Sunday, August 31, 2008

Weekly Rewind - Week 35 (08/29/08)

The week ended with a thud as several better than expected economic reports were offset by the worst personal income results in three years, and combined fears of foreign contagion and export weakness on dollar strength (UUP +0.6%). In a mixed market, Small-Caps were able to post a slim gain (IWM +0.3%), while the technology heavy NASDAQ 100 took it on the chin after a dour Dell report (QQQQ -2.9%)(FT - Dell's Long View).

Sectorwise, Financials and Real Estate were the only areas able to muster reasonable strength (XLF +3.3%; IYR +1.6%) as FOMC minutes suggested a policy hold (RTTNews - Policy Hold) and the GSEs staged a comeback rally on successful debt auctions and continued bailout speculation (HousingWire - Shares Rebound). This rally leaves the Financials looking vulnerable to a near-term pullback, however.

Looking ahead to a holiday-shortened Week 36 of 2008, trading action will be influenced by:

  • Tuesday - Auto Sales; Construction Spending & ISM Index

  • Wednesday - ADP Employment; Factory Orders & Fed Beige Book

  • Thursday - Jobless Claims, Productivity & ISM Services

  • Friday - Jobs Report

Meanwhile, it seems that national attention has been redirected from the global stage (Welt - Georgians Effectively Blocked) to our political conventions and the gulf storms (AP - New Orleans Orders Evacuation).

o Yahoo! U.S. Earnings Calendar
o Yahoo! U.S. Economic Calendar


Never Investment Advice

Friday, August 29, 2008

Market Rewind Readers Mostly Optimistic

Going into the last third of the year, Market Rewind readers are mostly optimistic on year-end equity market performance. Indeed, 58% expect an improvement from where the S&P 500 currently sits, down some -12.5% on the year. Only 19% of the 31 respondents see stocks falling appreciably lower. This is in relative contrast to the poll held last January, when readers were largely pessimistic on 2008 compared to historic averages, and correctly so. Will the wisdom of our community prevail once again?


Republished from the January post is a summary of S&P 500 cash index historical results over the last 80 years.


Original 2008 Poll Article

It goes without saying that these are small samples, but thank you for your participation. With many economic questions still lingering and the political season moving into high gear, we certainly have an interesting period ahead of us! Comments?

08.29.08 - Burning Off Overbought


VWAP is heading steadily south as we work off short-term overbought conditions. Oil up 1.66% and the looming long weekend are also playing their part. By the same token, the Advance-Decline line is flattening and Adjusted Tick is only midly negative at this point as the SPY just now touches S1 ($128.8).

10:15AM PST UPDATE:
S1 held, but watch closely how price behaves as we approach the falling Volume Weighted Pricing levels.

Thursday, August 28, 2008

08.28.08 - Testing R2


How was that for a GDP revision? The SPY is now testing R2 ($129.90) and I am starting to put on partial hedges. That said, cumulative tick is very strong and VWAP tests have all bounced up. Volume is very low again.



Have you voted in the reader poll to the right? It's just for fun to stimulate some interaction here, but do weigh in! I'll be keeping that open until at least thirty responses are logged. And please leave your comments on this post.

Wednesday, August 27, 2008

08.27.08 - Preholiday Bid?


In spite of light resistance at the five-day moving average/ R1 (SPY $128) and a somewhat erratic bar-by-bar tick, adjusted cumulative tick is looking very strong and it seems resistance will be broken to the upside.

Tuesday, August 26, 2008

08.26.08 - Ruler Flat Adjusted Tick


So far Trin and A-D line are positive, though price is really going nowhere fast -- putting out stops on select positions. Oil is pulling back in spite of the storm noise.

Two birthdays in the Pietsch household this week, here is a shoutout to my big boy Luke!

HAPPY BIRTHDAY LUKE!


Have you voted in the reader poll to the right? It's just for fun to stimulate some interaction here, but do weigh in! I'll be keeping that open until at least thirty responses are logged. And please leave your comments on this post.

