The Investor Intelligence (investment advisors)bearish % stands at about 15%. This is the lowest bearish % reading since early 1987. That doesn't in and of itself mean the market will fall apart, but realize that this rally since March has gotten very mature and shifted opinion back to historic extremes of optimism and speculation by some measures.
The AAII (American Assoc. Individual Investors) showed a large jump in bullish % and a large drop in bearish % this week. It puts the bearish % at about a 3 year low and more than 2 standard deviations away from the 1 year mean. So this again shows that the shift in opinion about the markets has come nearly full circle since March.
The last couple weeks the total ratio of bullish opening transactions to bearish opening transactions in the options market has reached a point higher than any since early in 2000. This shows that bullish speculation (or possibly smart $ hedging) is historically high in the options market.
Also, NYSE short interest has remained very low at around 3% since late 2008 but has dropped off a bit further to 2.8 as of the this month. Again, the low short interest % shows that there is not much fuel for short covering and certainly not excessive bearish bets on downside in the underlying issues.
These are all longer time frame (several months or more) indications, so when I look at them together, I believe that winds of change are coming at least for a sharp correction in the coming month or 2.
On the flip side long term cash data remains a bit mixed and most large scale economic opinion surveys remain low which may be a contrary indication. I will note that those types of surveys have tended to rebound in optimism much more after prior historical recessions. So how that factors into what the markets will do I'm not sure. My take is that things are not significantly better (and almost certainly worse) in an economic sense than they were a year ago.
That whole analysis is not something I have much leg to stand on though. I will say that the main measure I have been following on a fundamental basis is the debt/GDP ratio and the total credit outstanding (large scale view of money supply). This year, after decades of credit expansion, the credit volume has started to turn down. Of course I can't know when it will end, but view this as the main economic phenomenon of importance.
Thursday, December 31, 2009
Tuesday, December 29, 2009
An Aside
True Intent of Health Care Reform
I typically don't get into much outside the market in this blog, but I thought I'd pass the above link on. Unfortunately I don't have anything to offer regarding this issue, but it is my general belief that the less we know, the more we will be taken advantage of and the less collective will there will be to resist what we find to be "wrong" for lack of a better word. So I just offer this as food for thought.
The above article is a reasonable example of the Dialectic process in action - directed fostering of opposing extremes (thesis vs. antithesis) followed by inducing conflict between extremes with the end goal of creating a new middle ground (synthesis).
I typically don't get into much outside the market in this blog, but I thought I'd pass the above link on. Unfortunately I don't have anything to offer regarding this issue, but it is my general belief that the less we know, the more we will be taken advantage of and the less collective will there will be to resist what we find to be "wrong" for lack of a better word. So I just offer this as food for thought.
The above article is a reasonable example of the Dialectic process in action - directed fostering of opposing extremes (thesis vs. antithesis) followed by inducing conflict between extremes with the end goal of creating a new middle ground (synthesis).
New SDS Trade - Short Term
Click on Chart to Enlarge60 min stochastics is coming down off a bearish divergence with price.
Click on Chart to EnlargeNYSE TICK showing a bearish divergence today indicating potential waning in the bullishness of large scale program trading.
Click on Chart to EnlargeThe S&P 500 cash and the Nasdaq Composite (COMPQ) formed nice doji's today at the upper bollinger bands. I have not shown the bollinger bands here, but one thing of note is that while the S&P is at new rally highs the upper bollinger band is not. This is a type of divergence that shows up some times at turns. Of course if the move up continues, then that band will probably move to new highs soon.
Mean reversion models that I follow were very overbought last week, but there was no sign of loss in momentum until today. There are a plethora of intermediate term red flags going up as well, and the overall picture is similar (or more excessive optimism) than all the prior substantial pullbacks during this rally.
New Blog Trade:
Buy SDS tomorrow/Tuesday with a limit order of 34.50. I am not posting a stop on this initially.
Monday, December 28, 2009
Cancel the TBT Trade Order For Now
Earlier today I had posted a limit order to buy TBT, an inverse Treasury Bond ETF. This was based off of analysis posted previously. However, today's session gives me pause enough to pull the orders for now, but no significant change in the larger outlook.
The chart above shows that the yield on the 30 year Treasury Bond broke above the neck line of the reverse head and shoulders pattern. However, today a nice looking doji formed and the daily RSI is oversold. Signals are mixed in that the ADX/DMI just signaled a new downtrend as the ADX rose above 20. So at this point I am expecting a bounce in bond prices before any potential trade.
