Saturday, January 31, 2009

ETF Rewind - Week 5 (01/30/09)

(Click Image to Enlarge/ Glossary)

With all its ups and downs capped off by the most negative GDP report in some thirty years, the mixed week certainly felt worse than it actually was (LA Times - GDP Worst Since 1982). In fact, while the S&P 500 (SPY) closed down -0.3%, the Nasdaq 100 finished modestly higher (QQQQ +0.6%). Meanwhile, Precious Metals (DBP) continued its upward trajectory by +3.9%, as the US Dollar also moved curiously higher (UUP +0.3%).

Week Six of 2009 features the following busy reporting calendars, including the jobs report on Friday, and an increasingly heavy earnings season:

Markets have been understandably sensitive to every new report on the progress of the "Stimulus Plan" and "Bad Bank," so traders will naturally be following developments there very closely -- you should too. Enjoy your weekend and... the Big Game!

Never Investment Advice

January 2009 Rewind - The Inaugural Fall

January was a month of great anticipation leading into the New Year and the Presidential Inauguration. However, inaugural balls were soon followed by market falls, as bailout and earnings uncertainties quickly overwhelmed early optimism. This January, the S&P 500, Dow Jones Industrials and NASDAQ 100 cash indices got off to a rocky start, posting major losses of -8.57%, -8.84% and -2.59%, respectively -- reportedly the worst January for the Dow in 113 years.

Economic news for the period featured massive layoffs last seen during the World War II era, Treasury Secretary Geithner's protracted confirmation on alleged tax "discrepancies," ever evolving rumors of a "bad bank" asset purchase program, the controversial $820-plus billion "stimulus" program, mostly negative earnings, and the worst quarterly Gross Domestic Product reading since the early 1980's.

Style-wise, Large-Cap Growth stocks outperformed (PWB -3.1%). Sector-wise, Healthcare and Energy held relatively fast (XLV -1.2%/ XLE -1.8%), as the Industrials and Financials finished significantly lower (XLI -12.0%/ XLF -26.2%). While there is always a chance for an oversold rebound ahead, one has to wonder how much we can reasonably expect from a market whose "belle of the ball" remains the proposed extent and developmental status of various government relief programs.

Sentiment: Mixed
Volatility: Moderate-High (VIX 38-57)
Direction: Negative

[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.

Friday, January 30, 2009

01.30.09 - Absolute Truth Trumps

Even with GDP coming in ahead of the estimates, the hard truth of the worst decline since the early 1980s was too much for the a.m. trade to handle. And we were still faced with some pretty serious downward momentum from Thursday's trade.

All that said, price found a floor precisely at today's R2 level (SPY $83.05) and has been on an upward path ever since, putting us just past the VWAP as we recapture half of the morning losses. The AD and Cumulative Tick lines are confirming this move.

Introducing the iPath VXX

Looks like Barclay's VXX, a VIX Futures ETN, is up and trading. You can bet I'll be watching for Bill Luby's analysis -- no doubt already in the works! Meanwhile, here is how it's looking on the day [UPDATED CHART]. Certainly a good one for tracking tests!



And, just for kicks, here is the VXX versus the SDS, the double inverse S&P500... hmmm...



Barclays:

"The S&P 500 VIX Short-Term Futures™ Index TR is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. Specifically, the S&P 500 VIX Short-Term Futures™ Index TR offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500® Index at various points along the volatility forward curve. The index futures roll continuously throughout each month from the first month VIX futures contract into the second month VIX futures contract.


A direct investment in VIX (commonly referred to as spot VIX) is not possible. The S&P 500 VIX Short-Term Futures™ Index TR holds VIX futures contracts, which could involve roll costs and exhibit different risk and return characteristics. Investments offering volatility exposure can have various uses within a portfolio including hedging, directional, or arbitrage strategies and are typically short or medium-term in nature."

Thursday, January 29, 2009

01.29.09 - Back Under the Five Day

Yesterday's action left us technically overbought and vulnerable to today's jobless claims report. After bouncing twice off the intra-day five-day moving average, we have broken below that and continue to drift lower, now just under S2 (SPY $85.20). The cumulative tick and AD lines remain weak, and so I remain hedged. However, the VIX is up only slightly to about 42. I'll be looking for prospective support near $84.75.