11:42AM PST UPDATE: Obvious deterioration. The 52-Week New Highs was probably the first tell.

1:00PM PST UPDATE: Relatively strong put buying into the closing strength. Adjusted Tick, the turnaround tell (and AD Line), just went green again.

Monday, August 25, 2008

08.25.08 - Nothing Safe Today...


...unless you are in treasuries. Oil and gold up modestly as well. Be careful, Tick is highly negative and trending down. Street is practically begging for a retest last month's lows. Money flow as been very weak and there is no volume. On a more positive note, there is often a upward holiday bias going into this long weekend -- see Altucher's book on this (link on right below "How to Trade Like a Hedge Fund"). We'll see.


Have you voted in the reader poll to the right? It's just for fun to stimulate some interaction here, but do weigh in! I'll be keeping that open until at least thirty responses are logged. And please leave your comments on this post.

POST CLOSE UPDATE: Note that a Big Move on Low Volume mechanical "short" study criteria were met today [edit: not really a signal, just within study bounds; changed text accordingly], as described last week. With volume at 76% of average, although wins are greater in magnitude than losses, odds technically favor a bounce. Please read the article before you consider trading this... it's more of a cautionary warning than a statistically robust signal with volume so light -- just not alot of information there.

Never Investment Advice

Sunday, August 24, 2008

Weekly Rewind - Week 34 (08/22/08)

In a roller coaster week, equities ended up taking a breather after the Commodities Index (DBC) staged a powerful comeback rally of +3.7%. Late in the week, however, yet another oil reversal, a relatively optimistic inflation forecast from Chairman Bernanke, rumors of a pending GSE bailout, and a possible overseas investment in Lehman helped equities to moderate their steep earlier losses.

In contrast to the prior week, among the major indices the Russell 2000 (IWM) led the pullback with a loss of -1.9%. Scanning the sector spectrum, Energy(XLE) put in the strongest gains for the week of +5.4%, while Financials (XLF) declined -2.9% on continued credit worries. The only style area able to post a modest gain was Large-Cap Growth (PWB) at +0.5%.

Looking ahead to Week 35 of 2008, trading action will be dominated by a busy economic calendar, including:

  • Monday - Existing Home Sales

  • Tuesday - Consumer Confidence, New Home Sales & FOMC Minutes

  • Wednesday - Durable Orders & Crude Inventories

  • Thursday - Preliminary Q2 GDP & Jobless Claims

  • Friday - Personal Income/Spending, Chicago PMI & Michigan Sentiment

Other news to watch with the Olympics and earnings season over will be a fresh wave of political theater both here and abroad. World watchers will also no doubt be keeping a close eye on developments in Georgia, particularly as international "aid" arrives.

o Yahoo! U.S. Earnings Calendar
o Yahoo! U.S. Economic Calendar

Never Investment Advice

Friday, August 22, 2008

08.22.08 - Rumor Mill Continues


...to work its market magic: this time to the upside. However, today's chart lists five of the eight or so reasons I took a short futures position this morning where indicated by the circle. I'm already out (edit: why? bounce off of R1, acting as subsequent support, a technical trade) - it was a scalp - but perhaps you will find it instructive.

Short-term RSI's now exceed 80 in several markets - quite high, but perhaps artificially so based on the big swings in quick succession. Today's move puts us back into the recent trend-channel, but I'd continue to exercise caution. Enjoy your weekend!

HAPPY BIRTHDAY GARETT!


Have you voted in the reader poll to the right? It's just for fun to stimulate some interaction here, but do weigh in! I'll be keeping that open until at least thirty responses are logged. And please leave your comments on this post.

11:20AM PST UPDATE: Hmm, think yesterday's oil move might have been a squeeze?


Also, as everyone is saying, note how low volume is! Adjusted Cumulative Tick is VERY strong, but R2 continues to hold back the SPY ($129.45), but with all these tests perhaps it will break. Five-day moving average is heading up. Be sure to check out the weekly recap late before Monday's trading.

