Saturday, January 17, 2015

Plain And Simple, I Broke My Rules – $USO

You must be living under a rock if you haven’t heard about the drop in oil, which has been cut in half since the latter half of 2014. The financial media can’t get enough of its story.

I bring this up because I wanted to share a pretty big trading-related mistake I made recently not only for self-reflection but also helping you avoid the same mistake in the future.

I got long $USO (the United States Oil Fund ETF, which is meant to track the price of WTI crude oil) in mid December somewhere below $21.50. I had a very small position (quarter size) and my stop was roughly a point. I planned on adding to my position if I saw signs of strength. I initially got long because of what I viewed as signs of a short term bottom as it started going sideways after retesting lows, fulfilling my own prediction for 2015 that people will continue to try to catch the bottom in oil (catch those bottoms!). I ultimately got stopped out for a small loss about a week later. While I defined my risk and reduced my position size due to the lack of bullish technical signals, looking back now there was no reason to have gotten long, at least not to for my standards. At the time, USO was still trending down and was below all of the major moving averages I use (on a daily chart) and couldn’t even close above even the shortest duration moving average.  It was clearly still in a downtrend. Plain and simple, I broke my rules.

Another, perhaps worse, mistake I feel I made was that I let the noise wrongly influence my trading execution. A cardinal sin! I read countless articles about the collapse in oil as the financial media met my insatiable appetite. I read about supply-side factors, demand-side factors, future capital expenditures, potential effects on the economies of Shale states (the likes of Texas, the Dakotas, etc.), rig counts, this, that, and a little more this. “Oil can’t go much lower” Wall Street analysts and economists seemed to collectively guarantee. It wasn’t as if I said to myself, “OK, these Wall Street analysts say oil shouldn’t go much lower so I must buy.” Instead, I think I subconsciously let others’ views negatively affect my own trading behavior, looking for even the slightest bullish sign in something that was in a strong downtrend. What a piker move!

Which brings me to the point I wanted to share when I first started this post: You may have this strong belief or thesis about a particular asset class or a specific stock due to your own proprietary research or economic forecast. But are you really able withstand the time between the ostensible disconnect between the market and your belief? As Keynes simply said, “The market can stay irrational longer than you can stay solvent.”

Just a bit of clarification, I’m not advocating you eschew fundamental analysis (which foundation rests on finding market discrepancies in value and price, more or less). In fact, I think some of the best traders use a combination of fundamental and technical analysis. But again, I stress (at least my belief) the importance of waiting for price to truly confirm your thesis before acting. The risk/reward will comparatively be so much more in your favor if you do so. And be sure to not let your underlying thesis cloud your objectivity of the unfolding price action (e.g., trying to call those illusive bottoms in oil).

$USO perf chart (for post)

Related Reading: My friend and fellow DRC author Tom Bruni shares what he’s seeing in oil. 

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

StockTwits: @MarketPicker
Twitter: @MarketPicker 
Disclaimer: No relevant positions

Monday, December 22, 2014

2015 Predictions

With the new year right around the corner, I figured I'd join the rest of the professional prognosticators and share my market-related predictions for 2015. I hope to cast a wide enough net that I'll be praised for one correct prediction while the rest of my wrong predictions will be all but forgotten. This is only standard practice in the art/science of professional prognostication. 

Alright, let's get to it. In no particular order, here are my $TWENTY15 predictions:


  • Return of the small caps. After severely underperforming the broader market this year, small caps will begin outperforming the rest of the market by a large margin. 2014 has been nothing but chop for small caps. There was a bunch of talk about how the underperformance in small caps was indicative of an impending crash in the broader averages. At one point in October, the Russel 2000 was down 10% from highs, and was negative year-to-date as recently as December 16. While the Nasdaq is up 14% YTD and S&P 500 up 12% YTD, the Russel 2000 is up less than 3% YTD, positive gains of which came in just this past week alone. Mind you though, that the Russel was up nearly 40% in 2013 so it's only made sense that we've seen a year's worth of consolidation to digest those gains. Size has mattered in 2014, and I believe it will matter again in 2015 - only this time smaller will outperform. 

    Major US Market Averages - YTD

    • Increased market volatility. The past 3 years or so there has been very subdued market volatility. People (including myself) have been calling for a rise in volatility for a couple of years now, especially ever since 2013's aberration of slow and steady high returns. This year we saw relatively short periods where volatility would tick up but then things would go back to business as normal. Volatility really picked up though in October when the S&P had been down 10% from its highs and closed below its 200-period moving average for the first time in  2 years. Since then, the market has snapped back to make new highs. In my opinion, October's action will end up being a prelude to further market volatility and this time with some real staying power. This isn't to say I'm bearish on equities in 2015; I just believe there will be more market gyrations to come. If this is the case, then it will be especially imperative that you know who you are as a market participation and your respective time frame (as it always is). 