There is also more to this whole issue that I haven't got into. But in brief, bonds prices have moved inversely to stock prices for the last few years. However, in recent months that correlation has started to wane significantly. At this point though, there is still a general inverse movement. On a longer-term basis, I think it is most likely for both stocks and bonds to turn down. That would probably confound many people. Also, it would likely be interpreted initially that the market fears inflation due to the demand for higher yields. But a study of the scarce historic deflationary periods would suggest that it is more likely fear of default of the underlying debt. In this case most likely foreign governments beginning to unload long term US bonds onto the open market while prices are still modestly high.
If that were to occur I can only presume it will build into a selling panic which will spike yields (hammer down bond prices) substantially. For those looking for income investing, there may be a good opportunity to purchase bonds at higher yields, but of course you need to make your own judgement on the prospects of our government defaulting on its debt given the mounting deficits and all that.
So for now the bond market is the main one I am looking at for a possible trade.
New Guidelines
With the new layout for the blog I am suggesting to basically look at the account as divided into 4 equal parts.
-25% will be devoted to each intermediate term stock index trade.
-25% will be devoted to each short-term stock index trade.
-25% will be devoted to any other market that may be tradable.
-25% will be in cash at all times.
In general the intermediate-term trades will be either 1x or 2x ETF's meaning they will have equal or double the volatility of the market in general.
The short-term trades will generally be 2x ETF's but occasionally may be a 3x ETF. This decision will take into account the current market volatility, among other considerations.
The other markets that I follow in depth are gold, oil, the Euro/USD currency pair, and Treasury bonds, and grains. So there may not always be a trade suggested here, but when opportunities arise, this will be how to take advantage of them.
My goal is to suggest long-only trades. So that means that I will typically suggest an inverse ETF rather than shorting the standard ETF. However, if there is a good reason I may suggest shorting at times. If that does not work for you, then just pass on those trades.
Most short-term trades will not have a suggested stop loss, because as I've said many times, this hurts the long-term performance of the trading strategy I employ for these. The intermediate term trades will typically have a stop loss. So the initial stop and subsequent modifications will be posted in the upper right hand portion of the blog homepage.
-25% will be devoted to each intermediate term stock index trade.
-25% will be devoted to each short-term stock index trade.
-25% will be devoted to any other market that may be tradable.
-25% will be in cash at all times.
In general the intermediate-term trades will be either 1x or 2x ETF's meaning they will have equal or double the volatility of the market in general.
The short-term trades will generally be 2x ETF's but occasionally may be a 3x ETF. This decision will take into account the current market volatility, among other considerations.
The other markets that I follow in depth are gold, oil, the Euro/USD currency pair, and Treasury bonds, and grains. So there may not always be a trade suggested here, but when opportunities arise, this will be how to take advantage of them.
My goal is to suggest long-only trades. So that means that I will typically suggest an inverse ETF rather than shorting the standard ETF. However, if there is a good reason I may suggest shorting at times. If that does not work for you, then just pass on those trades.
Most short-term trades will not have a suggested stop loss, because as I've said many times, this hurts the long-term performance of the trading strategy I employ for these. The intermediate term trades will typically have a stop loss. So the initial stop and subsequent modifications will be posted in the upper right hand portion of the blog homepage.
Sunday, December 27, 2009
New Blog Trading Layout
As I start typing this I am not sure what all I want/need to get into. But in the spirit of New Year's resolutions and all, I have decided to make some changes with the organization and layout of the blog that I considered doing in some fashion before, but never did. These are things that I believe will help to improve the blog overall and take advantage of more opportunities.
Blog trades have typically been short-term in nature (about 5 days hold), however, the market dynamics began changing significantly this spring as volatility continually pushed lower and the market began to trend more so than mean revert. Markets are designed to go up, and in downtrends price movement is typically volatile and not trendy. However, in major uptrends price trends more, is less volatile, and it makes more sense to hold for longer periods in the direction of the trend. But as the market pushes higher (and has been for several months) it is my perspective that the downside risk is becoming very substantial relative to upside potential. This has made me shift my trading time frame a bit in really only looking to "top pick" a major reversal.
Tops are hard to pick. They are lazy and round. Bottoms are much different, with climactic spikes and sharp "V" rebounds. So this spring as the market began to maintain upward momentum despite sentiment conditions that would have marked tops in the prior downtrend, I began to feel that focusing only on one time frame (short-term) was not ideal, but I never made a major change in blog organization to really clearly communicate this and better take advantage of it. So for the last 4 months I really have been in the situation of trying to top pick and not post trades taking advantage of the still prevailing uptrend. In retrospect, I have managed to get us in inverse trades right near every short-term top, they have all eventually given way to new highs and resulted in several stop outs.
So to cut to the chase, I am going to change the format to include both an intermediate term time frame trading section on stock indexes in addition to the short term trades that this blog was really built around. Also, I will include a section aimed at trading other asset classes. I can think of several times this year that I saw a very good opportunity in something like gold, oil, US dollar, or treasury bonds, but did not post a trade on it because it was not part of the modus operandi. In this new format I believe it will be possible to post a trade based off of an intermediate term outlook (say the market is topping) and maintain that trade, but continue to buy dips in the uptrend as long as conditions look OK, all with everybody understanding what is going on and not feel like all their eggs are in one basket, particularly if they disagree with my perspective.