Thursday, August 21, 2008

Big Moves on Low Volume

With volume having drifted back down since the passing of July's stormy lows, we now find ourselves in the midst of the summer doldrums. On the other hand, August has certainly seen its share of large price swings.

As promised earlier in the week, this study takes a quick look at what typically happens the day after a "big move on low volume."

The conventional wisdom is to fade such moves -- if the market is significantly higher, the trader should go short, and vice-versa. Is this correct? As we will see, data is sparse, but anecdotally -- yes and no. Not surprisingly, the answer depends on how one defines big and low.

The analysis spans ten years of S&P 500 data (2,520 trading days), using the 'SPY' Exchange Traded Fund as a frictionless proxy. The table below presents next day results assuming the trader goes against the conventional wisdom in both directions, seeking a trend continuation trade. First, however, here are some definitions:

  • "Big Move" - A daily price change that is 1.8 to 2.2-plus standard deviations above the preceding one-year average.


  • "Low Volume" - Closing volume that is up to 20% or more below the preceding one-year average.
Observations:
  • These events are rare, limiting the study's statistical significance. In fact, no such trades have actually triggered this month (although we have come close a few times, stimulating the timing of this piece). Also, not seen here is how market behaviour changes over time. Nonetheless, we can still anecdotally test our query.

  • Contrary to conventional wisdom, for moderately low volume between 80% and 100% of average, there is a strong tendency for continuation.

  • Although the anecdotal odds of continuation trade success are quite high in both directions, a few large losses on the short side completely mitigated wins there except for the largest of pullbacks.

  • As volume gets increasingly thin (below 80% of average), consistent with conventional wisdom, the anecdotal odds again favor a fadable reversal.

For more analysis of volume indicated trading, see this excellent series by Quantifiable Edges. As interesting as the results of this series are, it is also instructive in showing how different conclusions may be drawn by slightly altering parameters or approach. This highlights the importance of confirming the robustness of results in all back testing, certainly far beyond the scope of this piece.

Lastly, estimating end-of-day volume to see if it will qualify as "low" while the market is still open can be problematic, since: a) by definition closing volume is not yet posted; b) volume is typically noisy; and, c) the distribution of volume over the course of the day is nonlinear. You may be able to get around these problems by using the divisors provided in this Market Rewind post.

In the future, I'll also look at post high-volume days. As we will see, there is much more information and compelling profit potential following those days. Can you guess what the title of that article will be?

Never Investment Advice

08.21.08 - Commodities Comeback


Oil (USO) is +3.85% and Gold (GLD) is +2.64% as the US Dollar has weakened (UUP) -1.13%. Equities are hanging in there at a loss, but be careful, Adjusted Tick is trending down, as is the AD line.

Have you voted in the reader poll to the right? It's just for fun to stimulate some interaction here, but do weigh in! I'll be keeping that open until at least thirty responses are logged. And please leave your comments on this post.

10:40AM PST UPDATE: AD line started sloping up about 40-minutes ago. Adjusted Tick is still negative, but swinging up. Impact on price is obvious. We have certainly been very oversold, but a bit bizarre to see the move on a huge commodities day. Is it a bounce in all quarters, GSE speculation, or a vote of economic confidence? That's Mr. Market for you. I'd still trail stops on longs.

o Blog to Read: Bill Luby presents a technical scenario involving a commodities rebound here.

CLOSING UPDATE: R1 on the SPY proved strong resistance. Fascinating day -- thoughts?

Wednesday, August 20, 2008

08.20.08 - Oversold

I'd start looking for reversal plays this morning. The a.m. downdraft has us officially in (short-term) oversold territory.

7:55AM PST UPDATE: AD Line and slope of Adjusted Tick look constructive. Don't forget to trail stops or set exit targets.

9:05AM PST UPDATE: Out.

