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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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  • Friday, July 6, 2012 - Short Term Update - Turning Lower  8 comments
    Jul 6, 2012 6:18 PM | about stocks: SPY, TLT, DIA, QQQ, UUP, FXE

    Bottom Line:

    Yesterday I noted the severe overbought technical condition in the equity market, a rally which was not confirmed by either the bond market nor the currency market. Following this morning's disappointing jobs report. futures tumbled, and stocks were unable to make up the lost ground during the regular session. Based on where the indicators I watch are currently at, further downside is the highest probability outcome.

    Update:

    As I mentioned yesterday both the 30 year and 10 year yield have been refusing to confirm the rally in stocks. I also noted that they have been consolidating in a sideways pattern for approximately four weeks. Typically, the longer something is consolidating in a sideways move, the more important the breakout. While the 30 year note yield fell today, all the way to the bottom of the pattern, it did not break down through the bottom of this congestion pattern.

    (click to enlarge)

    While 30 year note yields did not break down through the lows of this pattern, I think it is telling that bond investors are basically saying that they are as nervous as they have been in the past four weeks. I would say that if there's a disagreement between the equity market and the bond market, 8 out of 10 times, the bond market is correct.

    A little bit more encouraging to the bear case, 10 year note yields did in fact break down through the bottom of this pattern and continued lower throughout most of the day.

    (click to enlarge)

    Based on the height of this pattern, and the amount of time spent in this pattern, if this is a true breakout we should see the 10 year yield below its all time low sometime next week. This of course has negative implications for the stock market.

    Without going through the whole host of indicators that I watch, the market overall still remains very overbought.

    (click to enlarge)

    Looking at the Mcclellan oscillator we can see that the three day moving average crossed below the five day moving average, also producing a momentum divergence while remaining severely overbought.

    Summary:

    Personally I do not find that looking economic data to be all that helpful when it comes to trading. That said, I do have a background in economics, and to me today's numbers are nothing but the continuation of a stream of disappointing data points that suggest that the U.S. will follow the economic examples of Europe and Asia, that is to say a double dip recession is likely.

    Based on tax withholdings, even the 80,000 jobs added number seems high, and is most likely to be revised lower to somewhere closer to 75,000 - 70,000. It's been my experience that the government loves to overestimate then revise lower one to two months later when no one cares anymore.

    After adjusting for inflation, real wage growth in June was probably only 1% or less, and it seems highly unlikely that we will escape this economic morass with real income growth this low. Furthermore, it appears to me that the "real income growth" has been the result of declining inflation; specifically the drop in oil, energy and the increase of the U.S. dollar vs. the Euro, the last few months, rather than people actally getting paid more money.

    If the economy was really improving, which would be better proof, income growth due to declining inflation, or better than expected job growth?

    That's all for now, we'll talk again Monday,

    -Bill L.

    Disclosure: I am long BGZ.

    Stocks: SPY, TLT, DIA, QQQ, UUP, FXE
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  •  
    Bill -- impeccable timing once again. How you do it I don't know! Here's a link to the latest quarterly letter by Hoisington Management that discusses low bond yields. Basically, they think that the yields are heading even lower over the long term (last section of the letter). I haven't checked recently but I think a 10-year yield on Japanese bonds is below 1%, so the US has a long ways to go. It'll be extremely interesting to see what the market does next week!

    http://bit.ly/Nu9rQx
    6 Jul 2012, 07:15 PM Reply Like
  •  
    Great update as always. Do think the odds heavily favor more downside.
    6 Jul 2012, 09:16 PM Reply Like
  •  
    Bill, thanks for the udpate, and to Sundate for the link - great read.
    7 Jul 2012, 10:41 AM Reply Like
  •  
    Bill - what do you think of today's (Tuesday's) market action? Are you still short? Adding more positions? By the way, BGZ has changed to SPXS. Looking forward to your update!
    10 Jul 2012, 11:19 AM Reply Like
  •  
    Yes I'm still short, the TRIN is the only indicator I follow that appears oversold, however that tends to be one of the more sensitive indicators. The less sensitive indicators that I follow are far from oversold. At best a bull could read the aggregate message as "the decline is perhaps 50% done."

    I know about the BGZ, though apparently seeking alpha doesn't. At the time I wrote this article, SA would not let me enter "SPXS" as a disclaimer ticker. So that's the reason for that. Sorry if there was any confusion.

    I'm moving my stop down to an hourly close above 1361, which is this mornings high or the previous stair-step high pivot.
    10 Jul 2012, 03:52 PM Reply Like
  •  
    Bill, thanks! I decided (a while ago) to go long my favorite TZA (shorts Russell) and FAZ (shorts financials). Have you seen this recent update on Spanish banks in Barron's?

    http://on.barrons.com/...

    If something of significance happens in the market action within the next few days, would you mind posting a short note, even if it's in the comments section? I find your posts one of the few most interesting on seeking alpha.
    11 Jul 2012, 07:24 AM Reply Like
  •  
    I appreciate the comments, I'm doing my best to provide informative posts.

    I've worked at two of the most prominent investment advisory firms, and I've sat and watched what goes on at a trade desk at a proprietary trading hedge fund. The disparity between the two in terms of the level of true informed service is so great it would require pages upon pages for me to detail the difference. Perhaps I might in a future blog post/opinion piece. I think most people would be surprised at the difference.

    I'm just doing my part to close the gap.

    -Bill L.
    12 Jul 2012, 09:59 AM Reply Like
  •  
    Bill -- thanks for the update! You clearly have a gift for technical analysis and have a great sense of the markets. (I remember all the disclaimers about error rates in trading; still -- you deserve a huge compliment.)

    It's going to be an interesting summer for sure. On the one hand, the market is not supposed to fall too much during the election year (if we agree with the statistics) and it's an open question to what extent Operation Twist is going to provide any substantial support -- an abrupt turnaround to the upside worries me and I'm tempted to take off a small chunk of profits on my shorts with every coming decline (will probably do so today -- we've had quite a party!:). On the other hand, economic trends seem to be gathering significant downward pressures worldwide and we maybe at the beginning of a trend in the US bond markets towards even lower yields. Also, there seems to be another wave building in the crisis of confidence in some financial institutions/trading firms (partly the reason why I'm long FAZ). On the bright side, if the market does establish a downward bias it'll be great for trading!

    Looking forward to your updates, as usual.
    12 Jul 2012, 11:19 AM Reply Like
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