Friday, July 31, 2009

07.31.09 - Apparent Range Day

The S&P is trading in an ever-tightening coil even as cumulative tick continues a fairly consistent upward drift. That could signal a breakout higher in the second half of the day, but really volume is lightish, up and down volume are evenly matched, the daily fast MACD is going sideways after its big lift, so for now I assume we finish in the range.

Never Investment Advice

Thursday, July 30, 2009

07.30.09 - The Beat Goes On

After two mild down days we broke out of the congestive range from the get go this morning on strong advancers and tick action. A 23% extension indicates SPY $101 above, but this has been a somewhat marginal trend day so far even though the VWAP is holding and, while I'm not fading it, I see some risk that this is a false/ captitulative break up to the psychological SPX 1,000 number. We'll see -- it certainly seems alot will be hanging on the GDP tomorrow. Then again, this market will never go down ever again, right?

Wednesday, July 29, 2009

07.29.09 - Trade Under the Five-DMA

Back after an Internet outage, so late post today. Market once again shows resiliency after the weak bond auction and overnight Asian performance. Nevertheless, we are now trading below the VWAP and under the (intraday) five-day moving average as down volume continues to build for the first time in weeks. Also note the first lower low and high in quite some time. It's possible that the bounce off of SPY S1 was merely reflexive, so longs should continue to exercise caution into the close.

Never Investment Advice

Tuesday, July 28, 2009

Know Your Mean Reverters

The Mean Reversion Swing crowd has been taking it on the chin during the last two weeks and they are feeling quite mean about it -- I'm certain. Since I recently added a nice testable measure of mean reversion performance to the ETF Rewind in the form of David Varadi's (CSS Analytics) Relative Close "DV-2" indicator (see here for a nice explanation by MarketSci), I thought it would be a good time to review just how nasty it has really been.

The chart below plots the results of fading the unbounded DV-2 statistic for the SPY over the last 250 trading days versus the VIX. The hypothetical equity curve represents frictionless, additive returns. Although the tested results yielded nearly a 120% return, I wish to emphasize that this is not a trading system in and of itself. Although with raw returns like that -- it may certainly be the basis of one!

As shown, last year ended up being terrific for mean reversion methods, particularly when volatility was near its peak. By the same token, even if it feels otherwise, the recent 9% draw-down from peak equity is not without precedent in either magnitude or duration (see yellow bands).

While clearly the "trend has been your friend" of late and cycle periodicities have arguably shifted, it's far too early to pronounce mean reversion dead! Also, I would suggest that the aforementioned losses could have been materially reduced by ignoring or even reversing signals during extreme market environments as measured by a variety of metrics.

Sector Performance

This is a high level post, but I thought I'd take it one level deeper by searching for any particular sector source of the SPY's raw performance trading the DV. Looking across twelve major sectors below, my only conclusion is that the breadth of the S&P500 is what give it its edge as rotation among sectors keeps the the index more or less centered through time.

In fact, only Real Estate (IYR) significantly outperformed the SPY, while Consumer Discretionary stocks (XLY) showed no measurable edge on a raw basis whatsoever (though I imagine the savvy mechanical trader may have ideas to improve on that).

Here are several added take aways that I wish to emphasize from this post:
  1. Know what environment you are trading in (reverting/ trending/ break-out);
  2. Trading methods themselves revert (nice addition by David V.);
  3. Track your methodology's equity curve like it was a stock (even when you aren't trading it); and,
  4. Make sure you are trading the correct vehicle(s) for your method (see dispersion above).
Each night the ETF Rewind report provides just such broad market environment measures, as well as the DV indicator and over 65 additional key statistics for nearly 180 ETFs representing every major asset class.

PS - Welcome to the Blogosphere CSS Analytics!

07.28.09 - Minor Correction

After a very noisy yet tradeable open on the weak sentiment numbers (and inspite of the housing price numbers), the major indices have pulled back about a full percentage point, putting in the first lower-low in the SPY in eleven days. Internals are net negative, but are currently running with a positive slope after a very large supportive volume spike near the lows as the Qs moved off S1. There is always the chance of the "dipsters" coming in later in the day, but for now I expect continued mild weakness below the VWAP.

