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I am a retired individual investor in my late 40s who has recently moved from Washington DC to Portugal. My investment strategy is threefold: (1) spend less than I earn, (2) use the savings to acquire shares of companies that produce necessary products and services, with durable competitive... More
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  • Simple Verses Exponential - Two Very Different Tales

    Many traders follow moving price averages (which are just the average closing price of an asset over a certain time frame) to ascertain the technical strength or weekness of a marketplace. There are two widely used methods to calculate a moving average: simple or exponential (the latter of which assigns relatively greater weight to more recent closing prices). Some traders eschew the exponential moving average simply because it can be quicker during periods of high volatility, leading to false positive and negative signals. But in periods of relatively mild volatility (such as where we've been over the last month in many of the global equities markets), the simple moving average can tend to be "faster" then the exponential moving average. So, could the simple moving average produce a false positive signal now? Absolutely, which is why conservative traders follow BOTH.

    Sounds like simple enough advice, but there's a big fly in the ointment today: the simple and exponential moving averages in many equities ETFs are telling vastly different stories about where the markets really are, technically.

    Point in case. One of the broadest equities ETFs is the Vanguard Extended Market VIPERs (ticker symbol VXF), comprising small and midcap stocks. Here, the we see that both the 30 day exponential moving average and the slower 50 day exponential moving average have failed to cross above the long term 200 day expontial moving average. When short term price averages are below long term price averages, that tends to suggest the market is in a long term technical bearish trend.  Just looking at these averages, a trader would be very nervous about taking a long position in this asset just now. To put it mildly. In fact, nervous really doesn't describe the situation well at all because in a long term bear market, when price average get close but do not, in fact, cross over, you often see sickening price declines over the near term.

    But the simple moving average tells another story. Both the short term 30 day, and the longer term 50 day, simple moving averages are above the very long term 200 day simple moving average, and crossed over recently. That's often what you look for at the front end of a bull market. Traders looking only at this development with the simple moving average would be piling into risk at the moment.

    In sum, the moving averages are not really towing the line at the moment.  That's about the best way to explain why equities markets are at a key inflection point. Market observers have noticed an enormous tug of war between bulls and bears raging over the last month, which is enough to suggest a large move in one direction is likely whenever either of these two dueling camps throws in the towel. So this may be one of the most precarious inflection points we've seen in the last few years.




    Jun 22 9:42 AM | Link | 2 Comments
  • Back in Investment Land

    I have been almost 90% invested in equities since March. This week, I have been  in the process of unloading some exposure. Not because I believe the global equities bear market will resume, but because I have no idea whether it will or not and because I will know a whole bunch more in the next few days. While I fancy myself an investor, rather than a trader, I pay great attention to what traders are doing when it comes to balancing my portfolio. I will sell equities when long term technical sell signals start to crop up.

    Here's where I see things today. Most US ETFs that I track - VTI, SPY, IWM - recently crossed over, and then failed to observe as support, their 200 day exponential moving averages (or "EMA"). It is normal, in a bear market rally, for broad equities indexes to challenge their 200 day EMA, fail, and then devolve into a sickening slide.  It is also normal at the early stages of a bull market for an equities ETF to challenge the 200 day EMA and fail, on the first attempt. I place no technical significance on anything that has transpired in this regard as of yet.

    On the bullish side of the ledger, most of the ETFs I track both at home and abroad - EFA, VT, GWL, EEM, SPY, VTI, IWM - all have something in common. They have caught support at their 30 day exponential moving averages - that is, they are observing short term trading support. If that support holds, I expect the US markets to rechallenge the 200 day EMA. What happens at this point will be crucial.

    Scenario number one: the markets will clear the 200 day EMA, confirming that area is, indeed, no longer strong technical resistance. If not resistance, you can start to assume that area is, in fact, technical support. That would be bullish indeed, establishing a potential floor for the market that may support future gains. Ultimately, if the 30 day EMA crosses the 200 day EMA on US indexes, that will signal tremendous short term buying momentum, strengthening the bullish case further. I would begin to allocate assets back into the equities markets - albeit, probably not the US market, for reasons I will give later.  Ultimately, if the 50 day EMA crosses above the 200 day EMA, I will be satisfied that we are, in fact, at the front end of a longer term bull market, and would deploy capital accordingly.

    Why would I avoid the US equities market? One reason is that international equities ETFs have greater volatility than US equities ETFs, and positive correlation. I would expect them to outperform on that basis. And moreover, the US dollar recently entered a long term technical downward trend, which would benefit assets that are denominated in something other than the US dollar.

