T6 Improves But Still Cashbound...6.28.13

It's the last day of the month, which is typically bullish, but we're not seeing a bullish push as we head into the last hour.  Yes we did recover from an opening NYAD of .6 to the current 1.3 but on the heels of yesterday's rally the mood is muted at best......except in gold (GLD) and the gold miners (GDX) which are showing a nice surge after plummeting for weeks on end. 

Bonds are also continuing with a recovery move although we need to see further evidence that momentum has shifted to the upside following the massive global selloff over the past 10 days.

On the T6 bull model XLU is continuing to show promising signs of improvement following some higher than usual daily volatility...likely not unqiue to XLU,  just a parallel to the high volatility that has characterized the markets overall.

Interestingly, with the market down 55 one hour before the close the VIX is down 2%....not a typical correlation.

Dudley Speaks..Market Reacts....6.27.13

William Dudley, head of the NY FED said the FED's asset purchase would be more aggressive than that suggested by Bernanke if economic growth and the labor market turn out weaker than expected.
The markets loved that as evidenced by to day's action on the NYAD...opened at 8.00 (wildly bullish) and is actually above that at 8.30 after a brief pullback and the DOW is back above 15,000.

The VIX is down a modest 4% and volume is thin, a likely sign that not everyone is convinced the rally has legs. The P6 and the RSQ are still indicating cash.

The X sectors have now pushed into the top slots in the market neutral model (live update shown) and what's of more interest is that both equities and bonds are back to moving in sync (both good and bad) as can be seen by viewing the TrendX charts of the SPY and TLT (20 year treasuries).

T11 View of Default Model..6.26.13

Following yesterday post on the NYAD we saw another pop up of the NYAD to 7.85 at today's open (wildly bullish)...which has been in a steady decline since the open and now stands at 2.87 at 2 hours in.

We're still refining the T11 Lab but here's the view of the baseline T2 default (market neutral) portfolio as of Wednesday morning.  The position of AGG is a bit surprising given the huge selloff in bonds last week that dribbled into Monday (and yesterday).  Nevertheless, when put in the context of the rest of the portfolio there is apparent positive momentum in AGG (I-Shares Total Bond Core).
As of this morning XLU is also showing a renewed sign of strength after a 15% decline that started May 1st.

The P6 and RSQ stop loss lines still have the model in cash BUT if you held on and not followed the discretionary money management guidelines the metric panel displays the resultant damage.
Once again.....when P6 is downslope, especially when it crosses over the RSQ (linear regression  line) the only value of the momentum rankings is that they slow the rate of loss if the portfolio is not converted to cash.

The Pesky Advance/Decline line...6.25.13

I've mentioned the NYAD (NYSE advance/decline line) several times.  It's a true real time (or longer term) indicator of the underlying market pulse.
Here's the view on 30 minute bars looking back 12 days.
Keep in mind that a reading of 1.0 means equal advancing versus declining issues.
The days highlighted with the yellow arrows started with basically no advancing issues (.05) and showed no improvement throughout the day.
Each of these days was followed by an optimistic open which quickly faded down...in some cases substantially.
Before we can expect a meaningful (and more risk tolerant) investment environment for our models we must see a return to a more normal and less volatile action on the NYAD throughout the day.  A week ago we forecast a significant increase and volatility and based on the behavior of the VIX (white overlay line) we can see that this has occurred and the VIX now stands (as of this post) at 19.15, down 7.5% for the day, but still well above the 12 values that accompanied the previous month's slow rise and churn.

Is the VIX due for a pullback? If so it will probably come in little steps and not without a few whipsaws.
Betting against the VIX is a risky bet for now.

The global sell off in bonds has been dramatic with treasuries and munis taking substantial hits.
Thank the FED for getting that ball rolling but the China slow down and other macro economic factors have created a kind of pig pile effect and its not clear where the first support line is...and more importantly...whether it will hold.

Many issues are now right back where they were on Jan 1st so this may be the foundation for another run up, BUT...cash is still the P6 signal. Yes, all the X sector ETFs are green as of 90 minutes in today but we've seen the "trap door" spring before so caution is advised.

T11 X Sector Update..6.24.13

Here's a look at the X sectors updates as of today's close using the beta version of the new real time T11.
This is a top 2 sort and on the shorter time frames we see that the model is marginally underperforming the SPY, while on the longer time frames the risk management shows favorably.

