Momentum Improves, but Marginally...8.29.13

The markets put on another bullish day although momentum was muted and volume was thin.  Friday will be the last trading day of the month (75% Bullish) and the apparent delay in a US military response to the Syrian situation (and the possible consequences) gave a positive slant to the news.

GLD and SLV did go red today, a possible first step in a larger trend reversal so positions the the Hybrid model should be closely monitored and perhaps portions of any positions closed in order to protect recent gains.

Over in the default model the P6 is starting to look optimistic but a confirmation from the TrendX and the short term metrics would present a better case for a vested position in that model.
Friday's action is expected by characterized by more light volume and increased volatility ahead of the 3 day weekend.

Advance/Decline Line is the Key...8.28.13

Here's a look at the current NYAD (NYSE advance/decline line) that I've mentioned many times before.  It really is key in understanding underlying market momentum and, of course, it can rise like a rocket or plummet like a stone based on news or rumors.

Yesterday's NYAD was just plain dismal and the surprising thing is that it only dropped to the .20 levels.  Real selling is characterized by readings below .10 and such events occur on about 1% of trading days.
After 2 hours in today we're seeing an attempt at a rally, although volume remains low as everyone waits to see what the other guy is going to do.

Note what may be a current topping in the NYAD chart.  Although the argument can be made that selling days such as yesterday are really buying opportunities a similar argument can be made that yesterdays' lows will be tested again before a short term bottom is put in place...recall the "hairy bottom" pattern previously discussed.

In our Hybrid model silver is showing some weakness while gold continues to run. 

P6 and TrendX are Negative...8.27.13

Here's a real time ...pst 9:00 am...check on our default model with XIV sitting in for XLU. XIV is the VIX inverse so if markets are bullish XIV is high whereas if markets are bearish XIV is low.
Note XIV's current position at #11.

I'm using the new format again featuring the model TrendX and we should clearly be in a CASH mode to avoid the market drawdown that's currently underway.  How far this "correction" will go remains to be seen.
By the way...several market gurus announced today that a new bull market in gold is about to start.

Hybrid Model Rolls On...8.26.13

I've mentioned before that the Hybrid model leadership of silver and gold was in danger of collapse following its recent parabolic rise.  In early going today those issues did in fact turn negative but late day selling in equities apparently drove money into those issues and they once again reached short term highs.

The Hybrid model has made some very impressive gains over the past 90 days and 30 days relative to SPY, but the TrendX of a top 2 sort indicates that overhead resistance has now been penetrated and odds favor a near term retracement...... so keeping the exit door close at hand is advised.

The chart shown in from the beta version of the new real time T11 platform, which includes not only a real time feed (no data fees), but both a TrendX and a Volatility Skew indicator to help gauge when positions should be vested and when cash is the more appropriate risk management strategy.

Note that the standard commodities model is also performing very well, while the default and X sector models basically tread water and continue to display down slope P6 signals.

Top 2 View of T6 Hybrid Model..8.23.13

Despite, or perhaps because of the NASDAQ blackout on Thursday, the equity markets managed to make some modest gains yesterday.  Fears of another possible flash crash kept a lot of money on the sidelines and volume was trickling most of the day, with a gradual fade down into the close.

This is not a market characterized by a lot of enthusiasm, either up or down and the next earnings season will most likely be the catalyst for the next big move although the typical end of month buying may provide some lift.

In the meantime the commodities continue to book solid gains, as evidenced by the leadership of XLB (basic materials) in the T6 Hybrid model.  If the overall market was participating in this otherwise sector rally the positions of VIX and SPY would take top slots.  This is currently not the case although the relative weakness of XLU (utilities) in the momentum rankings indicate that risk hedging is not a big concern...so once again we are left with a market malaise looking for a reason to move.

The top 2 sort of the Hybrid model posted earlier this week continues to display a downslope P6, thus arguing for the safety of cash.  This sort, although still producing twice the volatility of the benchmark SPY, is probably the better (safer) choice than the top 1 sort posted earlier.... although strict adherence to the money management stops is crucial in both models.

