When Short-Term Momentum Subsumes Long-Term Momentum

There's an old saw out there that when short term momentum subsumes long term momentum, you tend to see a change in price trend. Why? Because traders place more transactions than investors, and, thus, set prices. When a short term average overtakes a longer term average, what you're seeing is this fact in action. Over longer periods of time, investors tend to throw in the towel and stop arguing with traders, and once both are on the same page, so to speak, you've got yourself a trend.

Many traders look at moving averages to monitor these developements, using a fifty day exponential moving average (or EMA) to measure short term trading momentum, and the two hundred day EMA to measure longer term investing momentum.

Here's the story of the S&P 500. S&P depository receipts (SPY) started their historic nosedive in January of 2008 - which roughly corresponds with the moment the 50 day EMA dove below the 200 day EMA. Observe:

click to enlarge

And where do we stand today under this analysis? Nowhere interesting. The 50 day EMA is still nowhere near the 200 day EMA, and under this technical metric only, nothing today is technically different from January 2008.

What about the flip side, though? If long exchange traded funds (ETFs) that track the S&P 500 are sort of looking dull at the moment, how about "inverse" ETFs that short the S&P 500? These looking any good? You tell me.

No, Short S&P 500 Proshares (SH) looks like it is ready to fall off a cliff using this technical trading tool. And if so, that ought to correspond the S&P 500 going higher. Right? Well... sort of. There's a few flies in the ointment, not least of which being that short ETFs tend to exhibit significant performance lag. When they go down, see, they overdo it. The reason is that they tend to close out positions at the end of each day, unlike long-only ETFs. Due to this performance lag, you'd expect to see a far worse technical posture on a short ETF when it's going down in price. My view is that this can produce some false technical messages with inverse ETFs, so I view their technical signals with some skepticism. But I view them nonetheless.

How about the inverse Dow Jones? Dig this chart of Proshares ShortDow 30 (DOG):

Same thing. Yeah, and going abroad, what about inverse developed markets (Proshares Short MSCI - EFZ)?

No surprises here. And where it really gets nasty is when you look at the inverse emerging markets. Proshares Short MSCI Emerging Markets (EUM) is interesting to say the least:

Now, when it comes to the short side of the market, we're seeing a world of pain. Literally. The planetary short stock index is a technical basketcase. Maybe we are seeing a leading indicator of happy days ahead for those who happen to be long equities at the moment. Or maybe we are seeing a head fake thanks to the performance lag exhibited by short ETFs.

I do not know the answer to that question. But I do think I have a pretty good idea about what the upshot of all this might be. That is, it might not be an opportune time to load up on long equities positions at the moment, but it really doesn't look like a fabulous time to be holding oodles of short positions on equities indexes.

Disclosure: The author is long SPY.

Comments

[Alex Trias:]

Where are my trendlines!?!?!?!?!

May 29 02:43 PM

[Alex Trias:]

Trend lines, dammit, where are they?!?!?!

May 29 02:44 PM

[John Lounsbury:]

Alex - - -

I have found that if I submit graphics ad .jpg or .gif files, the trend lines and other notations don't get dropped.

I have been working on the tracking errors of ETFs. Will do an article soon. I will reference your article, you have some good thoughts on the subject.

Thanks for a good article. (I have been visualizing the trend lines virtually.)

May 30 10:11 AM

[John Lounsbury:]

Alex - - -

Please read "ad" as "as". Sorry.

May 30 10:12 AM

[jlevando:]

Alex,

you seem to be an insightful, articulate, well educated individual. Why in God's green earth, did you put such assenine, blue collar, scarring tatoos on your body? Do you know, without exception, people think that you did that in a drunken stupor and talk like a sailor. Shame on you.




On May 29 02:43 PM Alex Trias wrote:

> Where are my trendlines!?!?!?!?!

May 30 10:35 AM

[fwallace55:]

Those tatoos are very sexy...

May 30 02:40 PM

[Alan Young:]

Beautiful tattoos!! Surely the mark of a refined, artistic, and highly-individuated character. Can we get a bigger picture?

I'm puzzled by why you are analyzing short-ETF charts. The value of the short is derived from the value of the long, so when there is a disparity, it seems to me the long chart would provide better guidance. And with 70% of the planet in a bull market, it's a strange time to be looking for something to short.

May 30 02:44 PM

[H. T. Love:]

On May 30 10:35 AM jlevando wrote:

> Alex,
>
> you seem to be an insightful, articulate, well educated individual.
> Why in God's green earth, did you put such assenine, blue collar,
> scarring tatoos on your body? Do you know, without exception, people
> think that you did that in a drunken stupor and talk like a sailor.
> Shame on you.

Nah! Shame on you for "judging a book by its cover" and using personal bias as a standard.

I don't like tats, and never will have one. But they often mark a motivated, rebellious, independent spirit and I have no bias against *others* having them if they so desire.

My first take is there might be a really interesting person there, with a lot to contribute.

Of course, we all carry the biases with which we are raised, so I would definitely be alert if I ever met him! ;-)

HardToLove

May 30 05:15 PM

[Alex Trias:]

Well, I have a confession. Once upon a time, I thought I wanted to make a career as a kick boxer. Thought the tattoos would scare the pants off my opponents. They didn't. As you point out, everyone thought I got 'em in a drunken stupor. So, after it became painfully clear I would never thrive as a profesional (or even amateur) kick boxer, I went to Yale Law School (and no, I have no idea how I got in), got a degree, and trotted off to Wall Street in a nice starchy shirt. Which I determined to shed for the sake of this web page. Why, you ask? Because a picture of my back covered in a starchy white shirt is dull. And from the front, what can I say, I don't want any angry readers to recognize me walking down the street - particularly since, as previously mentioned, my skills as a kick boxer stink and only grow worse as I age. Hope this clears things up a bit for you.


On May 30 05:15 PM HardToLove wrote:

>

Jun 02 02:52 PM