May 30, 2010 – 11:15 pm ET
The support levels identified last week held effectively and we have since seen some healthy consolidation. Our forecasts have been a little too accurate for some time now and Mother Market never plays that nice, I expect her to throw a spanner in the works soon. A big thanks to those who have been spreading the word about this newsletter, please keep it up!
I hope our American readers are enjoying their long Memorial Day weekend! Lest we forget those that have fallen in battle so that we may enjoy freedom.
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ETF % Change Comparison
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This is very encouraging to see; DIA and SPY, the most economically stable of the influential ETFs are lagging behind significantly. This shows that the money that has come back to the market over the last week has had enough confidence to invest in more risky areas like Transportation (IYT) and Semiconductors (SMH). Such behavior gives added significance to the bullish argument.
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What the % Comparison Table Tells Us:
By comparing the performance of the economically sensitive (SMH, QQQQ, IWM, IYT) and the comparatively stable ETFs (SPY and DIA) we can get an indication of the true market direction. The more sensitive areas of the market tend to be the first to initiate a trend change. For example if DIA and SPY sell off heavily while SMH and IWM (Russell 2000 small cap ETF) sell of mildly or continue moving to new highs then this would be very positive and vice versa.
The ‘Average Rank %’ is calculated by subtracting the % change for each ETF from the maximum % change and dividing it by the range for each period. 1-((MAX(% change all ETFs)-ETFs % Change)/(MAX(% change all ETFs)-MIN(% change all ETFs))) The readings for each period are then averaged. This reading is provided because if one ETF was significantly under/out performing the others then a plain high or low rank would not accurately reflect this.
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A Look at the Charts
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Last week we said “this is just the kind of place that consolidation could occur” and so far that is exactly what we are seeing.
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QQQQ’s RSI is yet to turn bullish and it will be interesting to see if OBV suffers a secondary break down first.
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SMH has some solid resistance around $28 and it is unlikely that we will see a close above this level before some further consolidation.
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IWM like SMH has some solid resistance just over head.
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IYT also has strong resistance over head at $80. Further consolidation is likely before this level can be broken.
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OM3 Weekly Indicator
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The OM3 indicator has been getting steadily more bearish for 5 weeks now.
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How to read the OM3 indicator
The OM3 indicator as with most of our models primarily reads price action and volume. The strong/weak buy/sell signals are self-explanatory. ‘No Signal’ means that the component readings are in conflict and cancel each other out.
The alerts let you know if the cycle is speeding up or slowing down, so when you get at ‘Strong Buy, Bear Alert’ for instance it simply means that the criteria for a strong buy is in place but this weeks cycle reading is weaker (or more bearish) than last weeks reading (the same is true in reverse).
The number of weeks that a signal has been repeated is displayed. Historically a ‘Strong Buy’ signal has lasted for an average of 6 weeks and a maximum of 42 weeks, while a ‘Strong Sell’ has lasted for an average of 4 weeks and a maximum of 16.
This is an indicator not a mechanical trading model. It is useful to assist in analyzing the market but for the best results should be combined with commonsense and support/resistance levels etc.
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TransDow & NasDow
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Both the Transports and the NASDAQ remain dominant over the Dow. Historically these conditions have represented periods of low risk.
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What the TransDow Readings tell us:
The TransDow measures dominance between the DJ Transportation Index (DJTI) and the Dow Jones Industrial Average (DJIA). In a strong market the more economically sensitive Transportation Index should be dominant over the DJIA.
Historically the DJTI has been dominant over the Dow 45% of the time. The annualized rate of return from the DJTI during this period was 18.47% with the biggest loss for one trade sitting at -13.27%. The annualized return from the DJIA during the periods it was dominant over the DJTI was just 4.06% and the biggest loss for one trade was -16.13%. A 4% stop-loss is applied to all trades adjusting positions only at the end of the week.
What the NasDow Readings tell us:
The NasDow measures dominance between the NASDAQ and the DJIA. Using the same theory behind the Trans Dow; in a strong market the more economically sensitive NASDAQ should be dominant over the DJIA.
Historically the NASDAQ has been dominant over the DJIA 44% of the time. Taking only the trades when the NASDAQ is above its 40 week moving average the annualized rate of return was 25.47% with the biggest loss for one trade sitting at –8.59%. The annualized rate on the DJIA during the periods it was dominant over the NASDAQ is just 8.88% and the biggest loss for one trade was –12.28%. A 8% stop-loss is applied to all trades adjusting positions only at the end of the week.
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LTMF 80 & Liquid Q
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LTMF 80 remains in cash while Liquid Q continues to have an open position in QQQQ that is now showing a small profit.
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Historical Stats:
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How The LTMF 80 Works
LTMF stands for Long Term Market Forecaster. It reads volume flows relative to price action and looks for out performance of volume measured on a percentage basis over the prior 12 months. During a sustained rally the readings will reach high levels (near 100%) making it imposable for the volume reading to always outperform price so any reading above 80% will maintain the buy signal. This system has outperformed the market over the last 10 years but performance has been damaged by some nasty losses. It only produces buy signals and only for QQQQ.
