"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
Sun Tzu

Tuesday, June 30, 2009

Relative Strength of Defensive Sectors a Bearish Sign?

Recent outperformance of defensive sectors has been taken as a bearish sign by many market observers. Let's look back into history to learn if that conclusion is justified.

The following snapshot shows the spreadsheet I use for tracking weekly performance of key sector ETFs (very important BTW, if you are a short term oriented trader). In the area on the right, I calculate relative strength of each sector based on a propriatary formula. Excel then offers a nice option to visualize results using a red-yellow-green system (BTW: I'm a very "visual person". Visuals help me to find patterns in all that data.) As you can see, defensive sectors Health Care, Utilities and Consumer Staples have been in fact the leading groups for the last two weeks after dramatically underperforming for the prior month.

I ran a little study to find out if leading defensive sectors in a strong market predict lower prices. I was looking for events, where these sectors showed at least 65% of realtive strength when the SPY was above the 50 day moving average. Unfortunately, my data just goes back until 1999, but results were not overly impressive:
- a similar pattern occured 10 times during the last 10 years.
- 5 out of the 10 times, the SPY lost value four weeks after the observation (same for a 10 week period)

- Average gain after 4 weeks: +0.13%, standard deviation: 2.53%

- Average loss after 10 weeks: -0.4%, standard deviation: 4.55%

you have to be careful with a conclusion because of the small number of observations. There seems to be a small bias to the downside after 10 weeks, but a hit rate
of 50% seems like a coin flip. Also, a standard deviation of 4.55% is pretty high (Recall: that means 68% of the observations are located between -4.15% and +4.95%).
Also keep in mind that this a very simple quantitive study, which was just supposed to give me some
directional ideas.
So just based on the defensive sector observation, I wouldn 't be too bearish at this point.

Thursday, June 25, 2009

That's why I'm Bullish on Apple

I'm deeply convinced that Apple is working on a tablet PC, even though the company has been denying every rumor. (In fact, they only claimed to not work on a entry level netbook, which isn't a contradiction). Apple is owning multible patents in the arena of multitouch technology, which will be very useful for this device. Whatever these guys will present either this fall or beginning of next year will probably set a new standard in mobile computing and IMO fill the gap between a MacBook and the IPhone. I do not think that the arrival of a "MacBookTouch" is priced into Apple's stock.

Monday, June 22, 2009

Game Plan Week of June 21

I have to admit I was looking for using the recent market pullback to add positions on the long side. A look at recent monthly and daily charts of the S&P turned me more bearish, though:

Some of the negative signs include:

- The market had three "up months", were prices showed higher highs and higher lows in each of the months. Historically, a down month shoud be expected. Especially since prices still trade below the 12 months MA.
- A strong long term resistance at the 950 level. Interesting to see that level dating back to 1997 and 2002 (1).
- Declining volume the last four months is showing that fewer buyers a coming in (2).

The daily chart doesn't look any better.

A pull back to the level below 850 in the next months seems to be the most likely move and wouldn't hurt the bottoming process at all. In fact, that proces would look similar to the 2003 market bottom.

In addition, I cannot see any positive catalyst coming up in the next months. Q2 earning season is on the horizon and I don't expect too many good news. Rememember that companies were beating last quarter on margins, not on sales growth.

Bottom line: I'll keep closing long trades and look for possible short setups.

Friday, June 5, 2009

Mentioning the Obvious: we are Trending Up

Amazing to see the difference between (negative) fundamental commentary and technical reality these days. Looking at a S&P chart allows only one conclusion: we are currently in a stable uptrend. Plain and simple:

I don't care if this is a bear market rally or a new bull market. Trading the trend (better: buying the counter trend moves and selling the legs up) is a profitable strategy in this market. I intend to keep doing just that as long as "the trend comes to an end".