Never Investment Advice

Wednesday, January 28, 2009

01.28.09 - Ten Day Highs on the Gap

We are at ten-day S&P 500 highs after this morning's +2.2% gap higher [SPY], ostensibly on 'bad bank' and stimulus plan news. This puts us prospectively within overbought territory with an RSI-2 of 95+ just under the fifty-day moving average. The 50-DMA coincides with today's second floor trader resistance level of about $86.90, and these are proving difficult for the market to overcome at the mid-day in spite of an exceedingly strong cumulative tick and VIX readings under 40 at the open.

Lastly, don't forget we are getting an FOMC policy statement today at 2:15pm EST. Zero interest rate or not, traders will be looking closely at that text. Reading:

o Quantifiable Edges - Gap Closure Study

Tuesday, January 27, 2009

Three types of banks...

Come on Washington [link] -- quit lollygagging and get it done!

(P.S. - Comment on ticker candidates for the above...
if not I'll assume they're all ugly!)

01.27.09 - Up Day on Down News

The markets are attempting to recapture yesterday's highs on very strong tick, advancing volume and an increasing level of advancers against a falling VIX (43). However, we are struggling to break the upper bounds above SPY $84.60 and have put in a short series of lower lows. Watch the rising VWAP (about $84.20), then Pivot ($84.00) for successive support if we can't break through.

Monday, January 26, 2009

01.26.09 - Support above R1

The S&P500 has found support above its broken resistance line of $84.40. This leaves the five-day moving average headed upwards for the first time in about eleven trading days. However, we have some mixed market internals with the VWAP flattened and the Advance-Decline line trailing even as Tick and Advancing Volume continue to increase.

Saturday, January 24, 2009

ETF Rewind - Week 4 (01/23/09)

Table Graphic Fixed!
(Click Image to Enlarge/ Glossary)

The holiday-shortened inaugural trading week brought us yet another downleg into the depths of the multi-month trading range on renewed banking fears, leaving the S&P 500 (SPY) down an added -1.5%, while Precious Metals (DBP) catapulted +10.6% higher.

After nationalization threats for England's banks (Guardian - Too Late for England's Banks?), the US Financial Sector (XLF) fell another -9.9%. However, for the first time in a while, we saw a divergence among the sectors with Energy (XLE +1.9%), Utilities (XLU +1.5%), Healthcare (XLV +0.9%), and Technology (XLK +0.3%) all finishing modestly higher. Large-cap Value stocks also moved up on the week (PWV +0.7%) in spite of the difficulties in the financial group. Lastly, note in the chart below how, despite the downward price movement, short-term RSIs attempted to register a mild bullish divergence.

Week Five of 2009 features the following busy reporting calendars, including an Federal Open Market Committee meeting within the increasingly heavy earnings season:

Traders next week will undoubtedly deconstruct the language of the FOMC policy statement as they continue to track the progress of the proposed follow-on stimulus bill (Reuters - $825B Bill Progresses) and new Obama administration proclamations (Bloomberg - Obama Signals Bank Restrictions). The rioting over the failure of the Icelandic banks and government will also be watched, mostly as a curiosity at this point (Mail - Icelandic Government Brought Down), even as the third US bank failure of the new year is announced (Bloomberg - First Centennial Shut).

This continues to be a very volatile, news driven environment -- trade accordingly, and... enjoy your weekend!

Never Investment Advice

Friday, January 23, 2009

01.23.09 - If this is a bottoming process...

...it's a darn painful one. For the n-th time we have retested the SPX 800 level and held on bad news. While I'd say lower prices are still in play, for today the upward sloping VWAP is proving strong price support and tick remains positive for the time being.

What I especially like seeing, is a flattening of the five-day moving average and positive action in the Financials [XLF +1.4%] and Semis [SMH +3.7%] on the day. Now we just need to break through that pivot, which has been upside resistance at SPY $82.64.

Thursday, January 22, 2009

01.22.09 - Tick Attempting a Turn

Cumulative Tick is attempting to turn around at the mid-day as the S&P500 managed to find support near S1 ($81.50). If we can hold here, it would be a welcome second consecutive higher low [add: considering aftermarkets]. Cycle-trend traders are making a killing this week. Meanwhile, this continues to be a heavily news influenced market. Watch S1 and the VWAP closely (just pierced). GOOG on deck tonight. The whisper number is at $5.00 versus expectation at $4.25...

