Thursday, July 24, 2014

The Importance Of Independent Order Flow - $FB $QCOM $SPY

SPY closed positive today by a mere penny, so certainly there wasn't anything going on in the market, right? Wrong. As I noted on StockTwits, there were several names I was looking at today on an intraday basis.

While I was watching a handful of different stocks, my primary focus today ended up being Facebook (FB) and Qualcomm (QCOM), as you can see below:

FB - beat Q2 earnings estimates, opened up over 6 percent higher (it had been as high as $78 pre-market). While I feel that given the large pre-market up move we saw, some of the intraday opportunities were limited, I still managed to make a couple of trades in the stock, seen below.

QCOM - beat earnings, but offered weak guidance. Stock opened down over 5 percent. I made a note on StockTwits that I was watching the $77 level right on the Open, as there was a seller that appeared there. I covered my short on the quick 1 point drop down to $76. I tried a short once again when I saw what I thought was a $76.20 seller. The stock made a new low after I got short but quickly reversed, stopping me out of my position.

FB - trade management on the Open (1min)
FB - trade management after the Open (5min)

QCOM - trade management (1min)

Please don't equate a slow day in the indices as being the same as being a 'slow' day overall in the market. This seeming paradox is especially apparent given the nonvolatile nature of the indices themselves (except for perhaps IWM) combined with being in the heat of earnings season. When the indices aren't moving, I'm not trading the indices. I shift my focus even more on stocks exhibiting unusual order flow (read volume) that are gaping up or down by a significant amount with fresh news catalysts behind them (e.g., earnings). I want to be trading stocks that are moving on their own, that is, stocks that are In Play. I will be focused on where the movement is. The concept of stocks with independent order flow is key for shorter-term traders. While it doesn't guarantee success, trading stocks that are In Play will significantly increase the probabilities that you are profitable on a net basis for the day.

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

StockTwits: @MarketPicker
Twitter: @MarketPicker

Tuesday, July 8, 2014

Down Days For SPY

Recently I've been playing around with simple backtests in excel, ranging from the proverbial "golden cross" and "death cross" in multiple instruments (e.g., SPY, GLD, etc) as well as other look-back tests (e.g. # of days above moving averages, etc). I don't consider myself an expert in excel whatsoever, far from it. With that said, the most recent test I ran in excel is looking back to see the number of consecutive down days in SPY year-to-date. With a relatively small sample size, you could just look at a chart and do the calculations manually, but in instances where you're looking back 20 years (as I have done in previous tests), the power of automation in excel can be very helpful.

Here's a link to my google docs showing my calculations as well the tweets I sent out earlier summarizing my findings:


Update: I ran the same exact test in excel using the S&P 500 Index (SPX), and the results are slightly different than the results for SPY (the ETF that tracks the S&P). While SPY is meant to track the SPX and its movements, there are times when small discrepancies do occur between the two instruments. The main takeaways from this new test are listed below:

  • The most consecutively negative days for SPX is still 3 days year-to-date, however, this has occurred 4 times this year compared to only 3 times for SPY. 
  • So far year-to-date, if SPX has closed down 2 or more times the next day has been positive 77.78% of the time, with an average next day return of 0.23% (median return 0.37%). This is compared to SPY's stats - seen in the link above - which has closed positive 81.25% of time with an average next-day return of 0.28% (median return 0.43%). So compared to SPY, the SPX has a slightly lower probability of closing higher the following day if down 2 or more previous days, and also has a slightly lower average next-day return. 
  • I still find it interesting that even despite the choppy action we saw in the markets earlier this year, the S&P (both SPX and SPY) have closed positive the next day over three-fourths of the time if down 2 or more consecutive days. And even more interesting to me is that the S&P hasn't been red 4 consecutive days - even marginally - so far this year. Eventually this track record will be broken, but who knows when. Maybe this time is different...?

Please let me know if you believe I have made any errors, as I'm sure most of you reading this are more familiar with excel than I am!

StockTwits: @MarketPicker
Twitter: @MarketPicker

Sunday, June 22, 2014

Late Night Reading

I have plenty of unread books on my bookshelf that I hope to get around to actually reading one day. Until then, I'll just admire their covers. 

