Friday, October 17, 2014

A Look Down Memory Lane - $SPX $RUT

We all know the stock market has been falling rather rapidly these past several weeks. From fears about slowing global growth (read Europe) to the Fed finally ending QE to potential rate hikes next year, we can speculate all day long as to what the reasons are for this change in character we're seeing in the market, but I personally don't see much benefit in doing that.

To get a better sense of the recent change in market trading behavior, consider this: the current daily average true range (ATR, 14) of the S&P 500 Index (SPX) is 31.77, which translates into an average percentage range of 1.70% based on yesterday's close, the highest it's been - on a point basis - in 3 years. Compare this to just one month ago when the ATR was 13.27, which translated into an average percentage range of a mere 0.76%! Volatility is clearly here. How long it stays is a different question.

Another aspect to consider is the fact that the S&P 500 is treading the positive year-to-date line, closing up 0.78% YTD as of yesterday's close (10/16/14). At one point - September 18 - the S&P 500 was up YTD by 8.82%. Having given back virtually all of those gains again speaks to increased volatility that we've seen in the market.

The most recent example of a similar type of market (that I can recall) was 2011 - specifically late summer and fall of 2011 during the whole budget fiasco and downgrade of U.S. debt. While the the headlines were completely different and separate then than they are now (for the most part at least), I thought it may be helpful to compare 2011's performance with this years performance to see if there are any similarities - or differences - that may be useful.

I've created a chart of 2011's "intrayear" year-to-date performance for the S&P500 as well as the S&P 500's YTD performance so far this year (note: the charts below are simply a rolling YTD performance tracker for each year). As you can see from the charts below, in 2011 the SPX fell hard during August of 2011, from being up about 7% for the year to falling down to over -10% YTD. After bottoming right around the beginning of October, SPX then recouped those losses in a volatile fashion and ended up closing flat that year.

Comparing this to 2014's YTD performance so far, you can see there are some similarities and differences. You can see that for 2014, SPX chopped around in the beginning of the year before finally trending up, albeit relatively mildly later this year, which is a bit different than 2011's chart. However, more noticeable (IMO) is the similarity - the increased volatility that sprung up right around the same time. Make sure when you're looking at the chart to mentally readjust for the incomplete data for 2014. 

So using 2011 as a guide, perhaps we rally back some near the end of Q4 which has historically been a positive period. Granted, in 2011 the SPX was rallying from being down sharply YTD while the SPX today is still positive. Note: I want to stress you shouldn't try to use 1 solitary data point in your analysis (like we're doing here). I'm not saying we have to do anything. All I'm doing is just trying to get an idea of what could happen going forward. 

SPX Performance YTD - 2011
SPX Performance YTD - 2014 (partial)
Compare this to the smooth, slow grind higher that we saw in 2013 where the SPX closed up 30% for the year (which honestly was just a freak of nature given not only the performance but just the way it got there):
SPX Performance YTD - 2013
If you're interested to see what the Russel 2000 (RUT) was doing back in 2011 - since that's all everyone seems to have been talking about this year, especially lately - I posted the charts below for 2011's performance as well as the RUT's YTD performance so far this year. The one striking similarity I see is that for both 2011 & 2014 the RUT was relatively weak compared to 2013 or even 2012, oscillating between flat and up 4-7% or so. Something interesting nonetheless.
RUT Performance YTD - 2011
RUT Performance YTD - 2014 (partial)

So maybe we rally later this year. Maybe not. I don't know. I'll keep my mouth shut and let the market do the talking. I thought this trip down Memory Lane might be fun nonetheless.

Trade well.

Friday, October 10, 2014

Market Commentary (10/10/14) - $SPX $SPY $IWM

Are you dizzy yet? The equity markets have seen increased volatility these past couple of week with the market rallying hard on Wednesday afternoon following the Fed minutes, only to give back the entirety of those gains the next day. Today, the market made new lows and ended up closing on dead lows.

