Tuesday, December 29, 2009

Investor Sentiment: What Does It All Mean?

As we have chronicled, investor sentiment has not been a very useful tool for timing the market the past 6 months. The "Dumb Money" indicator has been extremely bullish since the end of July, yet the S&P500 has tacked on - albeit begrudgingly - about 14% since that time. Looking at the sentiment picture from the perspective of company insiders, insider selling has exceeded insider buying by historic amounts since May, and company insiders continue to sell significantly despite the strong gains.

So what does it all mean? Are the sentiment indicators useless?

Rydex Market Timers: Expecting End Of Year Bounce

The Rydex market timers are betting heavily that an end of the year bounce will materialize as the bullish and leveraged assets now exceed the bearish and leveraged assets by more than 2 to 1. See figure 1, a daily chart of the S&P500 with the ratio of bullish and leveraged assets to bearish and leveraged in the lower panel.

Sunday, December 20, 2009

I Will Be Back After Christmas

Some Unfinished Business

Before I head out for the week, I wanted to update and follow through on several things that I have been discussing on the blog over the past couple of weeks.

Saturday, December 19, 2009

Investor Sentiment: On Vacation

The holidays are approaching, and I am lucky enough to be travelling this year with my family. So there won't be any comments attached to this week's sentiment charts. I don't have the time, and I won't waste your time. That's o.k. because as you know nothing has really changed in this market for the last three months anyway. Prices have been range bound, and investors continue to be overly bullish, insiders continue to sell, and the smart money remains indifferent.

Friday, December 18, 2009

What Does That Mean?

This video is courtesy of CNBC, and it reports on Bernanke's confirmation in the Senate Banking Committee. While the video is just reporting the news, focus on Senator Chris Dodd's comments starting at the 50 second mark.

Thursday, December 17, 2009

Currency And Country ETF: Japan

Figure 1 is a weekly chart comparing the Currency Shares Japanese Yen (symbol: FXY) to the i-Shares MSCI Japan Index Fund (symbol: EWJ). As you can see, these two instruments are un-correlated across multiple time frames.

Rydex Market Timers: A One Day Event

For Wednesday's FOMC announcement, the Rydex market timers were betting heavy that Bernanke and company would deliver. The Fed didn't disappoint as they continue to keep their foot on the easy money pedal. Unfortunately, the market did its best to frustrate the most, and the early morning rally fizzled intraday. The Rydex market timers have moved back to the sidelines.

Wednesday, December 16, 2009

Currency And Country ETF: Australia

Figure 1 is a weekly chart comparing the Currency Shares Australian $ (symbol: FXA) to the i-Shares MSCI Australia Index Fund (symbol: EWA). As you can see, these two instruments are highly correlated across multiple time frames.

Rydex Market Timers: This Is Amazing!

Figure 1 is a daily chart of the S&P500 with the amount of assets in the Rydex bullish and leveraged funds versus the amount of assets in the leveraged and bearish funds. This data is hidden, but the ratio of bull to bear, which is depicted by the indicator in the lower panel, is 2 to 1. Since July, 2009, every time this ratio got above 2, it marked a short term top in the S&P500. These are noted by the maroon colored vertical bars.

Dollar Index: TheTechnicalTake

Figure 1 is a weekly chart of the Dollar Index (symbol: $DXY). In our last look at the greenback I stated: "in all likelihood, this is the end of the down trend for the Dollar Index", and this is now fact! A weekly close over the high of the positive divergence bar (i.e., price bars marked in pink within gray ovals) has stymied the down trend. The highs of these positive divergence bars should act as resistance on the way back up.

Monday, December 14, 2009

Headwinds Abate Slightly

Last week the price of crude oil lost almost 10% pushing our composite indicator that is constructed from the trends in gold, crude oil and yields on the 10 year Treasury back below the extreme line. See figure 1 a weekly chart of the S&P500 with the indicator in the lower panel.

Saturday, December 12, 2009

Investor Sentiment: Stagnation

Like the markets, the sentiment indicators are in a state of stagnation. For 3 months now, investors continue to be overly bullish, insiders continue to sell, and the smart money remains indifferent. Not surprisingly over this time, the S&P500 has been stuck in a range too.

A breakout and a move higher from this price range would likely be a blow off leading to a market top. This remains the outlier. The more likely scenario is for sentiment to cycle from the current too bullish to a more bearish posture, and the best way for this to occur is to have lower prices.

Friday, December 11, 2009

The Greats Of The Blues: J.B. Lenoir

J.B. Lenoir is another Blues performer who died too young. He was 38 years old having died as the result of complications from a motor vehicle accident.

Lenoir was born in Mississippi and like many Blues performers, he made his way to Chicago in the late 1940's and early 1950's. He had gain some notoriety having recorded for the Chess and Checker labels, but he had to support himself with menial jobs until the mid 1960's when he was re-discovered by Willie Dixon, the influential Chicago musician and songwriter. He performed in Europe as part of the American Blues Festival.

To read more about the life and times of J.B. Lenoir go to this link at Wikipedia.

Lenoir had a distinctive voice, and he will probably be remembered most for his songwriting abilities, which had a socially conscious flair. He wrote songs about life in the South ("Alabama Blues", "Alabama March","Down in Mississippi"), about the wars in Korea and Vietnam ("Korea Blues", "Vietnam Blues" ) and about the signs of the times ("Eisenhower Blues" which later became the "Tax Paying Blues").

This video is with drummer Freddy Below, and it is from 1965. The song is "The Whale Has Swallowed Me". The singing is classic J.B. Lenoir, and the use of the guitar as a percussive instrument is priceless. Enjoy!