One book, though, that I just started reading is Beating The Stock Market by R. W. McNeel. I have the much older version that was printed in 1927. I felt compelled to briefly share some of what I've read so far (emphasis mine): 

From Chapter 1:

"The greatest single route by which men of the present day try to beat the fundamental law of existence, try to get something for nothing, or get rich quick, is through our modern stock market....
There is something mysterious and magical about the idea of the stock market which appeals to the imagination....
It is indeed an interesting and attractive game, one which appeals to the imagination and the desire for adventure and about which a great deal of romance has been built up. Its mystery appeals to the human mind, and its apparent creation of wealth by magic makes its acquisition by the slow means of rendering service to society for it seem stupid. 
While this view of the stock market is all wrong, and any one who regards it in this idealistic light is destined to failure, it is not surprising that a great mass of people should be attracted to it as a means of acquiring wealth, or at least as a means of making money bring large returns....
Where the public in general does err is in thinking the market is a 'get rick quick scheme.' It is not a game which pays something for nothing, or much for little. It is a game which repays liberally careful study of the underlying conditions which cause stock-market fluctuations. But the reward is apt to be more or less commensurate with the effort put forth to master it. It is a game to be beaten, not by disregarding the fundamental law of existence, but by remembering the old law that in order to reap the rewards of this world one must give something of himself, of his time and efforts and abilities, in order to acquire them." 

From Chapter 2: 

"Those who win in speculation do not make a success of it because they take a chance. They win because before they take a chance they use every human power to eliminate risk. One of the most successful speculators in Wall Street says the reason he has made a fortune through the rise and fall of stock prices is that before buying he always investigates stocks and the stock markets with the greatest care. His success has been due not to the fact that he bought, and therefore assumed risk, but in that he investigated most carefully what he was buying before he took a chance."  

From Chapter 3: 

"One of the veterans of the 'street,' who has made a fortune in Wall Street and kept it, asked for the secret of success, said: 'Few gain sufficient experience in Wall Street to command success until they reach that period of life when they have one foot in the grave."

From Chapter 4: 

"To say that the way to make money in the stock market is to buy stocks when they are low and sell when they are high may seem so broad and unsatisfactory a rule as to be of no practical value in speculation. But in reality the difficulty is not in knowing when stocks are cheap and when they are dear. The chief reason speculators fail to buy when they are low and sell when they are high is that they have not the courage, the initiative, and will power to act on their knowledge. Lack of knowledge of values is a much less frequent cause of loss in the market than the lack of those other sterling qualities of character which are necessary to make a successful speculator. And without them, all the rules of success and all the knowledge of what ought to be done to make money by speculation in the stock market will be valueless....If one is emotional, if he lacks the power of independent thought and the power of will to act on his own knowledge, he should keep out of the stock market. If one is temperamental that he is carried away by the enthusiasm or depression of the moment, failing to act when he should act and acting when he should not, he should keep his money in the savings bank. Otherwise, some one will get it away from him." 

I haven't read any further in the book yet. It's amazing how these concepts were written back in the 1920s and yet are very much applicable to today's modernistic (aka electronic) markets. 

Source: McNeel, R. W. (1927). Beating The Stock Market. McNeel's Financial Services. Revised Edition, Ninth Printing

Amazon link to later edition 

Sunday, June 15, 2014

Is TSLA Ready To Run Again?

One of the most memorable short squeezes I've seen in the past couple of years was in Tesla Motors (TSLA) back in early 2013. I still remember its momentum run from 40 bucks to almost $200 like it was just yesterday. Even more memorable were the constant short calls by fundamental traders because of its "excessive" valuation. It's one thing to pass on a stock because it doesn't fit your trading style (a la Warren Buffet during the Dot Com Bubble), but to actually short a high growth, momentum-driven stock simply because it trades at a hefty multiple is simple a bad strategy in my opinion. I'm not saying I believe fundamentals are useless. In fact, I believe in the long-run (10+ years), stocks are indeed driven by earnings growth and other fundamental catalysts. But I just don't understand how some of these guys on TV so confidently profess to short TSLA without price confirming their fundamental thesis. Price is the final arbiter, as @JBoorman would say. Or, only price pays, as @alphatrends says.

With that little rant out of the way now, I'd like to share some quick thoughts of mine regarding TSLA from a longer-term perspective. Let's jump straight to the chart. As you can see from the weekly chart below, TSLA corrected 40% back in late 2013. After the 40% haircut, TSLA proceeded to make new all-time highs, running up over 128% from lows. TSLA saw a similar correction earlier this year, pulling in 33% from its recent pivot highs at $265. To a simplist like me, it would appear that TSLA may be setting up for another leg higher. 
TSLA, weekly chart
One thing that I noticed was this most recent correction was not only slightly smaller in magnitude but it took a longer period of time as well (assuming last month's low are indeed the lows). To me, this suggest that a second up leg may be more of a grind higher and longer in duration as well. 

