"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

Friday, February 25, 2011

Market Commentary: Watching These Sectors

Looks like we are ready for a bounce after last days decline. I expect market players to sell into strength, so not sure how long this rally can last. For sure, there are some market leaders that look very interesting and I might trade them from the long side for a quick profit. In this environment, however, my trades are extremely short-term, so closing them after one or two days is my agenda

On a little bit longer time scale, some sectors look like being ready to break down. I'm looking into the following ETFs for potential shorts: Steel (SLX), Transportation (IYT), Agribusiness (MOO), Shipping (SEA) and Retail (RTH). They all share a similar pattern: sectors underperformed the S&P in the last months and are trading at major support levels. A break of these levels could trigger a nice sell signal:

On the long side, Healthcare (IHF) and Medical Devices (IHI) held up fairly well and outperformed the broader index in recent months, so it will be interesting to see if they can lead the market higher:

Thursday, February 24, 2011

Random Morning Market Thoughts

  • Forget the move in oil, equities or Gold. What's really interesting these days is what is happening in the Dollar: the Greenback is declining. Isn't the Dollar supposed to be a "safe haven" investment vehicle? If the Dollar cannot keep up in the current environment, then when else should he? Seems like the new safe haven currency is the Euro (believe it or not). Crazy world.
  • Market breadth indicators have been giving warning signals for weeks. Finally, we know why.
  • Concerning the Middle East: nobody likes (or liked) dictators such as Saddam, Qaddafi or authoritarian leaders like Mubarak However, I argue the world would be better off WITH them: most middle-east countries still consist of tribal structures. These regions need a strong hand to prevent chaos. Saddam knew it and Mubarak for sure knew that too. In fact I think even some European countries would benefit from a strong hand (Italy?).

Market Commentary: Changing Character

Obviously, the market's character has changed. While stocks have been trading in a low volatility environment in recent weeks, strong moves to the downside have been dominating price action in the last days. The majority of moves has been "under the hood": so called "momentum stocks", who were leading the markets higher sold-off strongly this week. Take for example Netflix, which lost over 20% in five days (I owned the stock, but had been selling into strength and finally closed the position on Feb 18).
At this point, we need to wait until emotions calm down before taking longer term positions in the market. However, markets are short-term oversold at this point so yesterday, I opened two new long positions, Agrium and Lululemon, to benefit from a possible oversold bounce. Note that these trades are extremely short-term and I expect them to close after one or two days.
Oil is obviously the place to be, though I'm not sure how long the sector will continue to outperform. In any case, my long positions in Halliburton and Abraxas (new) seem to work out in the current environment.
Besides that, I took partial profits in my short positions on major indexes (S&P 5000 and Emerging Markets). Going into Thursday, my shorts are SPXU, PHM and CHRW. Besides that, I'm 50% in cash. I expect that rallies will be sold, so closing long positions and maybe expanding the short book will be my strategy.

Tuesday, February 22, 2011

Morning Briefing for Feb 22: Trend Day to the Downside?

During the morning preparation, a trader has to ask oneself if he expects a trend or a range day. The answer is important even for swing traders with multi-day holding periods since they need to time their entry and exits intraday if possible.

This morning looks like we will might see trending conditions. Dr. Brett Steenbarger wrote about market structure identification on his blog and especially today, I recommend reading his key post about downside trend days. Shorting right at the open could be a profitable trade.

Unfortunatelly, I was stopped out of my Emerging Markets short position last week, but I'm 70% in cash so there should be enough fire power to play a possible trend day from the short side.

