More of the Same....6.30.14

Last day of the month saw low volume and a swoon to the red into the close.  These low volume pre Holiday sessions are typically bullish due to the lack of sellers but today's action was a bit of a head scratcher as XIV hit new highs and VIX remained in the green most of the day.  We're seeing some selling momentum in select sectors but tomorrow, the first day of the month will provide a much better indicator of the rest of the week's direction leading up to 4th of July Friday.

When in Doubt.....6.26.14

When in doubt, get out......that was a cardinal capital preservation rule I learned from Alexander Elder many years ago and it's saved me a lot of misery over time.  His 1993 book Trading for a Living is a classic and focuses on the need to treat trading as a business, not a hobby.  Well worth a read if you get the chance IMHO.  I've read and reread my copy over 7 times in the last 10 years.  There's always some nugget of trading wisdom that I discover with each perusal.

Meanwhile weak numbers in the GDP and durable goods reports coupled with suspicious remarks from FED President Bullard that interest rates might be going up send a red shiver through the markets although the VIX ended the day basically unchanged.

Below is an update of the weekly rebalanced T2 (top2) Commodity model....just something to keep in mind as an alternate investment strategy to a SPY sector based or SPY beta based (M3) format.

Teeter-Totter Continues + RED Countries....6.25.14

The XIV was back to its close 2 days ago while the VIX was marginally lower.  This market just doesn't want to go down even in the face of weak economic news and we may be seeing another leg grinding up to the July 4th holiday.  For now its one day at a time and tomorrow we'll look at a couple possible scenarios for the next 6 months and possible tactics to profit therein.
Short term the sidebar TrendX charts of SPY and XIV appear to be turning up with plenty of room to move before the next exhaustion thresholds are hit.
Keep in mind that the TrendX charts are not price charts but momentum and relative strength graphics so they may or may not align with a price chart overlay.
Finally, in the lower metrics panel I find it surprising that all the countries in the WORLD portfolio are showing readings below the 5 day moving average.

Break Down + Butterfly Tactics....6.24.14

We got the big move predicted yesterday (at least in the VIX/XIV) and it portends more to come.

Just as an aside note in answer to an M3 user's question as to which signal to follow when the Short Term Alert and the rankings diverge...example>  Alert Stop is active but XIV still shows in #1 slot......I generally go with the ALERT signal.

VIX rose 11% while XIV was down 4% intraday.  The opening green in the indices came under selling pressure and the biggest loser today was hands down XLE, which has been on a juggernaut roll for weeks.

So what's a guy to do for the next 6 months to limit risk exposure and still work an attractive risk/reward scenario?  One idea, which I've mentioned before, is a 3 prong option strategy, that has a fixed $ downside and which can be applied to both bullish and bearish market conditions.  A sample idea for playing SPY's current situation is shown below.  You can check out other ideas here for free.

XIV Teeter-Totter....6.23.14

Keeping a handle on the XIV is starting to give me gray hair. 2 hours in today and M3 went to a vested status for XIV and it continued strong for the rest of the day closing up 2.5% while the VIX was up 1.5%. Short covering on XIV may have contributed to some of the anomaly and this piece about the recent behavior of the VIX may help to put things in perspective....without offering any real advice on a tactical solution to profiting from the low VIX dilemma (hint...buy VIX calls, hold your breath).

Keep in mind that the VIX is a measure of CBOE put option open interest and traders' reluctance to place short bets on the SPY (puts) is becoming more evident as with Friday's reading below 11.
Meanwhile, the indices were all marginally lower on moderate volume and narrow range volatility.
The likelihood of a big move in now on the board.....perhaps setting us up for an end of month and/or July 4th rally (historically high odds).
By the way, oil (XLE) was at new highs today (again).

Cash Again in M3.....6.22.14

This is getting be a bit of a yin yang signal but M3 is back to cash as of 30 minutes in on Friday as the short term ALERT stop has crossed to the downside.  As mentioned Thursday the XIV momentum was going to be difficult to sustain and Friday reversal may be a sign of more to come.
Meanwhile, M3 has booked some nice recent gains and we'll just wait for the next XIV vested signal to appear end of day before jumping back into the fray.