Never Investment Advice

Wednesday, January 21, 2009

01.21.09 - Round Trip

The S&P500 [SPY] is struggling to hold onto gains with significant resistance at its Volume Weighted Moving Average (VWAP) after retracing all the way back down to yesterday's lows before a minor recovery. At the low we saw a nice supportive volume spike, which proved a turning point. Since then there has been a pattern of higher lows and highs as the VIX has moved downward and Advancing Volume upward. Meanwhile, Cumulative Tick is relatively flat, albeit negative on the day.

While we remain oversold, it still "feels" like the market could break either way here. I'll be watching price action near the VWAP and daily Pivot very closely ($81.88). The Geithner grilling will probably have to end before we break out of this range one way or the other.

Never Investment Advice

Tuesday, January 20, 2009

01.20.09 - Heading Towards a Retest

With the passing of presidential powers now complete, it is clear that we are heading towards a retest of Thursday's lows for the S&P 500 (that was at SPY $81.72). Leading the plunge, the financial complex (XLF) is back well below its November '08 lows, now down over -9.8% on the day. Although the recent pattern has been for a late day reversal, over longer periods of time and with tick and negative volume as bad as they are, I think it best to wait days like this out when considering counter-trend plays.

12:10PM PST - We've broken out of the trading range and are into November 20/21 territory. It it very difficult to draw support at this point. I probably will nonetheless cover my hedges at the close and reassess in the morning just based on the extreme range of the move. I will not play any added long, however. This is not normal market behaviour and it's not worth the risk in my mind.

Never Investment Advice

Monday, January 19, 2009

Weekly ETF Rewind - Week 3 (01/16/09)

(Click Image to Enlarge/ Glossary)

While last week removed near-term oversold conditions, this occurred largely through time as opposed to price, with the S&P 500 falling -4.5%, primarily on reemerging fears in the financial complex (PBS - Citi Splits & Bank of America Gets a Bailout). That sector (XLF) finished the week down -16.3%! As has often been the case of late, only Treasuries (TLT) and the Dollar (UUP) came out ahead, up +1.4% and +1.1%, respectively.

Week Four of 2009 features relatively light economic reporting, but earnings will pick up significantly, as follows:

While there is undeniably a great deal of popular optimism ahead of tomorrow's presidential inauguration, I remain reluctant to trade in much size on the long side. In addition to the swearing in, traders will also be monitoring developments in banking here and overseas (Bloomberg - RBS Plummets; Europe Trades Down), as well as the proposed Fiat investment in Chyrsler (Bloomberg - Fiat may take 35%). I hope you are enjoying your long weekend!

Never Investment Advice

Friday, January 16, 2009

01.16.09 - Gap Fill Plus

Cumulative Tick peaked into the second hour and price soon followed suit, quickly closing the opening gap. With the AD line also falling and declining volume moving higher on greater total volume, there is no sign of support in any technical quarter. The financial sector is down nearly -6.5% as of this writing [XLF]. This actually leaves the financials below their 2008 November closing lows. S&P500 S1 at SPY $82.7 may provide temporary support [SPY], we'll see.

11:00AM PST - Everything is headed higher for the time being. With the long weekend and lots of news risk still out there (i.e. Barclays et. al.) on this options expiration Friday, I'd still play it safe as we come back up to the confluence of the declining 5 day moving average, VWAP and yesterday's close (say SPY $84.60). Sounds like the three bears, eh? Just something to keep an eye on; the VIX is moving back down.

PIMCO's Bill Gross on damage to bank balance sheets nearing an end [LINK]. Hope you've been following twitter today; started putting some hedges back on. That was a scary retest by the financials today no matter how you look at it. I'll happily lift them next week if all looks clear (per Bill!).

Never Investment Advice

Thursday, January 15, 2009

01.15.09 - Market Can't Catch a Bid

It feels like we've been reliving the same day ever since the ninth as we set up for the seventh consecutive day of lower average prices. If we were near the bottom of the recent trading range yesterday, we are now officially right there at SPY $82 (save November 20/21). While I'm looking for places to get long for a counter-trend swing trade, it seems this market needs some catalyst to break out of this extreme negative news cycle. Also, don't forget that tomorrow is options expiration.