Monday, February 21, 2011

Apple: Two Important Charts to Watch

Apple investors might want to track the following two charts:

The first one shows a bearish "rising wedge" on the chart of Apple's stock price:

The second one is a Google Analytics plot of the search term "Steve Jobs Health". It'll be interesting how further news on this topic will effect shares of the iPhone company:

Tuesday, February 15, 2011

Watching this ETF to Track Rising Prices Theme

I'm carefully monitoring the PowerShares "Food & Beverage" ETF to evaluate when rising prices in the US would start to concern the markets. Food and beverage stocks should suffer from higher input costs. So far, the market ignored this theme. However, PBJ has also underperformed in recent weeks. With more confirmation, the ETF could be an interesting candidate on the short side.

Market Commentary: Trading the Momentum Environment

The current market environment is probably the dream of every swing trader: "buying the dips" is working and every pullback to the 20 day moving average is prompting the bulls to step in.Of course there are negatives that the market currently ignores: rising input prices, inflation in developing countries, developments in the middle east, high US unemployment. News usually don't matter until they matter.

When will they start to matter? Could be today, could be in two months, nobody knows. But one morning we will wake up and KNOW that this rally is over. Does this mean you shouldn't buy stocks at these levels? Depending on your time horizon. I am a short-term trader who is holding positions for just a couple of weeks (or just days if prices go against me). On one side, there is a lot to gain from quick moves if you are also fast. The good old Pareto Principle is also valid on the stock market: 80% of the gains are made in 20% of the time. If you miss these short periods, you usually don't have a chance to compensate underperformance in the rest of the year. Money managers know that and that's why they chase performance. If I would be a long-term investor, I would wait to buy stock. There is a very simple law in technical analysis: prices do ALWAYS come back to their moving averages. Take AAPL for example: during the current rally, which started in March 2009, Apple's stock price came back to its 50 day moving average five times, thus presenting a good buying opportunity. Even a highflyer like Netflix (NASDAQ: NFLX) pulled back four times in the course of the last two years. Quants would probably call the effect "mean reversion". They are the essence of swing trading when using shorter periods such as 20 days.

Another reason why I'm buying stocks at these levels: I am able to move very fast., because I keep the number of positions relatively small, trying to hold less than ten different stocks in my portfolio. If we get a move like on March 29 2007, I will be quick to close my longs and maybe even go short (the environment was quite similar at that time: every pullback was bought, but one day killed the returns of the prior four months). A mutual fund with hundreds of positions and billions of dollars under management could never do that.

You have to "make hay while the sun shines". With this in mind, enjoy the ride.

Disclosure: Covestor Model Clients are long NFLX

Monday, February 14, 2011

Weekly Game Plan: Momentum Acceleration?

Price action of the last four weeks obviously has been extremely strong, even on a intraday basis: 14 out of the last 20 sessions closed higher than the open. In addition, price momentum has been accelerating recently as being indicated by a rising MACD line:

Market breadth is sill weak, but improving. This week, I will watch the "Percent of SP500 stocks above 50 day moving average" indicator to see if it can climb to new hights:

So the big question is: how much further can this rally run? One scenario I'm considering in the light of recent acceleration of price momentum is the formation of a "blow-off top", where prices would rise sharply over the next weeks in order to collapse afterwards. Such a move would pull the small individual investor, who is still underinvested in the market and who usually buys at the top. I'm watching out for headlines in popular magazines, like "Time" to see if they start announcing that "the bull market is back". (The magazine indicator is of course a contrarian signal).
At this point, however, I'm not closing my long positions. A blow-off top could be a very profitable scenario on the long side and is only one of several possible outcomes. Stay alert.

