April 19, 2010 – 12:05 pm ET

Dear Investor,

Sorry, we are running late today due to a data feed problem but all is back up and running now (touch wood).  Living at this end of the world that means staying up all night… you are welcome 😉

Over the last week there were some very interesting developments:

The first one was Intel reporting its net income in the first quarter had nearly quadrupled from 2009 and that the big jump in spending had predominantly come from companies, not individuals.  When businesses are experiencing improved conditions and anticipating growth they must invest in new technology to capitalize on it.  This investment takes time to produce a return but because semiconductors are at the front of the business cycle they are the first ones to benefit.  That is why the news not only lifted Intel (INTC) but gave the entire market a significant boost.  If you have ever doubted the influence that semiconductors have over the market then doubt no more.

The 2nd major development was Goldman Sachs getting charged with fraud.  The SEC alleges that Goldman marketed CDOs that hinged on the performance of subprime mortgage-backed securities and failed to disclose to investors that hedge fund Paulson & Co. was betting against the same CDOs and influenced the selection of securities for the portfolio.  While this does sound morally questionable is it really fraud?

Lets say I ran a hedge fund and was bearish on the Passion Fruit Industry.  I could go out and help an institution put together a security for me to sell short.  If my research and timing was correct then I would profit but there is also the risk of being wrong in which case I would take a loss.  The institution what helped create the security is simply making a market, finding buyers and sellers.  The opinion of those who influenced the portfolio selection is irrelevant because if investors do their own research and don’t like a security then surely they won’t risk their money in it?  When Warren Buffett sold 4.5 billion dollars worth of put options should the buyers have been informed who the counterparty was?

If anyone committed fraud then what about the rating agencies?  The CDOs in question were class A-1 notes rated AAA by S&P and Aaa by Moody.  Let me know what you think.  Assuming the allegations are true did Goldman commit fraud or is this just an example of the heartless reality of capitalism?

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ETF % Change Comparison

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Last week I warned that “When risk levels are perceived to be low the market is more easily spooked and this tends to lead to sharper and more severe reversals.”  Most of the gains for the week were on the back of the INTC news while on Friday the SEC charge spooked a complacent and overbought market causing it to sell off heavily as you can see by the ‘% from peak’ numbers.

What is great to see is that for the week SPY and DIA lagged behind while SMH and ITY advanced 5.85% and 3.22% respectively.  This is not the type of behavior that you tend to see at major market reversals.  This is how a bull market behaves.

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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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SPY actually dropped 1.59% on Friday and further profit taking over the short term is likely.

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It won’t actually take much for QQQQ to break its bullish volume trend.  But if that happens then it will need to be confirmed by a loss of support and failure in other areas of the market particularly the semiconductors.

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For months SMH has been one of the holes in the long term bullish argument but suddenly it is showing life again.  If we see profit taking over the next few weeks but SMH can hold onto $29 and maintain its bullish volume trend this will indicate the market is very strong.

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What goes up must come down and profit taking on the small caps is highly likely.

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The transports continue to receive impressive volume, a very good sign long term.

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OM3 Weekly Indicator

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No signs of weakness here.

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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 Transports remains dominant over the Dow and have doubled the Dow’s return over the last 49 days with 12.36% vz 6.72%.

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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 remains on a buy signal for QQQQ after 210 days.  Liquid Q has no signal.

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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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New strength seen from the semiconductors is very bullish and long term indications remain positive.  However over the short term I would be very surprised to see new highs and tangible profit taking is highly likely.

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Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

.

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 Thanks to the 20 people who shared our article on Herd Mentality around Facebook

P.P.S Become a fan of ETFHQ on Facebook – HERE

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Breaking NEWS

Bank Run in Switzerland

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The bank run in Switzerland last week was kept mostly secret from the worlds media but this exclusive footage was captured from my brother in-laws iPhone.  Some are saying that it was actually very bullish behavior – VIDEO

April 12, 2010 – 02:45 am ET

Dear Investor,

Thanks for your recent questions and complements.  It is nice to hear that you are enjoying our reports.  Please spread the word so that the community of readers can grow and also please direct your questions to the comments section so that others can benefit.

In the last report we said “longer term indications remain positive making bearish positions risky”.  Since then we have seen a great example of why it is so important to trade in the direction of the prevailing volume trend.  For the last few weeks we have been anticipating short term weakness and did see a slow down for a period.  But, bit by bit the market has been moving higher and in the last few days it has done so with more vigor.

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ETF % Change Comparison

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IWM (Russell 2000 small cap) and IYT (Dow Transportation Index) were the top performers over the last week while SPY and DIA lagged behind.  Having the comparatively economically sensitive IWM and IYT leading is good to see.