11:45AM PST - Either we got bored of moving down, or the TARP add-on vote, stimulus plan and Bank of America guarantee news have proved to be the catalysts I was looking for. Your call! Volume is fairly heavy and I'd suggest we are seeing a combination of real buying, short covering and some reallocation trades all at once. I started trimming my longs at the pivot (SPY $84.65), but will now hold onto the balance of my exposure and reasses at tomorrow's open [add: although I am now trailing stops on my added longs].

Never Investment Advice

Wednesday, January 14, 2009

01.14.09 - Retail Knock Out

After a fairly strong after-session performance through the midnight hour, the S&P500 futures began to tick down and then cascaded lower over -3% on retail sales below expectation by two. In spite of a bearish technical bias last night, I thought we may see a bid today; this type of action reaffirms the need to play it light with counter-trend trades ahead of news risk during a bear market.

Although the SPY has found support just under $84, thus far we have seen a lackluster sideways drift below the VWAP on increasingly negative declining volume and tick action, and the VIX over 50. I have been doing some selective buying, but won't do so in size until intra-day indicators improve. However, I may consider more long exposure overnight on a lower close. Meanwhile here are two studies to review

o Quantifiable Edges - Big Gaps Down
o Market Rewind - Persistently Low RSIs (Now Day-3 <10)

Beige Book

"Overall economic activity continued to weaken across almost all of the Federal Reserve Districts since the previous reporting period. Most Districts noted reduced or low activity across a wide range of industries, although a few Districts noted some exceptions in some sectors..." [LINK]

Tuesday, January 13, 2009

01.13.09 - S&P Higher Lows & Highs

Even as the Dow (DIA) and Nasdaq 100 (QQQQ) go sideways. Also, in spite of the blog title pattern, the S&P500 (SPY) has been challenged by its daily pivot at $87.60, which has proved key resistance. Although the level of advancers is strong, tick is fairly flat and is actually below levels commonly seen in the last twenty days. There just isn't a lot of steam behind this move. Maybe later in the day if we can hold it together. Meanwhile, watch that VWAP.

Monday, January 12, 2009

01.12.09 - Weakness Follows Through

Pre-earnings jitters follow-on the Friday jobs report weakness and we got a gap down after all. I will look for increasing S&P500 support between SPY $86.50 & $87.50. Cumulative tick remains very weak at the mid-day.

11:50AM PST - Market is approaching S2 ($86.80), but with Tick as negative as it is, I'd stay away with longs and reassess at the close.

Close - Taking a long swing trade at SPX 865 on oversold conditions, but keeping size small. Lots of specific news risk around earnings in the weeks ahead and we are in options expiry week in what remains a relatively shallow volume environment.

Never Investment Advice

Sunday, January 11, 2009

Sinclair's Volatility Linkfest

Every few months I like to dig into a new trading book and occasionally come up with a winner. Right now I'm just getting into Euan Sinclair's well written "Volatility Trading." While I'd say it's generally an introduction to intermediate level topics with some solid mathematical backing, it does cover them quite well and includes a breadth of subjects from volatility measurement and forecasting, hedging, money management and trade evaluation, to psychology.

I also thought his "useful web sites" list was very good, as follows:

  1. http://www.nuclearphynance.com/ - A quantitative trading forum.
  2. http://www.gummy-stuff.org/ - Peter Ponzo's mathematics finance site.
  3. http://www.ssrn.com/ - Social Science Research academic papers.
  4. http://www.nber.org/ - National Bureau of Economic Research archive.
  5. http://www.behaviouralfinance.net/ - Papers organized by topic.
  6. http://www.unifr.ch/econophysics - More statistical finance papers.
  7. http://citeseer.ist.psu.edu/ - Backward citation reference links.
  8. http://www.ivolatility.com/ - Historical options data.
  9. http://www.earnings.com/ - Historical earnings release data.
  10. http://finance.yahoo.com/ - My personal finance portal, an inch deep but a mile wide and free to boot.

Saturday, January 10, 2009

Weekly ETF Rewind - Week 2 (01/09/09)

(Click Image to Enlarge/ Glossary)

The second week of 2009 took back about half of the New Year's rally, leaving the S&P 500 down -4.2% on the worst jobs reports in some sixteen years indicating the unemployment rate to now be about 7.2% [Chart] (Bloomberg - Biggest Job Losses Since 1945). Week Three of 2009 features holiday retail sales and various price index reports, among others, as follows:

As we head towards the US presidential inauguration, traders will no doubt be keeping a close tab on the first fourth quarter earnings announcements, Citigroup's merger talks with Morgan Stanley (Bloomberg - MS & C $3B Merger), and developments in the Middle-East alike (AP - Gaza Escalation).

