XIV Accelerates...3.31.14

OK...this is the last trading day of the month, not Friday, as I mentioned last week...and it was a strong day.  Actually, it's the first trading day of the month that has been historically strong.  Since this is a widely known fact many traders try and game the event by simply buying the last day of the month.

If you had a chance to catch "60 Minutes" last night on CBS you got a glimpse into how you and millions of others are being shafted by high-speed trading firms.  And, if the IEX ever decides to go public with their exchange it will probably be a whopper of an IPO to buy in to.

The XIV is continuing to accelerate upwards as the VIX settles down to the bottom of its 2 week channel.  There may be some hiccups along the way but this is definitely a bullish turn.
The strength of the XIV can be seen in both the 5 minute and daily bar charts below.
Meanwhile, XLE, which broke to new highs on Friday, pulled back a bit into the red after an early surge to another new high. (VEGA model below)

QQQ and XLF Remain Weak...3.29.14

Last day of the month trading looked encouraging for the bulls at the open but as the day wore on much of the gains were loss. 
At one point in the day the Qs were actually in the red and XLF was also weak relative to SPY.
The most optimistic factor now in evidence is the sudden surge in XIV (= reduced volatility)...a scenario we've been anticipating for several months.

XLE (energy sector) was at new highs...possible reasons include new worries about Russian incursion into the Ukraine, the impending summer driving season price escalation and general speculation about  improvements in emerging market economies...which have suddenly become hot (EEM and SCHE).
Despite the decision to release oil reserve inventories in an attempt to ease demand speculation the result appeared to be zero.  There may have also been some short covering at work pushing XLE higher as it has now broken above long term overhead resistance (although marginally so).

Weakness Persists...3.27.14

Another red day and another day where QQQ and XLF were the weak sisters relative to other VEGA components....a bearish indicator.  XLE and XLU were the VEGA leaders....and while XLU often operates in a momentum contrary to SPY XLE is a bit of a surprise, but the Crimea situation may still be stimulating uncertainty in the petro markets.

Bonds in the form of TLT 20 year treasuries are currently uber overbought as a safety net so the action of the next couple days will be critical in determining whether we'll see a reversal to the upside or a continued slide.

Tomorrow's TRENDX prognosis looks bearish unless some particularly positive overnight news puts the markets in a better mood.

Cracks in Momentum....3.26.14

A positive start for the day was reversed in the afternoon session, followed a very weak close.  Keeping track of the current trend puts us in a mildish bearish mode so how the end of the month plays out may be critical as we move into April.
QQQ and XLF were the weakest components of VEGA, exactly the opposite of what we have come to expect from bullish momentum.
The M3 daily bar chart (lowest chart) shows how XIV has behaved recently and it hasn't been bullish. The particularly weak close today leaves us with odds favoring more of the same tomorrow.

Poaching the Bond Cycle.....3.25.14

Here's the last word on TLT vs. TBT (20 year treasuries vs its ultra inverse).  Despite all the news dynamics and geopolitical uncertainties it turns out that once treasuries find a support resistance channel prices tend to behave in a rather predictable manner.  This doesn't mean we cast aside our money management stops...those stay in place....what it means is that once we identify these S/R cycles the odds for making money increase substantially.
Below are the daily charts for TLT and TBT. 
TLT has a intraday range of about 1%, TBT, because its an ultra (x2) has a daily range of about 2%. (Just for reference SPY has a daily range of about 1.3%).

Following the 2 prices charts is the M3 setup...just 2 inputs.
Then the M3 pairs analysis of the TLT/TBT skew. 
The red lines point to the zero line crosses that signaled the best odds for long TLT trades and/or short TBT trades.
So far the skew indicator has provided a good gauge of TLT momentum.  Just keep in mind that some factor will inevitably break the cycle (more tapering?).  When that time comes all bets are off until a new support/resistance channel is formed.

Ex Opt Weakness and XLU Looms...3.24.14

The QQQ was the big loser today, accompanied by the health care sector (XLV) which has, up until recently, seemed unstoppable. The double top that has been evident for some time may be about to lick in..further suggested by the strength in utilities (XLU) and treasuries (TLT), which are now technically in over bought territory (typically bullish).  On the positive side we're fast approaching the end of the month and may gain some bullish momentum strictly from that event.  Otherwise, the short term outlook is neutral.

More Gamma Nuances...TLT vs. TBT......3.21.14

Following yesterday's post on TLT vs TBT several readers asked for more clarification on how to play the Skew between the two. The pairs Skew is very similar to the M3 and M6 pairs Skew charts,
it's just programmed to run 40% faster since the target duration of the trades is only 8 days or less.

Here's a smoothed and refined version of yesterday's screen shot showing the momentum in both TLT (A) and TBT (B) as well as the % change dynamics for both A & B...which is actually a chart of comparative standard deviation decay.  Note the intersection (zero line crosses) of A & B.  These are the times when the skew favors either TLT (red) or TBT (blue).  Its complete serendipity that the length of the trough between the Skew crosses is almost consistently 8 days.