Friday, February 11, 2011

Quick Sentiment Upate: Mood Still Not Overly Bullish

A quick update on market sentiment: the equity put/call ratio still records at elevated levels around 0.55, so I currently don't see an excess of crowd optimism.(Too much optimism can trigger short-term pullbacks)
Risks increase when we would see readings below 0.5:

Blackstone (NYSE: BX): a New Trading Position

Yesterday, I added shares of The Blackstone Group L.P., a private equity firm to the Covestor Model Portfolio. The stock was meeting my criteria for a high-probability short-term trading position: BX has been showing superior relative strength against the S&P 500 index since September 2010. Price momentum had accelerated before the company reported earnings on Feb. 3. Of course, I didn't buy on that day, instead waited for a opportunity to get the stock at a cheaper price. Yesterday, BX pulled back and rebounded from its 20-day moving average - my signal to action in a strong market. Note that I often prefer to wait for a second bounce for the stock to shake out weak hands. However, buying earlier might be rewarded in strong markets like we have these days.
Shorts don't play a role with this stock: only 1% of float is held short, according to Yahoo Financials. Analysts are optimistic, but not overly bullish: 5 out of 9 analysts following the stock maintain a buy rating on BX, according to Yahoo. The most prominent one is probably Goldman Sachs, who has the stock on its "conviction buy list" with a price target of $20, according to TheStreet.com.

Blackstone is benefiting from an improving IPO market, which helps the company to profitably unload its investments.

Tuesday, February 8, 2011

Intermarket Analysis: Visualizing the Massive Move into US Equities in Recent Months

This morning, I was looking at various intermarket charts, mainly compared various asset classes with the S&P 500 performance. It becomes clear what happened in the last months: we saw a massive move of investment money into US stocks. I see investment money more or less as a closed system. It doesn't get created, it simply moves from asset A to asset B to asset C and maybe back to A. Even though some assets have been moving up, the relative strength charts illustrate the underlying theme:

 Emerging Markets:





The only "winner": agricultural commodities:

The 1 Mio Dollar question of course is: will this trend keep up? My feeling is it will.

Why I'm Not Buying Gold (Yet)

Gold has been consolidating for the last two months. So is this a good time to buy the yellow metal (if you are a short-term trader)?
Here is how I see it: Gold is in a long-term uptrend. Technically, the metal just bounced from its rising trendline, so it could make sense to buy here with stop below support in case we would see a larger correction.
However, I like to look at intermarket relationships to evaluate if a asset has real strength. Looking at how Gold has been trading vs. US stocks shows that the commodity has been underperforming stocks for the last two months. Maybe investors are shifting from safe haven Gold to more risky assets. In any case, I would like to see Gold starting to outperform stocks again before putting up a long position.

Note that I have been shorting Gold from Jan 4 until Jan 26. The "triple top" chart pattern looked too compelling. However, I closed the trade because the risk/reward ratio was not favorable anymore. As I mentioned before: the longer term trend is up.

Monday, February 7, 2011

Analysis of Doug Kass' 2010 Market Calls on Twitter

Followers of this blog know that I'm criticizing the common practice of letting professional money managers comment on the stock market on TV - without any accountability and performance reference. Actually, neither CNBC nor the commentators are to blame. The crowd is demanding these services and is obviously willing to pay for that.

Doug Kass is one of the individuals, who regularly appears on TV and manages a hedge fund. However, nobody knows how Mr. Kass performed in the last years. I do not buy the argument that a "accredited investors" would be able to pull performance data. If a money manager appears on TV, the public has a right to know how this person performed.

Legendary has been his call to buy Financials on January 14 2008 (!).

Wall Street Cheat Sheet wrote a piece about Mr. Kass' performance last March 23. So it is time again to check back and evaluate how he performed in 2010.

Of course, performance evaluation is not easy if you don't know the details of his trades. In order to find out if the statement "Doug Kass is known for his accurate stock market calls" on TheStreet.com is appropriate, a simple analysis of his Twitter posts might give some hints.
The following table summarizes his key 2010 tweets with an overview of the10 and 20 day stock market performance after the post. Short-term analysis seems appropriate since Mr. Kass changes his position obviously quite frequently:

(SPX close value taken from Yahoo Finance, Tweets taken from http://twitter.com/#!/DougKass)

Marked with green are calls, where the S&P 500 closed higher after 10 and 20 days (in the bullish case, lower in the bearish case). Red are calls, where the index closed lower (or higher in the bearish case). Yellow indicates a mixed picture.

