Monthly Archives: August 2009

Phew, the storm has passed…

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5-year view of positive-only maximum values for the NYSE TRIN* here:

Interactive Brokers

Boy, that squall just came out of nowhere, didn’t it? Thank god it’s behind us… looks like smooth sailing from here on.

I thought it was kind of neat to see this faulty, positive-only TRIN chart, since it highlights the really bad days. Here’s the complete picture of daily TRIN readings (3 years):

Stockcharts.com

Notice the symetry that forms over time: action and reaction. This picture is looking pretty lopsided at the moment, reflecting a very highly overbought market.

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*TRIN is a measure of breadth, useful for gauging the intensity of advances and declines.

Formula: (Advancing Issues / Declining Issues) / (Advancing Volume / Declining Volume)

When lots of stocks move together and volume picks up in the direction of the movement, you get a strong TRIN reading and you know that the movement could be more than just noise. Moving averages help you to identify overbought and oversold conditions.

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TICK

TICK* is usually considered a day-trader’s tool, but its longer-term moving averages are very information rich. It is a tool that would have helped keep you on the right side of the market for the last 24 months:

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Look at how useful the MACD has been. Very nice pattern here since the start of the bear market. From an overbought condition it gives a sell signal on a downward cross of the zero line. Once that is followed by a countervailing move large enough to reset momentum, the return to the zero line gives the signal to tighten up stops and a cross with gusto gives a buy signal.

Right now we’re at the zero and pointed down.

*TICK: Downticking stocks (hitting bid) minus upticking stocks (hitting ask) on the exchange at a given moment.

A little morning TA

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2-year view of QQQQ here (Nasdaq 100 ETF):

Image: Interactive Brokers

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Red: Trendline from 10/07 peak across June and Sept 08 peaks.

Light blue (nice fit): rising broadening wedge

Dark blue (maybe a stretch here): rising tightening wedge

White: Declining volume since start of rally, an unambiguous warning not to trust it.

Hat tip to Jim at slopeofhope.com for noticing the wedges.

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As for the failed head and shoulders pattern that we saw a few weeks ago, Edwards and Magee had this to say (Technical Analysis of Stock Trends, 9th ed., p62):

There is one thing that can be said and is worth noting about Head-and-Shoulders Formations that fail completion or produce false confirmations. Such developments almost never occur in the early stages of a Primary Advance. A Head-and-Shoulders that does not “work” is a warning that, even though there is still some life in the situation, a genuine turn is near. The next time something in the nature of a Reversal Pattern begins to appear on the charts it is apt to be final.

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And without comment, here’s the 2-year view of the S&P vs. the 20-day average Equity Put/Call ratio:

indexindicators.com

Tour des charts

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All the world’s a short…

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Charts below are 5-year views.

NASDAQ biotech index:

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Inter@ctive WK Internet Index:

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Value Line Arithmetic (where’s the value?):

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Philadelphia Gold and SIlver Index (XAU), back at ’06-’08 commodities bubble levels:

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Mexico Bolsa:

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Venezuela:

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Argentina’s Merval Index:

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Pakistan’s Karachi 100 (look at the flat line where the govt suspended trading last fall — worked wonders, didn’t it? This market is up a lot less than most others — maybe people don’t trust it as much anymore, since they can’t be sure they’ll be able to sell when they want):

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Bet you didn’t know Mongolia had a stock market. Looks like a one hit wonder:

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Singapore Straits Times:

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Indonesia’s Jakarta Composite:

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Taiwan Taiex:

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All images above from Bloomberg’s stock index pages

Bubblicious

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The Indian stock market since 1990:

Source: http://www.nseindia.com/

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I suspect that this market will end up back at 2002-2003 levels. Manias like this tend to be completely retraced, like the oil bubble from ’04 to ’08, which sports a similar chart to the above, complete with a big B-wave bounce that should be peaking soon, though by looking at this chart alone I wouldn’t rule out $80:

Source: http://futures.tradingcharts.com

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Thought I’d take a look at some other wild markets:

Russia’s RTS:

Source: http://www.rts.ru

Russia hasn’t made much of a retracement, only about 25%, but if the US markets fall from here you can bet it will join them.