These opportunities can also be traced using the actual trades signaled by the pairs algorithm (Excel spreadsheet below).  Based on the screen shot run at 7 AM PST today (Friday) the 30 Day Skew chart is displaying a cross of TLT and TBT SD decay and the open TBT Long position was closed.  A run of the same screen at the end of the day today shows this was a smart move as TBT deteriorated steadily for the remainder of the day.

Click once on chart above to enlarge.
In most case below we see a sequential reversal of  S-A (short A) versus L-B (long B), although there are several instances over the 6 month look back where the trend is so strong that back to back long,long or back to back short. short signals fire.

What the spreadsheet DOES NOT show is the effect of using an 8 day time stop.
As a result we see loser trades like #5, which the program allowed to run for 30 days.  Had the 8 day fixed time stop been employed the net result of that trades would have been a 3.13% gain.....not a 12.46% loss. Using that time stop would have upped total returns to almost 70% over the 6 month study period.

TLT vs. TBT is just one example of how this model can be used to generate short term gains using indices and their inverse:
Here's how QQQ versus QID looks over the past 6 months...still using an 8 day time stop.

The Skew is not quite as defined as the bond model but the idea is to develop and trade a basket of these pairs to further diversify risk exposure.

Gamma Nuances....TLT versus TBT.....3.20.14

As promised last week this kicks off a series of studies that seek to refine and enhance the 6 ETF Gamma model posted Friday.  In this instance we'll look at the dynamics between TLT (20 year treasuries and its ultra inverse TBT).  TLT is an IShares product while TBT is a Proshares product and its important to keep in mind that TBT is an ultra (x2 short).

We've discussed previously how ETFs and their inverses don't necessarily always work in true inverse fashion and that's certainly the case with these two.
First, here a look at TLT and TBT using the MOSAIC pairs Analytics version of the ETFP platform :

What the analytics reveal are clear pockets of opportunity when the inverse skew between these 2 gets imbalanced.  What follows that imbalance has always been a return to parity (the zero line) and I won't even begin to speculate on the factors that periodically create the skew.....the point is simply to recognize it and take advantage of it's profit taking potential.  For the purposes of this study I've set the time stop at 8 days.... just because I like to cut my risk exposure short.

What's encouraging about the risk profile is the 81% linearity of the equity curve over a period of 6 months....better odds than you'll get with most trades and the 20 trades over the last 6 months produced a 46% return or an average of about 2% for every 8 days of exposure. 

We can look at the TLT / TBT skew another way using the M3 platform:

 There is no ghost input for this model because we're just trying to see how these 3 inputs play against each other.  In times of market weakness we expect TBT to rank highest, whereas in times of market strength we expect SPY to outrank TLT.

This is a top 1 sort and, as always, we need to play close attention to the short term ALERT, the P6 and the RSQ line.  These are the results just using the AUTO STOP turned on....not a barn burner on the 6 month metrics but attractive on the shorter term times frames....and a nice upslope equity curve.

The M3 version doesn't get us close to the pairs modelling returns of 46% over 6 months, but we're also looking at the skew in an entirely different way using an entirely different momentum algorithm and timing framework plus adding SPY to the mix to further confuse things so the differences in returns are not unexpected.
Going forward we'll look at how we might use this correlation of the TLT and TBT (and other divergence pairs) to improve the Gamma model returns.

FED Lays an Egg....3.19.14

The day started out fine....XIV was up and although there was clearly some early profit taking ahead of a possible FED surprise the mood was pretty subdued.   But then.......

That all changed when the FOMC intentions became known just after 11 pst. 
The daily SPY VIXEN says it all.
Another 10 billion pullback on FED buying caused TBT to soar (TLT inverse), which was technically overdue.(.more on that tomorrow)....and XLU (utiltities) went into free fall...a situation that's not exactly clear.

The emerging markets EEM/SCHE got hit especially hard and the green was hard to find among the large caps.  There was a modest rally at the close and tomorrow's action may well set the tone into the end of the month but for now our bullish SPY M3 signal has been derailed.

Strength Ahead of the FED....3.18.14

Today looked very similar to yesterday's open to close action. We actually saw an improvement in the XIV situation...as was reflected in the end of day ranking for tomorrow.  It's been a while since XIV has been seated #1 and a quick look at the 5 minute and daily bar charts of the M3 SPY Trader (below) certainty looks bullish.

Of course the FED could drop a bombshell at tomorrow's meeting and derail the positive momentum but its widely expected that Yellen will do everything possible not to muddy the waters and get the markets riled up.  Eight times a year the FED gets together to formulate policy and deliver a kind of state of the economy report.  In the overwhelming majority of past meeting the response has been nasty intraday volatility followed by bullish action for at least a day or two, especially if SPY is above the 200 day moving average.