All of the ETFs we track made new highs this week apart from SMH which continues to be a drag on the market.  It finished up 1.65% but all of the gains were achieved on Monday and have dwindled ever since.  The broad market in comparison gained strength throughout the week and into Fridays close.  The NASDAQ can’t get far without support from the Semiconductors and the market can’t get far without the NASDAQ so continue to keep a close eye on how this develops.

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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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It looks like SPY has moved into part 2 of the rally that began in mid Feb.  This stage of a rally is usually violent and unpredictable so opening new short term positions is too risky.

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QQQQ has been performing well on strong volume.  Enjoy it while it lasts but if you are not already in the market then now is a time for patience.

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$VXN (CBOE NASDAQ 100 Voltility Index) moved to its lowest level since July 2007 this week.  $VXN is a measure of how much ‘time’ is selling for on NASDAQ 100 options and is a function of the risk traders perceive to be present.

When risk levels are perceived to be low the market is more easily spooked and this tends to lead to sharper and more severe reversals.  Because $VXN is so low and SMH is under performing on bearish volume it is important to remain cautions.

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IWM has also had weak volume recently.  It will be important for the small caps to continue to perform well if SMH is not going to provide leadership to the broad market.

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Unlike, SPY, SMH and IWM, the Transports (IYT) have had solid volume flows over the last few weeks.  This is an excellent sign for the long term health of the broad market.

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OM3 Weekly Indicator

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No signs of weakness here but the average ‘Stong Buy’ signal lasts for 6 weeks so these ones are getting statistically old.

.

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.

.

.

TransDow & NasDow

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The Dow Transportation index remains dominant over the Dow and has significantly out performed it over that time.  The Dow remains dominant over the NASDAQ.

.

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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Liquid Q remains in cash while the LTMF 80 trade remains open and is enjoying a nice profit of 15.53%.

.

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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When there is a lot of momentum behind a mature rally those that have been sitting on the sidelines waiting for a pull back start to jump in as their fear of loss is replaced with a fear of missing out.  This 2nd wind can create some impressive gains but usually on light volume and when it ends it tends to end in tears.

So far, several of the ETFs we track have started to float on light volume but QQQQ and IYT both continue to experience strong volume.  Long term indications remain healthy but the short term outcome during times like these is very unpredictable.

We turned bullish in our February 22 report so hopefully you have been on the gravy train with us and continue to enjoy the ride (while it lasts).  However if you are still sitting on the sidelines then now is not the time to enter the market, there is simply to much uncertainty and risk over the short term.

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Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

.

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 If you get value from these newsletters then please spread the word, we grow primarily through word of mouth. Please direct people to ETFHQ.com to subscribe.

P.P.S Become a fan of ETFHQ on Facebook – HERE

.

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The Devils Dictionary – H

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Hedge – A line of closely grouped shrubberies; a clever way of adding correlation and volatility risk to one’s portfolio.

Hedge Fund – A lucrative compensation scheme for professional investors, who get to charge roughly 10 times as much as traditional money managers while generating, in aggregate, similar returns.  See Loser’s Game.

House – 1. An abode; an investment.  2. A building constructed on weak financial foundations.  Formerly an asset, now a liability.  See Delinquencies.

April 05, 2010 – 02:07 am ET

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It was another uneventful week but there have been a few subtle developments; some support has been established, Easter has been celebrated, April has been fooled and there has been a slight shift in leadership.

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ETF % Change Comparison

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Last week ended with SPY and DIA at new highs.  This is positive apart from the fact that it is better to see the more economically sensitive ETFs leading the market higher.  Instead we see SMH 2.41% off the high it reached 9 days ago and IYT 1.06% off the high it reached 14 days ago.  This is only a subtle change and not cause for concern but it is different from what we have been seeing for the last two months where typically QQQQ, IWM and IYT have been leading.  It appears as though the market is becoming more cautions which makes short term profit taking more likely.

.

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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While SPY has had little momentum over the last three weeks it is impressive to see it inching higher bit by bit.  This consolidation has ended the overbought situation and made it easier to start another bullish leg but profit taking is more likely over the short term.

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QQQQ could go either way from here but there is nothing to suggest problems with the longer term bullish trend.

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For the broad market to move higher from here in any meaningful way SMH will have to fuel the rally.  Currently that looks unlikely.

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From IWM I will be looking for OBV to break out of its triangle accompanied by a loss of or maintenance of support @ $67.50.  This will provide a good indication of market direction over the short term.

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Volume from IYT is looking good and the slowdown over the last few weeks has been healthy.

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OM3 Weekly Indicator

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All signals remain bullish here.

.

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.

.

.

TransDow & NasDow

.

