Monday, March 31, 2008

March 2008 Rewind - Margin Madness

This March, U.S. equity indices posted mixed results topping off their largest quarterly losses since the third quarter of 2002. The S&P 500, Dow Jones Industrials and NASDAQ 100 cash indices recorded monthly changes of -0.60%, -0.03% and +2.10%, respectively.

As the deleveraging saga continued to unfold, some of the month's worst days occurred early-on as Thornburg Mortgage and The Carlyle Group were rumored to have missed margin calls, and culminated mid-month with the failure of Bear Stearns, the country's fifth largest investment bank.

Even as inflation signs bounced around the court and commodities hit the board with all time highs, the Federal Reserve traveled to the rescue once again with a sweeping series of actions, including: an emergency weekend 25 basis point cut, followed by an additional 75 basis point cut, and new extended lending facilities featuring the acceptance of subprime collateral from investment banks. In spite of wild ranging days in both directions, the equity markets ended the month nearly where they began as the realities of an economic slowdown overcame the relief of having sidestepped a nationwide financial crisis.

Style-Box performance was firmly in the Large-Cap camp, with Small-Cap Value stocks also showing relative strength. Since March's retest and bounce off of the January lows, many market pundits claim we have "seen the bottom." That may be so, but we have a good deal of technical resistance overhead to dribble past first. One thing is certain, as the first quarter's "Margin Madness" comes to a close, traders will be looking forward to the much ballyhooed second-half comeback.

The Style Box below was calculated using the following PowerShares™ ETFs: Small-Growth (PWT), Small-Value (PWY), Mid-Growth (PWJ), Mid-Value (PWP), Large-Growth (PWB), and Large-Value (PWV).

The Standard & Poors 500, Dow Jones Industrial Average and NASDAQ 100 may be traded through ETF proxies, including the SPY or IVV, DIA and QQQQ, respectively.

Sentiment: Negative
Volatility: Highly Elevated (VIX 25-32)
Direction: Sideways

03.31.08 - Up and Away

This move seems well supported internally. Come on shorts, cover! Check back after the close for the monthly "rewind". How does "Margin Madness" sound as a header?

Friday, March 28, 2008

03.28.08 - MA Sandwich

There is a slight downward drift and resistance at the falling VWAP on the day inspite of the postive A-D line and tick action. Right now there is significant volume spike occuring, we'll see whether that is buying or selling shortly. Notice above how the SPY is sandwiched between the falling 50-day and flattened 20-day moving averages.

1:35PM CST UPDATE: It has been lower lows and lower highs all darn day with little impulse to get out of trades. Cumulative tick has finally gone into the red. We will see if S1 holds at this point. Volume is incredibly low. Definite case of the Friday blues. Will we see a quarter/month-end reversal?

3:45PM CST UPDATE: I found today a bit disquieting for some reason. Unlike yesterday, it was a very tight rope, almost exclusively down. Makes me wonder about Monday. Historically, trading the end-of-month/quarter has a positive expectancy, but I was interested to hear one CNBC commentator (was it Art Cashion?), make an argument for a "Window Breaking" instead of "Dressing" whereby hedgies will load up on their shorts to push them down for extra gain. I'm not so sure... I'd think the greater tendency would be to lock gains as we are now close to the bottom of the recent range. We will see. Interesting blogs to read:

o Vix & More
o Quantifiable Edges
o Short-Term Trading

MONDAY UPDATE: Quantifiable Edges says the end-of-quarter markup expectancy is slim at best.

Thursday, March 27, 2008

03.27.08 - Trying to Stabilize

The Cumulative Tick is running quite strong as the market's attempt to stabilize off of the weak economic news and poorly received Oracle results. We have made a fairly extended run to the five-day moving average + R1 on the SPY, which may be potential resistance. That early morning move down had me concerned, but it found support at yesterday's overnight lows.

Wednesday, March 26, 2008

03.26.08 - Sell the Rally?

A follow through from yesterday's end-of-day pullback remains underway, albeit mild in magnitude thus far. Price is trying to break back through the five-day MAs, which remain positively sloped. Also, the cumulative tick has just gone positive. I think this is just some backing and filling as we head into the end of quarter.