    Scenario number two. The markets observe the 200 day EMA as resistance. In this case, what we'd probably be seeing is garden variety bear market behavior. The shorter term averages, which are inherently weaker support or resistance than longer term averages, would likely stand no chance of holding, and global equities markets would be prone to continued losses. In this scenario, I would continue what I have been doing all week. I would exit equities, and fairly quickly at that.

    My assumption is that we are in a long term bear market until proven otherwise.  In a bear market, my primary goal is to defend capital, rather than make money. Leaving possible gains on the table is a required strategy to attain that goal. However, once markets do prove otherwise, my primary goal changes, and I seek to maximize returns. At inflection points, such as the area the equities markets are in right now, I prefer to avoid making any predictions, and move to the sidelines. Overall, I think the chances for a lasting bull market are slightly better than a continued bear market. International equities, particularly in China and other emerging markets, are in technical up trends. That may be a leading indicator for the US, or simply a gigantic head fake. Short equities ETFs are in confirmed bear markets, and have failed to cross their short term moving averages - the 30 day EMA - and in many cases have observed that average as trading resistance.  Finally, the VIX (which can be inversely correlated with equities) has continued to observe its 30 day EMA as resistance, grinding ever lower in a clear pattern of lower lows and lower highs. Finally, equities ETFs abroad and here at home have seen their 50 day simple moving averages converge with or cross their 200 day simple moving averages, suggesting the likelihood of a trend change. These are hopeful technical signs.

    But not dispositive. Confirmation of a new bull market will come soon, or not at all. The markets remain on a knife's edge. Add to this mix the fact that Friday is a  tripple witching options expiration - volatility and unpredictable swings are likely. My guess? By Monday of next week, market technicians will have far more clarity on the relative strength of the bull and bear case. I'll wait until then before I deploy capital into, or remove additional capital from, the market.

    Jun 18 3:47 PM | Link | Comment!
  • Financials Looking Sick

    As of 3:30, several points of interest have emerged in the markets today. Many domestic equities indexes have failed to catch support at their 30 day simple moving averages, and appear poised to test their 200 day simple moving averages as support.  While there is nothing inherently bearish in that, traders will certainly become alert if the indexes fail to find support at these longer term averages, particularly if these averages ultimately behave not as failed support, but resistance.  This would be a matter of considerable anxiety to bullish traders because it would have to viewed in combination with the inability of certain domestic indexes to strike above their 200 day exponential moving averages, and of those indexes that did, their failure to observe those areas as technical support. In short, it would lay a groundwork of repeated technical supports, indicating the path of least resistance is downward.

    Another troubling development is that the VIX, for the first time since March, has managed to break through its 30 day simple moving average, which previous to yesterday had acted as trading resistance. This raises the prospect of a higher volatility going forward, which typically accompanies downward moves in equities prices. By the same token, it should be observed that the VIX has observed its 50 day simple moving average as trading resistance, which bodes slightly better from the bull's perspective.

    There are many stones around the neck of the equities markets, but one notable culprit may be the financial sector. XLF has stalled out, and appears poised to test its 30 day simple moving average as support. SKF, the evil twin of XLF, meanwhile, has managed a small victory, clearing its 30 day simple moving average as resistance.  This accompanies some troubling developments in the share prices of leading banks, such as JP Morgan. For the first time since breaking out of its downward price trend back in March, JP Morgan has failed to find any support at either its 30 day or 50 day simple moving average. The prospects for this company's share price would dim considerably if JPM fails to find trading support at the 200 day simple moving average, which lies just a couple of percent now below the current share price. The case for Bank of America is less ominous, but no happier.  Bank of America still remains above its 30 day simple moving average, albeit by a hair. Citibank, on the other hand, has blown through all manner of support and appears headed for a fall. Whether the company is large enough to take the balance of the financial sector down with it, however, is an open issue.

    One of the brigher stars in this otherwise dark constellation is Goldman Sachs, which remains perched at its 30 day simple moving average. This area may yet act as support, or may fail. The company certainly can outperform its peers, as it has consistently in the past.  Nonetheless, if the broader market for banks and financial services firms does collaps, it would be difficult for Goldman's share price to remain aloof of any carnage that may ensue.

    I have held financials and etfs that overweight financials since November of last year, and truly began to pile into them around March. It has been a fine run. The question now is whether it makes sense to hold them when there are other assets offering far more diversification benefits and that are better positioned, both technically speaking and from a valuation perspective. It is difficult for me, at least, to find the justification for doing so. Accordingly, I am exiting many (but not all) positions in banks that I have been holding, and looking now for other opportunities once markets pass through their current inflection points.


    Jun 17 3:56 PM | Link | Comment!
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