Another View of XIV...8.21.13

Midday it looked like the markets were going to follow through on yesterday's modest rally....and then the trap door opened and the markets came tumbling down into the close.  Of particular note...most of the closing imbalance order were on the SELL side...that means market makers were struggling to find buyers for their SELL positions and were trading on the BID, not the ASK prices.

The volatility can probably traced to the FED and the uncertainty of the equity damage a pullback in quantitative easing would create.  No one wants to be long through another 2008-2009 collapse.

Since you asked...thanks to Jim L. for the suggestions on XIV variations.  Here's what happens when we add XIV (the VIX inverse) to the T11 hybrid model and pull UNG (natural gas from the mix).  This is a top 2 sort and note that XIV has been slowly migrating away from the top slot since 8.13. 
The short term performance metrics (5-90 days) of this model have certainly been attractive and what's interesting is, despite the negative slope P6 in most of our other study portfolios, this P6 is upslope (its not parabolic) and looks poised for possible additional gains.

A REAL Momentum Model...8.20.13

This is another version of the X sector model but we've juiced up the returns by adding XIV, the VIX inverse ETF that obviously behaves like a wildcat, so attention to money management stops is not suggested...its mandatory.  The performance metrics are a bit scary and this is clearly a model best used by those willing and able to actively manage their account on a day to day basis using the P stops.

Note that this is NOT a delta neutral model...there are no beta offsets to the portfolio components....these are all ETFs that flourish in bullish environments.  The way we control risk is simply by going to cash in times of market neutrality or bearishness...thereby further emphasizing the need for paying close attention to the stops.

Hybrid Model Details...8.19.13

Here are a few nuances concerning the hybrid currency, country, commodity model posted last Friday.
There are several features that make this an interesting investment but, as mentioned, close attention to the money management stops is crucial...making this moe like a trading portfolio  Although the performance metrics shown DO NOT reflect the application of the P6 or RSQ stops, it's clear that net retruns could be improved significantly if those stops were followed.

Note the yellow arrows indicating that an all in all the time portfolio of the 11 components would return just 2% over 2 years, reflecting the underlying market neutral features of the portfolio. At the same time note that the volatility of the model is considerable greater (at present) than the SPY benchmark, which is both good (the short term metrics of the model are stellar) and bad (the drawdown metrics are greater than the SPY).

Per the red arrows note that this is a top 2 sort shown...Friday's post was of the top 1.Also note the parabolic situation of the current equity curve (blue) and the P6 (red) relative to the RSQ.  While recent momentum has been a barn burner such accelerated strength cannot be sustained and the position of these lines should be a heads up to exert extreme caution going forward.  While we may not expect a dramatic collapse in the momentum of the top sort leaders there will quickly come a time when momentum will abate and a new leader sort will appear...most likely WITHOUT the almost vertical equity curve we currently see.
There are times for aggressive investment and times for caution with this model.....this is one of the later.

A Hybrid Model for the Times...8.16.13

This is a variation of the commodities model which includes several currencies and countries as buffers against commodity fluctuations.The futures based DBA, DBB and DBC have been replaced along with IYR, the real estate component.

We have maintained XLU in the mix as a market weakness hedge and at the same time take advantage of the cyclical price patterns that are characteristic of the currencies.  Keep in mind that the volatility of this model is more than the SPY benchmark and as result strict adherence to the risk management stops is critical.
Note the yellow volatility line versus the SPY red line.

This is more a trading portfolio than an investing portfolio as the rankings (and returns) can change quickly and we don't see the usual extended run of positions ranked #1 and 2 as in the more market neutral models.
Nevertheless, there are some quantifiable edges here (see Costanza post) if the trading plan is closely followed.  A Top #1 ranking sort is shown...the top 2 also yields respectable results.

Click once on chart to clarify...........