New VIX Low, New XIV High....6.19.14

Intra day saw new VIX lows and new XIV highs accompanied by big pops in gold and silver and, not surprisingly, XLE went over the 100 mark today as the IRAQ oil field situation has oil traders betting on the long side.
Given the extremely low VIX its become increasingly difficult to mine premium using covered calls or credit spreads and although for the first quarter of the year traders use to be able to collect a fairly reliable 1-1.5% / month using 3o day ATM covered calls on the majors that return has now dropped to .5-.75% and even in those situations the risk/reward curve has gotten skewed to the risk side.
IMHO, it's actually hard to make money in the current markets despite what the get quick ads might suggest.

VIX Drops 12%...what's next?....6.18.14

The FED news contained no surprises and in the absence of any near term policy adjustments the markets took a clue and jumped to new highs.
The VIX dropped a whopping 12%. back to 14 month lows on monthly VIX option expiration and we're now left with a new bullish (still low volume) signal adding to the suspicion that SPY 200 is not far away.
XIV again soared like a rocket into new territory.....this is not normal market behavior.

GAMMA Update....6.17.14

For the true Lazy Man investors here's the most recent update of the weekly rebalanced GAMMA model which was designed to weather both bull and bear markets and incur minimal trading activity.  SSO (SPY x2 Ultra ETF) has been the leader for a while and racked up some nice gains.  The metrics report reflects NO money management stops...we just go with the flow.  The report covers the last 7 years using a top 2 sort.

The TrendX charts below show today was characterized by minor gains...except for XIV, which jumped like a rabbit ahead of the FOMC minutes tomorrow reflecting the historically typical bullish pop the day before such meetings.
No FOMC surprises are expected although given the recent new highs there may be further tapering.....previous FOMC moves in this direction have been received with a market yawn so, again, no large volatility response is expected.

What, Me Worry?..Part 2.....6.16.14

For younger readers the above was the motto of Alfred E. Neuman, the fictional mascot of MAD, the classic comic magazine, and it reflected a nonchalant attitude about life.
Following my comments on Sunday's post here's a similar (more informed) article on the possible consequences of the current mid-East political turmoil and it's definitely a reason to actually start worrying about what may be coming down the pipe now that huge funding resources have been looted..
I have already alluded to one consequence of the rising political tensions in the form of higher oil prices and here's two looks at a SPY, QQQ, XLE M3 analysis...the first with the auto-stop turned on and the second with the auto stop turned off.  The risk off second model has been the real performer showing that sometimes a What, Me Worry trading program works better than a more conservative risk focused strategy.....keep in mind that a risk off strategy works in this example because we have chosen to focus on issues such as XLE which we know from hindsight (the left hand side of the chart) is a hot sector.  If we are strictly focused on the right hand side of the chart (tomorrow) then the auto stop control remains the focus of a risk sensitive trader  (both sample models below use a top 1 sort).

A Little Relief.....6.15.14

Now we need to watch out for the Trap Door set up ...when the market appears to be in a rally mode and then quickly plummets to near short term lows.
Friday's "rally" was extremely low volume in the morning session and there may have been considerable short covering in the afternoon to contribute to the early gains.

Oil in the form of XLE has been unstoppable and there's every reason to belief it's only going higher.
Political instability is not limited to the Ukraine, Iraq, Africa and pockets of new unrest seem to appear daily.
While the rising cost of oil and gas to US users can be traced to questionable govt. policies favoring exports over domestic markets leaving consumers to OPECs whim, the net effect of foreign conflicts only exacerbates the problem and provides fuel for oil supply uncertainty fears and the subsequent excuse to raise prices.....just my opinion.  Meanwhile...XLE is showing superior momentum and relative strength.

Happy in Cash...6.12.14

A timely switch in yesterday's M3's ranking to cash kept us out of today's carnage.
Rather amazingly SPY has gone from an RSI2 reading of 100 to 7.5 in 2 days!!!
That's a dramatic change of relative strength.
Weak retail sales reports, increased jobless claims and increased business inventories all contributed to the rise in uncertainty about he economy and the President's comments about needing to do something about the deteriorating political climate in Iraq probably provided the icing on the cake as nobody wants to relive the cost in dollars and lives that the decade long foray there cost us the last time.