Now, I've been messing around with different ways of producing upside targets. None of these are full proof and they shouldn't be considered concrete price targets. In addition, it can be difficult to apply percentage moves as a stock's price increases, since it has to move many more points for an equivalent percentage move. I'm just trying to get a general idea of how high the stock could reasonably run. The first method: after the 40% correction last year, TSLA ran 36% above the prior pivot high (which had been the all-time high). If TSLA were to run 36% above the current all-time high ($265), that would take the stock to $360.
TSLA, weekly chart (method 1)

The second method: I just decided to put some fib extensions on the chart. As you can see from the two weekly charts below, TSLA stalled out at the 161.8% Fibonacci extension before its recent 33% correction. Currently, the 161.8% fib extension sits around $320. I guess that's simple enough. 
TSLA, weekly chart (method 2)
TSLA, weekly chart (method 2)

The third method: TSLA runs 128% like it did the last time it corrected! This is the most simplistic and perhaps the most glib method (although not unreasonable over the long haul). 

I guess you could say that TSLA is relatively weak considering the Nasdaq Composite is less than 1.5% from all-time highs and QQQ recently made new all-time highs while TSLA is over 22% from its all-time highs. Perhaps it's time for some catch up? 

What I have surmised from this cocktail-napkin technical analysis is that it is very reasonable to believe that TSLA not only makes new highs soon but it may very well run above $300 a share. Other factors suggesting TSLA may see another leg higher include strong fundamentals as well as its high short interest (which is still over 26% according to finviz). @jfahmy did a nice job recently laying out some of his reasons that he still likes TSLA as well here. On a more intermediate basis, a strong move above 212-215 would trigger a long for me with a daily stop loss below $200. If/when this happens, I will be sure to send out a message on StockTwits and Twitter. 

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

You can follow me on StockTwits or Twitter

Saturday, June 14, 2014

Please Short Responsibly - $SPY

We all know that we're in a strong bull market right now. Aside from the many calls for a 10-20% correction in the broader markets (IWM actually already did this), the major indices are all up for the year as well as for the month. Coming into this week, SPY was clearly "overbought" with a number of indicators in overbought territory, but as I noted on StockTwits, these indicators by themselves were not a short signal. I also noted on StockTwits that SPY needed to break below $195 first before it had a chance of pulling in further. I like to think of these counter-trend market plays as a type of scalp because they are counter-trend in nature. I wasn't looking to catch a top or capture 20 points to the downside. I was simply looking for a counter-trend short trade looking to play a 2-3 point pull in.

On Wednesday (6/11/14), SPY was gaping below that $195 support level I had mentioned. If SPY was holding below $195-$195.20, I would look to put on a short. SPY failed multiple times to hold above $195, so I got short @ $195.05. I wanted to see SPY get below its pre-market low of $194.60 and then take out $194.30 support level. SPY ended up trading down to $193, which was my downside target. As of now, I'm flat SPY. Going forward, I'd be interested to see what SPY does now with $194.30 resistance and $193 support. The market could very well just consolidate and moves sideways. I guess we shall see. 

Please let me know if you have any questions or comments in the comments box below. You can follow me on StockTwits or Twitter

Monday, June 9, 2014

The Wizard of Oz & Where the Markets Are At Right Now

Dorothy: Toto, I've a feeling we're not in Kansas any more. 

You said it Dorothy!

With that momentary "official" correction (arbitrarily defined as being down at least 10%) in the Russell 2000 now behind us, is it time to finally breathe? I'd like to think so...

Over the course of March and April of this year, investors saw the momo names get taken to the woodshed with NFLX down over 34%, YELP down 45%, and SPLK down over 60% from its highs! Biotechs too. The IBB biotech etf was down 20%. The list goes on. The point is that these prior leaders corrected through price (opposed to to time).

Now, one would expect some retracements in these names as well as in the indices themselves, as sellers become exhausted and/or short sellers cover to book their hefty profits. I think even those with the most bearish views expected some type of dead-cat-bounce in these high fliers (sorry to you cat lovers). Well we didn't just see these minor retracements, but instead we've seen moves in these beaten down names that I think even the most fervent bull is surprised by. The Russell 2000 (IWM) has retraced almost 80% of its down move that occurred earlier this year, NFLX the same story, and IBB has retraced about 24% of its down move. Of course, it's all about perspective; one could look at NFLX retracing over 80% of its down move or could view it from the point-of-view that NFLX is up over 40% from its recent lows. While both viewpoints are effectively the same thing but stated differently, it's clear that things can change rather swiftly.

