…

    Now mostly the advice to not expect to ‘buy and hold’ for a 20 year period in a 16 year ‘bummer’ cycle is not particularly bad advice. But not the best either, IMHO. So yeah, be more ‘mobile’ in your placement of assets; but not for the reasons they give. Because of the “Me and Empowerment Generations” wanting to “dick with” the economy for “feel good” instead of “just make it work” as the Greatest Generation did… and you don’t know how long the ‘slow learners’ will take to learn…

    Along the way there will be many ups and downs, so more money to be made on ‘swing trades’ and ‘trend trades’ of months to ‘a few years’, but I’d not do ‘buy and hold investing’ anymore.

    @PhilJourdan:

    It has been the place to be, and isn’t a bad choice right now; but what this posting is about is saying “probably time to look around and I’m going to do that”. So ‘what is the BEST place to be NOW’ is an open question, with a WSW posting to help put some light on that as ‘needed’ being the conclusion I drew above.

    Or, short form: “Watch this space for a couple of days”…

    @DirkH:

    Probably about right, depending on ‘news flow’ and does the “not talked about much current warm-war in Israel / Palestinians” turn hot…

    One of the interesting challenges of making “trading postings” is that I have to ‘guess’ several days in advance. For my own trades, using a chart that ‘calls the buy’ mid day is fine. But a posting that says “buy now!!!” that gets read 4 days later is not very useful. So I’ve been developing a bit more skill at being able to say “Not yet, but soon. Watch THIS.”

    And that’s what this posting is. A “Soon, but not yesterday.” posting. In that light, 22nd is a reasonable guess.

    So what method are you using? Charts? Guessing? Astrology (that made several folks surprisingly rich… why is unknown)? Insider info? Lifetime of experience base? etc. etc…

  5. vukcevic says:

    Mr. Smith
    Thanks, no sure thing in the stock market. I use to play a bit, studied tech analysis and kept Gann’s book under my pillow. In October 1987 I had number of short options, market crushed and I made some good money. I couldn’t believe my good luck, instead of putting money back in the market I bought some land at an auction, price was good, nobody was interested in any kind of investment at the time, ‘hold on to your cash’ was the advice. That proved to be a slow but very profitable investment.
    Occasionally I would put small amount here and there, but interest faded with age.
    .

  6. crosspatch says:

    Might be a good time to start buying REITs

  7. DirkH says:

    @DirkH:
    “So what method are you using? Charts? Guessing? Astrology (that made several folks surprisingly rich… why is unknown)? Insider info? Lifetime of experience base? etc. etc…”

    Genetic algorithms. My evolution came up with several interesting strategies over the past year, one of them exploited among others a monthly pattern, and bought on around the 22nd of a month and sold on the first trading day of the next month. Others were only in the market from October to February.

    So they reduce their exposure and try to be in the market when it’s more promising, statistically. I checked for various stocks in Germany and the US, NOV 22 looked good in the past 2 years.

    Psychological explanation: Investors run out of money over the month; near the end of the month new wages come in so more buying happens again. That could explain the monthly pattern. Often the market peaks on the first or 2nd trading day of the next month.

    Just a slight wobble on top of other movements. I would also say that people are more susceptible to good news when they have money and more susceptible to bad news when they need to find a reason to de-invest… As we have seen with Benghazi or warmism, people are enormously immune against news they don’t want t to hear.

  8. E.M.Smith says:

    @DirkH:

    Don’t forget, in the explanation, that “options expiration” tends to be near that “twenty something” date each month. (Third Friday) There tends to be a ‘reversion to the trend’ about then (but not always), since closing out all those futures or options contracts puts pressure on price back toward the mean value used in pricing them.

    There are also a load of folks who have ‘monthly payroll deductions’ for savings and retirement that all tend to hit the last couple and first couple of days of the month. A cynic would speculate that the ‘smart money brokers’ deliberately run up prices into those dates so they “sell high” to the saver rubes, then let the price drift back down later… but ‘that would be wrong’ so I’m sure they would never ever do it… /sarcoff>;

    Options expiration calendar:

    http://www.marketwatch.com/optionscenter/calendar

    So I’d expect a run up from expiration back to the SMA stack just in time to sell to the ‘savers end of month buy’, and then a drop…

  9. DirkH says:

    “There are also a load of folks who have ‘monthly payroll deductions’ for savings and retirement that all tend to hit the last couple and first couple of days of the month.”