Below is a version of the 6 ETF  BETA model  XIX,SSO.SPY.SH.SDS,VXX which covers the full beta spectrum of SPY from uber bullish to uber bearish. By looking at a VIXEN type comparison of current up versus down pressures its easier (for me) to appreciate the magnitude of market momentum as well as the relative alignment of + and - beta factors in the various SPY derivatives (the other 5 ETFs).
The first chart is daily bars from Jan 2014, the second a more close up 10 minute bar view of the last 4 days.

World Bank Speaks...6.11.14

My friends over at the World Bank must have been feeling sorry for me and the conflicted M3 signals so they cut their outlook for he global economy, now projecting 2.8% growth in lieu of the previous forecast of 3.2%.  US growth projections were also dropped from 2.8 to 2.1 %.  Since the markets are typically looking 6 months ahead it's not clear that this announcement actually precipitated today's drop but M3 went to cash at the open as XIV dropped like a stone and the previous short term ALERT was validated.

I hope to roll out the real time M3 signals within the next couple weeks to make capturing these midday reversals much more transparent.

Bob=0, M3 Robot=1......6.10.14

Today was another example of how much smarter M3 is than my feeble old brain.  I mentioned yesterday than although the short term ALERT had crossed the momentum raankings still had XIV in a vested position and that paid off handsomely today as XIV stumbled out of the box and then gradually rose to end the day with a 1.75% gain.  Sometimes you just have to play the system and not try to second guess it.
The VIX actually ended down a few pennies and the indices were basically flat so XIV was clearly where the action was focused.

XIV Reverses Midday on ALERT...6.9.14

It was smooth sailing early on with a little red on the Qs but the indicies eventually went all green bringing DIA 170 even closer to reality. The caution was that both VIX and XIV were green....a contrarian divergence of momentum. Then, midday, XIV reversed to the downside and closed in the red with a vengeance (see SPY Trader chart below).
This action caused the M3 ALERT to signal a STOP although our momentum ranking remains intact.
Regular M3 users know its better to be safe than sorry when such ALERT reversals occur as they may harbinger bigger and/or longer drawdown risks.  With SPY and DIA kicking RSI2 readings of 99%+ technical bloggers were almost universal in their prediction of a near term downturn. Caveat emptor.

SPY 200, DIA 170...Just a Blink Away...6.8.14

Friday's action was more of the same bullish low volume melt up.
Employment data looked OK, productivity is on the rise and consumer confidence is riding high.
VIX hit a 14 month low and plunged dramatically on Friday's close.
It's no wonder that XIV has been such a $$ success in the M3 model.

And, although the markets are almost comically overbought there's no indication that the party is about to end.  Well, there's the technical support/resistance/PE argument that says the markets should go down. There's the seasonal argument that summer is historically an almost net zero game and there's the herd mentality that says the markets are so high they have to come down.
So far, all these contrarian views have proved costly to short sellers and cash holders.
Do I regret not being 100 % vested in M3 over the past couple weeks?  Absolutely!  But I'm conservative by nature and divide investment capital into several porfolios such as Small World, Gamma, and M3 in order to mitigate risk exposure in the face of market uncertainty.
That being said, it will be interesting to see what catalyst, if any, gives the bulls a reason to head for the exit gate.  For now it looks like smooth sailing to new whole number highs.....which the market loves.

What? Me Worry?...6.5.14

Wall of worry?  Not today.  New index highs all around and modestly improved volume although the effect of short covering may have contributed to some of the golden glow.  Once again XIV blasted off like a missile and booked some impressive gains.
Somehow the M3 SPY Trader just keeps guiding us to the right side of the market and the algorithm has effectively trumped my subjective risk on attitude over the past few days.
Sometimes you just have to follow the signals and believe that a systematic algorithmic trading program will deliver the goods.....this has certainly been the case with M3 this year.

The Problem with Non-Trending Markets....6.4.14

Today's action was the inverse of yesterday, with marginal gains and a fundamentally neutral outlook.
That being said, the markets have gone from a clear trending paradigm to a consolidation mode.

Is it difficult to make money in such markets?  Well, yes..  You could use options strategies such as covered calls or collars to protect existing positions, collect premium and mitigate potential loss. But with trending momentum fading the safety of cash is always a viable alternative to preserve capital while waiting for the next trend momentum to develop.