The model's current status is, with all the other Mosaic portfolios, not vested and in cash at this time.
While the RSQ is upslope the P6 is not giving us a positive reading at the present time.
The good news is that the markets cut the opening losses by almost half at the close.

The bad news is that there is still significant selling, which was particularly evident going into the close.
Another day, another wait and see recommendation.

Wait and See...6.22.13

We did get a little bounce on Friday but it's not clear that this will turn into a rally run. 
To confound the market's direction earnings season is beginning, which typically stimulates volatility as large traders seek to straddle the news with options positions and/or outright directional bets.

Of the 6 bullish components only XLU is downslope XLU and only XLV has a positive P6 slope...which is not a signal to be vested...just a suggestion as to XLV's relative strength.
HOWEVER,  on closer examination after checking with the Variable metrics panel it's apparent that XLV's strength is a trivial .07% relative to it next best performer (IWM) on a 5 day basis so the apparent strength is marginal at best and not significant.

At this point the T6 portfolio (along with all the T2 variations) remains in cash until technical signals improve.

Click once on chart panel to clarify and enlarge.

Trap Door Opens...6.20.13

We never got the actually P6 and RSQ cross and yesterday's reversal sell off was a big one.
Today is more of the same with the advance/decline line (NYAD) hovering between .04 and .05 (a value of 1 is equal advancers versus decliners, so there are basically no buyers.

The VIX is up 16 % so far today....a huge move and the bottom has fallen out of both bonds and gold as the FED suggests the market prop up program may be easing.

The "trap door" pattern discussed previously is evident everywhere today....here's the view of XLU, which looked like it was about to stage a strong rally.

The yellow line is an overlay of the VIX showing how previous spikes in volatility have been ignored by the utility sector.  This time is different.
It's important that we stick to the rules and follow the plan.  Here's an old archive file that looks at reasons why and what happens when some of the "smartest guys in the rooms"don't follow through.

Bonds & Fixed Income...All In...6.19.13

Here's an update to the all in bonds and fixed income T2 model...which is effectively a market neutral portfolio. 
Once again, this is a model that holds all positions in equal dollar amounts and the only trading is a monthly rebalancing to assure that equal dollar amounts are allocated to each position.

The attractiveness?  
It's not the returns obviously, but the drawdown containment and the rather astounding RSQ of .97.
All ears on on the FED today.

T6 Model at Bull Cross..6.18.13

It's a late post but I wanted to see how the T6 Bull Model updated after today's action.  All of the sorts of the model 1-6 are either at the P6/RSQ intersection or fast approaching.  This cross has produced distinctly bullish results in the past and tomorrow's FED minutes report may be the catalyst to signal new vested positions.
We did see the P3 and P6 cross 2 days ago (typically bullish), but the cross of the RSQ will be a true confirmation. 

We suggested 100+ daily moves would ensue after the weekend update and Wednesday will likely be one more.

T2 X Sectors Update...6.17.13

There's the bounce off the 50 day moving average...and it was a big one.

As usual, volume is a trickle and the TICK is actually negative but the markets are always ready with a new twist.
Surprisingly, the VIX (volatility index) has only dropped 1.5% today.  Bullish moves of this order typically are accompanied by VIX moves of at least 5-7% so we may suspect some undercurrent of caution being exercised.

XLF and XLK (Financials and Tech) are the top sector movers today...a pairing that we have relied on in the past to signal bullish intentions.
The NYAD (advance decline line) has been downslope since the open but is now leveling off at a bullish 2.6 (0 is neutral, equal advancers and decliners). 

For now, the T2 X remains in cash per the 4 month P6 and RSQ readings.

T6 Bullish Model Update...Part 2...6.15.13

These are the updated results for the T6 Bull Model using a top 1 sort:
Depending on the timeframe in focus, one or two years, a top 1 or top 2 sort deliver a marginal edge over one another.

What's interesting is that XLU has a downslope RSQ and while the remaining 5 components have upslope RSQs the P6 is distinctly negative.
 
The best looking P6 slope charts include XLV and SPY although the XLU P6 line has switched to positive in the last 3 days.  As mentioned previously in situations where P6 is below the RSQ and dowmslope we have to be especially cautious that an apparent rally doesn't turn into a "trap door" and a sudden plunge to new lows.