Never Investment Advice

Monday, July 27, 2009

07.27.09 - Looks Like a Range Day

With up and down volume about evenly matched and tick oscillating around the zero line, it would appear to be a range day bounded by the new home sales pop and S1. The Vix took a bit of a leap today, but is having little effect on price and cumulative tick is actually building to the positive. Just now the S&P500 is right below its flattened VWAP/pivot, but refuses to break down.

Saturday, July 25, 2009

ETF Rewind - Week 30 (07/24/09)

(Click Image to Enlarge/ Glossary)

Given the major indices' largely overbought status at the end of last week, I was especially curious to see how this week's table would compare after the strong re-pricing encore. As shown above, further gains left the S&P500 (SPY) up another +4.2% for a (mere) four week increase of +6.5%.

Short-term mean reversion signals can be very unreliable during re-pricing moves like this where risk and opportunity are rapidly reconsidered, effectively causing a technical reset. However, by almost any measure, this one has been a whopper. Of the tracked equity ETFs, six now have RSI-2's pegged at 100 with another 13 well above 90. Indeed, the SPY's RSI-2 has put in nine consecutive closes over 90.

This is a very, very rare occurrence indeed. While the move leaves us more and more susceptible to some sort of pullback, intermediate-term studies continue to suggest better than average odds of further advances ahead with analogous periods predictions twenty weeks out suggesting SPX ranges from lows of 910 to highs of 1,070.

Also, while the magnitude of this two week +11.4% move certainly came as a surprise to many, recall that the analogous March move actually had us +12.5% higher with the ensuing week higher yet again. In fact, during the past 50-years the S&P500 Cash Index has recorded eight two week moves of +10% or greater. The table below identifies these moves and the ensuing week's relative highs, lows and close.

(Two weeks ended the week starting... just how dates reported! )

Week Thirty-One of 2009 features the following busy earnings and economic reporting calendars:

To close, note in the RSI charts below how the NASDAQ 100, which led us higher, finally experienced a relative pause this Friday -- well see if this has any significance soon enough as an added push occurred in the aftermarket. Leading Financials (XLF) have also been a touch weaker on a relative basis. Have a Terrific Weekend!

Never Investment Advice

If you are interested in a significantly more thorough version of this weekly summary, consider taking a look at Market Rewind's new nightly
ETF Rewind Pro service (free trial). In addition to coverage of over 170 ETFs across twelve major asset classes, you will find three model portfolios, daily market signals and commentary, pairs trading and various portfolio management tools.

Friday, July 24, 2009

07.24.09 - Post Rally Range Day

Is this consolidation for SPX 1,000, or a set up for some short-term profit taking? That will be the question on traders' minds all day long and into next week. So far we have seen a ten-point range limited by the daily floor trader pivot. Although we got off to somewhat negative start, yesterday's after-session lows held on stabilization in the Nasdaq, falling VIX and recovering Cumulative Tick and Advance-Decline lines. Those elements have since flattened and remain net negative on the day, setting up a potential push back towards the pivot if they can't firm up once more.

Ponzo Update as of Last Night's Close

Note range lift from last week.

Never Investment Advice

Thursday, July 23, 2009

07.23.09 - Breakout Trend Day

Exceptionally low volatility readings last night were suggestive of a big move ahead, and now we know the direction. While it may be that short covering initially put in a bid upon breaking yesterday's highs as stops were hit, with growing volume it's hard to pin it all on that. We are thus far in a clear trend day on strong A-D and Tick action, although just now price has stalled and the VIX has begun to push back. We'll see soon enough whether price can hold through the mid-day lull.

Wednesday, July 22, 2009

07.22.09 - Gone Fishing

OK gang, we are firmly in an non-normal environment as the markup repricing of risk and future earnings expectations continues. Internals are mostly positive today, though I note we found preliminary resistance at yesterday's post-session highs, and just put in a lower high. Posting early today because this trader has gone fishing. Trade well and enjoy your day.

Tuesday, July 21, 2009

07.21.09 - Looking Toppy

The market has put in a mild pullback off its pre-market gap up near the June 11 swing highs. Semiconductors (SMH) are particularly weak (-2.34%), though the S&P 500 (SPY) has found support just above $94.60. Nevertheless, Cumulative Tick, the Advance - Decline Line and Down Volume continue on their negative path, potentially auguring a weak afternoon session.