On the daily time-frame, short-term RSI's are quite low now even as traditional Macd's look to be rolling over. I've been looking for a 'bottom' to trade, but note that intra-day the AD line, New Highs and Adjusted Tick are all heading back down again. Really a mixed picture and not alot of breadth supporting my bottom fishing premise! Only trade for now is to play the noise on range extremes, it seems. These are all scalping trades; be nimble.

Have you voted in the reader poll to the right? It's just for fun to stimulate some interaction here, but do weigh in! I'll be keeping that open until at least thirty responses are logged.

Tuesday, August 19, 2008

08.19.08 - Knocked Out

Knocked out of my trade just as the S&P500 has broken its trend channel. Tried to put it back on, but it's counter the developing trend and looking to exit on a wave.

Bar-to-bar volatility has been fairly low, but the VWAP trend is clearly down as Energy catches a bid (XLE +2.75%) and note spreads widen. Will reassess a counter trade at day-end.


Have you voted in the reader poll to the right? It's just for fun to stimulate some interaction here, but do weigh in! I'll be keeping that open until at least thirty responses are logged.

10:35AM PST UPDATE: We've broken the VWAP and Adjusted Tick is on the mend.

11:45AM PST UPDATE: And... no dice.

Monday, August 18, 2008

08.18.08 - Monday Morning Pullback


Financials and Semis are leading the way down while Gold is getting a small break on the day. Adjusted Tick is just getting worse, so I'd consider waiting until the end of the day before putting any money to work. That said, I'll be looking for potential SPY support near the rising 20-day moving average today or tomorrow in the $127.70-$128.00 range. This is also the bottom of the rising trend-channel. If it fails to hold...

Have you voted in the poll to the right? It's just for fun to stimulate some interaction here, but do weigh in! I'll be keeping that open until at least thirty responses are logged.

12:10PM PST UPDATE: Sizable drop on low volume -- buy it? Talking heads will say yes; my studies say no though edge is slight. More on this later.

CLOSING UPDATE: Application of the comment above nullified by close -- I'll still post the study later this week. As a postscript, I did buy a little at the target of SPY 127.70, four cents above the low. I know... I'd just assume be lucky as smart, but see comment above posted much earlier in the day.

Never Investment Advice

Saturday, August 16, 2008

Weekly Rewind - Week 33 (08/15/08)

This week, equities continued to benefit from what has evolved into a violent commodities liquidation (London Free Press - Oil Hits Three Month Lows; Bloomberg - Gold, Oil Slump). Although a bit mixed, the broadest U.S. indices ended in the plus column, with the Russell 2000 (IWM) leading for a gain of +2.7%. This was inspite of reports of weak retail sales, record home foreclosures, job pressures and hot inflation data (Yahoo! - Economic Table).

However, the export sensitive Dow Jones Industrial Average (DIA) and EAFE International Index (EFA) didn't fair as well, down -0.1% and -3.4%, respectively on continued dollar gains and news of economic weakness abroad (Bloomberg - Euro Falls).

Looking across the sector spectrum, Consumer Discretionaries (XLY) put in the strongest gains for the week of +2.8%, while Financials (XLF) declined -2.6%. This had some market commentators discounting next week's upside potential even as the likes of Ambac and MBIA were upgraded on Friday (Market Watch - Insurers Pace Gainers). However, of all the tracked ETFs within the scope of this article, it was really Precious Metals (DBP) that took it hardest on the chin, posting a -9.9% loss, now down over -20% in the last four weeks alone.

While commodities corrections are known to be turbulent, this further decline leaves metals heavily oversold and positioned for a short-term technical bounce. On a related dollar trade, the same can now be said of international issues. In contrast, while Technology (XLK) may yet have some legs left in its powerful upward move, it has become highly overbought and due for at least a brief correction soon, as have Healthcare (XLV) and Small-Cap Value (PWJ) stocks.