Lastly, note below how the overbought readings from just last week have quickly turned to near oversold. Back to the table above, last year's leading Consumer Staples (XLP) group looks particularly enticing for a short-term trade on an RSI reversion basis. Financials (XLF) are a close second, but in both cases news risks outlined above may impact these opportunities, so I'd play it safe until there is confirmation. And as always, enjoy your weekend!

Never Investment Advice

RSI-mon Sez ~ Falling RSIs, Think Ahead!

As a follow-on to Market Rewind's recent post on the overdue nature of this pullback, by request and thinking ahead with the Spider's (SPY) RSI[2] having fallen quickly to 12 or so, here are the historical odds of a next-day higher after successive RSI[2] readings below 10:


Note the immediately higher odds of a next day gain with a dip after sustained selling pressure before jumping back higher still. Also note that, in comparison to the prior post, oversold readings under 10 have historically been outnumbered and outlasted by overbought readings above 90. This is expected given the positive long-term drift of the markets. Lastly, a neat little RSI widget is embedded below for your own experimentation and future use.



Postscript: The pending ETF Rewind presents a five-day history of short-term RSIs for nearly 170 ETFs across nine major asset classes. How great is that!

Friday, January 9, 2009

01.09.09 - A Fall; A Floor

Lost track of the clock, though it's not like anything is happening. In the pre-market just before the jobs announcement, the S&P 500 moved up to its declining five-day moving average, then summarily dropped all the way down to the SPY $89 level. As expected, this level is initially providing strong support at the confluence of the flattened 20 & 50 day moving averages. So far this is holding, though repeated rebuffs by the falling VWAP don't bode well. That said, tick is flattening and the VIX appears stable; lower, in-fact, than yesterday's close. You know I don't like narrow ranges -- I'd suggest going into the final hours we could break either way with a downside bias.

Never Investment Advice

Thursday, January 8, 2009

01.08.09 - Possible Post-Gap Accumulation

After a near 1% gap down at the open, the S&P500 has found support just above S1 (SPY $89.80) and the VIX appears to be stabilizing near 43. While the daily VWAP has mostly flattened, positive Tick and AD line slopes are suggestive of possible accumulation at this level. However, Energy (XLE +0.46%) is once again the day's big winner, volume is light, down volume continues to outpace, and the big jobs report is out tomorrow, so I'll be playing it safe into the close even as I trim hedges a tad here.

Reading:

o Quant Edges - Weakness Begets Weakness
o MarketSci - TM's VIX 5% Rule

Never Investment Advice

Wednesday, January 7, 2009

RSI-mon Sez ~ This Pullback Was Overdue!

Looking down my blogroll, I see that the wise and thorough 'Woodshedder' has beat me to the punch with an excellent post on this topic, so I will keep this brief.

As you will note below, the odds of a next-higher day fall precipitously compared to average for each successive day that the S&P500 RSI[2] exceeds 90. We had had readings over 90 for the last four days; nearly five by a hair counting December 30th's 89+ reading. As has been discussed extensively throughout the financial blog-o-sphere (most notably over at MarketSci), the mean-reversion versus trend tendency has strengthened since the late-nineties.



Postscript: The pending ETF Rewind presents a five-day history of short-term RSIs for nearly 170 ETFs across nine major asset classes. How great is that!

01.07.09 - First Negative Tick in 5-Days

In a sense, the shocking ADP jobs report gave an excuse for the market to take some pressure off its overbought condition. A few days ago it probably would have rallied on "further signs of a pending bottom!" As noted in last night's ETF Rewind, the SPY RSI-2 reading had been over 90 for five consecutive days, this was an incredible statistic. I will post a mini-report on this ahead [POSTED].

For now, we are holding just below S2 (SPY $91.80) on negative cumulative tick, increasing down volume and a moderately rising VIX. Should we sell off more today or later in the week, I would anticipate potential support near $89.00. Continue to keep an eye on movement around and off of the now flattened VWAP. And if you think our 2% drop is something, take a look at India (IFN), down over 7% on reports of major accounting fraud.