That's pretty much what most traders are expecting short term based on today's financial blog chatter.

The SPY-XIV and SPY-SSO pair charts are now both bullish and will get even more so once the zero line intersection is crossed.

Relief Rally?...3.17.14

Thanks for the comments on the new Gamma model.  I'll post a few variations to that model later this week that can be used to refine the beta balance of the components if things get nasty. 

For today, St Patrick's Day green was the theme and the markets took a breather from recent weakness.... although it was an odd technical level for a reversal so I caution that the all clear signal may not yet be in effect.

It's also unusual for the markets to simply gap up at the open and then hold fast for the rest of the day.

On the daily SPY Trader we're seeing some encouraging momentum in XIV (below).

Gamma... A Model for All Seasons...3.14.14

Here's an update and revision of the 6 ETF M6 Gamma model using both daily bar and weekly bar rebalancing based on current momentum/relative strength rankings.
A closer examination of the model shows how using the money management stops in the daily version can be useful of avoiding inter week drawdown in the weekly bars model.
Gamma is not a beta neutral model and in fact will always perform better in bullish trending markets.  The use of an SSO (SPY ultra) input allows the model to pick up maximum gains during those periods.
On the other hand, the 3 bond components will help buffer the portfolio from drawdowns when the trend is downslope.

We're using a top 2 sort for this study.  That allows the model to pick up some gains and avoid some drawdowns during periods when the trend is in a transition phase.
As with all the Mosaic iterations its important to adhere to the money management stops regardless of what the rankings are suggesting.  SSO and QQQ can be he leaders and still be losing money...all that means is that the other inputs are performing even worse.
In the situation below the equity line and the P6 stop crossed the RSQ line simultaneously 9 weeks ago....a clear sign that cash was the safe course of action going forward.

Looking at the daily bars version of the model below we detect that TLT has crept into #2 slot as of yesterday and QQQ has moved almost to the lowest ranking...not a good omen for QQQ.  At the same time the short term ALERT stop crossed the equity line back on 3/7 suggesting that the market trend was under threat from the bears. Note that TLT is the pair study input against a SPY benchmark.

Now keep in mind that daily results are different than results obtained from a weekly rebalance.
The results of the daily rebalance model are shown below. What's interesting is that the equity chart and the pairs chart (SPY versus TLT) both confirm 3/7, 3/8 as a turning point in the trend ...thus indicating the safety of cash as the recommended course of action.

Indices Swoon, XLU Pops...3.13.14

For the first hour it looked like we might see a green day fostered by good employment and productivity reports.  But then the trap door opened for the rest of the day and the VIX surged 15% with only a modest rally at the close.

XLU was hands down the VEGA winner, a pattern we've noted before on weak days. 
Otherwise, there was heavy selling across all the sectors with energy (XLE) taking a big hit and QQQ, which has actually led SPY in +momentum over much of the past 6 weeks, ended up at the bottom of the pack. 
Bonds surged, (aka TLT) as expected, and we have now gone from overbought SPY conditions to nearly oversold in a matter of 3 days.

Today's selling is likely to beget more selling as the NYAD didn't come close our typical low teens reversal levels.  For now cash is king until prove otherwise.

Utilities XLU Surges...3.12.14

The interesting action today on the VEGA model was the strength in XLU....typically a symptom of underlying bearish market sentiment as money flows into the lower beta issues like XLU. 
On the other hand the financials (XLF) are showing some distribution, a situation that has been recently expected by a number of market gurus and is not bullish.

Otherwise, the VIX/XIV skew continues to mask the market's likely next move and from a calendar standpoint we're mid month, an unusual time for dramatic breakouts/breakdowns absent some provocative news item.

Resistance Holds...3.11.14

It's actually kind of freaky how SPY reacts to the TrendX support/resistance lines.
Yesterday we noted the SPY position relative to the medium term resistance line and today we saw a clear break of momentum to the downside.
In previous cases of an upper resistance kiss during the past 6 months a reaction to the downside has never been more than 2 days away.

It wasn't a dramatically bad day, the losses across the board were fairly muted but this might be the start of a least a short term correction to get the markets down to a more buyable status.

XLE was the big VEGA loser while healthcare XLV continues to hold its own.
The XIV is not behaving well....note the daily bar chart below....it's ominous.

TrendX High....3.10.14

We're back up to the SPY TrendX upper resistance line (side right panel) and the market is clearly in an ambivalent mood.  It's now become clear that the Ukraine situation is no where near a "final resolution" and Putin is likely to escalate Russian provocation just to see how far that ball will bounce.  The West is meanwhile powerless to provide any negative reinforcement for the incursions and is left to simply worry over the problem.  The effect on the markets has so far been minimal and despite the constant headlines there's little to suggest a panic is forthcoming.

Earnings are behind us for a while and the economy is chugging along nicely.
For now its wait and see what the next big thing will be.