      Average True Range (ATR) of SPX - Weekly
      • There will be a flood of financial pundits giving their two cents when the Fed raises its target fed funds rate some time next summer. $SPY message volume will spike the day Fed actually announces its rate hike. 
      • King Dollar will remain strong in 2015: Foreign monetary authorities have engaged in slashing interest rates & effectively undergoing their own QE programs. Meanwhile the Fed is set to make its first rate hike in over 6 years next summer. In addition, in response to fears of a slowdown in global growth, the US dollar will continue to see the notorious "flight to quality" that we all know and love. Export-dependent companies will gripe about the US dollar's strength in their conference calls and will blame their poor revenue numbers on poor international sales, warranted or not. Technically, there may be some resistance in the low $90's but I'd expect further appreciation in King Dollar. 
      US Dollar Index - Weekly
      • Cyber security stocks will be bid up even more. Honestly, I'm surprised we didn't see a broader, more momentum-type run in cyber stocks this year given all the hacking scandals this year (too many to name). Perhaps 2015 will be the year of cyber security. Here's a quick list of names I'd keep an eye on, many of which are at or near highs: link
      • Bitcoin will trade back above $500.
      BTCUSD - Daily
      • Oil ($CL_F) will stay below $80 a barrel but won't make new lows in 2015. Oil, along with energy-related names, will rebound in Q3/Q4 of 2015. 
      Crude Oil WTI - Weekly

      • Alibaba ($BABA) will make new highs in 2015.
      Alibaba (BABA) - Daily
      • My S&P 500 target for 2015 is 2200... just because. 
      • It may take awhile but $XLE will be one of the top 3 best performing sectors in 2015. 
      • Gold will trade below $1000/ounce. 
      GLD - Daily
      • People will try to catch the top in the market as well as the top in bonds. 
      • People will try to catch the bottom in oil. 
      • Some longer term, individual stock charts that look very interesting to me are Citibank ($C) and Ebay ($EBAY). Both have pretty similar looking weekly charts - both have been consolidating/going sideways for well over a year. First, Citibank has been trading between about $45 and $57. A weekly close above $57 would be very interesting to me. Second, Ebay has been going sideways for about 2 years now between $47 and $59 or so. You may recall that I was bullish EBAY heading into 2014 because of this very same consolidation pattern. The stock made new all-time highs early in the year, and there were many people pointing out the breakout as well. Unfortunately,  the breakout ended up being a false breakout, as the stock traded back to the lower end of its weekly range. I'm sure there will be many eyes on this one if/when we see another attempt at a breakout. If we get a real breakout this time, I could easily see this one trading up towards $70-$80. One step at a time though. 
      C - Weekly
      EBAY - Weekly

      Let me know if you have any questions or comments. 

      StockTwits: @MarketPicker
      Twitter: @MarketPicker 

      Disclosure: As of this writing, I'm long BABA and USO

      Saturday, November 22, 2014

      A Stream of Thought: $BABA

      I haven't been very active at all this past month as I've been busy with school, however, I managed to share my thoughts live regarding BABA (Alibaba Group, Inc.) on StockTwits recently. I just wanted to combine my tweets and annotated charts to share my thought process. I didn't have an actual position in this particular trade since I wasn't able to commit enough time to monitor the trade. And before you say this is just "Monday-morning-quarterbacking" let me remind you that I shared my thoughts live on StockTwits and Twitter (below). Had I been able to monitor the trade, it is very likely I would've actually taken this trade myself.


      Here's an annotated chart outlined my thought process:


      Here's a 5min intraday chart (11/17/14) showing low-risk short entry:



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

      StockTwits: @MarketPicker
      Twitter: @MarketPicker

      Tuesday, October 21, 2014

      Remember When - $SPX $SPY

      Remember when the S&P 500 broke below its 200 moving average for the first time in something like 2 years, breaking its stellar track record? Not anymore! This morning the SPX gaped back above the 200ma and, as of this writing, is trending higher intraday. I'm sure today's move has caught many people by surprise (including myself) given the large pullback we saw weeks earlier. I noted recently that I didn't believe the risk/reward favored the long side but that I would continue to take setups on an individual basis, i.e., the stock's own merits.

      I think many people strongly believed that last week's break of the 200ma signaled a further pullback in the market to come (e.g., 20-30% pullback). Again, while I thought the risk/reward didn't favor the long side at the time, I wasn't in the camp that the market had to see a further correction merely because the SPX's long-running streak above its 200ma had come to an end.

      In fact, it's extremely common for the SPX to test its 200 moving average some time during the year, and the market certainly hasn't been down every year it has done so. Going back to 1970, there have only been 3 years where the SPX didn't test its 200ma intrayear: 1989, 1993, & 2013. (Thanks to @RyanDetrick for helping me out with this test). Clearly, testing the 200ma isn't such a rarity.

      So remember, just because a trend ends doesn't mean we have to see a full on crash. Personally, I think we base a bit and end up rallying to new highs by year-end. But that's just speculation at this point. I'll take things as they come.

      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. 

      Chart

      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