The decline in the market is being attributed to fears concerning slowing global growth, the Fed finally taking away the magical punch bowl, probable rate hikes next year after 6 years of ZIRP, Ebola (or so I was told), the fact Katy Perry will perform at this season's Super Bowl halftime show, the unstoppable strength in the dollar, and just because. All said and done, the Nasdaq was down 4.4% this week, IWM was down 4.47%, SPX was down 3.1%, and QQQ was down 3.77%. To get a sense of the action these past weeks, take a look at the performance chart below for the past 3 weeks below:
3-Week Performance Chart

In all seriousness, though, there are some signs that concern me going forward. I'll lay out some of them below. I will say, though, that I agree this isn't the ideal place to initiate shorts - after the market has now pulled in 112 handles from its recent highs, but I am bearish on the market for the first time in a long time. If we bounce and start to reclaim levels, I have no problem switching my bias, but as things stand now, things don't look good. This isn't to say we have to have an '08 type crash, but strictly from a risk/reward standpoint, the long side is not favorable here and now in my opinion. Here are some reasons I feel this way:

  • The VIX (CBOE Volatility Index) closed above its weekly 200ma for the first time in nearly 3 years. While I typically don't consider moving averages to be exact levels (more as "zones"), the weekly 200ma has acted as nearly perfect resistance for the VIX these past couple years, making it a level of significance. The close this week above the weekly 200ma tells me there may be some staying power in volatility, opposed to the quick spikes we've seen lately that are quick to dissipate. 

CBOE Volatility Index (VIX) - Weekly Chart

  • The S&P 500 Index (SPX) closed below its weekly 21ema (this is just the moving average I happen to use) for the first time since 4/11/14. However, this week's close below the 21ema was much more decisive than the most recent close below. You can also draw trendlines as well, and SPX broke below them too.
SPX - Weekly Chart

  • The average true range (ATR, 14) continues to climb, reflective of the increased volatility that we've been seeing lately. I noted recently on StockTwits that spikes in ATR (& thereby volatility) have marked turning points recently. The fact that volatility uncharacteristically continues to climb may be indicative of further gyrations going forward. Generally, a gradual increase in volatility (expansion) is a bearish signal, whereas when the market advances, it typically does so in a type of "grind mode" with the occasional quick pullback that ultimately resumes higher. 
SPX's ATR (14) - Daily Chart

  • SPY (the ETF for S&P 500) touched its 200sma for the first time since December 2012. In addition, the Nasdaq Composite Index closed below its 200sma for the first time since December 28,2012. This doesn't necessarily have to be a bearish signal, as the 200ma for both are still trending up, but this could change eventually. However, I think at a minimum it speaks to the change in character we're seeing. 
I know you probably feel like you hear this too often, but it bears (no pun intended) repeating especially now: understand who you are as a market participant, have a clear grasp of your true time frame, and let price be the final arbitrator. One of my favorite quotes comes from @millenial_inv post, saying "Risk can only be accurately assessed in combination with a time horizon." Awesome, right!

I'm still long a small handful of names after getting stopped out of some names already. I'm still long TWTR, CELG, and AAPL. I acknowledge the faulty action in CELG and the nasty move today in TWTR (down nearly 9%). For these positions, I'm only in half size currently or less after taking profits and/or trimming risk weeks ago. My trailing stops for all 3 positions are relatively close, and I have no problem getting stopped out of all three (which doesn't seem all that implausible). 

This isn't about me (or anyone else for that matter) getting a pat on the back for trying to pick a top in the market. I don't know if September's highs will mark "the top" (whatever that's supposed to mean). I just know that from my perspective, the risk/reward does not favor the bulls currently. 

Wednesday, August 27, 2014

Are Emerging Markets Set To Outperform U.S. Equities? $EEM $SPY

Last week I mentioned that the IShares Emerging Markets Index (EEM) was nearing an important resistance level near $45. I also noted on StockTwits that there was a bullish weekly RSI divergence on the EEM/SPY spread. With EEM closing above that $45 level for the third day in a row today, I thought it may be a good idea to do a quick blog post to journalize and share my thoughts.