Shanghai is ready to rumble (about a Fibonacci 38% retracement, just like the S&P 500):

Yahoo! Finance

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Brazil’s Bovespa – about a Fibonacci 62% bounce:

Bloomberg.com

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Why not check out the Swiss? Ok, they’re not so wild — just a 33% retracement here, but a remarkably similar pattern to the S&P 500. Also, it is worth noting that the Franc went from roughly $0.83 to $0.93 over this period, so this was a much larger rally when priced in dollars, like many of the other foreign markets.

Bloomberg.com

WIth foreign markets sporting high valuations and high exchange rates, it looks to me like the US dollar is going to be where it’s at going forward. Shorts that capture the exchange rate movement along with stock moves would be attractive.

Scaredy bears

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Well, we’ve hit the first common Fibonacci retracement level (38.1%). We’ve now rallied 350 S&P points after a 904 point fall (1570 to 666). This is the best shorting opportunity since 12 months ago, IMO.

Source: Interactive Brokers

Nasdaq is nicely lagging, and the dollar is looking good. China could have topped already. The chatter on the boards is of scared bears and confident momentum chasers.

Next week could be nasty, maybe a drop to 950 before a rally to test 1000 again soon thereafter. Or maybe we slowly roll over and don’t break 950 til almost Labor Day (first week of Sept — when summer vacation ends in the US).

If this really is wave 3 down, it should be another 5 wave move, like wave 1. During the first wave, and even the second, most won’t believe the top is really in. Wave 1 could start from right here, since the momentum guys would be buying in on the decline and there would be few shorts to drive a squeeze to new highs. It would be seen as a “healthy correction.”

This is it: we have a major top this week.

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Frequent readers know that I watch sentiment and put a lot of stock in Investor’s Intelligence and Daily Sentiment Index surveys, and that when extremes in sentiment match with extremes in price, it is as good a trade as the market ever provides. Well, we have 3% dollar bulls today. The dollar is going to blast off from here and kill the stock and commodity rally and blow credit spreads wide open. It also appears that emerging market (including Chinese) stocks have already started stair-stepping lower.

The dollar vs. the euro, pound, Aussie and Loonie — a loaded springboard:

Chart from Yahoo!

I see three clear waves up from March in stocks and commodities (three is what you need for a complete countertrend move), with big B-wave moves down in the dollar and bonds, which now have the potential to blow right through their highs from last winter’s deflation trade. In stocks and commodities, the sell-off into early July was the b-wave (of 2 of C), where the hobby bears jumped in, and the rally since has crushed all but the most disciplined, patient and deep-pocketed shorts. On the cusp of the big 3rd wave down, this is definitely not the time to lose religion.

Commodities’ last gasp (indexes here):

Credit: Bloomberg.

Watch for VIX liftoff as well to add extra oomph to put portfolios.

Yahoo!

I’m sitting on puts on oil, silver, stocks, the euro and pound and calls on Treasuries. There are no guarantees in the market, so anything could happen, but I’ve never felt better being short (my puts are comfortably long-dated, of course). A sharp pullback might set us up for new highs, though I doubt it. I’m expecting a typical rollover at first, with increasingly jagged price movements (remember when almost every day saw 3% swings?), but not necessarily full-on crash conditions for several weeks to months.

Don’t trade like me (I’m a wild man), and good luck out there.

Addendum:

Here’s the much mentioned analogue to the ’29-’30 post-crash rally (image from D. Rosenberg at Gluskin Sheff — sign up for his free letters here):

Blow-off tops everywhere

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Everywhere I look this morning I see spikes in risk assets: copper, silver, oil, the pound, stocks, credit, etc.  Copper and oil are moving tick for tick in lock step at the moment. These really are all the same market.