Please see yesterday's post-close update for more about the "mixed signals" I was noting.

11:50AM CST UPDATE: Money is coming out of bonds but the stock market is down. Where is it going? Commodities!

o Blog to Read: Quantifiable Edges makes the pullback case.

2:20PM CST UPDATE: A program trade (judging from volume) just took us up momentarily to the daily pivot at SPY 134.60. Got taken down just as fast -- man alive. Some Bear rumours floating around apparently too.


Tuesday, March 25, 2008

03.25.08 - Mixed Signals

Although the market is running flat here and the VWAP is slightly negatively sloped, the Cumulative Tick and A-D lines are slowly headed northward. We have two opposing signals, one medium-term long-biased, and one short-term short-biased. I will be writting about these more later today. This has clearly been a very nice move off of the Thursday pullback that looks like it will have legs.

[EDIT: Hilarious, I posted "Big Lots" instead of the S&P500, here it is again. VWAP is now definitively headed north.]

Post Close Update: To follow-up on this post, I mentioned the longer-term "long" signal and the short-term "short"/overbought signal.

First the long signal -- This was based on fifteen industry sectors all closing under their 20-day moving averages last week Wednesday. When this occurs, it indicates capitulation, generating a twenty-day long signal. I have this filtered against a yield curve model looking for a normal curve. These ideas are not mine, you can find them in past issues of TAS - though I don't have the exact reference handy.

Second, the short signal -- Sorry I can't go into the detail of this because of my duty to my fund, but the intuition is that when the market indices are below their 200-day moving averages and a strong rally occurs, it is shortable with good edge. You probably didn't need a model to tell you we were stretched after that nice recent move though.

Hopefully this is enough information to generate an independent research project on your part. Feel free to email me.


Monday, March 24, 2008

03.24.08 - M.I.A. Today

Sorry gang, I'm out again today. Two very big back-to-back days here, look to hedge again soon. Back tomorrow at the mid-day.

Thursday, March 20, 2008

03.20.08 - I'd Rather See an...

... even paced day like this than the madness we've been observing. It has been a fast-money day trader's paradise, but for the rest of us a rather frazzled period.

In my opinion, the market must hold here and follow through with a few easy days like this. The possibility of what lies below is on one hand too scary to ponder, and on the other requires our consideration in the months ahead. I've been a little too busy to post much lately. I hope to have more original research for you in the weeks ahead. Enjoy your long weekend.

Wednesday, March 19, 2008

03.19.08 - Retrace

Don't forget it's expiration week and even the elevated volatility will be multiplied (VIX is 28.5 +10%). Looks like yesterday was short-covering induced. Bespoke makes this argument as well with their usual concise charting skills. Nonetheless, I'd expect potential support here around the SPY $132 level with the next, perhaps stronger level at S1, $131.25.

1:45PM CST UPDATE: Uggh. If S1 fails, I'd buy for a trade at the 5-day MA, which is about $130.40. I covered my hedges too early, but glad I had them on in-spite of the early morning regret.


Tuesday, March 18, 2008

03.18.08 - Fed Tuesday

Talk about schizophrenic. Amazing Cumulative Tick strength and AD line is maxed. Hard call ahead of Fed, probably buy or sell any parabolic move for a mean reversion trade. May want to think about going neutral or hedging if you are concerned.


POST CLOSE UPDATE: Wow! I have two closing signals: one, a breadth based go-long signal; and two, a bear market rally short signal... I'll look for consolidation tomorrow and reassess.


Monday, March 17, 2008

03.17.08 - Sunday Haircut

Uh oh... get ready...

o Fed Cuts Rates... 25bps?
o Bear for $2.00..?

Hate to be cute ahead of day like this, but this is as least as entertaining as CNBC commentary -- I'm rather certain all we will hear today is how unique BSC is:

o Radiohead
o 4000-Ds
o Falling Down
o It's a Wonderful Life
o A Waste
o ...