Here are the component charts displaying the RSQ and P6 nuances described above:

And here's another way of looking at the current situation using the P3 and P6 overlay:

That's XLF, the financials, at the bottom on the chart set...displaying an almost straight line appeciation over the past 2 years

The other 5 components, including SPY,  are now all sitting dead on the RSQ stop, which just happens to coincide with the 50 day moving average (not shown).

What's next?
As expected, there are divergent opinions.
The largest retail account broker in the US remains selectively bullish on the markets and expects a positive bounce off the RSQ line,  a pattern which has repeated multiple times in the past 6 months.
On the other hand, a  billion dollar bond manager (with whom I share ideas) with a stellar track record (can't mention his name) advised clients on Friday to assume protective cash positions.
Of note is that he didn't say "buy bonds", he said "take your profits now".
He also mentioned that he fully expects more volatility in coming weeks with 100 point + or - days more common than in the past few months. 
Buckle up.
Next week we'll talk about the implications of the VIX (volatility index).

T6 Bullish Model Still Cashbound...6.14.13

It's been a tough week for the markets but our T6 Bull model has held it's own, even though the P6 and RSQ triggered cash more than 3 weeks ago.

At this point the top 2 sort of the model is slightly ahead of the SPY but what's interesting is the upturn in the P6 line.  Now these results reflect Thursday's close and do not include the downdraft in Friday's session.
This is a late post as I literally just got in from 2 days of car travel. 

The updated results reflecting today's action will be posted on Saturday with a more thorough analysis of what the current momentum signals may be telling us along with some proprietary notes from two billion dollar fund managers.

XLF Views (Continued)..6.12.13

Here's a different way of looking at the opportunities in the XLF component model. 
We simply set XLF as the benchmark and then examine whether selectively playing the top 2, 3, 4, etc. helps to reduce risk and enhance returns.

For this study we look at such a model using at top 6 and a top 2 sort:
Both sorts outperform the XLF but what is surprising is that the top 6 sort is clearly the better choice......
Higher returns, less drawdown and a stronger RSQ value argue that a top 6 sort is better.
We also see that the op 6 sort has a lower Skew (volatility) than the top 2 or the XLF benchmark...another supporting metric.

Of note:  both the top2 and 6 sorts have a downslope P6 currently....as does the XLF benchmark.

I'll be on the road tomorrow and there will be no posting.

T2 XLF model Update...6.11.13

A look at how the financial sector is faring helps to put the larger market picture in perspective. 
We continue to believe that tech and financials are prime movers in bull markets and if these falter or lag other sectors then we should be suspicious of the markets' true strength. 

Looking at the XLF component model demonstrates the financials relative resilience over the past year although we also note that if no stops had been exercised there was virtually no gain (or loss) between years one and two.  The metrics provided DO NOT reflect the use of any of the recommended stops since these are really discretionary on the part of the user, but the dramatic rollover of the P6 line for a top 2 sort in the last week of May was a clear signal to cash out. 
On the 4 month chart the P6 is now dead on the RSQ longer term support line and in the past this threshold has always been penetrated downward....another cautionary canary in the mineshaft of possible market troubles ahead.

Although the financials have outperformed the SPY on a component basis their momentum is currently on a fade.  A top 6 sort of this model provides considerably better metrics, which we will examine tomorrow.

Click once on chart to clarify and enlarge.

T2 Update...Cash...6.10.13

This is a period in market gyrations where anything can happen and changes in perceived risk can produce dramatic price fluctuations.  Keep in mind that over 70% of market volume is robot trading so when things get moving in a direction, either up or down, the bots tend to pile on and create more of the same.

The T2 market neutral model has not fared well recently...which is exactly what we would expect following inception of the P6 downslope in the last week of May.  This stand aside strategy can be frustrating, especially in the face of last week's 2 day rally but our goal is always focused on risk containment more than capital appreciation and patience is the price to be paid.

Click once on chart to expand and clarify

Commodity Bounce Next?...6.7.13

The commodity model has had a downslope P6 since April 15th after an impressive run up in March and early April.  With today's encouraging US jobs report and Canada's blockbuster jobs report the markets have displayed an impressive rally.  The rally's been on low volume but we've discussed the relevance of that metric previously and discounted it as a critical factor.

