Bill L.'s  Instablog

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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  • Long Term / Short Term Update - April 2012 5 comments
    Apr 27, 2012 11:40 PM | about stocks: SPY


    I look at measures of valuation to determine the direction, and possible turning points of the long-term trend. I use several methods of technical analysis models to determine whether the long-term trend is up or down, then I use several shorter term indicators to help me find high probability low risk points of entry in the direction of the longer term trend.

    Measures of Valuation:

    Measures of long-term valuation such as the Schiller PE ratio, the dividend yield on the S&P 500, and the Q-ratio remain at levels that indicate to me that the long-term bullish trend should be nearing some sort of end. I say "should" because many of these indicators of actually remained elevated for quite some time. The Schiller PE for example has remained elevated for much of the last 10 years since reaching an all time peak in 2000. To as the famous quote goes, "the market can remain irrational longer than one can remain solvent," still it would be foolish to simply dismiss these long-term tried and true the measures a valuation.


    Schiller PE: courtesy of

    (click to enlarge)

    Notes: We can see here that the Schiller PE ratio stands at over 23, generally speaking anything over 20 is considered a market that is long-term expensive. When analysts on CNBC say that the S&P is trading at a "cheap" multiple they are typically referring to a PE ratio that is constructed using either a trailing year's earnings, or next year estimates. The problem with using a previous year's earnings when calculating the PE ratio is that this measure fluctuates wildly and thus is not very predictive. The obvious problem with using next year's estimates is just that, they're estimates. At market peaks estimates will always be too enthusiastic thus making the PE ratio look cheap even the market is at a turning point.

    Long Term Trend Model :

    LTTM - SPY (standard)

    (click to enlarge)

    Notes: Possible slowing of momentum (failing to rise to the top of the trend channel).

    In a previous short term update I mention them a long-term trend model recently suffered some whiplash, and here we can see the false their signal, and subsequent resumption of the bullish trend. There are some problems with this however, for example the NYSE composite index, which does not get the benefit of Apple, has not confirmed this bullish signal and remains underneath its previous swing high.

    LTTM - NYSE Composite (standard):

    (click to enlarge)

    One must be careful with non-confirmations because in the vast universe of the indicators and methods there'll always be some indicator that fails to confirm. Still, it is something to take note of and with long-term measures of value still very elevated this does in my opinion raise the probability that this recent breakout could be a false signal. So I'm not getting too married to the idea that we're back in a bull market.

    Summary: According to my long-term trend model the S&P 500 is back in bull market mode. That said, whiplash is unusual and there is some non-confirmation when looking at the other indexes. While I accept the signal at face value, in the near term my response to this is to temper my bullish expectations, and reduce position sizes on trades taken until the non-confirmations disappear and the indexes once again align.

    Short Term:

    The short term picture hasn't changed much since yesterday's post but the indicators I watch have risen again to the point where there should be no further buying. Long positions should be held and maintained, with a trailing stop in place.

    NYSE 5 Day Advance Decline Line:

    (click to enlarge)

    NYSE 5 Day Up/Down Volume Oscillator:

    (click to enlarge)

    NYSE 5 Day Tick:

    (click to enlarge)


    (click to enlarge)

    NYSE McClellan Oscillator:

    (click to enlarge)

    NASDAQ McClellan Oscillator:

    (click to enlarge)

    Percentage of Stocks Above their 20 Day Moving Average:

    (click to enlarge)

    Summary: The short term indicators that I follow have reversed past neutral or higher. While they're not quite yet of level or I would expect a reversal, they are to level where I would feel uncomfortable putting more money a risk on the long side. I'm maintaining a long position in SPY with a trailing stop, and if this is the new bullish trend we should stair step higher. The next step is for the SPY to continue higher without breaching the 136 swing low on any pull back. Since the market just experienced whiplash as well as the non-confirmation with some of the other indexes, it is important to maintain this level and to continue breaking out to new highs.

    -Bill L.

    Disclosure: I am long SPY.

    Stocks: SPY
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Comments (5)
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  • Bill L.
    , contributor
    Comments (691) | Send Message
    Author’s reply » Also, I think sometime soon there will be a major long term buying opportunity in natural gas. I'll work something up and post it here.
    27 Apr 2012, 11:44 PM Reply Like
  • untrusting investor
    , contributor
    Comments (9903) | Send Message
    OK, natural gas is very cheap at this point. But it may also stay that way for quite some time into the future as well due to significant supply. And what about coal? Coal is also quite cheap as well at this point, as cheap NG is displacing much coal demand.
    28 Apr 2012, 01:12 PM Reply Like
  • Bill L.
    , contributor
    Comments (691) | Send Message
    Author’s reply » I track short interest on several of the most popular in heavily traded ETFs as well as commodity ETFs. If you look at short interest on the UNG, the ETF that tracks Natural Gas, short interest has increased this last month by almost 400%. This is a very unusual event to say the least. Meanwhile the COT report shows no such confirmation in terms of the behavior of commercial hedgers. You are correct when you say at this point there are a significant supply of Natural Gas, as well as more supply likely to come online as we become more efficient at extracting natural gas from hard to reach places. But what’s more interesting to me is the fact that the public is becoming very aware of such facts.


    And last few weeks traders and guests on CNBC have been listing their reasons why natural gas should remain low, namely oversupply and how new technologies and techniques such as hydraulic fracturing will likely mean supplies will remain low now and in the future. But for my point of view as a technical analyst and an observer of price trends, this is an example of those in the know with, selling an idea to those not in the know. In commodities markets the food chain looks like this: commercial hedgers (those who actually drill or use Natural Gas for commercial purposes), large speculators who willing to offset their risk, small speculators, finally ETF traders (the public). So commercial hedgers have made their bets, and professional traders have taken their positions and offset their risk, and now they are on TV telling the public that they should be shorting natural gas. The problem being is that they themselves are already most likely short and they need the public to continue selling to keep prices low while they exit their short positions. This is the way trends work.


    Remember that in the beginning of a true a bull market the reasons why prices should remain low will be well known, and the reasons why prices could go higher will be obscure. Just to be clear I have no position in natural gas, I’m simply stating that conditions are right for a long-term reversal. Conditions could remain this way longer, but if I see a significant reversal which leads to a buy signal in my long-term trend models I wouldn’t fade it, and at that point I would look at weakness as a buying opportunity.
    30 Apr 2012, 11:57 AM Reply Like
  • The_Hammer
    , contributor
    Comments (5110) | Send Message
    Good stuff bill.
    How about keeping an eye on the Mother of all bulls, the 10 & 30 year treasury?
    Do you have any sentiment readings on the market? like investor intelligence and put call stuff?
    The aaii seems a little short term shizo.
    30 Apr 2012, 08:09 AM Reply Like
  • Bill L.
    , contributor
    Comments (691) | Send Message
    Author’s reply » My computer died last week so I'm working on a replacement at the moment, so I lost some of the sentiment excel data series that I follow such as weekly option premiums and block trading. I should be able to salvage it though. I'll update the weekly surveys after they're released this week.
    30 Apr 2012, 10:52 AM Reply Like
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