As you can see on the weekly chart below, EEM is now above that important $45 level, although it has yet to close above the level on a weekly basis. Also, EEM is currently above all major moving averages on all major time frames and is clearly trending up. @harmongreg offered his thoughts as well on the Re-Emergence of the Emerging Market ETF as well. 
EEM, weekly chart

In addition, the EEM/SPY ratio has shown some weekly divergences that could have bullish implications as well. As you can see in the ratio chart below, the EEM/SPY spread made a new low earlier this March, yet the Relative Strength Index (RSI) made a higher low - which is typically seen as a bullish divergence. 
EEM/SPY ratio, weekly chart

Seen another way, the SPY/EEM ratio (which is simply the inverse of the above chart) made a bearish weekly divergence, where the spread made a higher high that was not confirmed by momentum. 
SPY/EEM ratio, weekly chart
Another interesting little tidbit is the extreme underperformance we've seen in emerging markets (EEM) since the '09 lows in the SPX. As you can see on the performance chart below, SPY is up well over 200% since those March 2009 lows, while EEM is currently only up about 150% since then. Visually, you can see that the underperformance in EEM relative to SPY has become much more pronounced. Perhaps time for some catch up?
SPY vs EEM % performance since March 2009

Lastly, a fundamental component of the EEM story is the low price-to-book ratio levels which tend to only been seen during prior crises, which you can see in from the below chart that @ukarlewitz shared (link below). Technicals tend to lead fundamentals. 


Now I know I'm a big preacher of only focusing on price and not using a plethora of lagging indicators (technically, all indicators expect price are lagging indicators), but the combination of the technical breakout in EEM above $45, the bullish weekly divergence in the EEM/SPY spread, EEM's historical relative underperformance, and even the low price/book ratio levels gives me reason to believe that emerging markets (as measured by EEM ETF) are about to outperform - on a relative basis - the S&P. 

Please let me know if you have any questions or comments below. 

StockTwits: @MarketPicker 
Twitter: @MarketPicker

Disclaimer: Long EEM as of 9/5/14

Tuesday, August 19, 2014

A Quick Excel Study

I'm on vacation, so I'll make this quick. For some odd reason I decided to run a quick test in excel looking at gap ups and downs in excess of 1 percent going back to SPY's inception (1993). These numbers aren't adjusted for dividends or splits because I wasn't able to attain an adjusted "open" so I had to keep things consistent (i.e., unadjusted). If you'd like to see the excel test I did in its entirety, just email me and let me know.

Going back to January 29, 1993 to yesterday (August 18, 2014), on an unadjusted basis, there have been 224 gap ups of at least 1 percent and 235 gap downs of at least 1%. Out of the 5,427 total trading days in the look-back period, this represents 4.13% and 4.33% of total trading days consisting of gap ups/downs of at least 1% on an unadjusted basis, respectively.

More interestingly, I decided to look at the percentage of time that SPY closed higher than where it opened on gap up days (at least 1%) and closed lower than where it opened on gap down days (at least 1%). When SPY gaped up at least 1%, it closed higher than where it opened 58.04% of the time. This compares to a 51.59% total (closing above where it opened). On the opposite end, when SPY gaped down at least 1%, it closed lower than where it opened 48.94% of the time, compared to a 47.13% total.

As you can see below, even when SPY gaps down at least 1%, the intraday performance (i.e., where it closes in relation to where it opens) has been positive, both on an average and median basis (0.09% and 0.06%, respectively). While the performance numbers themselves may not seem too impressive in magnitude, the fact that SPY has averaged out a positive median intraday positive performance going back to 1993 seems to suggest, on aggregate, buying strength (specifically, gap ups in excess of 1%) has been better than shorting gap downs in excess of 1%.

While this clearly isn't meant to serve as a trading strategy, I think it provides some insight into the historical performance of the market (specifically, SPY ETF). In addition, this rather truncated analysis doesn't provide any insight into the market structure (bear/bull market); this is another big component that needs to be considered as well.