The Dow Transportation Index remains dominant over the Dow and has advanced 6.24% over the last 34 days compared to just 5.83% for the Dow during that time.  Conversely the Dow remains dominant over the NASDAQ, advancing 2.85% while dominant compared to just 1.47% for the NASDAQ.

.

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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On Thursday Liquid Q closed the position in QQQQ for a 12.55% profit over 62 days.  The signal remains open for LTMF 80.

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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.

.

.

Summary

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The consolidation over the last few weeks will make it easier for the market to start another leg higher.  However for that to happen with any sort of enthusiasm then SMH will need to be driving the market higher.  Judging by the current volume flows of the semiconductors that is unlikely.  Over the longer term indications remain positive making bearish positions risky.  Any profit taking should be seen as a buying opportunity.

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Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

.

Derry

And the Team @ ETF HQ

.

P.S If you get value from these newsletters then please spread the word, we grow primarily through word of mouth.  Please direct people to ETFHQ.com to subscribe.

P.P.S Become a fan of ETFHQ on Facebook – HERE

.

.

The Devils Dictionary – G

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GAAP – Generally Accepted Accounting Principles (as opposed to Specifically Accepted Accounting Principles which right there shouts out “Houston, we’ve got a problem!”) GAAP is intended to create consistency in financial reporting for pubic and private companies.  Its vast inconsistencies with regulatory accounting and the IRS tax code is the primary source of investment banking revenues as bankers routinely attempt to exploit, circumvent or create small meaningless yet terribly complex discrepancies that result in arbitrage opportunities of epic proportions. Interestingly the U.S Government itself refuses to adopt GAAP standards and furthermore refuses to issue any useful financial reporting that would tell us how broke we really are.  The main argument for refusing to adopt GAAP standards is that it would require extensive use of scientific notation due to the incomprehensibly large numbers involved.  GAAP has taken on a new culturally significant meaning lately as in the GAAP between the truth and what is really going on.

Greater Fools – Wall Street’s ever expanding clientele.

Green Shoots – 1. The first signs of spring, often clobbered by summer’s heat and autumn’s rain.  2. A sign the economy is falling apart more slowly than previously thought.  Related: Daisies, Pushing Up.  See also Thinking, Wishful.

March 29, 2010 – 08:35 am ET

The strong advance by the market on Monday and Tuesday took me by surprise and the fact that it was lead by the Semiconductors looked very positive.  But by the end of the week most of the gains had been returned.

Really it was a rather uneventful week but without many distractions I have added some new blog posts to elaborate on the philosophies used in these reports.  I hope you find them useful.

• The Dow Theory – Truly timeless writings on Technical Analysis
• Trading Psychology – Part 1, Imperative Foundation For Success
• Herd Mentality – Trading Psychology Part 2
• Group Intelligence – Trading Psychology Part 3

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ETF % Change Comparison

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SMH was the top performer again over the last week and finally closed above its January high on Tuesday although only just.  IYT (Dow Transportation ETF) on the other hand peaked last Thursday and was the only one of the influential ETFs to finish the week lower.

.

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.

.

.

A Look at the Charts

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Short term weakness continues to be the most likely outcome from SPY although we have now established a base from which the next leg could be launched.

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If QQQQ is to continue moving higher in any meaningful way then SMH will have to rally strongly.  Short term weakness is more likely however.

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I am surprised that SMH has done so well over the last two weeks but the lack of volume behind the move is not a good sign.

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IWM has had enough consolidation to start another bullish leg but that would require a strong rally from SMH.

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Like much of the market ITY continues to indicate short term weakness.

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.

OM3 Weekly Indicator

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All signals are positive here although IWM has been on a strong buy signal for the last 7 weeks while the average signal lasts for only 6 weeks.

.

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.

.

.

TransDow & NasDow

.

The Dow Transportation Index remains dominant over the Dow while the Dow remains dominant over the NASDAQ.  It would be better to see the NASDAQ regain dominance.

.

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.

.

.

LTMF 80 & Liquid Q

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Both LTMF 80 and Liquid Q remain on buy signals for QQQQ.  Internal readings from Liquid Q have weakened and it would not take much to trigger a sell signal.

.

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.

.

.

Summary

.

Over the last two weeks the market has seen enough consolidation to start a new leg higher.  But for that to happen SMH would have to be the one leading the market.  The more likely outcome is further weakness over the short term.  There are currently no indications that anything more sinister is brewing so any declines should be seen as buying opportunities.

.

Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

.

Derry

And the Team @ ETF HQ

.

P.S Thank you for sharing this newsletter, we grow primarily through word of mouth. Please direct people to ETFHQ.com to subscribe.

P.P.S Become a fan of ETFHQ on Facebook – HERE

.

.

The Devils Dictionary – F

.

