December 13, 2010 – 07:45 am EST
The market continued its advance over the last week and the best news is that much of it was backed by strong volume. Over the last month the advances have been nonstop and over the last 3+ months they have been huge. Now the question is whether we are due for some profit taking. Lets take a closer look…
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****Thanks to all those who referred people to this newsletter over the last week. The more readers we have the more services we can provide you.
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ETF % Change Comparison
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For the first time in a while SMH wasn’t one of the top performing ETFs and finished the week off its highs, this is no cause for concern but is interesting to note. IWM on the other hand had a very strong week and it is always positive to see the small caps leading.
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Learn more – ETF % Change Comparison
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A Look at the Charts
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New highs and improving volume, you can’t complain about that!
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There looks to be little to sustain the rally on QQQQ so continued strength from SMH is particularly important.
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After a huge run SMH is very much due for some profit taking, hopefully volume flows remain positive.
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Strong volume and strong price action – great to see from the small caps. They are overbought though.
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The transports look good but currently lack a catalyst for a big move higher over the short term.
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OM3 Weekly Indicator
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‘Strong Buy’ signals remain active across the board.
Learn more – The OM3 Indicator
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TransDow & NasDow
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The TransDow maintains its position in the Transports as they remain dominant over the Dow. The NasDow on the other hand has just shifted out of the NASDAQ after two weeks for a 4.06% profit as the Dow has become 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 return from the DJIA during the periods it was dominant over the DJTI was just 4.06% and the biggest loss for one trade was -16.13%. A 4% stop-loss is applied to all trades adjusting positions only at the end of the week.
What the NasDow Readings tell us:
The NasDow measures dominance between the NASDAQ and the DJIA. Using the same theory behind the Trans Dow; in a strong market the more economically sensitive NASDAQ should be dominant over the DJIA.
Historically the NASDAQ has been dominant over the DJIA 44% of the time. Taking only the trades when the NASDAQ is above its 40 week moving average the annualized rate of return was 25.47% with the biggest loss for one trade sitting at –8.59%. The annualized rate on the DJIA during the periods it was dominant over the NASDAQ is just 8.88% and the biggest loss for one trade was –12.28%. A 8% stop-loss is applied to all trades adjusting positions only at the end of the week.
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LTMF 80 & Liquid Q
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LTMF 80 continues to hold QQQQ and is now showing a profit of 13.55%. 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
Everything continues to look good and volume is improving in most areas. Over the short term however profit taking is a real possibility simply due to the fact that the market (particularly SMH) has become overbought and currently lacks the fuel for a major advance.
Hope you all have a good week, I will be away for most of it on holiday but will be back for Friday’s close.
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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Quote of the Day:
“I’m going to buy hamburgers for the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up, we weep. For most people, it’s the same way with everything in life they will be buying – except stocks. When stocks go down, you can get more for your money, but people don’t like them anymore. That sort of behavior is especially puzzling.” – Warren Buffett