Interesting nonetheless (at least for me, hopefully for you as well)!

Gap Ups 224 4.13%
Gap Downs 235 4.33%
Total Days 5427
Pos Close 130
Neg Close 115
Gap Up, % Pos Close 58.04%
Gap Down, %, Neg Close 48.94%
Up, Avg Perf 0.22%
Up, Median Perf 0.29%
Down, Avg Perf 0.09%
Down, Median Perf 0.06%
Total Close>Open 2800 51.59%
Total Close<Open 2558 47.13%

Tuesday, August 12, 2014

Late Night Reading

I'm getting caught up on some late night reading this evening. Some of the articles below are "old," but still worth reading. Here are some things I've read so far: 

Go Be Different via @upsidetrader 

The pullbacks have become shallower and shallower... A 10 Year Look At The SP 500 With Corrections via @TheFibDoctor also @seeitmarket 

That's the bottom line cause Stone Cold said so... The Bottom Line by Carl Icahn via @Carl_C_Icahn

What's volume got to do with it... Is Volume A Good Market Indicator via @andrew_falde 

Kick 'em to the curb, maybe not... Fired Managers Outperform Hired Managers via @ReformedBroker 

Corrections happen. Get used to it... Halfway Through a Correction via @ritholtz

The pressure on employers to offer more generous wages could be increasing... JOLTS Report Show More Labor Market Strength via @bespokeinvest 

"All else equal, a talented sales staff will trump a talented investment staff when attracting capital from investors." Unfortunate Realities of the Investment Business via @awealthofcs 

Quit acting like you know it all, Mr. KnowItAll... On Embracing Stupid 

"Individuals subconsciously resist factual information that threatens their defining values." How Politics Makes Us Stupid via @ezraklein also @voxdotcom

Monday, August 11, 2014

A Soft Gap Fill - $KMI

Kinder Morgan ($KMI) was gaping up big this morning and was up over 20 percent in the pre-market on news that it was consolidating its oil-and-gas pipeline business into a single company. While I expected there would be some profit taking on the open, I didn't really expect to see the "soft" gap fill that we saw during the first hour of trading ("soft gap fill" meaning the stock doesn't fill the entire gap but rather pulls into recent support). If you were aggressive, you could have shorted it on the open below pre-market support at $42. I passed on the short, as I was not only unsure of the potential on the downside but I was also watching some other things as well.

I eventually bought some around 10:45am as the stock pulled into $38, which had been resistance (now support, or should) about 3 weeks ago. I thought there was a pretty good chance it would drop out below $38, so I put out a bid @ $37.82 to nibble on some and planned on hitting it out below $37.40. I added some around 11am after the $38 bid held. I scaled out of some into $39 and $39.50 (which was right around VWAP). Then, a little before noon, I sent out a tweet on StockTwits noting that KMI had finally crossed above VWAP after spending the entire morning below it and that I was looking to add on a consolidation above intraday VWAP. When a stock spends a significant amount of time below VWAP and breaks above VWAP, that's a bullish sign cc @MikeBellafiore

I stuck to my plan and added, but was eventually stopped out of my added shares and got flat after it broke back below VWAP, but still for a pretty nice profit. FYI, had I not been stopped out, I was planning on selling some into $41 and would have gotten flat into $42 (had been pre-market support).
KMI, daily chart showing $38 level
KMI, 5min chart with trade management

Once quick thing I wanted to point out. For my intraday trading, the only "indicators" I use are price, volume, and VWAP. For my swing trades (longer time frame), I have some moving averages plotted, but I don't use them as specific levels but instead use them as a quick visual reference of a stock's current trend. My intraday trading has much more to do with support and resistance levels (longer-term charts as well as intraday levels) than anything else. I don't like to clutter my charts with a plethora of indicators, especially when looking at shorter time frames. That's just me though.

Anyways, thanks for reading.

Please let me know if you have any questions or comments below.