Looking ahead to Week 34 of 2008, trading action will be dominated by Producer Price Index and Housing data on Tuesday; Crude Inventories on Wednesday; and Jobless Claims, Leading Indicators and Philadelphia Fed readings on Thursday. As earnings season comes to an end, other news to watch will be the progress of the prospective Russia/Georgia truce (New York Times - Kremlin Signs), and Tropical Storm Fay in the Gulf (Bloomberg - Storm Nears Cuba).

o Yahoo! U.S. Earnings Calendar
o Yahoo! U.S. Economic Calendar

Never Investment Advice

Friday, August 15, 2008

2008 Prediction Poll Revisited

Remember these two posts from late last year (below)? With the general elections coming down the pike and roughly 4-1/2 months left in the trading year, I thought it would be interesting to revisit and update the 2008 S&P 500 reader prediction poll. So far the lower barbell outliers have it (GSPC -12.4%)!

While I'm not usually one to reveal my "political" affiliations, I've started us off with one vote for -0% to 7.5%. Register your revised estimate of the S&P500's year-end performance on the right-hand sidebar, and please leave comments on this one! Have some fun with them and enjoy your weekend.

o Market Rewind 2008 Poll Results
o Market Prediction Poll

Note: There were actually 23 responses to the original poll -- apparently Google managed to 'lose' half of them over the course of the year. However, the barbell distribution was similar -- best to see the post.

08.15.08 - Sideways Trade on Negative Tick


As the Nasdaq 100 continues its amazing strength, the markets are generally heading sideways on increasingly negative adjusted tick and declining new highs. But for what looks like increasingly isolated index participant strength (on the day) and lower oil AGAIN, I think we'd be lower all around today.

WEEKEND UPDATE: Anyone notice how low volume has been these last several days... anecdotal toppiness after a big leg up? Looks like Quantifiable Edges has put some numbers to it here. In spite of the healthy move up (including the Nas peircing its 200-day, which I haven't pointed out before), this still feels like a bear rally.

Oil, Gold and the US Dollar

Yesterday I posted an article on the short-term statistical correlation between Oil and US Equities. In that article I referenced the connection between Oil and the US Dollar, and one reader asked that I post the rolling correlations for those assets as well. Here they are with Gold thrown in for good measure.

Also, as a clarification I did not mean to imply that I think input prices don't impact our economy over time; merely that this is more difficult to detect using one basic statistical measure on a daily-close basis than conventional wisdom may purport.

ETF proxies include the United States Oil Fund (USO), the PowerShares DB US Dollar Index (UUP), and the SPDR Gold Shares (GLD), as follows starting with USO vs. UUP:


Similar to US Equities, while the daily correlation between Oil and the Dollar has been relatively weak, the Ratio of Inverse Closing Changes has certainly been on the rise. Below is GLD vs. UUP:


As shown, the inverse correlation between Gold and the Dollar has been significantly stronger and more persistent as compared to Oil. While the rotational/liquidative commodities crush looks more overdone by the day, gold bugs who believe the Dollar will continue to gain strength might bear this in mind.

Thursday, August 14, 2008

08.14.08 - Resistance at R1


The SPY is doing its darnedest to break through resistance after a powerful bounce off of support at the open. Bullishly, Small-Caps, Technology and Consumer groups continue to lead this market. Adjusted Tick looks strong.

News:
o SIFMA Loan Limits Increased
o Auction Rate Settlement

Wednesday, August 13, 2008

Oil & Equities - Just How Correlated Are They?

Am I the only one tired of hearing about the correlation between Oil and US Equities? Certainly that has been quite the trade, and there is obviously a fundamental connection between the two that goes beyond the US Dollar, but all the TV talk and loose use of the term "correlation" had me wondering just how strong the relationship has been from a bar-to-bar statistical standpoint. As this article will point out, over the long run the relationship has been less than one might assume from all of the talk.

Causal or Casual Relationship?

