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Bill L.
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Methodology: setups require certain criteria to be met before trades can be executed, which include weighted statistical studies on several indicators of price, breadth, volume, and sentiment . Amount of risk taken is proportional to how many indicators are aligned. I mainly trade market... More
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  • Retail All Aboard As Insiders Flee The Ship

    Last week I reported the NAAIM had seen some record breaking numbers regarding the bullishness of active managers. This week it looks like we have another record being broken, this time in mutual fund inflows by retail investors (from ICI, more on this below).

    I've received a few questions regarding several recent articles about the surging insider sales, and my thoughts on the matter.

    Insider sales is a statistic I track (data from Insider Insights), and my own research concurs with the above articles; the rats are fleeing the ship.

    Things always get interesting when retail investors are doing (or being told to do) one thing, meanwhile corporate insiders are doing another. Sales by insiders have been rising throughout most of this rally. Many pundits have been dismissing this as normal year end tax selling. The thing is, selling has not dissipated with the start of the new year, and has instead been rapidly increasing.

    If it was just "tax selling" it should have ended back in January, however insider sales have been surging. I've summed the largest buys and sales from insiders from the current month, both in numbers of shares, and in dollar amount. The results... insiders have been selling almost 11 shares for every 1 share bought, or have been selling $3 worth of stock for every $1 purchased.

    If graphed cumulatively, the results don't look any better... Thus far, there has not been a day this month that buy orders have even come close to matching the number of sell orders.

    (click to enlarge)

    So what's the public doing? According to ICI the past rolling 4 week sum for mutual fund inflows has hit a new all time record high. And why not? They're getting lots of advice to. According the most recent Hulbert Financial Digest, the current net recommendation is 64% long stocks. This has only been exceeded twice in he last 5 years (both of which turned into tops shortly after). Regarding bonds the current net recommendation is to be 50% short bonds. Readings for this magnitude generally lead to intermediate term bottoms in bonds. The aggregate message: get very long risk, get very short safety.... Right as the people most in the know regarding their own company's performance are dumping their shares.


    -Bill L.

    Disclosure: I am short SPY.

    Feb 07 8:03 PM | Link | 1 Comment
  • Monday, February 4th, 2013 - Short Term Update

    Bottom Line:

    The SPX had a small momentum breakdown today, filling in the final piece I was waiting for before initiating a short term trade on the short side.

    Price Action:


    (click to enlarge)

    Notes: I use momentum bands to help identify the long term trend and when the trend may be changing. Lets say we have a break down by price below the bands. That could mean the trend is changing. Lets say we have a break when oscillators are overbought. That increases the odds that the trend could be changing. Lets says we have a break below the bands, the break down occurs on multiple time frames (15 min, 30 min, 1 hour etc), overbought oscillators, breadth divergences, volume divergences, and extreme sentiment... you get the idea. A break down below the bands isn't so significant, but when more and more things line up, the greater the odds that momentum in price changing directions is more than just a normal fluctuation, but the start of a new trend. That's the situation right now.

    Indicator Summary:

    • Bullish: 9.1%
    • Neutral: 0%
    • Bearish: 90.9%%
    • Aggregate Interpretation: So most of the indicators are still best interpreted as bearish IF you allow of bearish divergences. So the actual indicators are evenly split 45-45 though if you read their exact position.

    Indicator Snap Shot:

    Percentage of Stocks Above DMA:


    (click to enlarge)


    (click to enlarge)

    Notes: Both of these are longer term indicators that can have pretty long cycles, meaning if this is the start of decline it could carry on for some time. Regardless of the duration of a correction, as they stand today, both are overbought and would argue in favor of declining prices rather than continued gains.

    NYSE McClellan Oscillator:

    (click to enlarge)

    Notes: The McClellan oscillator started diverging as the top was reached, and has quickly declined to the mean. It's rare in my experience for a decline to just suddenly stop at the mean, and it's much more typical that it proceeds into oversold territory, especially when the decline starts with a divergence.

    NYSE Advance - Line:

    (click to enlarge)

    Notes: The AD line illustrates my point perfectly, if you just read the position, it's neutral. If you allow for divergences, it's a bearish setup (because of the declining internal strength as the top was reached).

    NYSE Up - Down Volume:

    (click to enlarge)

    Notes: Up - Down volume follows the same pattern.


    (click to enlarge)

    Notes: Cumulative TICK has just come off a massive overbought reading.


    (click to enlarge)

    Notes: The 10 day TRIN also follows the divergence pattern. It didn't get quite as overbought on the second push to new highs. It's close to neutral now, but I think the best way to interpret this is a bearish divergence.


    Over all I think the setup here is bearish and today enough pieces came together to make me take a shot on the short side. As usual, the use of stops is pretty much mandatory. I always predetermine my stops based on price history, volatility, and how much risk I'm willing to take on. Then my stop is placed right after the trade confirmation flashes on my screen. Risk management is probably the most overlooked aspect of trading. Everyone wants to know how to spot entries, pattern, what to analyze, what's the best indicator. No on talks about what's the best way to take your losses. But it's just as, if not more important.

    Good Hunting,

    Bill L.

    Disclosure: I am short SPY.

    Feb 04 6:26 PM | Link | 1 Comment
  • Initiating A Short Trade

    People have been asking for real time setups, rational, explanation, so here you go:

    (click to enlarge)

    Taking a shot on the short side today if we can clear the current level of support (highlighted as a green rectangle). The SPX has broken through some momentum bands (which I use to initiate trades, identify the trend, and create stops), and has done so with a growing list of technical indicator divergences, as well as with some pretty extreme senitment figures. The two levels of resistance overhead can be used for stops of your choosing depending on risk tolerance, position size etc.

    My long term trend model still says we're in a cyclical bull within a secular bear, so short trades should be given less tolerance for failure. Meaning, smaller position size, or tighter stops, of a combination of the two.

    Full update tonight.

    -Bill L.

    Disclosure: I am short SPY.

    Feb 04 4:02 PM | Link | 2 Comments
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