SPY Falls to Support Levels...8.15.13

A nasty day of selling with the advance/decline line hovering at .10...meaning one advancing issue for every 9 decliners...so not a lot of buyers.

Yesterday's TrendX indicated expected weakness and bad earnings reports by Cisco and Walmart set the mood for today's uber weak open.  Today's slide takes SPY down to previous support elevels and we may expect some initial buying at Friday's open although it is not at all clear that a bounce that will hold is about to happen.

Meanwhile, the commodities model has quietly come to life again in the short term metrics with silver, gold and basic materials (think metals) leading the momentum model returns. The model has been in the doldrums for a while and should be monitored closely to re-evaluate when the P6 goes downslope again.

No Bullish Confirmation...8.14.13

OK...today was NOT the bullish confirmation day we were looking for.  As earnings season winds down there are a few nasty surprises that have punished the otherwise upbeat mood...such as CSCO.

As in previous times of accelerating volatility this has become a market of stocks, not indices and the collateral damage from that milieu is a general stagnation in ETFs...which are comprised of multiple stocks.

Of note, we did get a nice move in gold and silver over the past 2 days and the dollar (UUP) looks poised to make another 10% move to the cycle top...just as FXE (the Euro) looks poised to retest the previous cycle lows. Looking at the SPY TrendX and considering where we are (mid-month, option expiration near), the odds favor a continued slide and we again must suggest CASH even though the P6 is marginally upslope.

Bonds and utilities (XLU) are particularly stagnant as investors try to game the FED's next move.
Surprised that QQQ is in the momentum top 2?  Thank AAPL,which has enjoyed a nice ride through 500 and which comprises 20% of the QQQ and XLK.  Without AAPL's support the Qs position would be much closer to a # 5 or 6 rank.   This situation emphasizes my previous comment on a market of stocks.

X Sector Update...8.13.13

We got a little boost today all based on some random comments by one of the FED governors that the future growth of the economy was not certain.   Until that profound utterance the markets had been digging a red hole...but hope springs eternal for continued FED propping up and the markets reacted accordingly..although volume was very thin...as it has been over the past few days.

Now we're back into earning season and the usual market gurus are hyping tech and the financials... a 2 headed driver for typical bull markets that we have mentioned many times previously.  While the XLK is doing its part to make this scenario a reality the XLF financials are clearly lagging the pack and have some ground to make up to gain higher ranking.

Note the position of the P6, which has arrested its downslope with today's reversal and we are now looking for at least one more day of confirmation before signalling the all clear for vested positions.

The Costanza Problem...8.12.13

The Costanza Problem 

The Jerry Seinfeld sitcom often featured George Costanza, a character who was a serial loser by his own admission.  George was frequently unemployed for long periods of time and was forced by his poor financial situation to live with his parents whom he found every opportunity to denigrate and demean. Although George tried almost every job imaginable, he always found a way to get fired, often under embarrassing (and hilarious) circumstances. His personal relationships and his professional pursuits were a series of unending blunders.   George’s inability to make either personal or professional commitments doomed him to a world of constant conflict between Relationship George and Independent George.  As George was fond of saying, "A George divided against himself can not stand”. 

George was a comic success because of his personality quirks, but a deeper analysis of his multiple character foibles provides an insightful look into the types of behavior and attitudes that can help investors and traders succeed.

While George frequently acted like the poster boy for deviant behavior, he was merely displaying an over the top version of many of the negative traits that traders must avoid in order to become consistent winners.  Denial, failure to be honest with one’s self, lack of training, lack of a professional attitude, lack of self-discipline, lack of patience, lack of focus, poor capitalization, poor planning and/or the inability to formulate and follow a plan are all examples of self-destructive behavior that traders must overcome.

In a particularly watershed episode George experiences a glorious epiphany that everything he has ever done in his life has been wrong and that to rectify his failures and now become successful he must behave exactly opposite to the way he has behaved in the past.  George undergoes this realization while in a tavern and immediately approaches to the back of a very attractive, apparently unattached blonde perched at the bar.  Completely contrary to his usual attempts at gaming and deception he openly declares, “Hi, my name is George, I’m unemployed and I live with my parents”.