The inverse relationship between Oil and the S&P 500 certainly seems readily apparent, just look at the chart of the United States Oil (USO) versus S&P500 Spider (SPY) ETFs over the last ten-days:


But, statistically, are we being fooled by the recency effect of this fresh observation? Take a look at the longer-term six-month chart of the same ETFs below:

The market is clearly sensitive to oil, and suffered as it posted its sixty percent gain, but did the market decline sixty percent? How about forty? Has it recovered twenty percent as oil has fallen by the same relative amount? Clearly not. Even after considering the moderating energy component of the index, the statistical relationship on the broader market is considerably weaker than some may lead us to believe from their casual commentary. But how much so?

Just the Stats Ma'am

As shown in the chart below entitled 1-Day Rolling Correlation, over the last ten days, while there was obviously an inverse directional relationship between the indices, there was really only one when when the rolling correlation exceeded 70%:

(Note: One would minimally like to see closer to 80%-plus against at least 30 data points to consider the relationship statistically "strong".)

In fact, over the 790 five-minute bars constituting that ten-day period, there was only a -31.6% bar-to-bar correlation. Furthermore, over a longer two-year period using 20-day rolling correlations (20-Day Rolling Correlation), there was actually only one brief period late last July when such a significant statistical correlation occurred. Over the entirety of that period there was no measurable correlation (r=-0.8%). If anything, historically there appears to have been a positive regime bias to the relationship!

So what's all the hoopla about! Well, again there is the recency effect of the last several weeks, and crude oil near USD $150 per barrel will undoubtedly be etched in our collective conscious for some time to come.

More significantly, while the relationship may be dicey on a bar-to-bar statistical basis, during the last 20-days, 70% of the time the two indices did indeed close in opposite directions (Ratio of Inverse Closing Changes), confirming our intuitive reaction to the current regime.

The real question going forward, of course, is how much longer this connection will play out? Tracking the rolling correlation and ratio of inverse closes between the two may help you to answer this question.

08.13.08 - Very Negative Tick


The market couldn't recover from the morning gap down and adjusted tick remains highly negative as Energy pushes higher (XLE +2.5%). Note the successive periods of lower lows and highs. I'll be looking for possible strong SPY support near its 50-day moving average ($127.25), though I'm already working my hedges off. Also, I'll get that USO/SPY correlation study up later today.

11:30AM PST UPDATE: First money came out of bonds, then energy as the SPY broke its VWAP -- doubt we'll hit break even though. Tech and Small-caps have been amazingly resilient, indicating on-going rotation.

11:45AM PST UPDATE: Well what do you know! Pretty bullish - trail stops.

Tuesday, August 12, 2008

08.12.08 - Mixed Market

Most indices/sectors are seeing mild selling pressure after two days of strong gains. However, Large-Cap Tech (QQQQ +0.46%) as led by the Semiconductors (SMH +0.53%), Energy (XLE +0.21%) and Consumer Staples (XLP +0.38%) still show a bid. Adjusted Tick is getting worse, however, and with Tech technically overbought and Financials (XLF -2.78%) leading the way down, I'd be careful with new long positions. Lastly, note that the Dow did find support at its rising five-day moving average.


10:45AM PST UPDATE: Volume is light again (again predicting less than 200K SPY shares) and the market is hanging in there [edit: BUT - VWAP and Adjusted Tick still negative!].

Blog to Read: Quantifiable Edges/ Two Day Gains

NEVER INVESTMENT ADVICE

Monday, August 11, 2008

08.11.08 - Equity In-Flows


Continued flows into equities out of commodities and bonds. The ten-year note yield is once again just under 4 points. Adjusted Tick is very strong. Keep an eye out though, we are now at the top of the recent trend channel.

Yahoo! Excerpt:

"Retail gasoline prices fell for the 25th day in a row, a survey of gas station credit card swipes showed Monday. The national average price for a gallon of regular gas fell to $3.81 from $3.818 a gallon the previous day, motorist group AAA said. Prices though remain more than $1 above year-ago levels."