Thursday, December 10, 2009

ETF's To Buy, Sell, or Hold

As price weighs heavy in my market analysis, I always look for methods that quantify the price action. For example, when XYZ stock goes up 3 days in a row, I want to know what does that may mean (if anything) for the future price of that stock. In my work, I have explored the significance of divergences between prices and oscillators used to measure price. Divergences are often associated with market turning points.

Wednesday, December 9, 2009

Developing A Trading Strategy (Part 2)

In part 1 of this series, we looked at some tools that I use to evaluate the appropriateness of a trading strategy. In this article, we will explore the use of a filter to improve not only the reward to risk profile of the strategy but also the feasibility of implementing and trading that strategy.

Our initial strategy was based upon weekly S&P500 data going back to 1984, and our signal to go long the S&P500 was when price was greater than or equal to its simple 40 week moving average; positions were exited and you went to cash when prices closed below the simple 40 week moving average. Simple enough.

Tuesday, December 8, 2009

Oil ETF: Oversold

What seemed like a timely "call" back on October 8, 2009 "that crude oil could move significantly higher over the next couple of months" has kind of turned into a dud. Two weeks after this initial post, the United States Oil Fund (symbol: USO), the ETF that tracks crude oil futures, moved 14% higher. Since that time, USO and crude oil, have slowly given back all of those gains. From penthouse to the dog house.

So what gives?

Monday, December 7, 2009

The Technical Take: Dollar Index

It's Monday, and there is no better place to start the week with the only asset that has mattered for the past 8 months - the Dollar. Although Friday's job report brought a spike in the Dollar Index, the down trend remains intact. However, the likelihood of the downtrend ending leading to a counter trend rally or consolidation is now as high as it has been in months.

Sunday, December 6, 2009

Trends In Gold, 10 Year Treasury Yields, And Crude Oil

On Friday, yields on the 10 year Treasury spiked higher by little over 3%. Our composite indicator that assesses the strength in the trends of gold, 10 year Treasury yields, and crude oil is back into the extreme zone. This represents a headwind for equities.

Saturday, December 5, 2009

Investor Sentiment: "America Is Back"

The trading range that has developed over the past several weeks is emblematic of the cross currents confronting this market. New highs seem to be made daily and then boom, the rug is pulled out from the market, and prices plunge for a couple of hours. Buyers appear and back to the highs we go and selling begins again. If you are looking for some support area where you might think it is "safe" to find a low risk entry, then this isn't the market for you. Sell offs are clearly unpredictable although they are occurring at the upper reaches of the trading zone that I had expected when I stated this over two months ago:

"If you intend to play on the long side, it will be important to maintain your discipline (for risk reasons) and buy at the lows of that trading range and sell at the highs to extract any profits from this market."

You Got To Be Kidding Me

Wow and I thought we had real problems in this country! Congress is now stepping in to lend its wisdom and oversight to the Bowl Championship Series (BCS) which determines a national champion in college football.

Holy Keith Jackson! What's next? The jump rope championships at my kid's school.

Friday, December 4, 2009

Intra-Day Observations: Anecdotal And Otherwise

Some intra day observations are noteworthy.

At first blush, it would seem we are in a new paradigm - all of a sudden. The Dollar Index is up. Equities are up but former high fliers - the metals and gold and emerging markets - are taking a beating. Treasury yields are rocketing higher as though the recovery is around the corner. All of a sudden the economy no longer needs the support of the federal government?

Thursday, December 3, 2009

Developing A Trading Strategy (Part 1)

In this article, I am going to take a simple trading strategy and show you some of the metrics that I use to determine if it is suitable for trading. Subsequent articles will expand on the strategy and the back testing process, and in the end, we should have an acceptable strategy that is easily implemented.

First, let's take our data set. I am going to use weekly S&P500 data, and the starting period for the study will be 1984. Why 1984? Because in part 2 of this series, I will introduce a filter that will improve the efficiency of the strategy introduced today, and the data for the "filter" only goes back to 1984. So this is the place where we will start.

Wednesday, December 2, 2009

Gold v. Currencies v. Gold Sentiment

Figure 1 is a weekly chart of gold (cash data) through last week's close. The indicator in the middle panel measures gold's 52 week performance relative to a basket of 8 currencies.Those currencies are: 1) Australian Dollar; 2) Canadian Dollar; 3) Swiss Franc; 4) Eurodollar; 5) British Pound; 6) Singaporean Dollar; 7) Japanese Yen; 8) US Dollar. Relative to these currencies, gold has been outperforming, and the indicator is making new all time highs versus this basket of currencies.

The Only Chart That Matters

How could I forget the only chart that matters?

Figure 1 is a weekly chart of the Dollar Index. This is the same chart I have been showing since June, 2009 - prior to the Dollar Index unraveling. Last week there was a weekly close (price bar with down red arrows) below the low of the immediate positive divergence bar at 75.20. Closes below positive divergence bars (price bars highlighted in pink with gray oval) tend to lead to selling as traders expecting a reversal close out their losing positions. The down trend continues, and as the data shows, there is a high likelihood of the downward move accelerating.

Tuesday, December 1, 2009

Have You Sold Anything Yet?

For those of us without a crystal ball, we have to rely upon techniques or signals to get in and out of the markets. These could be moving average crossovers or other more "sophisticated" methods like counting negative divergences, which I have developed and discussed previously. Regardless of what you do, just have a plan. Honor the signals; know where you would get back in if you are wrong.

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