This posting will have three graphs for the same things, but starting at different points in time.
The purpose is to show how sliding the start of time changes the picture of what you see as history, how context changes the message.
We’ll start off with a 2 year daily view of SPY, GLD, TLT & RUT. S&P 500 US stocks ETF, Gold ETF, long term bonds ETF, and Russel 2000 small cap stocks. Then we’ll move to 1 year, then 6 months. You find slightly different things emphasized with each graph.
Note that since the “start of time” changes, all the tickers have their origin reset to start at the same place at different times in the 3 graphs. Much like in “Global Warming”, where your choice of start time changes what you see happening…
We start with the 2 year view. Here we see more of the lead-in context to the big change. Those ups and downs at the start, the “dip” about 1/2 way where GLD TLT swap places relative to SPY RUT. You can embiggen the graphs by clicking on them.
Until the mid-point, Gold and Long Bonds have a big lead on stocks. After the mid point they lag. Something happened at the mid point to drastically reduce worry about risk. (Any guesses? ;-) There was a giant rush upward in “risky” small cap small business stocks, and a drop in ‘low risk’ gold and long bonds.
At the start of the new year, back on the left edge, we have a giant drop in stocks and a huge burst in volume. MACD very negative (below zero red on top) and ADX/ DMI showing DMI- (red) way on top with high force of momentum (ADX 30). The world was worried about “something” and reacting. In September and October that “worry” returned, with force, and we again have stocks dropping, but this time even TLT and GLD are also taking a hit. Don’t know just where folks were “running to” but it was somewhere else. Perhaps cash, perhaps just out of the USA. MACD again below zero, but not as much. There was some kind of hope that was missing before. ADX was below 20 at the start of October, slowly building after that. Some slow build of confidence started then, and gained force for the next month and a half, peaking at about 35. A fairly high ADX number.
In early November, the volume bars have a big spike of black (positive volume, or volume on up market movement) bars. RUT goes rushing past SPY and both are running up fairly fast. MACD shoots into positive territory and has ‘blue on top” as does DMI. We’re off to the races!
I’m sure by now folks have noticed that it was the First Tuesday of November that was the big win day for positive attitudes, and that it was the “OMG Not Hillary!!!!” panic causing the down shots prior. Here, in one graph, you can see the impact of the primaries, and the election, on stock prices and bond / gold prices.
Since the election, stocks have risen, gold has regained some punch, and bonds have been tepid. Recently, RUT has fallen behind. The emphasis is moving to bigger more staid companies. That can be a sign of worry, or it can just be a sign that it takes a lot more money over a longer period of time to move the stock of a mega-cap company.
Most worrying is that volume has had a steady downtrend from the Big Panic at the far left. The stock market is a volume seeking machine and that tends to indicate a desire to “create some volume via panic”… Essentially, as “everyone is bought in” volume dries up and the way to make more is to scare people into selling. That’s where the short sellers come in. In that creating panic stage. Some excuse will be trotted out. Bombing North Korea. Impeaching Trump. Failure to repeal Obamacare or get tax cuts. Any excuse will do. The real mechanism is folks with $Billions shorting YOUR stocks to panic you. Just when it starts is an open question. I’d give it about 5 to 6 months max at the moment, but it has high error bands right now.
Note that MACD ‘bumps above zero’ are getting lower and lower. ADX dropped to an astounding 11 just before the recent bump up out of the summer drop. We ARE at MACD above zero blue on top and DMI blue on top and all, but… look at those black volume bars at the very right edge. Damn small volume to the upside run. Look at the price bars in the main ticker on the far right edge. VERY small range (low volatility) and just “squinchy”. All squashed small and flat. Not Good.
OK, lets pull it in to a 1 year more standard chart. What changes from this POV:
Well, first off, we’ve lost all that pre-election panic area where the Hillary Witch was scaring everyone. Now we just see the climb out of the Trump win, stocks taking off and bonds / gold as “risk off” trades lagging badly.