You get the idea. Let's hope they are right. I did like the comment that the finacial's repriced multiple is now two times... shares outstanding. Now off to work.

AM Update:

o As a reminder, options expiration comes a day early this week.
o So much for my "news risk aside" comment last week!
o There are a number of banks reporting this week.
o The bounce is rolling over under the VWAP -- cash is king for the day.
o This blog makes a number of great points in a very concise manner.
o Has anyone looked at the VIX? It has nearly tagged 36 -- levels last seen January 22nd, and last year on August 16th.
o Excellent post on The Big Picture.

Friday, March 14, 2008

03.14.08 - Bear Stearns B.S.

Ugly tape, but so far we are holding just below S1 on the Spiders. Cumulative Tick is very negative and the VWAP is downward sloping, so be careful if you are considering standing in front of the train. Plus, it's Friday. Positives for next week are a likely positive Fed + Holiday effect. Below is a chart of oil, gold, the S&P500 and an inverse US Dollar ETF...

1:50PM CST UPDATE: I'm looking for the next level of possible support at $127. Boy, I'd hate to be short ahead of next week, news risk aside. This is an uncertainty trade today and the markets are down over 2.5% -- when will it be resolved?

2:40PM CST UPDATE: VIX almost tagged 33 today. Healthy volume and we still held the lows from several days ago. Close to capitulation in most books. I'd think about buying any further weakness into the close.

Blog to Read: VIX & More - A new ratio to consider.


Thursday, March 13, 2008

03.13.08 - Still a News Driven Market

Clearly still a very news driven market. I can't imagine traders will want to be too short ahead of the Fed next week, especially as recent negative economic news continues to support a good sized cut in-spite of the liquidity action this week. Barney Frank's comments haven't hurt either. I read a post recently that fading large gaps in a bear market usually bear fruit, but large gaps up should not be faded. I'll post a link later.

Wednesday, March 12, 2008

03.12.08 - Just What We Want

This is just the type of action the longs would like to see, a narrow range consolidation day, preferably on lower volume, setting up for another leg higher. For today's post, I have put up the daily timeframe to show where we are at longer term. All we have really done is reentered the prior trading range. Hopefully we stay inside this time -- we can only have so many 2% down days in a row, 4% ups aside (50 to be exact!).

Tuesday, March 11, 2008

03.11.08 - Hard Habit to Break

Ah -- so tempting to fade the strong gap up in a bear market! Just remember there are many more "unfilled" gaps down remaining above us. If we can just hold above 1290 by the close, the bulls can still declare victory on the day.

CLOSING UPDATE: That, my friends, is what they call one helluva day! Biggest up move in five years. I believe we'll see follow through, though there may be better rentry points for the fast money.

Monday, March 10, 2008

03.10.08 - Big W?

A possible "Small W" put in intra-day, reflecting a retest of the January lows as well (the "Big W"). "Mad, Mad, Mad, Mad World" references aside, lots of "go long" signals triggering. Semi's are pulling hard too (+1.28%). Still a volatile world, but seems like downside risk may be setting up to mitigate for a trade here.

1:30PM CST UPDATE: Things have fallen apart a bit as we made a run up to the VWAP and were promptly rebuffed. Semi's are still in the green, but cumulative tick is largely negative. We'll see.

Blogs to Read: Looks I'm not the only one seeing long set ups evolving...

o Quantifiable Edges marks down to capitulation.
o Traderfeed sees possible leading price/ indicator divergences.

2:30PM CST UPDATE: Looks like the VIX is tagging 29.5... there is a crowd that would like to see it top 30 before they'll bite, but this is pretty darn close for a slow death day like this.

Kirk has some sobering thoughts. Makes a pretty good argument for timers and traders if you can get it right, which, of course, ain't easy.

Friday, March 7, 2008

03.07.08 - Bouncing Around S1

Heck of a news day. In spite of all the violent action, Tick and A-D are relatively flat, albeit negatively sloped.

The VIX is slowly creeping up, now at 27.9. I usually find it best to view the VIX relative to its recent past... I still find myself surprised that it has not risen more on a relative basis. Although we are at levels that have indicated support for equities recently, it worries me there could still be a flush out to come.