If there is true momentum in this next potential leg up for the markets then we should expect to see a parallel move in the commodities, especially the oil, gas, and basic materials...USO, UNG, XLE and DBB so although the model is currently in cash it bears watching.

Today we are seeing some of the week's previous biggest losers becoming the biggest gainers and the X sector model is now all solidly in the green......although the P6 remains downslope.  There's always the risk that what we are seeing is buying as a result of short covering but there's no way to know if this is actually the situation.
The advance/decline is steady at 2.5...clearly bullish...but I'm still on the sidelines for now waiting for clear opening and confirmation from the P6 and or RSQ.

Click once on chart to expand and clarify.

Beta Neutral Model Warning..6.6.13

I've mentioned several of the sample T6 portfolios that are post in the User Reference section. 
This is the beta neutral model with a top 6 (all in) sort. 

We should expect that the results would approximate a straight line since we have created a situation where volatility is (hypothetically) close to zero.  In fact, we see that market technicals began to deteriorate around May 15th...supporting the argument for cash....and that trend continues through the present.

In this case we use the model not as an investment model but as an indicator of market stability.
Using the market neutral model produces almost identical results so the P6/RSQ cross should have been detected regardless of the model examined.

Click once on chart to clarify and enlarge.

Bottoms and Trap Doors...5.6.13

Early market action suggests another down day with the advance/decline line at a bearish .38 level (1.00 is equal advances versus decliners).
Following yesterday's post we are seeing some development of the bond/equity skew but it still too early to bet on that trend.  Note the TrendX charts of the SPY and TLT in the right side panel.>>>>
SPY has once again arrived at a technically critical support level, while bonds are just marginally improving. Cash is still advised.

In response to reader queries here's another look at the hairy bottom setup.
There are 2 examples shown on daily bars for FDX (Fedex).
The first resolved into a trap door...wherein what looked like a bottom turned into a drop to new lows.
The second was a true hairy bottom...with a gradual upslope rise in price following a series of long tails on the candlesticks which I have hence nicknamed the "hairy bottom".

This pattern appears in all time frames..2 minute, 10 minute, daily, weekly, etc.  In most cases momentum reversals are more reliable when such a bottoming is clearly visible, although the markets have been known to go straight up or straight down without the advantage of this pattern.
Saturday's post of the EWJ (Japan Index) is such an example of an abrupt turnaround..

X Sectors All Downslope..6.4.13

Monday's pop looked like a turnaround but today's action has currently erased almost all of yesterday's gains.
Patience is the best advice for now until it becomes clearer if this is a short term or longer term correction.

All the X sectors ETFs are downslope. In most cases the P6 has been in that mode for over a week...in the case of XLU the roll over occurred a month ago. 
There are currently no bottoming patterns (hairy bottoms..discussed in previous posts) so cash is the safest place to be right now.

We're still waiting for a resolution of the bond/equity skew...at the present they are displaying correlated momentum.  When (and if) that changes and bonds begin to move divergent to equities then we may expect a more technically reliable investment milieu.  That's not the current situation.

All Models in Cash

This post is earlier than normal.  I'll be on the road (literally) Sunday, Monday and Tuesday so here's the upshot of Friday's collapse:
Virtually every model portfolio that we track...T2 market neutral, X Sectors, Commodities...even Bonds and Fixed Income.. are all showing downslope P6 and in most cases a penetration of the RSQ equity line. Under the pressure of equity selling we would typically expect the bonds side to be running green...that has not been the case and TLT's dramatic plummet on Friday (before a late recovery) is a sure sign that the market fundamentals are in need of a new paradigm.


The portfolios have incrementally gone to cash since April 15th and there's little evidence that the pattern is ready to exhaust.  We're a long way from capitulation selling and this may turn out to be just another great buying opportunity.  In the meantime however patience is advised just in case this is a delayed "sell in May' distribution that could have several hundred more points to the downside before finding a viable support level.

With all the sectors showing weakness there's little point in being vested...the only result is that we lose money at slower pace.

These turnarounds can be dramatic...and costly, if you're not paying attention.  As an example here EWJ, the Japanese Index, which has given back 2 months of gains in just a few days.  What's scary is that it may revert to $ 9.50, which would really be disappointing to investors who jumped on around May 15th based on several reputable money manager's recommendations.

It's well said that anybody can buy a stock (or ETF)....it's when you sell that counts.