I recently read about a strategy whereby a trader would start “trading campaigns” 25k to risk on very high payoff black swan events. If his first short-term options trade was a winner, he would do another with the proceeds, and if that trade also worked, one more, for a total of three trades. The math can actually be highly favorable for of such a strategy, since for a good timer, the payoff can be dozens of times the initial capital. All you need is one winning streak in 10 or so campaigns to come out way ahead. This trader had attempted 9 such campaigns, 7 of which were 100% losers, 1 of which was flat, and one of which was a 60-bagger. He had socked away the proceeds from the 60-bagger, and was still trading 25k at a time. I’m not saying I’ll adopt this method, but it makes a good point about humans’ tendency to underestimate and underprice the probability of large moves, as well as their irrational risk aversion when it comes to the possibility of losing 100% in any one trade.

Yen:Euro cross as a measure of risk appetite

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Jason Bourne asked for some thoughts on the Yen. Well, the poster Sleeping Bear over at Slope of Hope pointed out that John Murphy (a technical analysis grandmaster) noted the strong correlation of the Yen:Euro cross with the global risk trade. Here it is (blue) in Yahoo! versus the S&P 500 (red):

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I feel like I should have made this a regular chart of mine ages ago, since the Yen strengthens versus the dollar when the deflation trade is on, while the Euro gets weaker, so of course these two should be paired for an extra sensitive indicator. Come to think of it, I even successfully traded the Yen:CHF cross last fall and winter, and the CHF trades like a slightly harder Euro.

Anyway, you can see the divergence in the chart last July, and more importantly in Feb-March where the Yen strength didn’t follow through as equities continued lower in their 5th wave. This was just the kind of hint you would expect in a 5th (ending) wave, along with the relative weakness in the VIX and Put/Call ratio compared to the panic conditions of Wave 3 (Sept-Nov). Yours truly was too dense to remember this, which is part of why he missed the rally bus.

Well, I see a divergence here again, but this time it’s bearish for stocks. The Euro has failed to make new highs  this summer as stocks have surged, and in fact the Yen has been creeping higher. This jives with my current read on an extreme in dollar bearishness. A dollar and Yen rally vs. the Euro, Pound, Loonie and Aussie would bode poorly for stocks and commodities. Conversely, if the Euro recovers after a correction and breaks out here, who knows how high stocks will go?

Goldman is not invincible

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I have talked a lot about the conspiratorial tone of frustrated bears lately, and how I take it as a sign that traders are resigned to the market marching ever higher despite the depression grinding on. Much of that anger and awe is directed at Goldman Sachs, which rightly or wrongly is perceived as the all-seeing, all-profiting eye at the top of America’s Ponzi economy. With their men in high places and their high frequency trading bots, they are invincible, or so says their stock price:

Source: Yahoo! Finance

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I am prone to fading consensus wherever I find it, and here I see the chart of a financial behemoth trading at the same level as at the very height of the credit expansion, 2006, back when it was churning out toxic bundles of AAA debt on houses and malls that are today being abandoned. In 2006, the company earned over $9 billion a year with 20% fewer shares and 20% less debt, and the mood in the stock market was of total euphoria: smooth sailing as far as the eye could see, Goldilocks time.

As far as I’m concerned, the rally from $47 to $165 has been one of the greatest short squeezes and dead cat bounces in history. For this stock to have a market cap over 20% greater than at the height of the bubble is absurd. Yes, they earned a record $3.4 billion last quarter, but trading profits come and go, and it’s not as though any of that is doled out to common shareholders: the company pays no dividend.

Expect their political racket to come back to bite them, and hard, as regulations tighten on all kinds of trading and the skeletons start to fall out of the closet. The heyday of finance is over for America, and political power follows economic power.

I suspect that the lows are not in for this pig, and that in fact it may face a crisis of existence at some point in the coming years. Besides, did you ever see a better chart from a short perspective? Its got a ready-made stop, too, in case there is more steam here than I think.