Fees – The raison d’etre of Wall Street.  The means by which wealth is transferred from its owners to those entrusted to manage it.  See investment banks, private equity, hedge funds, rating agencies, money managers, etc.

Financial Engineering – Whereas conventional engineering seeks to take weak structures and make them solid, financial engineering aims at the opposite.

Fitch – What you say to your dog after you throw the bone of the last steak your family will eat for the foreseeable future.

March 21, 2010 – 08:30 pm ET

Over the last two weeks the market has been moving rather predictably.  But due to ‘Mother Market’ having a twisted sense of humor (or perhaps simply due to being female) her times of predictability are commonly followed by periods that defy logic.

Last week I said that things looked a bit overcooked and there has since been a definite slow in momentum.  The short term technical picture has deteriorated although on a positive note the semiconductors did shown signs of life.

.

ETF % Change Comparison

.

IWM was the most over cooked of the ETFs that we track so it is not surprising to see it was the worst performer over the last week.  SMH finished the week as the top performer although it is yet to break through the high it set 70 days ago and was hit hard on Thursday and Friday.  Still, the fact that SMH produced some buying interest is a good sign.

.

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.

.

.

A Look at the Charts

.

Little has changed over the last week although short term weakness from SPY looks even more likely.

.

It will be interesting to see where QQQQ will find support.

.

SMH is the only one of the ETFs that we track to still have a bullish RSI.  If the market is going to defy gravity and keep heading higher before any consolidation then SMH will have to be the driver.

.

IWM couldn’t keep going up forever without taking a breather.

.

Another impressive week from IYT (Dow Transportation Index ETF).  It is very unlikely that IYT could perform like this if the market was about peak.

.

.

OM3 Weekly Indicator

.

All positive signs from the OM3 indicator.

.

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.

.

.

TransDow & NasDow

.

The Dow Transportation Index remains dominant over the Dow while the Dow remains dominant over the NASDAQ.  I wouldn’t read too deeply into this.

.

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.

.

.

LTMF 80 & Liquid Q

.

Positions remain open on QQQQ from both LTMF 80 and Liquid Q.  Internal readings are also strong.

.

Historical Stats:

.

.

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.

.

.

Summary

.

Everything looks quite simple at the moment.  Longer term indications are positive but short term weakness is likely.  If profit taking occurs how severe it will be is not clear.  However as long as SMH stays above $26 then any pullbacks by the broad market should be good buying opportunities.  Remember though, the market is in a constant state of change so just because current risk levels appear low is not excuse not to be prepared.

.

Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

.

Derry

And the Team @ ETF HQ

.

P.S Thank you for sharing this newsletter, we grow primarily through word of mouth.  Please direct people to ETFHQ.com to subscribe.

P.P.S Become a fan of ETFHQ on facebook – HERE

.

.

The Devils Dictionary – D

.

Dead Cat Bounce – Originally a trading floor term for false bottom stock price movements but since the Madoff Fiasco it now describes a new phenomenon of mass coordinated suicide by disgraced yet honorable felines of soon-to-be felons.  It is unclear whether a Jonestown style cool-aid is being secretly absorbed at grooming parlors by cats of hedge fund operators faced with massive investor redemptions making it clear to the cats that the party is over or whether it is totally instinctive similar to homing pigeons who can travel thousands of miles with out a guidance system.

The are several reports, most likely fictitious, of cats unsuccessfully trying to convince their owners to do the honorable thing with them.  It is interesting to note that attempted cat suicide has a statistically significant survival rate when the leap occurs from the 9th – 17th floors of residential buildings.  This is due to the cat’s automatic bladder evacuation reflex that occurs in this range of fall.  Ruptured bladders are the primary cause of death of falling cats and nine floors seems to be just enough time to empty their bladders while above 17 floors the laws of physics take over.

This phenomenon will likely result in a financial arbitrage opportunity where 9 – 17th floor apartments will trade at a premium and a new financial security is rumored to already be in the works known as the CBO or Cat Bounce Option.

Downgrade – A reduction in the quality of a credit rating.  Normally occurs after the deterioration of fundamentals, but before the event of a default.  This action protects the reputation of the rating agencies but not the wealth of bondholders.  See subprime.

.

E

.
EBITDA – Earnings Before Including Terribly Dubious Activities.  Antiquated use was Earnings Before Interest Taxes Depreciation and Amortization.  One of several measure of earnings power of a firm for purposes of valuation.

March 14, 2010 – 10:00 pm ET

We saw new highs from the broad market over the last week as expected although from a technical stand point not much has changed.  Volume flows remain very positive, and there is little negative that can be said except the ongoing concern caused by the under performance of the semiconductors.