The anticipated result of this encounter is, of course, that the blonde will turn away from George in disgust and disdain.  But with an inviting smile and flourish she turns to George, extends her hand and says, “Hi, I’m Victoria, it’s so nice to meet you.”  It is in this moment of brilliant clarity that George ceases to be divided against himself and presumably later reaps the benefits of his new persona off camera with his new lady friend.

In like manner, a mantra for traders might be,  “A trader divided against himself cannot survive”.  How can a prospective trader formulate and effectively utilize a unified mindset and attitude that will enable him to emulate George’s awakening and trade with calm, clarity and consistency?  The ability to successfully answer this question is fundamental to a trader’s longevity and the shape of his equity curve. 

State of Mind

Long term investors and short term traders operate in a dynamic, probabilistic and opportunistic environment characterized by uncertainty and risk.   Market movements are driven by government financial policies, unpredictable news, intentional mis-information, chat-room hype, program trading, earnings reports, business fundamentals and the rampant trader emotions of fear, greed and hope that can dramatically impact price and volume action in both stocks and options.  The markets are a zero sum game and utterly impersonal.  Other traders have no regrets about taking your money and eating your liver for lunch, presumably with some fava beans and a nice Chianti.

If you ignore the following brute facts of market activity then it is extremely unlikely that you will be able to preserve your capital and to survive as a trader:

Anything can happen (and probably will).

There are always unknown forces and traders operating in the market with diverse goals and strategies that may not be logical or probabilistic according to your perspective. If you believe anything can happen in the markets then you will always be right.

Murphy’s Corollary:  “Anything” will most often happen when you least expect it or when it is most disadvantageous to your market position.

A trading edge increases the probability that market moves can be anticipated.

The only determination you need to make is whether the factor you have identified as an edge is present at any given time. If you mix in other information to try to qualify a prospective trade then you are weakening the probability of your edge. Do not waste time attempting to gather more information to guide your trade if the market offers you a legitimate edge.  Instead, apply your risk management plan, seize the moment and take the trade.

Every moment in the market is unique.

Come to the market with no agenda other than to let it unfold as it may. If you have a quantified trading edge then the laws of probability will prevail over a series of winning and losing trades. Incoming market information, news and data are only threatening if you expect the market to react in a certain way.  If you don’t expect the market to make you a winner every time you place a trade then you will have no fear of losing.  If you eliminate your expectations, then the market cannot disappoint you. Maintain a clear and focused state of mind in order to recognize and take advantage of the opportunities the market makes available to you. Successful traders have trained their mind to believe in the uniqueness of each moment in order to be open to perceive what the market is offering.

Once you have accepted the inherent uncertainty of the market your success will increase dramatically. Consistently successful traders develop an almost detached state of mind that treats trading as a probability game because they know with a high degree of certainty:

v  What a trading edge looks like and how to determine if it is working

v  The amount of risk required in order to determine if an edge is going to work

v  A specific trading plan to mitigate risk and to define how to take profits and cut losses.

As a investor or trader you need to be rigid and flexible at the same time: rigid with the rules of the trading plan and flexible in the expectations for how the trade will play out.  A trader needs to be rigid to give himself protection in a market environment that has few boundaries and to promote self-confidence and a trader needs to be flexible in order to be objective and give clarity to what the market is communicating.

Creating consistently profitable trades results from acquiring and embracing the tools to master these technical, tactical and mental skills rather than focusing on making money. 

T6 and T2 Weekly Models...8.10.13

For those using the Lazy Man approach and just rebalancing on weekly bars here are the views of the compact delta neutral T6 and T2 weekly models.  Keep in mind that the data won't update until after Monday's close so the metrics are reflective of performance as of 8.5 only.