    Yes, exactly. That’s what I meant with fresh money at the end of the month.

  10. p.g.sharrow says:

    This about 22ed of the month shift is something that I noticed back in the 1970s. Must be something to do with the herd behavior of fiduciaries. The 22ed before the end of the quarter was the most pronounced. Also large capitalization stocks moved up to down or down to up over 5 quarters. pg

  11. DirkH says:

    I have to correct myself: the 23rd looks slightly better. (Using German and American stock valuations from the last 2 years)
    No proof of predictive skill! Use at your own risk…

  12. E.M.Smith says:

    @P.G.Sharrow:

    I think that structural issues matter more. “3 rd Friday Options Expiration” 3 x 7 = 21 days….

    Quarterly another set of futures and options expire ( ‘triple witching’)…

    http://www.investopedia.com/terms/t/triplewitchinghour.asp

    @DirkH:

    It’s a holiday week. That often skews things just a bit. “reversion to the mean” in some cases, or ‘positive trend’ in others. ( “Santa Clause Rally”…)

    Volume goes light too.

    The professional traders sometimes try to move things around (to their benefit…) due to the low volume making it easier to do, lowering their commissions on volume, and being bored ( IMHO ).

  13. DirkH says:

    E.M.Smith says:
    21 November 2012 at 11:19 am
    “@DirkH:
    It’s a holiday week. That often skews things just a bit. “reversion to the mean” in some cases, or ‘positive trend’ in others. ( “Santa Clause Rally”…) ”

    Of course. My computer knows little. But what it does find out I should at least try to report accurately. I said 22nd, but my computer says FR, 23rd… a misreporting, that’s all.

  14. E.M.Smith says:

    Well, looks like the date of the posting, Fri 16th, was the ‘buy day’ for best return (given an inspection of the 10day 15 minute chart). Exit on a trade basis was last Friday, 23 rd. Though OK to exit today, too. (that’s for a fast swing trade on the 10 day 15 minute chart).

    Looking at the daily tick chart, it’s got prices back at the SMA stack. That puts us in ambiguity land… The longer cycle indicators have MACD with “blue on top” pointing upward, so saying “be in” while RSI is showing a ‘higher high’ off of a near 20 moment. Not quite as good as a ‘higher low’ but still indicating downside ending / ended. ADX (black line) is near 20 (so below 25) that says “don’t use MACD, use Slow Stochastic or swap to a faster 10 day chart) while DMI- has inflected down (but is not YET clearly crossed over DMI+ blue) so a bit ambiguous.

    My “trade rules” generally say to “exit on a return to the SMA stack from below and buy on return to the SMA stack from above”, so I’d step out here and except the ‘slippage loss’ if this goes on up through the SMA stack in the start of a new run, then buy back in on the next dip. That protects against this being the start of a new downtrend, but at the cost of that ‘slippage’ amount while it confirms it was just a ‘correction’ by moving back above the SMA stack.

    There are other strategies that could be used instead. Buy some puts and hold the stock (“protective puts”) or use stop loss orders to only sell on a price drop (that increases the ‘slippage’ in the trade to the upside). Or just shift to the 10 day 15 minute or hourly charts an only do ‘fast trades’ in the vicinity of the SMA stack (it is presently saying ‘be out’ as of yesterday).

    Yet we still have the ‘end of month new month’ retirement money to flow into the markets. So in theory this week ought to end to the upside. Will there be a better ‘buy in’ between now and, say, Thursday? Hard to say. That’s the nature of the ambiguity of a return to the SMA stack from below…

    It will likely take more detail than this one chart to sort out that decision. Me? I’m being lazy and letting some longer term positions ride, but my ‘trade money’ is in cash for now. We’re at the SMA stack, and I have my ‘trade rules’…

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