It was a busy week at the office for us with the start of a new sector volume research project.  While hunting down the data required a friend at SPDRs has gave me month end component data for the S&P Select Sectors back to Sept 2001, let me know if you would like a copy.

.

ETF % Change Comparison

.

IWM (The Russell 2000 – Small Cap ETF) and IYT (Dow Transportation ETF) continued to show great strength and lead the market to new highs.  SMH was the only one to decline over the last week and has been the worst performer over all the measured time frames.  Unless SMH starts to participate in this rally then the broad market can’t go much further.

.

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.

.

.

A Look at the Charts

.

Look at all that volume behind the recent rally, this is great to see and indicates that further advances are on the way.  When we do see profit taking, if SPY falls back below the Jan high it will not be a cause for concern as long at SMH holds together.

.

QQQQs holdings are 35% in hardware and the key component for hardware is semiconductors.  For this reason it is simply not possible for QQQQ to go far without SMH participating.

.

How this plays out will be very interesting.  I have never see a time when everything else has looked so bullish while SMH has been so discouraging.  As I said last week SMH must hold onto $26 or risk a test and likely break of the 200 day SMA.  If that occurred then the broad market will almost certainly return to a bear market.

.

IWM is offering the broad market all the strength that SMH lacks and the performance of the small caps remains the strongest argument for the bulls.  It is doubtful that IWM can continue at this pace for another week and it would be far better to see some profit taking or consolidation at this point.

.

It is great to see the Transports ending the week convincingly above their Jan high.  In a weak economy less goods are sold and therefore less goods are transported making it imposable for IYT to perform like this.

.

.

OM3 Weekly Indicator

.

All signals are bullish here.

.

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.

.

.

TransDow & NasDow

.

This is interesting and unexpected; the Dow has regained dominance over the NASDAQ.  Price action would not explain this but the dominance reading for the NASDAQ is taken from volume flows.  The Transports remain dominant over the Dow.

.

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.

.

.

LTMF 80 & Liquid Q

.

LTMF 80 and Liquid Q continue to show open positions in QQQQ.

.

Historical Stats:

.

.

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.

.

.

Summary

.

It has been a great run over the last 5 weeks but the further the market goes without profit taking the sharper the eventual pull back will be.  It would be a good outcome over the next week to see some profit taking occur and support established.  Do keep an eye on SMH as its ability to hold together is imperative for the health of the market.

.

Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

.

Derry

And the Team @ ETF HQ

.

.

The Devils Dictionary – C, Part 2

.

Counterparty – The name for the other guy or institution in a deal, otherwise known as he who is left holding the bag.  If you lend me $10, we are each counterparties to the loan.  A committee has been formed to find out why this word is needed.

Credit – Long ago, when she first appeared amongst us, “Lady Credit” was said to be attracted to a person’s character, probity and trustworthiness.  With age, she has become less choosy.

Credit Default Swaps – A means for transferring risk.  Lenders can now insure against the risk that a borrower goes bankrupt.  Instead, they are now exposed to the risk that the seller of default protection, in an unregulated $30 trillion market, goes belly up.  Loose translation from the original Latin “ubi mel ibi apes,” or “where there’s honey there are bees.” 1. A complex financial instrument vital to the functioning of a modern economy in the way it spreads risk among consenting parties. (Greenspan, A., pre-Sept. 2008.) 2. A complex financial instrument that nearly destroyed modern capitalism (Greenspan, A., post-Sept. 2008).

Credit Line – A set amount of borrowed money available only to those who don’t need it.

Crisis – A frequently occurring one-in-a-lifetime event, generally deemed impossible by those under the age of 28.

.March 08, 2010 – 5:50 am ET

What a fun week to be on the right side of the market (although I closed my largest position which was short EWJ at small loss).  Anyway, the breakout we were looking for occurred and as expected it was a violent one.

The target I set two weeks ago for QQQQ of the January high has been reached and IWM has convincingly surpassed this level powering on to a fresh high.  This is all exceedingly positive but on the negative side the relative under performance of the semiconductors does raise concerns.  Of the influential ETFs, SMH is the furthest from the January high bring the long term prospects of this rally into question.

.

ETF % Change Comparison

.

IWM had a stellar week advancing 6.08%.  IYT was the worst performer but had a strong week prior.

The data in this table that currently warrens the most attention is the ‘% From peak’ and ‘Days Since Peak’.  In the ideal world we should see SMH and IWM leading the market to new highs closely followed by QQQQ and IYT while SPY and DIA are dragged along for the ride.  The fact that IWM has set the example of new highs while QQQQ and IYT and not far behind is very bullish and indicates that we are likely to see new highs from the broad market.  However because SMH is lagging behind it is imperative that the semis at least maintain support otherwise the advance over the last month will have just been a fools rally.