So should you follow Mr. Kass on Twitter? Everyone has to make up his own mind, but based on his tweets, I doubt that he outperformed in 2010. I might be wrong, but at least it seems like he has been short since at least September 2010 and missed a 25% rally in the S&P 500.

On a final note: I appreciate that Mr. Kass communicates his calls on Twitter so openly. I understand that this makes him vulnerable. But it would be even better if he could just sign up for a Covestor account and directly compete with me - like a man.

S&P500: Enterering Technical Paradise?

I usually do not post simple technical chart analysis on this blog. There are too many other sites, which do a great job on this field.
However, I cannot resist to briefly discuss the current weekly S&P chart because the huge technical impact of a break of the 1300 level:

Should the index indeed leave 1300 behind, there is no major resistance before 1400. It's also interesting that this level indicates the upper boundary of the rising channel, that has formed over the last two years.

Another aspect is coming from simple candle stick pattern analysis on the weekly chart:

Note how the index formed two "rising three methods" continuation patterns during this rally. (Actually, the last one should rather be called "rising two methods".) The market managed to rally 5.7% after the first pattern in November. Will we see a similar rally to 1400 now, after the "rising two method" pattern has been completed? Well, POMO is running until June and -more important- such a move would surprise most market participants since everyone seems to expect a major pullback.

As you can see, the S&P might enter "technical paradise" for the next weeks.

Current Sentiment Based on Put/Call Ratios

One of the sentiment indicators I'm following actually does not look too bearish: the Equity Put/Call Ratio has been showing relatively high readings in the last week. The 5 day average recorded at 0.58 on Friday, a level that has rather associated with short-term bottoms than tops.
Interestingly, also the Index Ratio is at relatively high levels with a 5 day averaged reading of 1.46. I usually put more emphasis on the equity ratio, but the elevated reading for the index hint that market participants are expecting a correction and hedged their portfolios:

In any case, both ratios are sign that there is not too much optimism in the market, which should be supportive of stocks. However, the situation can change quickly if we get a strong run-up this week.

Wednesday, February 2, 2011

Random Morning Market Thoughts

  • My short-term bearish thesis didn't play out so far. I was wrong, so let's move on. Yesterday, I closed short positions in the consumer discretionary sector and small cap stocks. I was probably not the only one. 1300 was an important level for the S&P and a lot of stops were triggered. We'll see if Tuesday was "just" a short covering rally.
  • Credit Suisse finally figured out to "buy the dips". Hey, that's what traders have been doing for the last two years. Actually concerns me a little when big banks jump on board (Pragmatic Capitalism).
  • I was looking at a lot of commodity sector charts this morning. Incredible bull market. However, it gets time to take partial profits on extended names. I'll sell half of my best performer Halliburton.
  • Financials start to look interesting. Stalking JPMorgan and Wells Fargo.

Tuesday, February 1, 2011

April 2010 Top Comparable to January 2011?

Right before the "flash crash" in April 2010, the stock market became much more volatile and recorded three "distribution days" over a two week period:

The price action in January this year is looking quite similar. In order to get more bearish, I would like to see further expansion of the Average True Range. If April 2010 is indeed the playbook, a break of support at 1275 could result in a very sharp move (thanks a lot to all you algos):

Crude Going to $100: Who Cares?

It seems to be consensus that crude will hit $100 within the next months. High oil prices don't seem to bother stock investors (yet). Both asset classes are highly correlated these days. When crude moved up, stocks moved up as well in the last two years:

I'm carefully watching this chart in order to see if and when this relationship might change.
Some historical perspective: October 2007 was the last time positive correlation reversed (while oil was rising). By the way: crude was at $90 at that time ;-):

Even though the general market declined, Energy stocks turned out to be a good investment since their correlation to crude prices was higher than to the S&P 500 (which shouldn't come as a surprise):