The slow decay of MACD ripples to every lower is more evident, as is the ADX strength decay from 40 down to 10. The big rush up is running out of steam. In August DMI+/- (blue red) becomes confused and weaving. The decay of volume is even easier to spot. You can also see that the at the very far right we’ve got near dead flat small price bars and vanishing volume both up and down. The market is slowing to a stall. That tends to be when shorts come in. Gold and Bonds are dropping too. No “safe haven” and “somebody” is raising cash for “something”…
At this time scale we see just the one event, and then the run-out from it. It focuses more on the general change of the market over the year, and not much more.
So let’s move in to the 6 month time scope. Past the election, more of a ‘what have you done for me lately?’ POV. Easier to see daily ticks, but little context of history.
Loss of that historical drop of gold and bonds and resetting their start point has them generally rising with stocks (but from that lower, now hidden, start). There is an “odd convergence” at the far right as all the tickers are headed for an intercept point. Meaningful, or accident of start point bias?
We can clearly see the more “squashed” shape of the price bars and their (nearly) hard top action as they run into shorts on price rise attempts. Scanning volume we see down days (red bars) mostly outpacing up days (black bars) on volume. Not good.
The MACD “wobble down” is a bit harder to see as the context is less, but still visible. The black “histogram” works a bit better here as we can see the above / below zero coming into balance. ADX is flatlined for about a month and a half at near 10. This market is “going nowhere fast” at the moment. Yes, recently is has had DMI+ (blue line) go to the top, but that was just a run out of the recent dip (failed shorts run?). With ADX at 10 there is no force behind this recent run up. Volume in the last few far right bars is dismal, and with down days about double the up days on volume.
So at a very close look, this looks like a market in trouble. It has no direction, so would be easy for shorts to push around with a few $Billion. It is long in the tooth, so “everyone is bought in” no one left to buy (up volume very weak).
Looking at the SMA stack, we still have normal order. (Price over shortest average over longer averages). But that only inverts once the market has changed direction. For now it still is saying “Market in an up trend”, but it is a lagging confirming indicator, not a leading predicting one like Volume+ and ADX/DMI.
Now, what’s happening in the Political Front?
Trump is under strong attack from The Left.
His tax and company benefits (repeal Obamacare) initiatives are stalled.
RHINOs are at his heels.
In short, the anticipated “pay off” for businesses are not on the books and looking less likely.
Similarly, we have “scares” with things like North Korea and damage from Hurricanes.
Is that what we see in this graph, too? Or just a ‘fully bought’ market?
Which is the reality and which is “The Story”? (“There is always a story.” -E.M.Smith)
Does that really matter?
So for me, it is still a time to be cautious, but not fully out. Tighten stop loss orders. Dump weak positions. Look into “rotation” into stronger more downturn resistant positions, but not yet “Run, just run for the gold”.
Hopefully this helps to illustrate how to read charts and how to see the Political-Economy reflected in markets. It also ought to illustrate how choice of “start of time” biases what you see in time series (and part of why I’m particularly sensitive to start-of-time being in the Little Ice Age for temperature data…)
Secondarily, the ‘granularity’ of daily makes it hard to see some details in long charts like 2 to 5 year daily, but they stand out on close inspection in a 6 month chart (though with loss of context). For this reason I keep shifting my time scope to see both bits of information.
Third, while not in these charts, it ought to give you perspective on the use of 10 year weekly and 10 day hourly charts. That one (the 10 year) gives LOTS of context, but not much of “what is happening now”, while the other gives much more detail on “what are folks thinking today” but devoid of the wider context. This is also the reason why when a longer term chart “becomes confused” (i.e. has gone flat as ‘change is in the air’) I shift to the next shorter time scope for may actions. Eventually ending at the 10 day chart. It will show the resolution to the outer time scope first, and gives me the fastest reaction to that change. So as 10 year goes flat, I shift to swing trading, then as 1 year goes flat, I shift more toward day trading or “run to cash” and wait for a clear change of direction.
Yet at that time scope, right now is lacking in direction too. What have we got here? Basically end of day positive volume as the end of month mutual fund buys from long term retirement investors buy a chunk and not much else. What happens when the end of month is over?
It is essentially dead flat for 8 days without even day trade opportunities. It looks to me like a dead market waiting for something. Is that something war with North Korea, or just October 1 and a good chance to short all the end of month 401K buyers?
Hard to say, but I know I don’t want to be playing in that game right now…
So, yes, I’m mostly sitting in cash at the moment. Waiting for direction to mature.