.

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.

.

.

A Look at the Charts

.

With OBV at a new high and little resistance overhead the prospects for SPY are very positive.  However a new high from SPY is meaningless without QQQQ also doing the same.  A pullback will have to come at some point and when it does all eyes should be on SMH for an indication of whether it is just profit taking or (another) trend reversal.

.

QQQQ has reached the target set two weeks ago and volume flows suggest that new highs are likely.

.

SMH must stay above $26 if the broad market is to break through and stay above the Jan high.  A close below $26 would cause the broad market to pull back significantly.  SMH would almost certainly test and probably break through its 200 day SMA which would put an end to the bullish trend.

Arguably the broad market is due for some profit taking now. The problem is that the Semis lack the cushion between price and support that the other ETFs currently possess. So if the profit taking occurs now it will put real pressure on SMH.

.

Last week I said that IWM was “one of the Jewels in the bullish argument” and it has not disappointed.  Small caps stocks lack the ability of the Large Caps to weather economic storms.  However when the economy is expanding the small caps can grow at a speed that the large caps simply can’t for the same reason that elephants don’t gallop.  That is why it is so positive to see IWM leading the market through the Jan highs.  If profit taking occurs this week then I will be watching that IWM stays above $64.  A close back below the Jan high at this point would be a major failure by the bulls.

.

IYT is not far from making a new high and closer to doing so than the Dow Jones Industrial Average which will make the Dow theorists happy.  It will be important that IYT confirms any new highs by SPY and DIA particularly seeing as SMH is not showing much strength.

.

.

OM3 Weekly Indicator

.

IWM has been on a strong buy signal for the last four weeks and has also been the top performer during that time advancing 12.40%.  DIA has the weakest signal with a ‘Weak Buy’ which is actually positive because in a healthy market the Mega Caps should under-perform relative to the more economically sensitive segments.

.

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.

.

.

TransDow & NasDow

.

The Transports remain dominant over the Dow and on Friday the NASDAQ also claimed dominance over the Dow.  This is very positive as historically most bull markets have occurred when the NASDAQ and the transports were dominant.

.

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.

.

.

LTMF 80 & Liquid Q

.

Both LTMF 80 and Liquid Q remain on buy signals and have clocked up some reasonable little profits so far.  Internal reading on both remain strong.

.

Historical Stats:

.

.

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.

.

.

Summary

.

The market is displaying many positive signs including healthy volume flows, dominance by the NASDAQ and the Transports, several active buy signals and leadership from the small caps.  Indications are that new highs from the broad market are very likely.

I don’t know about you but I find it very easy to produce evidence to support my current outlook no matter what it may be.  If I am bullish then I see everything through rose tinted glasses.  If I am bearish then I find the sinister side of everything.

For this reason it is important to always look for arguments against your outlook, cracks in your logic.  Not to cause analysis paralysis but to identify specifically what would need to happen in order for you to close your positions or make adjustments.  This way in the heat of the market you have a game plan, you have a contingency strategy in writing and don’t have to make it up as you go along.

The #1 bearish argument from a technical stand point at the moment is the relative under performance of the semiconductors.  If SMH closes below $26 then I will be rethinking all bullish positions.  If IWM closes below $64 then we are probably stuck in a crab market.  A a new high by SPY will be meaningless without QQQQ doing the same and will still be lacking conviction without confirmation from IYT (Dow Transportation ETF).

Have a good week.

Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

.

Derry

And the Team @ ETF HQ

.

.

The Devils Dictionary – C

Carry trade – The act of borrowing cheaply and lending at a higher rate.  Popular with hedge funds when short-term rates collapsed after the dotcom bust.  Charlie Munger of Berkshire Hathaway, “Never have so many people made so much money with so little talent.” See Greenspan.

Cash Flow – The movement your money makes as it disappears down the toilet.

CDO – Certain Death Obligation resulting from a number of causes ranging from mark to market accounting to too many NINJA loans in a pool of securities.  A dumping ground for loans off-loaded by banks, which are pooled, sliced up and stamped with investment-grade ratings.  Take a bunch of commercial loans for which there is collateral of some kind or other, smoosh them together into one big loan or bond and voilà!  You have a CDO.  Whether you want the CDO depends on how good the underlying loans and collateral are.  It appears that many of the investment bankers selling CDOs were too busy buying houses in the Hamptons to find out.

Conspiracy – The only possible explanation for certain types of irrational price action.  There’s a government conspiracy to support the stock market; how else could it have rallied 70% since March?  A crackpot theory held by nut jobs who can’t admit when they’re wrong.  Have those conspiracy theory wackos never heard of an oversold bounce before?