10:40AM PST (Edit: Obviously had time messed up here) UPDATE: It's 1:40EST -- huge rally day -- where is the volume? I estimate closing SPY volume under 200K shares. Typical daily volume has been 230K shares. Obviously lots of short-covering; where are the institutions?

o Predicting End-of-Day Volume

11:40AM PST: The SPY is sitting right on its rising VWAP. Not clear if we will break or bounce. On a daily basis, we went overbought earlier with an RSI of 84 and now oil is bouncing back. Tick and AD may be rolling over, but it's not clear yet whether or not they'll trend. Watch that VWAP, oil and treasuries.

12:50PM PST: Volume picked back up to average on the pullback. Not a terrific candlestick. Anyone else getting sick of the oil correlation talk? Maybe I'll look more into that. On a daily basis, the correlation is less than you'd think from all the talking heads (take a look at the chart in the post below).

Quotation of the Day:

"This could be a prolonged and bloody conflict with an unpredictable end," said Pavel Felgenhauer, an independent military analyst in Moscow. (Bloomberg)

Saturday, August 9, 2008

Weekly Rewind - Week 32 (08/08/08)

This week, equities saw a powerful upside reversal consistently putting in both higher-highs and lows. The major U.S. indices all ended in the green for the week, with the NASDAQ 100 (QQQQ) leading with a gain of +5.4%. Non-dollar denominated assets performed less spectacularly, however, with the EAFE International index (EFA) nearly flat as the USD found footing on the possibility of overseas easing even as the Federal Reserve held key rates at 2.0% (Bloomberg - Euro Declines; RTTNews - Greenback Levels).

Helping fuel the upward move, crude oil once again fell hard to close the week near $115/BBL, over 20% off its recent highs (AFP - Oil Prices Slump). In fact, Liquid Commodities (DBE) fell back another -9.0% on the week. Sector-wise, Consumer Discretionaries (XLY) put in the strongest performance of +7.5%, while Small-Cap Value (PWY) stocks led the pack from a style-perspective at +4.2%. Meanwhile, Financials (XLF) took a relative breather with a gain of +1.4% on poor Fannie Mae results (AP - Fannie Mae Loses) and regulatory heat from Cuomo's auction-rate security investigations (AP - UBS Settles): impressive given the news.

Looking ahead to Week 33, while strong breadth and oscillator headroom suggests follow through early into the week, both the Technology and Small-Cap Growth indices may quickly become due a relative pullback. Otherwise, trading will be dominated by Price, Inventory and Retail Sales reports on Wednesday; CPI and Initial Claims on Thursday; and various production indices and the Michigan Sentiment report on Friday. The battle between Russia and Georgia may also play on commodities (Bloomberg - Russia Is Waging), while another 214 companies are scheduled to report earnings.

o Yahoo! U.S. Earnings Calendar
o Yahoo! U.S. Economic Calendar

NEVER INVESTMENT ADVICE

Friday, August 8, 2008

08.08.08 - Lucky 8's

What a powerful comeback rally. Adjusted tick continues to be very strong as does the AD line. So if oil goes to zero will the equities go infinite? Hey, we'll take what we can get. Trail stops and have a good weekend. And be sure to check out the Weekly Rewind before next Monday!


P.S. -- Something to keep an eye on in addition to the Olympics this weekend. Also see the chart below, Oil and Gold versus the Dollar:


10:20AM PST UPDATE: Be advised that on the daily time-frame the SPY and DIA are now just below their respective 50-day Moving Averages, which could initially pose a modicum of technical resistance. The IWM, on the other hand, has shot through its 200-day and the QQQQ is right behind.

Impressive -- but again, I'd trail stops or look to hedge on any sign of reversal. Gains are too hard fought in this market! Meanwhile intraday, I'm wondering if another leg higher is about to form in the SPY.