Never Investment Advice

Monday, July 20, 2009

07.20.09 - VIX Higher SPY Higher

Internals are strongly supportive today with upside alignment among all the non-price indicators that I track. Interestingly, the VIX is also higher, but it may just be resetting from the Friday/weekend decay phenom. It has been a long, long time since we have seen such an extended directional run. More on this later today (see 'Runs update' below). I'm sure I sound like a "perma-bear" here, but whichever side of the trade you are on, I'd suggest it would be healthy for some small pullback sooner rather than later.

Runs update - as of Friday, the QQQQ's had strung together eight higher closes. Over the last ten years, I see two other times that occurred, both in 2005 (May and November). While both marked a very short-term swing high, eventually they went on to post further gains. Of course another high today would therefore be unprecedented in recent history. Sorry, not much to go on there.

Quick Chart Study:

Go long the SPY at the close and hold for one day when both the SPY and VIX close higher. Ten-year period, frictionless, simple returns:

(Ok, so you want to see the other side too right? The answer is much less/ more volatile edge.)

Sunday, July 19, 2009

ETF Rewind - Week 29 (07/17/09)

(Click Image to Enlarge/ Glossary)

Better than expected earnings and improving economic reports catapulted all of the major indices higher, leaving the NASDAQ100 (QQQQ) and S&P500 (SPY) up a whopping +7.0% and +7.6%, respectively. Higher still were the leading Material (XLB) and Financial (XLF) sectors, each up over +9%. Meanwhile, the prior safe trade Utility (XLU) and Healthcare (XLV) sectors lagged by half. In fact, the only real loser was the bond complex, with Twenty-Year Treasuries (TLT) down -5.2% for the week.

Speaking of which, with longer dated treasuries yielding 30-40 basis points more than last week, the often mean-reverting VIX (<25) (if not more so), it wouldn't be surprising to see a short-term pullback ahead.

Week Thirty of 2009 features a lighter economic calendar, but the earnings floodgates open wider still, as follows:

The Relative Strength Index charts have little meaning this week due to Thursday's corrupt closing ticks. I have therefore instead posted an update to the "Most Analogous Historical Epochs Projection" series. I find the results interesting since the 25-week look-back period contains the entirety of the steepest portions of both the plunge and recovery.

Note that all five analogous projections suggest at least a mild retracement next week followed by a summer trading range bound by SPX 880 and 1,010. Well, it's good eye candy at the very least -- have a terrific weekend!

Never Investment Advice

If you are interested in a significantly more thorough version of this weekly summary, consider taking a look at Market Rewind's new nightly
ETF Rewind Pro service (3-day trial). In addition to coverage of over 170 ETFs across twelve major asset classes, you will find three model portfolios, daily market signals and commentary, pairs trading and various portfolio management tools.

Friday, July 17, 2009

07.17.09 - Narrow Range Options Expiry

Volatility and range are unusually low this options expiration day. Of course, we had our big fireworks earlier in the week? Though internals opened with a negative tilt, they are now recovering and look supportive of a neutral to positive afternoon session. However, being OPEX and as overbought as we are on the daily time frame set against this big-mo, really anything goes! I do note particular weakness in the Financials (XLF).

WSJ's Guide to Econoblogs

I don't get my WSJ until after the close, but for those of you who don't get it at all, here is a link-fest comprised of The Wall Street Journal's "Guide to Econoblogs" (more online here):

Hey -- where is Market Rewind? ;-)

Thursday, July 16, 2009

What's My Line?

Professional traders always know what their factor exposure is to the market. Are their holdings tilted towards Small or Large caps? Growth or Value stocks? Finance or Material sectors?

In this way, they are aware of how their portfolio may respond to industry specific news and broad market changes alike. By knowing the exposure of their line in toto, they can hedge against unexpected moves without having to sell the whole lot. If their individual picks have a true edge, they should outperform without regard.

If you have more than a handful of stocks in your portfolio, you may be surprised what your real exposure is. The latest addition to the ETF Rewind suite allows the active trader to more intelligently answer this question without falling back on simple dollar-weighted S&P hedges. System traders who automatically generate their trade candidates will find the tool especially helpful, as it also downloads the name, sector and industry sub-sector for each entered symbol.

