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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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  • Tuesday, January 15, 2013 - Short Market Comment

    Not much to report today as most of the indicators look almost identical to yesterday's report. So instead I'll pass along some information sent to me by another trader. A friend of mine tracks the TSE's weekly release of trading information, in particular, the trading activity of margin traders. Those who trade on margin rarely do well, and when they do, it's generally a sign of an impending top rather than continued good times. It might seem like a stretch that the P&L of Japanese margin traders is correlated with the peaks and valleys of the S&P, but just upon a visual inspection there obviously is some correlation. Furthermore:

    • This is the closest to break even that margin traders have gotten 5 years (holding at approximately at -3%).
    • -3% profit/loss is actually the best performance margin traders have had since virtually the exact peak of the S&P in 2007.
    • Since 2009 their P&L has oscillated between -20% and about -5%, so there at the high end of the range now.

    I'm not sure what conclusion we can draw from this alone since during the 2004-2007 period this "indicator" routinely got even higher. Still, it's at levels that have lead to pullbacks every time during the 2009 - 2012 period.

    Full update tomorrow,

    -Bill L.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in SPY over the next 72 hours.

    Tags: SPY, DIA, QQQ
    Jan 15 4:37 PM | Link | Comment!
  • Monday, January 14th, 2013 - Short Term Update

    Bottom Line:

    Between the overbought short & medium term indicators, the overhead resistance, and the extremely low VIX, the market has had trouble going any higher. That said, it hasn't pulled back either. If the sideways action continues to the point that the short term indicators reach "oversold" without any meaningful pullback, that would raise the odds that this is a sideways "recharge" correction before moving higher again. I'll be on the look out for new developments that could tip the markets hand.

    Price Action:

    SPX:

    (click to enlarge)

    Notes: With the market in a tight range for several days now, there hasn't been much to report in the way of price action. The SPX is still running into overhead resistance set way back when the ECB and Bernake tried to one-two punch the market higher with promises of easing forever or until satisfied. Interesting that several Fed members already want to pull back on the easing policy already...

    JJC: (2 hour bars)

    (click to enlarge)

    Notes: Last week we looked at the Dow Transport Index and how it is very close to new highs, which would, according to Dow Theory, be a major positive and reconfirm the trend. Today we're looking at the JJC exchange traded fund which tracks the price of copper. Copper's conductive properties make it a widely used industrial metal, and its price is watched as a clue towards the state of the world economy.

    JJC: (daily bars)

    (click to enlarge)

    Notes: The previous image was on a 2 hour chart (same as the SPX) to show that it has not confirmed the move in the SPX. In this chart of daily closes, we can see that copper is badly lagging the SPX and has only had a minimal retracement since peaking in February 2012. It's difficult to say that one is more important than the other (copper vs the Dow Transport Index and Dow Theory), though copper's action is clearly a negative to the bullish case.

    Indicator Summary:

    • Bullish: 4.7%
    • Neutral: 33.3%
    • Bearish: 62.9%%
    • Aggregate Interpretation:

    Indicator Snap Shot:

    Percentage of Stocks Above DMA:

    (click to enlarge)

    Notes: The cumulative percentage of stocks above their 20 day moving average has declined ever so modestly, though still in well overbought territory. This indicator is more relevant over the medieum term, 1-3 months or so.

    NYSE McClellan Oscillator:

    (click to enlarge)

    Notes: Similarly, the McClellan oscillator continues to hover near overbought territoy, though it hasn't declined much either. Today's action has the 5 day moving average just starting to turn lower... what you typically see at the start of a decline.

    NYSE Advance - Line:

    (click to enlarge)

    Notes: Last week almost all of the short term indicators were overbought. The several days of sideways action has pushed most of the most sensitive indicators close to the neutral area.

    NYSE TRIN:

    (click to enlarge)

    Notes: Similarly the TRIN has move from overbought to nuetral.

    Put / Call Ratio:

    (click to enlarge)

    Notes: I've mentioned the VIX a few times in the last couple of updates, and I'm bringing it up again tonight because now the put call ratio's 5 day moving average has reached 1 standard deviation from the mean. By these measures, this market looks pretty complacent.

    Talk again tomorrow,

    Bill L.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in SPY over the next 72 hours.

    Tags: SPY, DIA, QQQ
    Jan 14 10:01 PM | Link | Comment!
  • Thursday Morning, January 10th, 2013 - Short Term Update

    Bottom Line:

    The short term indicators as well as the VIX continue to suggest that stocks should struggle over the next 1-2 weeks. If the market takes out the 1,360 November 2012 low (and has a monthly close below 1,360), my long term trend model will have been tripped and switched back "bear" mode. If the market is mostly just sideways, and the overbought conditions are alleviated, I would look at this as more of a "recharge" and another leg up would be likely. The best stance to take here is neutral on stocks.

    Price Action:

    SPX vs VIX:

    (click to enlarge)

    Notes: In my previous update I mentioned the low levels in the VIX were a headwind to further gains. In the chart above I've circled the other instances of weekly closes below 15 (and one below 16) and how such instances have almost always corresponded to near future weakness. While these declines don't look impressive when hidden within a recorded breaking rise, these declines were large (nearly -20%), multi-week declines.

    $DJT:

    (click to enlarge)

    Notes: In the December 5th update I wrote "Should the transport index break out of this range, it's been consolidating for so long that the move out of this zone should be quite large." Since breaking above the top end of the range, the move has been swift and nearly vertical. According to Dow Theory, this is a positive, and new highs would once again confirm the long term bullish trend. That said, in the era of light speed HFT, and central back intervention, etc, I'm not sure how relevant this method of analysis is.

    Indicator Summary:

    • Bullish: 5%
    • Neutral: 30%
    • Bearish: 65%
    • Aggregate Interpretation: The sideways action has somewhat alleviated the overbought indicators, though most indicators are still overbought.

    Indicator Snap Shot:

    NYSE McClellan Oscillator:

    (click to enlarge)

    Notes: I've only included two indicators since they represent the group so well. On one hand the short/medium term indicators such as the McClellan remain overbought. On the other hand, most of the short term indicators such as the AD line (shown below) have pulled back somewhat to the "high/neutral" area.

    NYSE Advance - Line:

    (click to enlarge)

    Good Hunting,

    Bill L.

    Tags: SPY, DIA, QQQ
    Jan 10 12:24 PM | Link | 1 Comment
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