Recommended Blog Series: MarketSci on TradingMarkets,

1. Buy New Lows, Not New Highs
2. Buy the Market After It’s Dropped Not After It’s Risen
3. Don’t Fight the Long-term Trend

Never Investment Advice

Tuesday, January 6, 2009

01.06.09 - Sideline Fear


It's bullish to see the market get taken up ahead of news risk, even if it was too much too fast given the results. In spite of the first reaction back down, a quick glance at bond rates suggests continued rotation back into equities on rebalancing and institutional fears of missing out on an upswing.

Since the morning pullback to the daily pivot, we have seen nothing but a series of higher highs and lows, and cumulative tick looks very strong (as it has all day long) as we now pierce R1. Volume looks to be picking up and while the Semi's are bullishly leading (SMH +4.5%), note the second place runner up, Energy (XLE +2.6%) again!

I'm certainly encouraged by what I'm seeing and while SPY $100 looks increasingly in reach, I am not inclined to chase it with anything more than day trades just yet.

[December FOMC Minutes]

The economy is weaker than expected -- let's bid up the market! Adjusted cumulative tick remains very strong going into the final hour.

  • "The information reviewed at the December meeting pointed to a significant contraction in economic activity in the fourth quarter."

  • "Available forward-looking indicators pointed to a significant downturn in manufacturing output in coming months."

  • "Several indexes indicated that house prices continued to decline substantially."

  • "All told, real GDP was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year as the stimulus from monetary and assumed fiscal policy actions gained traction and the turmoil in the financial system began to recede. Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly above the rate of potential growth in 2010. Amid the weaker outlook for economic activity over the next year, the unemployment rate was likely to rise significantly into 2010, to a level higher than projected at the time of the October 28-29 FOMC meeting."

Monday, January 5, 2009

ETF Risk in Review

As I sat down to write this article relying on last Friday's closing ETF Rewind (still in beta), at first glance I have to admit that the annual Sharpe Ratios made no sense to me whatsoever. How could Financials (XLF) be in the middle of the pack! Surely I had checked and rechecked the math!

Then came the "aha" moment (sometimes we need to relearn old lessons, no?). Traditional risk-reward measurements may produce absolutely nonsensical results in broad negative return environments -- but, I'm getting ahead of myself.

By now you have undoubtedly read the thousand-and-one blogs on 2008 relative ETF return rankings, but how did they fair on a "risk-reward basis"? This is the focus of the table below, as follows:


If one thinks of each ETF as a miniature strategic portfolio in and of itself, the savvy investor may consider not only the raw returns of that portfolio, but also how much return it provided for each unit of risk. The statistical out-takes above cover a number of risk and risk-reward measures, including: Beta, Historic Volatility, Sharpe, Sortino and Omega ratios, as further described here (the nightly ETF Rewind file covers nearly 60 key statistics).

Getting back to my opening comments, let's focus on the Sharpe Ratio, which is defined as Excess Returns (subject asset returns less risk-free returns)/ Risk (the standard deviation of the subject asset returns). In a positive return environment, a security featuring relatively higher returns and lower risk receives a higher ranking. In the "biz", results approaching or exceeding +2.0 are considered especially good.

Now let's imagine that ratio in a negative return environment... more volatile securities are rewarded rather than punished, receiving relatively higher/closer to zero rankings (think, for example, -10%/1 risk unit versus -10%/2 risk units)! The simple solution to this problem? Modify the traditional calculation by raising the volatility denominator for all assets with negative returns to the power of -1. Last year that just about covered the waterfront -- unlike prior recessionary bear-market periods, there was nowhere to hide in 2008 (alright, except cash)!

The table above is sorted by Sortino Ratio, which is similar in construction to the Sharpe, but only penalizes returns for downside volatility, as similarly modified to accommodate last year's net negative return environment. Do any of the results surprise you? Last year's deflationary recession trade is well described and all is right in the world again!

The Momentum Persistence effect remains largely unexplained by Efficient Market Hypothesis proponents. The 2007 year-end risk-reward review provided key forward looking clues towards both the intermediate and ultimate outcomes for 2008. Take a close look at last year's table, recalling that early on stagflation remained a primary concern even as the full scope of the financial industry woes was yet to emerge.

You'd better believe that I'll be tracking this year's list and its constituent rank evolution over this and shorter time frames very closely.

01.05.09 - Intraday Double Top?