As a simple example, I ran the MS Excel spreadsheet against 40 of today's reporting companies. With such a big list, it's a pretty diversified portfolio, but even so you can see it has a small-cap value skew with an aggregate emphasis on financial and service sector exposure. On top of that, the portfolio's beta (the extent it would hypothetically move relative to the market) is a quite levered 1.4+, meaning if you were to hedge with a straight S&P short, you would sell 1.4:1. (Note that non-equal weighted and short positions can also be entered.)

Between this new short-term exposure hedging feature and the longer-term portfolio variance minimization feature (a "Modern Portfolio Theory Efficient Frontier" calculation), ETF Rewind users now have two very powerful tools to better manage risk across multiple time frames without relying on pure market timing. So - What's Your Line?

07.16.09 - Consolidation or Range Trade?

So far we have seen a fairly tight range between the S&P500's pre-session highs and the 500-minute EMA/ Pivot. However, I see the A-D and Cumulative Tick lines are rising steadily as the VIX continues to pullback, leading me to think we may be seeing some consolidation for an afternoon breakout.

The only fact holding me back on that as a firm conclusion is how overbought we are on the daily time frame/ relative positioning. Nice earnings aside, this CIT thing and the poor Philly Fed still weigh in my mind.

(Note: SPY 200-dema as potential resistance today/tomorrow at $93.84. Also, options expiry still looms in volatility land inspite of VIX <25.)

Never Investment Advice

Wednesday, July 15, 2009

07.15.09 - Power Move

The Advance - Decline line has been pegged over 4,000 stocks, nearly the entire universe of US stocks, for the entire day. Tick has only printed near zero a handful of times with Cumulative Tick powering ahead alongside Up Volume. Interestingly, the VIX, while lower on the day, has been up trending with price as Supply & Demand for protection and repositioning affects premium. After breaking well above the prior resistance channel from the get go, technicians will next look to the prior shoulder peaks near SPY $93 as potential resistance. That is just about a quarter above as of this writing.

Tuesday, July 14, 2009

07.14.09 - Capped by the 50% Retrace

The S&P 500 moved up quickly at the open to just below the mid-point of its recent swing highs to lows, and has traded near there since. Internals look mostly positive going into the second half of the day, though trade is getting a bit choppy above the VWAP.

Monday, July 13, 2009

07.13.09 - Up Move into Earnings

S&P 500 futures rallied impressively off their Sunday/ Asia trade lows, were rejected by their five-day moving average, then catapulted higher back through the recent head and shoulders neckline on what has evolved into very strong cumulative tick and advance - decline action. However, I see the NASDAQ 100 continues to struggle with R2 and we are in the afternoon doldrums momentum-wise.

As of the mid-day, it looks like we can carry this on through the afternoon session, though I wouldn't be surprised to see a last minute ditch with uncertainty remaining palpable. Today's graphic provides a look at one of my primary work spaces.

Saturday, July 11, 2009

ETF Rewind - Week 28 (07/10/09)

A quick look at the Relative Strength charts below highlights the divergence in performance we saw last week between the NASDAQ100 (QQQQ) and S&P500 (SPY). Nevertheless, both ended the week undeniably lower, with the QQQQs down -1.9% and the SPYs off some -2.1% for a fourth week of losses. In spite of the declines, a consolidation process on declining volume really only left Real Estate (IYR) clearly short-term oversold among the tracked sectors, as follows:

(Click Image to Enlarge/ Glossary)

Week Twenty-Nine of 2009 kicks off the opening of the potentially catalytic second quarter earnings floodgates and includes a very busy economic calendar, as follows:
Note that it is also options expiry, and that the last FOMC meeting minutes will be released. I suspect next week may prove seminal in setting the course of the market's next move -- one way or the other. Have a Terrific Weekend!

Never Investment Advice

If you are interested in a significantly more thorough version of this weekly summary, consider taking a look at Market Rewind's new nightly ETF Rewind Pro service (3-day trial). In addition to coverage of over 170 ETFs across twelve major asset classes, you will find three model portfolios, daily market signals and commentary, pairs trading and various portfolio management tools.