It's difficult to pick support here as we break down, but to "throw a number out," I'd be looking at the prior intra-day lows of SPY $126 [Edit: $128 may be a more likely interim stop if one looks back to 'O6].

12:40PM CST UPDATE: Funny how the large caps are getting hit the hardest today... with continued indicated dollar weakness ahead, they should benefit more than the rest. XLF & IWM are only down half as much as the SPY, and Semi's remain in the green. So far no sign of a bottom though the rate of decent has slowed.

[Add] This latest political theater on CBNC is a complete joke. If congress has some specific allegations related to executive compensation, they should forward the supporting evidence to an appropriate prosecutor. I totally agree with the commentator noting they should be using their time figuring out how to help this economy move forward.

1:15PM CST UPDATE: Tremendous supportive volume spike as the SPY tapped against S2... let's see if it does anything (look for some higher lows in the impulse waves), I'm putting a little on -- if you are looking at this day to add longs, you have to think about legging in -- risk is still to the downside.

2:35PM CST UPDATE: Anticipation of a Monday Fed action? In any event, I'll give a rare toot of my horn as I called the bottom within five-minutes. Use stops and watch the VWAP in particular... still not convinced this will stick. If I stop out and the market does slip back I'll think about holding again over the weekend. This is a quick trade environment, which is definitely not my style, but we are down over 7% over the last 8 days or so. Perhaps we are due for a small bounce.


Thursday, March 6, 2008

03.06.08 - Relative Strength in Large-cap Tech

As financials find themselves back in the tank, technology has been showing relative strength. Note that the Quad-Q is just now touching its five-day moving average. Tick is very negative -- I wouldn't try to pick any bottoms here.

2:25PM CST UPDATE: Now it's all eyes on the jobs report. Here is a good blog read for the hopeful bulls among you.

3:05PM CST UPDATE: Not a pretty tape and we are now outside the recent trading range [edit] to the downside. I believe this is the lowest close of the year. Volume was a tad light [edit] and the VIX still looks relatively tame... this doesn't bode well going into the weekend.


Wednesday, March 5, 2008

03.05.08 - Waiting on AMBAC

The AMBAC news pending is causing some noise here, but overall, Cumulative Tick has been very constructive and continues to slope upward. Also looks like money is coming out of bonds, which is healthy for equities (and commodities today). Keep an eye on that VWAP. Relative to the rest of the market, the financials are flat on the day. Let's see what happens when the news comes out.

Tuesday, March 4, 2008

03.04.08 - Cascade of Gaps Down

As a swing trader, I absolutely hate cascading series of gaps down when I am making a counter-trend play... I openly admit to feeling psychologically trapped in them. Anyway, we follow the model -- it's far more reliable than my personal state of mind. That said, use close stops if you are making discretionary buys unless you are a true long-term investor here!

So far today, the S&P500 has held at R2 (about SPY $131.45), but is now being "snagged" by the declining VWAP. While the leaders have been hit hard today, as of the time of this post they are showing relative strength vis-a-vis a recovery attempt relative to the broader market.

I noticed at the open that one of the long signals mentioned in yesterday's PM update became unstable and actually went back to cash on the official close. Welcome to the occasionally wily world of quantitative trading... Meanwhile, the market really needs to find its footing here, as it otherwise increasingly looks like we are setting up for a retest of the intraday January lows.

UPDATE: Excellent post by Dr. Brett related to my psychology note above!


Monday, March 3, 2008

03.03.08 - Bottom of Range

Looks like we are trying to put in a bottom along the rails of this recent trading range. A-D line is flat lined while cumulative tick remains slightly down sloped. Watch out for resistance at today's pivot (SPY $134). We are technically oversold, but volatility has a lot of room to move if pushed.

Blog to Read: Vix & More - McClellan

2:50PM CST UPDATE: I am getting signals for a short-term bullish edge based on the number of Dow components at multi-day lows over a given period of time. Sorry, I can't disclose the precise formula. However, the idea is not unique and it is easily researched. The contrarian sentiment signal has also triggered.