With all that said, I still recognize that the IWM is still lagging behind the other indices. With SPY up over 5.5% YTD as of this writing, the IWM is hardly up a percent YTD. As the chart below shows, the IWM is actually down relative to SPY year-to-date. This divergence had actually been in excess of 7% but with the recent strength in the IWM, it has come off its lows.
IWM relative to SPY year-to-date
Clearly, there is still relative weakness in this group. But what did you really expect? These volatile, momentum-driven names got crushed on the way down, so could you reasonably expect them to then not only bounce but then outperform the other indices? In my opinion, this is rather normal action.

So what are we to think right now as things stand right now? The wild swings in these so-called "risk assets" may have left some turned around and caught with their pants on the ground. Sectors that led the move during the momo meltdown are currently relatively weaker (on a comparison basis). As you can see from the two charts below, utilities (XLU), energy (XLE), and health care (XLV) are the top 3 performing sectors year-to-date relative to SPY. However, XLU and XLV are actually the worst performing sectors looked at in this analysis for the month of June. Now granted we're only in the second week of June, but I think this represents the recent acceleration we've seen. Industrials (XLI), financials (XLF), and cyclical (XLY) are the top 3 performing sectors month-to-date relative to SPY. Note that XLF and XLY are still the bottom two performing sectors year-to-date. The stark difference in performance of sectors based on different time frames speaks to the fact that sector rotation recently has turned on a dime.

Sector performance YTD relative to SPY

Sector performance MTD relative to SPY

So that brings me to this final point of mine about corrections. I'm sure most of you know that price can correct either through price or through time. Case in point, IWM's 10% "correction" was a correction through price. In contrast, a correction through time simply means the stock, index, or whatever instrument you're looking at is consolidating. This type of correction is actually more bullish of the two, as buyers are willing to support stock/index at what is considered to be extended levels, thereby working off the "overbought" readings. I think this is what we will now see in the market (referring specifically to the SPY). Intermediate indicators are certainly "overbought" but given the broad market participation (% of 52-week highs at levels not seen since March), I think it's more likely we correct through time. It will be interesting to see if the relatively weaker Russell is able to hold its gains as well.

The Daily Show is calling my name now, so until next time.

As always, let me know if you have any questions or comments in the comments box below.

StockTwits:  @MarketPicker
Twitter: @MarketPicker

Tuesday, June 3, 2014

Bulls#!t Detector: Why Blocking Out the Noise is a Hopeless Fantasy

You often hear about how you need to block out the "noise" in order to be a successful trader/investor, i.e. turning off the television, not watching your twitter stream, etc. While I don't disagree with the fundamental premise, what I do disagree with is the practicality of trying to apply this head-in-the-sand approach at its extreme. I think a more realistic approach is selective consumption of information. This is why I love Twitter's service of allowing users to customize their news feed to only the most pertinent information to them and their needs (why Katy Perry and Justin Bieber each have almost 50 million Twitter followers, I'll never understand). Becoming smarter and more efficient with our information consumption is a real challenge, one that most if not all of us, including myself, need to tackle.

We are constantly bombarded with "news" so to think we can suddenly turn off the natural instinct of wanting to hear what the guy flailing his arms on TV has to say is unrealistically idealistic. As Josh Brown says, "The Myth of the Media Diet" is a perfect strategy for a perfect world; the only problem is the latter isn't true. I think investors do, however, need to define what news and information in general is the most important to their trading strategy, in terms of having real implications on their returns. Developing a true news edge can be a difficult task but, in my opinion, can be one of the most important factors in your trading.

You first have to define what "noise" means to you. In other words, you have to develop your own bullshit detector (Barry Ritholtz recently laid out Carl Sagan's bullshit detection kit here). While it may seem idealistic and perhaps even admirable to have a news edge comparable to the Amish, the fact of the matter is that you likely saw the horrifying 1929 chart when it first made its way around the Twittersphere back in February, as well as all the other sensationalized charts and predictions over the years. I don't think being aware of the so-called "news" is the problem. I think the danger comes when you then act on this commentary that is propagated as being news. If you were the hyper-sensitive, reactive trader/investor, how has that worked out so far? By the way, here's an updated view from @RyanDetrick of the chart comparing today's market to 1929 that all but seemed to predict a looming doomsday: link. The only think comparable to today and 1929 is that Betty White was alive!

The morale of the story is don't pretend that you're able to completely block out the noise. Honestly, if you think that, you're just lying to yourself. Instead, learn how to filter the news until the most germane piece of information is left, which will often be relatively scarce. Tadas Viskanta does an excellent job of doing just this for readers over at Abnormal Returns.

My primary "news edge" so to speak is the tape (price action). However, I recognize that the noiseless utopia that we dream about is simply a hopeless fantasy.