FED policy changing
And the good news just keeps on coming:
The Associated PressVerified account @AP 5 minutes ago
BREAKING: SEC says 2016 cyber breach of its filing system exposed information that may have been used for illicit trading gains.
Thanks again EM
The interesting thing is that humans have a built in ability to see patterns where there are none. Imagine you are in a jungle. You see something that looks like food. You investigate and find it is food or not and live to see another pattern. Then you see something that looks at you as if you are food. If you exit the scene you live to see another pattern. If you don’t and it wasn’t a predator, you live to see another pattern. If it were a predator, you become its lunch and are purged from the gene pool. Hence the ability to see patterns even when there is no there there is an evolutionary supported survival mechanism that works in the jungle.
Now move that capability to the stock market. You see a pattern and you place your bet. Sometimes you win and sometimes you lose. You remain in the gene pool and keep it as muddy as it ever was and the next generation is no better at the game. You have to use something else to survive in the stock market beyond your ability to see patterns. That is if you want to be able to continue playing the game.
It is beyond my ability to conceive what that something is if it consists of watching the time series known as “market data”. In the long term the data displays the obvious. In the short term the data is nothing but noise. Hence I have chosen to focus on my ability to make things that work and make my living by trading the values I create rather than chasing my tail on the noise of the so called market. The only other thing I see that works is “buy low and sell high”. The only thing that is real is the trade. All else is story.
Your context may be different.
That’s why I like the charts. It reflects only the trades. I’ve sunk over a decade into looking at various patterns folks claimed and discarding the ones that were worthless. Sorting out the patterns that were “dependable enough”.
One clear, if simple, example: Volume spikes at bottoms. Look at the 2 year chart above. Every down plunge has a matching volume spike rising toward it. About 20 years ago I started by drawing lines on printed versions of these charts (from a different source then). Connecting those price down and volume up spikes. It is persistent over time and reliable.
The necessary corollary is that volume is less at tops. Somewhat harder to reliably pick out of the charts, but there all the same. Most visible just after the infection down begins, but in plenty of time to be usable.
Other indicators are more “concise descriptions” than seeing patterns. MACD is one of them. It is a description of the displacement between two moving averages. “Moving Average Convergence Divergence”. By definition it must have crossovers at significant inflections and have an inverted order in downturns vs upturns. Careful inspection of the moving averages can tell you the same thing about price movements, but making a formula based visual description of it is easier to do. Similarly ADX that is a measure of the overall force of any movement. Average Directional Index. It takes a (default) 14 day period and shows how much price has changed over that time. So again by definition, when it is a low number, not much price change is happening and when it is large, the game is afoot.
There is a bit of art in playing these indicators off against each other in that any one may be a bit misleading especially on thinly traded stocks. For that reason, using 3 or 4 of them together improves the accuracy.
None of that is seeing patterns in the forest. It is presenting information about the way others are spending money to buy or collecting money by selling, in a more rapidly usable way. It answers questions like “Are buyers increasing?” and “Is buying volume drying up, and are sellers entering?”
Now in this particular posting I happened to add “A Story” but one that’s pretty obviously real. The Election happened and it had a major effect on both the real economy and folks attitudes toward investing in the economy. Rich people being happy at the prospect of a big tax cut on business.
But that Story is after the fact. It isn’t what I use to decide probable future rise or fall. At most I’ll use a 4 Walled Story in the news to give an idea when a “catalyst” is likely to happen. So I’ll look at the first Tuesday in every 4th November as a catalyst day. Things WILL change. But then let the charts tell me how the mass of money is voting on that change. Again, not seeing patterns in the forest, but collecting information on money flow… measuring the actions of others.
Underlaying all of the chart reading is finding the answer to just one question: What is the Market Maker community thinking and planning to do?
Golly, the SEC got hacked… Why would anyone want to hack them /sarc;
Well, now they know…
“Fast, Good, Cheap, pick any 2” – Traditional SysAdmins & Developer Saying / Folk Wisdom
“Outsourcing overseas is cheap” – Essential Truth.
“Fast or Good, Pick One – with outsourcing” – Necessary Corollary…
Most folks choose fast. Decades of observation…
More on the SEC hack – summary of what is known at this time.