StockTwits: @MarketPicker
Twitter: @MarketPicker

Friday, August 1, 2014

Market Commentary: $SPX $SPY

Photographer: Jason DeCrow/AP Photo
Given yesterday's 2 percent down move in the S&P, we've been hearing many different market perspectives on where we are and where we can go (many from people whom I respect and follow). I figured that I might as well offer my perspective as well, if nothing more than a personal entry in the trading journal.

SPX (SPY) broke and closed below its 50-day moving average for the first time since April 10 of this year, or almost 4 months (note that the last time SPX simply closed below its 50ma was April 15, but the last time it crossed below and closed below was April 10). It took 4 trading sessions after closing below the 50ma to then close back above the moving average. The time before that was January 24 of this year, at which point it took 12 trading sessions before we were back above the 50ma. In those cases - 4/10 and 1/24 - the declines after closing below the 50ma were roughly 0.90% and 2.92%, respectively (calculated as the closing price of the first day below the 50ma minus the extreme low of the down move). Remember this is just for 2014, so the sample size is small. 

I then decided to run some tests in excel using the 50-day moving average as the look-back indicator. For disclaimer purposes, I believe theses numbers are correct, but they are not guaranteed to be accurate or complete. So the first test I ran was looking to see what the average number of consecutive days the SPX has spent below its 50-day moving average. I decided to look back 5 years because of the "gen low" of '09. To my surprise, the average number of consecutive days spent below the 50ma was only 4 trading sessions. To be fair, this average can definitely be (and probably is) skewed by large numbers, especially considering the fact that prolonged periods below the 50ma occur in scarce clusters that aren't evenly dispersed throughout the data set. 

I then looked at the percentage of time the SPX spent below its 50ma on an aggregate basis for the entire look-back period, which was 25.66%, meaning of the 1259 trading sessions 25.66% of them were spent below the 50ma. I also looked at how many times the SPX simply crossed below the 50ma (just the 1 day closing below) and found that the SPX has crossed below - on a daily closing basis - its 50ma 37 times since July 31, 2009, that is, of the 1259 trading sessions since July 31,2009, 2.94% of those trading sessions involve the SPX crossing from above to crossing and closing below the 50ma. In other words, it hasn't happened all that often. 

For visual purposes, I've included a chart showing the number of consecutive days the SPX has spent below its 50ma going back 5 years. Notice that the max is 52 consecutive trading days (or about 10.4 weeks), which was back on November 8, 2011.

Ok, now to the technicals. As you can see from the daily chart of the SPX below, yesterday the SPX broke its upward channel, closed below the 50ma, and closed dead on lows with a 2 percentage point drop. 

SPX, daily chart

Looking at the weekly chart, this move so far just looks like another pullback. In the chart below, I've plotted both an 8 and 21 weekly ema (these are just what I use. You can easily use a 20sma as well). I don't consider these exact levels, I use them more as a way to give me a quick visual idea of the trend of the market. Notice that we have seen SPX close below the the weekly 21ema before, 3 times in fact going back to late 2012. However, we haven't seen any type of distribution once below. Rather, these past instances have been met with buying pressure, and the market simply resumes its uptrend. 

SPX, weekly chart
While I recognize the current "pullback-ish" period we're seeing right now, for me to become more cautious on the longer-term picture of the market (SPX), I'd have to see a multi-week period below the 21ema, as this would signal to me a change in character, i.e., a longer-term distribution pattern. 

The funny thing is how people say they want a pullback in the market as its rising and then become overly bearish as it actually pulls in with a "this time is different" mentality. I mean look, yes this persistent bid in the market will come to an end eventually. Is this time different? I haven't a clue! The pullbacks have become shallower and shallower over the course of this bull run. I don't think that means we have to see a 20-30% correction as Marc Faber decisively predicts though. 

We shall see. I will let price do the talking. 

Thanks for reading. Please let me know if you have any questions or comments below. Also, if you feel my numbers are off or would simply like to see my calculations, just contact me for the excel file. 

StockTwits: @MarketPicker 
Twitter: @MarketPicker