Friday, July 10, 2009

07.10.09 - Successful Higher-Low Retest

After filling the opening gap down, the NASDAQ100 (QQQQ) was predictably rejected by its declining five-day moving average. However, after re-probing those am lows at support just above the Wednesday lows, we saw some covering action against the easy trade and the Nas relative strength is bringing all the majors back up to their flattish volume weighted averages. Cumulative Tick and Advance Decline lines all look to be supportive of a healthier afternoon session, but keep any eye on action around that VWAP (& SPY S1)!

Never Investment Advice

Thursday, July 9, 2009

07.08.09 - Small Lift off the Pivot

We have seen a positive range between the opening highs and the daily Pivot. While cumulative tick, up volume and the AD line all look positive and I'm liking the leadership, we are testing the top end of that range now and momentum has been slow to build. Therefore, while still optimistic for a more positive close today, I am trailing stops on my long positions that have already reached their profit targets.

Quick Chart Study:

In answer to the chat room question -- long the overnight session/ short the daily in the SPY over a ten-year period, frictionless ($ scale):

Links from QE:

A few links for your chat guys that pertain to yesterday’s discussion:

On trading deep in the money options:





1930’s market environment:



Never Investment Advice

Wednesday, July 8, 2009

07.08.09 - Another One-Way Trade

After a weak and uneven opening bounce, the market turned sharply and has gone nowhere but south with momentum continuing to build to the downside. The market "should have" bounced by now, but there are no buyers to be found and we are clearly back to a day trader's bear market.

Post Market: Alright, did we ever leave that market (above)? Nice end-of-day reversal on volume, though, which I'd have liked better if it wasn't so overdue. AA beats, maybe we can juice that little-w bottom going into the weekend after this sizable rout.

Never Investment Advice

Tuesday, July 7, 2009

07.07.09 - Vix Gaining, Market Falling

At the midday, the market looks to test and possibly break yesterday's lows. Cumulative tick, the Advance - Decline and Down Volume all continue to break down as the Vix picks up steam. Yesterday the S&P found support at the 200-day moving average (today about $88.50). I have lower expectations for support on continued tests. A measured move on this nearly confirmed head and shoulders pattern would take us down to about $82. We'll see.

Potential Support/Resistance

Monday, July 6, 2009

07.06.09 - Struggling at Best

The market is struggling mightily near the June 23 lows. While the rate of decline is subsiding, we still see negative tick, A-D and down volume action. Interestingly, volume is the highest since that June 23 date as well. The Vix lies just over 30, up about five points from recent lows. However, note how the 200-day moving average of the SPY has provided a spring board. How is this for a "welcome back" from vacation!

Saturday, July 4, 2009

ETF Rewind - Week 27 (07/02/09)

(Click Image to Enlarge/ Glossary)

After alternating moves higher and lower, the S&P 500 (SPY) ultimately posted a moderate -2.2% loss late last week after a disappointing June jobs report [Link]. In fact, among the tracked Exchange Traded Funds, only the US Dollar managed to eek out a small gain of +0.3% during the Fourth of July holiday shortened week.

Week Twenty-Eight of 2009 kicks off second quarter earnings with Alcoa after the bell on Wednesday, as follows:

While last week's down move was extreme enough to provide some mild oversold readings, I would be quite surprised if the corrective move didn't have more room below early into the upcoming earnings season. The only good news there is that options insurance remains relatively inexpensive with the VIX (implied options volatility) still under 30. Have a Terrific Holiday Weekend!

Never Investment Advice

If you are interested in a significantly more thorough version of this weekly summary, consider taking a look at Market Rewind's new nightly
ETF Rewind Pro service (free trial). In addition to coverage of over 170 ETFs across twelve major asset classes, you will find three model portfolios, daily market signals and commentary, pairs trading and various portfolio management tools.

Thursday, July 2, 2009

Book Review: High Probability ETF Trading

Summer time is here and it's time to pick up a good book. Fortunately for me, I was recently provided with a reviewer's copy of Connors Research's new book, "High Probability ETF Trading".

You may recall Larry Connors from his early work applying non-traditional look-back periods to the otherwise common Relative Strength Index (RSI) indicator. In this book, he and lead researcher and co-author Cesar Alvarez take some of that early research to the next level with seven strategies designed to fade short-term overreactions in price. Here they focus on higher-liquidity ETFs as superior vehicles to gain exposure across broad asset classes with limited corporate/individual stock risk.

