ETF HQ Report – Long in the Tooth

December 20, 2010 – 07:15 am EST

It turned out to be a good week to take off as there was little movement in either direction which was rather what we expected as mentioned in our last newsletter – the market lacked the fuel for a major advance.  I had a great time however rafting off a 23 foot waterfall in Rotorua, picnicking at a secret location in Taupo and relaxing in Kerosene Creek where the water is naturally about 110 degrees Fahrenheit.  At ETF HQ we all hope that you are also enjoying the holiday season.  Now lets take a closer look at this market…

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ETF % Change Comparison

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SMH and IYT were the two under-performers over the last week while DIA stole the show.  This indicates that people are becoming reluctant to invest in the more economically sensitive semiconductors and transports while they are seeking out the relative security of the mega caps found in the Dow.  Now, it is a bit premature to read too deeply into this but we can definitely see a change in the behavior we have witnessed over the last few months and that makes profit taking all the more likely.

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Learn more – ETF % Change Comparison

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A Look at the Charts

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No sell signals for SPY yet but there is unlikely to be much upside potential over the short term.

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If the RSI turns bearish then a test of the 50 day SMA is likely to be the best case scenario for QQQQ.

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Keep a close eye on the semis – if the RSI drops below 50 and the OBV trend turns bearish then expect a test of the April high.

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IWM has recently found some volume to back its bullish move so some profit taking to test the April high would be really healthy.

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Suddenly the Transports offer the the strongest bearish argument with a fresh sell signal.  A close above $93 would reverse the signal.

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OM3 Weekly Indicator

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While the buy signals remain active the multiple bear alerts warn that this run is getting long in the tooth.

Learn more – The OM3 Indicator

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TransDow & NasDow

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Despite the sell signal from our discretionary trading the Transports remain dominant over the Dow and the TransDow continues to maintain its position which currently shows a profit of 9.14%.

The NasDow remains in Cash as the Dow is dominant over the NASDAQ and historically the market has been very unproductive under these conditions.

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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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The LTMF 80 continues to hold a position in QQQQ and is showing a profit of 13.82% while Liquid Q remains 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

This rally is looking rather tired and there are few signs of fuel to cause any major advances before the end of the year.  There are also few sell signals at this point apart from the Transports that have recently produced a fresh sell.  Keep an eye on the relative performance of SMH, IWM and IYT compared to SPY and DIA; if they can outperform this will be a sign of strength and any profit taking should be seen as a buying opportunity.  If SMH, IWM and IYT under-perform then this will indicate a rising risk level and more substantial profit taking will be likely.

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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Thought of the Day:

At this time of year we must remember to take time out and focus on what is important.  Here is a great post from a fellow systems trader Michael Stokes on Wasting a Good Life Trading.  Be sure to subscribe to his blog for some high quality ideas on quantitative analysis as well as other topics of interest to traders.