I think we may have seen a double-top on the day against large resistive volume spikes on each effort to break SPY $93.30. This is against the backdrop of widespread overbought readings (see Weekly ETF Rewind). I am also noting that the energy complex is largely floating this boat (XLE +2.59%)...

Countering that technical crystal ball effort, cumulative tick and advance decline lines have been consistently positive sloping, albeit mildly so, and the daily pivot provided strong support at $92.00. Therefore, I would still not get too aggressive on shorts until either the VWAP proves vulnerable and/or the daily indicators turn definitively south. Lastly, I will look to close my profitable TBT trade on any turn in fortune. Obama tax cuts, hmmm...

Never Investment Advice

Saturday, January 3, 2009

Weekly ETF Rewind - Week 1 (01/02/09)

(Click Image to Enlarge/ Glossary)

The first week of 2009 provided traders with a powerful rally over just four short days, leaving the S&P 500 up +7.3%. A good portion of this move came on the first trading day of the new year, flying in the face of the leading ISM Manufacturing Index reported at generational lows (Top News - Manufacturing at 28-Year Lows). Week Two features market moving Auto Sales and key Employment reports, among others, as follows:

To this writer, the most remarkable impression from this first week's table is just how overbought almost every tracked security is along multiple time frames, as measured by 'Price Index' readings in the high 90s (also see the RSI time-series below). The only real exception being long-term bonds, which finally hit a wall on the mini-rotation back into equities (TLT:RSI[2]=7).

In addition, the VIX (implied options volatility) remains bearishly stretched below its near-term moving average, and don't forget that last week's trade came on exceptionally light volume. While we remain in a bullish period and the Price Level readings are somewhat inflated by our emergence from a relatively narrow trading range on reduced volatility, caution would appear to be in order for the days ahead. Enjoy your weekend!

Never Investment Advice

Friday, January 2, 2009

December 2008 Rewind - Holiday Cheer...?

By the end of a month featuring ever declining volatility and a relatively benign close, it was easy to forget that December began with the fourth worst trading day in the history of the markets and some of the worst economic news recorded in a generation.

This December, the S&P 500, Dow Jones Industrials and NASDAQ 100 cash indices posted mixed results of +0.78%, -0.60% and +2.18%, respectively. For 2008, that left the indices down -38.49%, -33.84% and -41.89% from their respective 2007 closes (-36.79%, -32.44% and 41.73% with dividends), capping off the worst annual market performance since the 1930s.

However, on balance sentiment for the period was characterized by an increasing sense of optimism for the new year and change of leadership as the Obama administration filled out its economic team, the Federal Reserve cut target rates to historic lows, and an automotive bailout was ultimately engineered by the Whitehouse after a failed Congressional attempt.

All this was against an otherwise extremely negative news cycle, including relentless corporate layoffs, the highest reported unemployment rate in 15 years, an official NBER recession call, dismal auto sales, the Madoff scheme, and numerous overseas conflagrations. In spite of the global tensions, oil actually moved down to the low $30 per barrel range on stockpiling and the weak economic news. Likewise, the VIX (implied options volatility) ended the month at 40 after being nearly double that only a short while ago.

Style-wise, Value stocks strongly outperformed, while Sector-wise, Healthcare and Consumer Discretionary stocks moved higher as Energy, Material and Financial stocks finished lower. While we are off to a great start here on the first trading day of 2009, we are coming into the year highly overbought on a near-term basis. That said, we have a full 250 trading days ahead of us -- here is wishing you a happy and profitable 2009!

Sentiment: Optimistic
Volatility: Declining (VIX 40-68)
Direction: Mixed

[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.

01.02.09 - Sideways Trade After Morning Run

Don't be fooled though, the Cumulative Tick is marching steadily higher and there is always a trend-day risk to shorts of a second leg higher into the close. The Trader/Investor dilemma is that we have a bullish day internally in a bullish time of year after a 20-day/ 50-day moving average breakout to the upside even as short-term oscillators are increasingly overbought.

We do seem to be finding a bit of resistance at the top of the recent trading range here, however. The only answer I have is to stay away from the net fade trade until we have clearer evidence of a breakdown, but consider increasing hedge positions as we move higher.

In intermarket news, oil is up sharply (USO +7.15%) and bond rates are finally catching a bid (TNX +1.92%). The dollar is up (UUP +0.40%) and gold, not surprisingly, is down (GLD -0.25%). The VIX has amazingly broken 40, at 37.66.


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