I believe that new and intermediate traders alike will especially benefit from the concepts presented in this book, particularly if they have been looking to delve into quantitative, mean-reversion based trading. As well as identifying high probability entries, readers will also learn the more nuanced arts of scaled entries and dynamic exits.

My only critical comment is that, like all mechanical systems, these systems would likely have performed differently during various historical periods (beyond the tested periods). It is naturally always important for traders to know current cycle periodicity and whether they are in trending or mean-reverting environments.

True to form for Connors Research, all the strategies are conceptually well backed, completely systematic, clearly described and quantified. That is a hard combination to come by among trading books. In fact, I note that today's big pre-Fourth of July move would have been caught by several of the systems. Highly recommended!

Amazon Link: High Probability ETF Trading: 7 Professional Strategies To Improve Your ETF Trading

Bad News Bears

Couldn't resist on this rare pre-Fourth jobs dump;
one of my favorite movies as a kid...
Maybe I'll rent for mine over the long weekend.
Not very PC huh? Well enjoy your weekend anyhow!

07.02.09 - Jobs Blues

CNBC paraphrased quotation of the day, "US investors ahead of the July 4th weekend are in the Red, with White knuckles, and singing the Blues..."

Markets were hit hard in the pre-market on the ECB jobs numbers, only to double dip on the US surprise. Although the VIX has leveled off just over 28, cumulative tick continues to deteriorate along with price, with the SPY now down over -2.30% (but Transports (IYT), Energy (XLE) and Discretionaries (XLY) all down more than -3%). That said, so far the SPY has found support well below the 50-day moving average near $90.20.

Not so sure I'd add to shorts if I weren't already in, but that tick doesn't presage well for the second half of the day. Volume is naturally very light.

Never Investment Advice

Wednesday, July 1, 2009

June 2009 Rewind - Seeking Analogues

June's toppy action played out within a wide congestive range, ultimately leaving the S&P 500 marginally higher for the fourth month in a row. Last month, the S&P 500, Dow Jones Industrials and NASDAQ 100 cash indices recorded mixed performances of +0.02%, -0.63% and +2.89%, respectively. For the first half of the 2009, that left them similarly stationed at +1.78%, -3.75% and +21.92%, respectively.

The monthly price action was characterized by an initial push higher, only to find stiff resistance near SPX 950 preceeding a strong mid-month correction. Nevertheless, by month-end price had retraced half of that fall and implied options volatility was at nine-month lows. News flow featured new oil highs, a slew of successful Treasury auctions, improved factory order, construction, housing, income and jobs numbers, and yet reduced global growth forecasts and the highest unemployment rate in some 25 years with many western states exceeding the 10% level.

Sector-wise, Materials (XLB) and Energy (XLE) came back hard, even as Technology (XLK) continued to plow ahead and Heathcare (XLV) caught a second wind. Style-wise, Small-Cap Value (PWY) stocks were the only real bright spot. This powerful recovery rally has left Price/ Earnings ratios quite rich. As positive as the economic tea leaves appear, if jobs and earnings can't also show supportive signs this July, the bulls may find that they lost more than their analogue television reception last month.

Sentiment: Mostly Positive
Volatility: Declining (VIX 25-32)
Direction: Sideways

[Click to Enlarge/ Additional ETF Analyses Posted on Market Rewind]

The Style-Box 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 Sector-Ribbon was calculated using the following Select Sector SPDR™ ETFs: Materials (XLB), Industrials (XLI), Energy (XLE), Staples (XLP), Discretionary (XLY), Financials (XLF), Technology (XLK), and Healthcare (XLV). 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.

07.01.09 - Low Volatility Day

The S&P500 has come back a full percent on the first day of the month and volatility has been very low just above R1. Internals are largely positive and the VIX is back down near 25 for new 9-month lows. However, Finanicals (XLF +0.33%) and Consumer Discretionaries (XLY +1.39 vs. XLP +2.22%) are lagging more than I'd like, and the 62% retrace continues to prove a difficult level to vault. Today marks the sixth day of higher highs on the SPY, hmmm...