The simple T6 model is shown with a top 1 sort and SPY has held that slot for months now so not a lot of trading involved.
Fact be known... since the first of the year SPY and SDY have held the top 2 slots.. so if you ran a top 2 sort portfolio you would have had no trading costs.....so pretty Lazy, to say the least.

Looking at the more diversified T2 model and a top 2 sort produces somewhat similar results but, as I've mentioned several times before, the IWM and XLV have been the ETFs that have driven this model.  There's a bit more volatility involved as compared to the T6 and returns could obviously have been improved by adhering to our P6 money management guidelines.\

As with all models...the results shown DO NOT reflect employing the P6 safety net but rather reflect results that would be achieved by simply following the momentum rankings with no regard for underlying market weakness and consequent drawdowns.

Click once on charts to clarify.............

XLF Update..8.9.13

Still a few issues settling in which caused my IT to give me grief yesterday.  Verizon swears they have it fixed as of this morning so hopefully there will be no more service interruptions.
As we gaze into the crystal ball in search of the market's next move this seemed like a good time to review how the XLF model is performing...relative to both the XLF and SPY benchmarks..
For now the SPY TrendX is downslope...confirmed by this morning breakdown... and virtually all models, including XLF remain in CASH following the P6 slope...which is also down.

Using XLF as the benchmark we note a marginal advantage is utilizing a top 6 sort versus an all in strategy.
From a portfolio maintenance perspective the commission costs in sustaining this approach are difficult to justify...unless the portfolio size is several hundred thousand $..

The upper matrix is shown with a top 6 sort, the bottom matrix with a top 2 sort.  Both apply to the XLF component model so our goal is simply to show the relative performance of using greater than a top 2 sort.
You can obviously play around with other top# sorts...these are just a couple examples.  In most cases a top 2 sort generates the optimum return....you just have to pay attention to the consequent drawdown and skew values and act accordingly....as noted below.

In the situation below, with SPY as the benchmark, the argument for adopting a T2 strategy makes a lot more sense...although it must be noted that the volatility (skew) of the model is considerably greater than the blended SPY and to protect against possible drawdowns the money management stops...especially the P6 slope indicator...must be rigorously enforced.

We'll do a weekend wrap up on Saturday to put this week's action in perspective.

Cash Signals Remain Intact..8.7.13

We're in another wait and see mode......fears are once again increasing that the FED will dump its buying program and the markets will suffer.  This is an old story but as September approaches the risk hedgers have apparently decided to lighten their portfolios...just in case and buyers seem reluctant to step and pick up the stack.

What looked like an encouraging bottom  pattern in GLD has turned into a sneaky trap door situation.

Meanwhile the bond ETFs remain struck at the back of the momentum rankings while tech and health care try and regain their footing.

Better safe than sorry in this trading environment...there are few buying bargains to be found.

Commodities Continue to Languish...8.6.13

The simple P6 momentum indicator once again kept us out of today's red market today.  There are times when positive momentum is relatively to forecast...and then there are other times (most of the time) when the vagaries of the market and macro economic forces make the logic behind market moves essentially unpredictable. From a risk management standpoint we just want to capture those easy moves.

Commodities continue to under perform SPY and the X sectors.  Such weakness is usually a symptomatic of underlying market weakness and lack of commitment in the industrial sector.

The futures based commodity ETFs, DBA, DBB and DBC are riding in the back of the momentum rankings, a further indication that institutions and large traders are skeptical of the market ability to move forward in a positive mode.  Despite a variety of good earnings reports the true growth potential of the market is still in question.

X Sector Update

I finally have connectivity back... the folks at Verizon had a bit of a problem making it happen according to schedule, but after 2 1/2 days and 9 hours of tech time the network seems to have reached a semi-steady state.
While I was sweating it out with my move to La Quinta the market displayed the anticipated first of the month rally, taking it to an overbought status on Friday and a not unexpected pullback today.

The momentum rankings have been able to track the recent leaders...XRT, XLY and XLI although the model is still displaying a downslope P6...so our conservative risk management profile of CASH remains intact.