How Liquid Q Works
Liquid Q completely ignores price action and instead measures the relative flow of money between a selection of economically sensitive and comparatively stable ares of the market. It looks for times when the smart money is confident and and can be seen by through volume investing heavily is more risky areas due to an expectation of expansion. This system has outperformed the market over the last 10 years and remained in cash through most of the major declines. It only produces buy signals and only for QQQQ. We will provide more performance details on the web site for these systems soon.
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Summary
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There were several good reasons to believe that the support identified last week would hold and so far it has. Now things get a little more complicated.
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For the bullish argument:
- NASDAQ is dominant over the Dow
- Transportation Index is dominant over the Dow
- Liquid Q has an open position in QQQQ
- Support has held
- SPY, SMH, IWM and IYT all have bullish RSIs
- SPY and DIA are under performing relative to the more economically sensitive ETFs.
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For the Bearish Argument
- Volume flows are negative across the board
- QQQQ still has a bearish RSI
- SPY – 200 day SMA resistance
- SMH – $28 resistance
- IWM – $67.50 resistance
- IYT – $80 resistance
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If we see a close above ALL of the resistance levels and OBV does not suffer any secondary breakdowns (see charts) then we will be back in bull market territory. The more likely outcome however is that resistance will hold and we will see further consolidation before a continuation of the bear market.
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Any disputes, questions, queries, comments or theories are most welcome in the comments section below.
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Derry
And the Team @ ETF HQ
“Equipping you to win on Wall St so that you can reach your financial goals.”
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P.S Like ETFHQ on Facebook – HERE
P.P.S This is a fascinating video about what motivates us. I highly recommended you take the time to watch it:
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The Devils Dictionary – R
Rating Agency – By analogy best understood in terms of the kosher or Jewish dietary tradition i.e. what would you think of the slaughterhouse rabbi who is willing to bless pork sausages? One of three unscrupulous, unregulated, unchallengeable yet universally well-regarded companies (STANDARD & POOR, MOODY and FITCH) specializing in credit analysis whose only asset is its reputation. The rating agency is compensated usually by investment bankers (an archaic term) for rendering advice on how to structure inscrutably complex securities from pools of loans and other securities that no one understands and is then compensated again for assigning its highly-coveted and necessary rating (typically ranging from AAA to CCC ) as to the likelihood of “timely repayment of principal and interest”. Investors, like religious zealots, rely on these ratings with no further independent due diligence undertaken since that would otherwise make redundant the supposed purpose of a rating. A highly liquid over-the-counter option is currently trading at a substantial premium as to the likelihood of one or more of the rating agencies to win a Nobel Prize in Physics for having actually exceeded the speed of light as a scientific phenomenon for the time elapsed in the downgrading of AAA rated securities into total worthless claims by investors relying on these ratings. (see also: Sausage Making)
Restraint – An undesirable spending habit rarely observed in public; an offense punishable by a targeted taxation regime.
Risk – A binary analytical framework for the simpleminded; can be either off or on. A characteristic of investment that was largely forgotten in the mid-noughties
Risk Management – The conviction that young men and women with PhDs in mathematics can write formulas so that they are financially fail-safe. It was believed until late 2007 that risk could be so well managed that it would be possible to lend billions of dollars to deadbeats, would-be bankrupts, near paupers, irresponsible speculators, uninformed immigrants, drunks and people seeking funds for a South American vacation and still make a profit. The process by which banks make giant bets with other people’s money before persuading someone else to take the fall. Currently known as “federal supervision”.
There are severe economic storms on every horizon. Here's some examples:
Look at M3 for the US. It's fallen about $1 trillion from $13 odd trillion to $12 odd trillion. Obama is panicking – wants another $200 billion stimulus package. US banks are reluctant to lend to industry.
Inflation is heating up in China, manufacturing wages are up 20% this year as are some food prices and property sales are falling but property prices aren't. M1 is still very high, increasing 31pc from last year, which is one per cent higher than last month.
The world price of cotton is up well over 20% this year and to protect it's textile industry India has banned the export of raw domestic cotton. Down for bedding is up 200% on last year's price.
The next shoe to drop in the Euro zone will be Spain. Spain's unemployment rate is 20.5% and the total private/public debt is 270% of GDP and they have 1.6 million unsold properties (six times the level per capita in the US).
Although one should never discount the ability of politicians, along with the rich and powerful, to come up with schemes to pass the consequences of their profligacy, greed and stupidity on to our grandchildren, it looks very possible that the US could see a double dip recession and as the saying goes “when the US catches a cold, the world gets pnuemonia.”
Some very fine points there Norm. Thanks for sharing! I agree with your fundamental assent of things, the challenge is in getting the timing right of when reality will hit home. Currently my largest position is short EWJ (Japan) so hopefully you are right. Looking at the market futures now (Tuesday Morning) it looks as though the market is set for a rough start to the week.
Cheers
Derry