NEVER INVESTMENT ADVICE

Thursday, August 7, 2008

08.07.08 - Semi's & Energy Outperformance


I find today's sector chart more interesting than market-wide price action with Semi's (SMH +2.53%) and Energy (XLE + 0.26%) outperforming the likes of Financials (XLF -3.23%) and Consumer Discretionaries (XLY -1.42%). That said, the broader market is holding up fairly well given an increasingly negative adjusted cumulative tick with S1 providing strong support thus far. Should that break, I'd look next to the rising 5-day moving average for possible support (SPY $127.45). However, as long as the downtrend from late yesterday afternoon remains intact, I'd say odds favor the shorts.

10:20AM PST UPDATE: Got a bit of a break through that trend line; I'm not particularly optimistic, but we'll see if it can hold. Watch Energy, the AD line and VWAP for additional clues.


NEVER INVESTMENT ADVICE

Wednesday, August 6, 2008

Trading Energy Complex Pairs

Over the last several months, it seems that every other financial blog has opined on the trading relationship between the Energy and Financial complexes -- so what's one more?!

While it has certainly been the trade du jour, it is perhaps one degree separated from the more intuitive Energy vs. Consumer Discretionary trade -- at least for this writer. But how to successfully trade these sectors against one another in an erratic market characterized by rapid rotation?

This article poses one possible short-term quantitative answer to the question using traditional long-short pairings of exchange traded funds, including: the Energy Select Sector SPDR (XLE) versus the Financial Select Sector SPDR (XLF), and the Consumer Discretionary SPDR (XLY), respectively.

Method & Rules

The premise will be to trade mean reversions after statistically extreme sector divergences. After scanning for such divergences, we will then employ pairings of the above ETFs whereby one stock will be held long and the other held short with equal dollar weightings.

The method and rules for this simplified trade follow:
  1. Divide the Daily Closing Prices of ETF-A by ETF-B;
  2. Calculate the Log of the Resulting Price Ratio.
  3. Calculate the 15-Day Moving Average of the Derivative Log Pair;
  4. Subtract the Average from the Current Result and Divide by the Pair's Trailing Standard Deviation ("SD") of the Same Length;
  5. Long the Derivative (Long A and Short B) when the Number of SD's Exceeds -2.2.
  6. Short the Derivative (Short A and Long B) when the Number of SD's Exceeds +2.2.
  7. Exit the First Close after: 1) the Pair has Mean Reverted past Zero; and, 2) the Derivative Ratio Moves Against the Trade for First Time. Obviously, there are many potential variations for Entries and Exits.
Easy, right? The sections below provide trading results for the two pairings over the most recent five-year period ended August 6, 2008 (1,263 trading days). As you will see, results are generally positive but far from consistent. In both cases, results have been strongest in 2008, though performance of the XLE/XLY pair has perhaps been more predictably consistent. No slippage or trading costs are assessed.

Results A ~ Energy vs. Financials (XLE/ XLF)


Results B ~ Energy vs. Consumer Discretionary (XLE/ XLY)


Closing Notes

Trading pairs can be notoriously tricky and it is not uncommon for both sides to move against the trader -- just look at all the reported hedge fund losses last month. Careful money management is needed, and the development of non-dollar weightings and intra-day rules may hold you in better stead than the simplified on-close method presented above.

If nothing else, I hope this article points you in the right direction for further study. These days, it certainly beats holding onto a theme based on discretion alone. In addition, you may find that tracking the relative success of various sector pairings provides advance notice of "what is working" beyond the trade du jour.

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Addendum: Apparently I haven't been the only one with pairs on the mind. A morning visit to Dr. Brett Steenbarger's TraderFeed blog presents an excellent companion piece to this article. Here is the link to "Divergences and Pairs Trading." Dr. Steenbarger frequently writes about inter-market relationships in addition to his core articles on improving trader performance. Highly recommended. Also, a spelling correction -- of course it's "Du Jour" (of the day), not "Du Jure" (by law!).

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