With this new layout, I will not be posting stops nearly as often, but getting back to exiting purely off of indicators and controlling risk via % allocation to the trade and the leverage of the fund/ETF used in the trade.
I will go into specifics in the next post on the new layout. As a general rule though, you never want to risk more than about 2% of your account value of a given trade. Risk even less if your account is substantial like $20,000 or more, and aim to keep risk at about 0.5% if your account is upwards of $100,000. If your account is smaller then you could risk a little more per trade but not too much. Also, in that case, I would focus on the intermediate term trades until your account is larger (especially if you pay more than a couple dollars in commission per trade).
Also there is a new trade listed on the blog site right now, but I haven't had the time to post the details. So until, I get more time to post, you may want to check the blog website.
Blog trades have typically been short-term in nature (about 5 days hold), however, the market dynamics began changing significantly this spring as volatility continually pushed lower and the market began to trend more so than mean revert. Markets are designed to go up, and in downtrends price movement is typically volatile and not trendy. However, in major uptrends price trends more, is less volatile, and it makes more sense to hold for longer periods in the direction of the trend. But as the market pushes higher (and has been for several months) it is my perspective that the downside risk is becoming very substantial relative to upside potential. This has made me shift my trading time frame a bit in really only looking to "top pick" a major reversal.
Tops are hard to pick. They are lazy and round. Bottoms are much different, with climactic spikes and sharp "V" rebounds. So this spring as the market began to maintain upward momentum despite sentiment conditions that would have marked tops in the prior downtrend, I began to feel that focusing only on one time frame (short-term) was not ideal, but I never made a major change in blog organization to really clearly communicate this and better take advantage of it. So for the last 4 months I really have been in the situation of trying to top pick and not post trades taking advantage of the still prevailing uptrend. In retrospect, I have managed to get us in inverse trades right near every short-term top, they have all eventually given way to new highs and resulted in several stop outs.
So to cut to the chase, I am going to change the format to include both an intermediate term time frame trading section on stock indexes in addition to the short term trades that this blog was really built around. Also, I will include a section aimed at trading other asset classes. I can think of several times this year that I saw a very good opportunity in something like gold, oil, US dollar, or treasury bonds, but did not post a trade on it because it was not part of the modus operandi. In this new format I believe it will be possible to post a trade based off of an intermediate term outlook (say the market is topping) and maintain that trade, but continue to buy dips in the uptrend as long as conditions look OK, all with everybody understanding what is going on and not feel like all their eggs are in one basket, particularly if they disagree with my perspective.
With this new layout, I will not be posting stops nearly as often, but getting back to exiting purely off of indicators and controlling risk via % allocation to the trade and the leverage of the fund/ETF used in the trade.
I will go into specifics in the next post on the new layout. As a general rule though, you never want to risk more than about 2% of your account value of a given trade. Risk even less if your account is substantial like $20,000 or more, and aim to keep risk at about 0.5% if your account is upwards of $100,000. If your account is smaller then you could risk a little more per trade but not too much. Also, in that case, I would focus on the intermediate term trades until your account is larger (especially if you pay more than a couple dollars in commission per trade).
Also there is a new trade listed on the blog site right now, but I haven't had the time to post the details. So until, I get more time to post, you may want to check the blog website.
Thursday, December 24, 2009
Probable Trade Christmas Eve
Based on the market indicators from Sentimentrader.com, sentiment made a dramatic bullish jump today. The trade set-up from today did not materialize, but I will probably be posting a new trade tomorrow at some point.
If there is indicated a sizeable gap up, then I will probably suggest a trade on the open. If not, I may wait until the middle of the day, but I think action needs to be taken pretty soon here.
On this trade I will probably not suggest a stop loss, so review the basic money management for trades without stop losses. Also please keep in mind that those suggestions were all based on using 2x ETF's, but recently I have been suggesting the 3x due primarily an expected sharp and large move down. So if the trade is on SPXU then please adjust those suggestions down by 1/3, and of course err on the side of being conservative.
If there is indicated a sizeable gap up, then I will probably suggest a trade on the open. If not, I may wait until the middle of the day, but I think action needs to be taken pretty soon here.
On this trade I will probably not suggest a stop loss, so review the basic money management for trades without stop losses. Also please keep in mind that those suggestions were all based on using 2x ETF's, but recently I have been suggesting the 3x due primarily an expected sharp and large move down. So if the trade is on SPXU then please adjust those suggestions down by 1/3, and of course err on the side of being conservative.
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