Trader’s Narrative

This is a guest post by Wayne Whaley, CTA:

Over the last 12 months, I have posted several articles concerning the bullish nature of tape action during 2009, specifically the repeated thrust signals that have occurred over the last 12 months coming after the selling capitulation in October 2008.

Recently, I received an inquiry from a reader about what it would take for the tape to give me a bearish signal. Here is the start of a response: In January of 2010, I wrote a 17 page paper on reading the tape. The following is a summary of a tidbit of that paper related to negative tape action. My analysis is of an intermediate nature.

There are a couple of different tape observations that would cause me concern. The first is a long period of time with no signs of either a selling capitulation or a thrust signal. The second would be signs that the market is confused with unusually large numbers of issues going in different directions. Today, I will address the first of those two concerns.

For a little background, my paper identified conditions related to thrust or reverse thrust (selling capitulations) that were extremely bullish. We have touched on many of those recently. I outlined in my paper, 51 of these signals from 1970 through 2009. Assuming that each signal is good for 12 months and eliminating repeats, the 51 signals condense to 12 time periods. Below are the results for the S&P 500 during the signals, assuming that you exit long positions 252 days after the last observed signal.

Any time within the 252 day thrust signal period that a new signal was observed, the long exposure was extended an additional 252 days (approximately 12 months). For example, in the third period listed, an initial “price” thrust was observed on October 10th, 1974 and then a “breadth” thrust was observed on October 11th, 1974, January 6th, 1975 and January 6th, 1976 extending the exit date to January 7th, 1977 (252 days after the last signal on January 6th, 1976).

We reviewed the bullishness of the breadth and volume signals recently. Today, I want to address the question of how long the market needs to go without a signal before we should grow concerned.
Continue reading ‘Searching For Bear Tracks In The Tape’

Caesar: Who is it in the press that calls on me? I hear a tongue shriller than all the music cry “Caesar!” Speak, Caesar is turn’d to hear.

Soothsayer: Beware the Ides of March.

Caesar: What man is that?

Brutus: A soothsayer bids you beware the Ides of March.

Caesar famously dismissed the warning saying, “The Ides of March have come”. The soothsayer replied, “Ay, Caesar; but not gone.” According to the Roman calendar, the Ides are March 15th. So they have come and gone. So why am I still nervous?

Even if we ignore the cryptic warning from our quantitatively gifted soothsayer (QuantDNA Spies Exhaustion Pattern) we have this to ponder:

Click to see larger chart in new tab:

As you can see from the chart above (courtesy of RMG Wealth Management) for some reason, March has been a pivotal month for changes in market direction in the past +10 years. Seasonal patterns are well known on Wall Street but this is the first time that I notice the significance of the “Ides of March”.

Or are we seeing patterns where there are none? Like looking at cloud formations and letting our imagination run wild?

Report card time! I usually try to revisit a call, whether good or bad, to see if there is something I can learn from it for the next trade.

At the start of the year I wrote that the health care sector faced strong headwinds. You’ll recall this was during a very heated political debate about health care reform with many pointing out that HMO stocks were hitting new highs.

Based on that sentiment high and reading the tea leaves through technical analysis my suggestion was that the good times for this sector were over:

For a few days that call was really bad. The sector, as measured by the S&P Healthcare Index spiked higher to 385. It also didn’t hurt that the market as a whole was strong. But the general market was also close to a short term top. The sector displayed a surprising amount of relative strength because it didn’t really fall very much into the February 2010 correction.

Below the 370 level, I was a genius. Above it, a dunce. So over all, a C+. Is that fair?

Now, let’s take a look at the bullish call for the energy sector at support in early February 2010. You can check out the previous link for my rationale. Here’s a chart of how things developed in the AMEX Oil index:

As with the health care call, the general market was helpful. In early February most stocks firmed up and started to rise again. As they say, the tide lifts all boats.

The bull trap just under the 200 day moving average combined with the very long tailed hammer candlestick worked their magic as shorts scrambled to cover and fueled the rally. As I mentioned, the Oil Services Index (OSX) was acting much stronger and I expected it to do better. While the AMEX Oil Index rose 10% (to date) my hunch about the relative strength of OSX was spot on as it has risen 13% so far.

The energy sector did present a good opportunity but it is not among the strongest sectors (like retail for example). Naturally, we would prefer to get the most bang for our buck. Nevertheless, this was a pretty good setup so let’s give it an A-.

As always, let me know if you have any questions or comments.

And Happy St. Patrick’s Day to my Irish readers (as well as those obtaining temporary Irish citizenship for the day).

Six months ago we looked at the S&P 500 index as it traded at a very rare and lofty level in relation to its long term trend: What Happens This Far Above The 200 Moving Average? On September 16th 2009 the S&P 500 closed more than 20% above its 200 day moving average, something it had not done in 12 years:

The market is like a rubber band. It expands away from a long term trend either to the downside or the upside, before snapping back. In early March 2009 the market was as deeply oversold (according to this indicator) as it had been for 60 years. Based on the few times the market was this far extended above its trend, I concluded that the short term upside would be limited (see the data table below). But I was proven wrong.

This time around the market totally ignored this and seemingly every other obstacle thrown in its way as it methodically inched higher:

The red arrow above points to the September 16th date. A little bit later, in October 2009, we had another signal when the market reached almost 21% above its 200 day moving average. Looking at the data now, I’m not sure there is an edge here. With these new data points, the short term is a toss up with positive and negative returns almost evenly split:

Inevitably, if you analyse the market enough you’ll run into your share of dead ends. This looked like a promising path but unless I’m missing something, I don’t think I’ll be relying on it as much as I wanted to. Right now the market seems to be climbing a classic “wall of worry”: unemployment, consumer sentiment, deflation, real estate collapse, etc. Take you pick. There are lots of reasons for the market to not go up.

But it does.

Here is a side by side comparison of today’s FOMC statement:

The Federal Reserve was so careful and meticulous to telegraph its intentions in advance that it didn’t even cause a ripple in the market at 2:15 PM - unless you count a 4 point move a ripple. As expected, the Fed will continue to provide the trough of free money, for now. You can bet they will be acting with extreme caution when it comes to removing the liquidity so as to not snuff out what could be an actual recovery in the making.

The delicate balance they are trying to strike is just enough liquidity to fight deflation, but not so much that it creates an inflation monster they will have to wrestle with down the line. Yes, once again, we return to the inflation/deflation question.

Hat tip to Tyler for the comparison.