February 28, 2010 – 2:40 am ET

Last week we said that there were some “cracks in the bullish argument” yet “indications are that we have returned to the bullish trend but a test of support will be due soon.”  Well, we did see a touch of healthy profit taking over the last week, support was found and things are still looking good.  .

.

ETF % Change Comparison

.

IYT (The Dow Transportation index ETF) had a fantastic week advancing 2.45% and smashing through its 50 day SMA.  This is very positive from the perspective of the Dow Theory, the transportation industry is highly economically sensitive.  IWM (Small Caps) also had a strong week and closed every session above its 50 day SMA.  The poor relative performance by SMH would be more concerning were it not for the resilience seen by IYT and IWM.

.

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.

.

.

A Look at the Charts

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Currently sandwiched between support and resistance but with volume in a bullish trend indications are that SPY is headed higher.

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A close below $44 by QQQQ and the situation will need to be reassessed but a test of the January high is still the likely outcome.

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The volume behind the declines over the last week from SMH were reasonably heavy and OBV is not really in a clear trend.  It is good however to see SMH finish the week above its 100 day SMA.

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Volume is in a clear up trend on IWM and the 50 day SMA has been holding strong as support.  This strength would be strange to see if we were about to return to the bearish trend.

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Volume flows still point to a trading range but IYT is now just 1.99% below the closing high achieved 46 days ago.  IYT will be due for some consolidation soon but its recent performance is a very positive sign for the broad market.

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OM3 Weekly Indicator

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The OM3 indicator continues to find this market confusing and is producing indecisive signals with a bullish bias.

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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 still in place but this weeks 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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As you would expect after its recent strength DJT (The Dow Transportation Index) has taken dominance over the Dow Jones Industrial Average.  This indicates that the risk level in the market has been reduced as historically DJT has advance at annual rate of 18.47% while dominant.  However the Dow remains dominant over the NASDAQ.

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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 rate on 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 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 the LTMF 80 and Liquid Q remain on buy signals with strong internal readings.

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Historical Stats:

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Summary

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No damage has been done by the slight profit taking over the last week in fact it has been a positive development because of the way that support has held and the strength we have seen from IWM and IYT.  However the market remains stuck in a tight range between support and resistance.  There is a lot of conflicting technical information but when the breakout occurs it is likely to be violent and indications are that the breakout should occur to the upside.

Any disputes, questions, queries… comments or theories are most welcome below.

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Derry

And the Team @ ETF HQ

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P.S If you get value from these newsletters please share the word with others. Thanks.  If you are a new reader please subscribe using the form to the top right of this page.

P.P.S Go Canada, 13 Golds so far and some amazing curling!!!  Can’t wait for the men’s Hockey Finals.

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The Devils Dictionary – B

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Bailout – A notorious regressive tax; the public underwriting of stupid bets made by overpaid morons.  Can you believe their bonus pool was $16 billion a year after the bailout?

Bank – The place you’re money visits whereupon heads they win and tails you lose.

Bankers – People who lend other people’s money in exchange for a fee.  Formerly concerned about the return of principal, but now only interested in the fee.  “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.” (John Maynard Keynes)

Bear Market – A 6 to 18 month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no sex.

Broker – What my broker has made me.

Bull – Politely speaking, the stuff and nonsense of Wall Street’s daily conversation.

Bull Market – A random market movement causing an investor to mistake himself for a financial genius.

February 22, 2010 – 5:40 am ET

The market displayed some impressive strength over the last week.  We were looking for several key technical achievements to occur in order to indicate a return to the bullish trend.  They were:

• New high from OBV on QQQQ
• Close by QQQQ above $44
• Close by SMH above its 90 day SMA
• OBV Bullish trend change on SMH
• OBV Bullish trend change on IWM

On Tuesday, the first day of the shortened trading week all of these milestones were achieved.  Needless to say this is a very bullish sign.

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ETF % Change Comparison

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IYT, the Dow Transportation Index ETF was the top performer over the last week followed by IWM and SMH.  Although none of the ETFs lagged behind significantly.

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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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There is not much negative that can be said about SPY, with healthy volume flows, bullish RSI and an impressive recent advice.  Although the 50 day SMA is yet to be convincingly surpassed and a test of support would not be surprising to see this coming week.

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We were looking for a close above $44 and a new high from OBV and this occurred on Tuesday.  With OBV pushing through to new highs it is likely that QQQQ is set to test the January high or hopefully break through it.  The 50 day SMA remains an Achilles Heel and another reason why the market may be due for a breather and a test of support.

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Volume flows on SMH powered ahead and are now in a bullish trend.  There are cracks in the bullish argument however due to the under performance of volume flows until recently.  A test of support will have to occur at some point and it will be interesting to see if that occurs before or after the 50 day SMA is broken.

