July 05 , 2010 – 08:40 pm EDT
Well happy Independence Day America but the market sure knows how to rain on a parade. Last week we warned that bearish volume flows indicated that support was soon to break and that a continuation of the bearish trend was highly likely. Indeed, over the last few days the market has been a wash in red but things may not be as bad and they first appear…
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ETF % Change Comparison
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Wow, IWM is now almost 19% from its peak 70 days ago while DIA is ‘only’ down 13%. This is typical of a bear market where money retreats to the more economically stable areas like the mega cap stocks found in DIA.
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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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Volume flows on SPY correctly warned that support would fail and remain in a strong downward trend.
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While all indications remain bearish on QQQQ an oversold bounce from support is quite possible.
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In a strongly trending bear market it is best to see SMH leading QQQQ and the broad market lower. Instead SPY is testing its Oct low and QQQQ its Feb low while SMH is yet to reach either. This would suggest that we are likely to have a bumpy ride lower rather than going straight down.
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IWM like QQQQ is also coming up against support from the Feb low. An oversold bounce from here is quite possible.
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Despite a shocking week IYT still has bullish volume flows and after assessing the internal volume flows of its component stocks I can confirms this. A break of this trend will confirm that we really are in a strong long term bear market.
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OM3 Weekly Indicator
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Seven weeks of “Strong Sell” readings and fresh “Bear Alerts”; not positive to say the least.
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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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The shift to the Dow becoming dominant over the Transportation Index last week correctly identified a jump in market risk levels. For the NasDow there continues to be no clearly dominant index. Historically the market has been very unproductive under these conditions and has seen the majority of it’s major declines.
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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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Both LTMF 80 and Liquid Q remain in cash.
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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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Yes, the market has broken down through several important support levels. Yes, volume flows in SPY, QQQQ and IWM are strongly bearish. But, it should not be ignored that volume on the Transports remains bullish. Transportation stocks are highly economically sensitive and should see heavy outflows of money in a bear market. Instead they have seen declines on light volume. Add to this the fact that the market is slightly oversold near new support levels and there is good reason to believe that an oversold bounce is on the way. Having said that, there will be no reason to initiate bullish positions while volume flows from other areas remain so clearly bearish.
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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
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Quote of the Day:
“People are unreasonable, illogical, and self-centered. Love them anyway. If you do good, people may accuse you of selfish motives. Do good anyway. If you are successful, you may win false friends and true enemies. Succeed anyway. The good you do today may be forgotten tomorrow. Do good anyway. Honesty and transparency make you vulnerable. Be honest and transparent anyway. What you spend years building may be destroyed overnight. Build anyway. People who really want help may attack you if you help them. Help them anyway. Give the world the best you have and you may get hurt. Give the world your best anyway.” – Mother Teresa
Hello Derry,
It was a pleasure to read the quote by Mother Theresa you took the time to include with your last email update – Thank you 🙂
Sincere and best regards,
Stefanos
You are more than welcome Stefanos. Glad that you liked it.