Two weeks ago I said that in a rally I would expect AMAT to be the best performer out of SMH’s top three holdings.  I certanly got this wrong; so far AMAT has been the worst performer of the three advancing just 2.21% while INTC is up 6.93% and TXN 8.88%.

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This is fantastic to see, IWM is the only one of the influential ETFs to really leave its 50 day SMA in the rear view mirror.  Now IWM is only 2.76% away from the closing high it achieved 31 days ago.  This strength from the Small Caps is a solid indication that the broad market will also be able to break through the 50 day SMA.

IWM, rather like SMH, has had under performing volume flows until recently.  These are cracks in the bullish argument that should not be ignored.

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IYT powered ahead on Friday, no doubt to the cheers of the Dow theorists but again we see the 50 day SMA standing in the way.  Volume indicates a continued trading range.

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OM3 Weekly Indicator

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The OM3 indicator has conflicting internal readings resulting in most of the ETFs receiving ‘No Signal’ while SMH and IWM are both on a ‘Strong Buy’.  It is positive to see SMH and IWM exhibiting the most bullish readings however.

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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 still in place but this weeks 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.

.

.

TransDow & NasDow

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The Dow remains dominant over the Transportation Index and the NASDAQ.  Historically little ground has been made by the broad market under these conditions and most of the disasters have occurred.

.

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 rate on 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 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 and Liquid Q remain on buy signals and are both showing small profits for now.  Their internal readings have strengthened significantly over the last week.

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Historical Stats:

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Summary

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Indications are that we have returned to the bullish trend but a test of support will be due soon.  IWM and SMH do however remind us of some cracks in the bullish argument, from a technical standpoint.

Semiconductor companies are extremely economically sensitive; they lead the business cycle and as a result tend to lead the market and reveal its true direction.  In the Information Age semiconductors are like the railways of the Dow Theory during the Industrial Age.  Likewise Small Caps are inherently more economically sensitive than Large Caps.

SMH was the first of the influential ETFs to peak 42 days ago while most of the others peaked 11 days later.  Also from the beginning of September until just recently OBV has been significantly under performing the price action on both SMH and IWM.  By OBV breaking below the November low earlier this month it indicated significant weakness and I was expecting a return to the bearish tend.  However support held and now things are looking very good.  This conflicting information points to the possibility that we are stuck in a trading range.  For now however, the market is likely to have a bullish bias.

Any disputes, questions, queries… comments or theories are most welcome below.

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Derry

And the Team @ ETF HQ

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P.S If you get value from these newsletters please share the word with others.  Thanks.  If you are a new reader please subscribe using the form to the top right of this page.

P.P.S I hope this week leaves you feeling like Ivan Skobrev (left) did after seeing he had just posted the fastest time in the men’s 1,500m speed skating and not like Canada felt after losing to the US in the Hockey on home ice.

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The Devils Dictionary – A

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AAA – A credit rating which indicates a company has very little likelihood of default and therefore carries too little debt.  By a process of financial alchemy, this rating now covers most of the riskiest corporate and consumer borrowers, which have too much debt.  See Rating Agencies and CDO.

Accounting – An elaborate system of gibberish intended to describe the abstract theory of financial reality: how much money you have borrowed and can’t pay back (the balance sheet), how much money you are losing (the income statement) and how much worse this year is than last year (changes in financial condition); accounting has been integral to the history of civilization.  Pacioli, a mathematician, published Summa de Arithmetica, Geometrica, Proportioni et Proportionalite in 1494, a year that closely coincided with Columbus’ discovery of America wherein the need to keep track of massive fraud, schemes, scams and other thievery was widely anticipated.  An elegantly elaborate system of debits and credits known as ‘Double Entry Accounting’ quickly came to mean “two for me and none for you”.  Without accounting there could be no fair system of taxation; this fact further highlights its failure because tax and fair remain like oil and water.

AICPA – The American Institute of Certified Public Accountants is the national, professional organization for all Certified Public Accountants.  Its mission is to provide members with the resources, information, and leadership that enable them to provide valuable services in the highest professional manner to benefit the public as well as employers and clients.  AICPA has a trademark lawsuit pending with the Absolutely Incurable Crooks and Perpetrators Association that it is expected to lose for imperceptibly different activities and mission.

AIG – The distressed vocalization of regulators upon examining the books and records of American International Group which was code for All Investments Gone; financial equivalent of “S.O.S – Mayday! Mayday!”  While all the investments had gone to zero, incalculable liabilities remained as a result of an enormous unregulated gambling scheme known as Credit Default Swaps that left the U.S. Taxpayer holding a $200 billion bail-out bag that turned out to be heavier than a black hole.