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My Advance/Decline Model Kicks In A Buy At The Open

In July of 2007, I began a model to track the advance decline line. The model is simple. Track each day the advance decline line of the NYSE and NASDAQ.

Then I use a 10 day moving average to trigger buy and sell signals. Currently, we have been in a sell signal. The 10 day moving average needs to move to +200 or greater on two days in a row. We are now there. As such, we move from cash to a buy.

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The model went to cash on January 8th at 1920.03 when we published on the 9th. We track in real time.

So a question that should be asked is how has the model done since 2007. The model tracks the S&P 500 and the returns are 118.13% versus the S&P 500 return of 176.02% so as a market timing tool it captured 67% of the upside.

Initially, the model was either buy or sell, i.e. short. In 2012, we added cash as a component. Since that point in time, there has been one sell signal that made money.

I use this model as one of several components of my market timing tools. The other tools have yet to tell me to dip my toe in the water and usually this is the first to do so. By the way, one of my models correlates almost 95% to The Fly’s buy model.

A key component of the model is it needs to start working within a couple days or the odds of failure are high.

Therefore, the rest of this week is key.

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What Events Are Going To Influence Trading Today

Each day it is REALLY important if you are trading to understand what could trip you up. I write a column everyday that attempts to do this day in and day out. This is highlight of day’s piece and those events all traders need to be aware of.

Earnings due after the close (by avg. trade volume):GILD EQR YHOO ILMN FISV EW VMG KIM UDR.

Due Wednesday morning (by avg. trade volume descending): MRK CMCSA MDLZ GM SO ADP ABB ALXN BDX EXC ETN MPC BEN.

Auto sales due today. Chrysler out already and beat estimates. General Motors and Ford are still to report.

Federal Reserve Kansas City President Esther George will speak at 1:00 p.m. EST.

China Service PMI is due out at 8:45 p.m. EST.

The Bank of Japan (BOJ) releases minutes from its latest meeting at 6:30 p.m. EST.

On Wednesday in Japan, Bank of Japan Governor Kuroda will speak and may expand on last week’s move to negative interest rates.

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Barron’s Top Names To Buy

Over the weekend, Barron’s produced their list of “15 Stocks To Buy Now”. I always like to run my metrics against others ideas. That is how I tend to get some of my best ideas.

The list was divided between tech and financials. Right now I am not going to touch financials until we begin to get some signs that in fact we have an economy and second that interest rates can rise instead of fall, especially on yields at the long end of the curve.

Therefore that limits my review to technology names. Most of the names were complete dogs with Yahoo, Micron and Seagate on the list. The only name that interested me was Akamai Technologies $AKAM. Technically the stock has almost retraced 61.80% of its October 2011 low to May of 2015 high. That number is $41.24. That said it is holding $45 and there is decent weekly support there.

Fundamentally there is earnings growth from $2.43 to $2.69 this next year. So earnings growth of $0.26 or 10.69%, The P/E is 16.84. Not cheap. Earnings are due next Tuesday on February 9th.

Therefore, I want to want to see how earnings go. This name goes on my shopping list but I am not willing to buy it here. The lesson learned here is as we correct it makes sense to build lists and buy where there is real and not perceived value.

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Locking In Gains On The Other 50% of ABX

Last Sunday, January 24th I recommended $ABX. It opened last Monday at $8.74 and is now at $10.01. It is higher by $1.27 or 11.21%. We locked in 50% of the position at $9.72 and will lock in the rest here. Anytime we make such “fast money” it makes sense to take some of the profits.

Gold looks a little toppy to me right here and with the awful PMI numbers we could see it pull back. Also, at 1:00 p.m. Federal Reserve Chairman Stanley Fischer will be jaw boning rates and that could hurt gold stocks.

Expect to see a new recommendation out this week as we have lots of ideas but want to see how the week plays out given the abundance of news.

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What A Week We Have Coming Up

1.Geopolitical and Fiscal Events. Monday sees the Bank of Australia announce its latest interest rate decision. On Tuesday Federal Reserve Kansas City President Esther George speaks. Wednesday sees Bank of Japan Governor Kuroda speaks and may expand on last week’s move to negative interest rates. Thursday sees Dallas Federal Reserve President Rob Kaplan speak on the economy as does Cleveland Federal Reserve President Loretta Mester. Thursday also sees IMF Head Christine Lagarde speak. The BOE is out with its latest interest rate decision on Thursday.

2.Economic Releases. Releases of note this week include the weekly chain store sales, oil/gas numbers, mortgage applications personal income, ISM Manfacturing PMI, factory orders, ADP Payroll, Challenger Gray & Christmas Job Cuts, Nonfarm Payrolls and the Unemployment Rate.

3.Earnings Releases. Notable releases include GOOGL AET XOM PFE MRK CMCSA PM AZN EL CME.

Monday, February 1

Sunday night China Manufacturing PMI is released at 9:30 p.m. EST.

Eurozone PMI is released at 4:00 a.m. EST.

December Personal Income is due out at 8:30 a.m. EST and is expected to remain at 0.3%. Then at 10:00 a.m. EST, January ISM Manufacturing PMI is due out and expected to rise to 48.5 from 48.2. At the same time, December Construction Spending is due out and expected to rise to 0.4% from -0.4%.

Markets are closed in Mexico.

The Bank of Australia will release its latest interest rate decision at 9:30 p.m. EST. Tuesday, February 2

The Security Exchange Commission (SEC) meets on equity market structure.

The Bank of Japan (BOJ) releases minutes from its latest meeting at 6:30 p.m. EST.

China Service PMI is due out at 8:45 p.m. EST.

Wednesday, February 3

ADP Employment Data is due out at 8:15 a.m. EST and is expected to fall to 180,000 from 257,000.

Eurozone Services PMI is due out at 4:00 a.m. EST.

Then at 10:00 a.m. EST, January ISM Services are due out and expected to fall to 55.2 from 55.3.

The Bank of Japan (BOJ) Governor Karuda speaks more about recent stimulus action enacted last week.

Thursday, February 4

January Challenger Gray & Christmas Job Cuts are due out at 7:30 a.m. EST and last month fell by -27.6%. Then at 10:00 a.m. EST, December Factory Orders are expected to remain at -0.2% month over month.

The Bank of England (BOE) releases its latest interest rate decision and no change is expected.

International Monetary Fund (IMF) Head Christine Lagarde speaks about emerging markets.

Friday, February 5

January Nonfarm Payroll is released at 8:30 a.m. EST and is expected to fall to 200,000 from 292,000. The unemployment rate is expected to remain at 5.0%.

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Scenario #2 Played Out

 

Yesterday it was noted there is a very specific pattern for FOMC Announcement Days over the last 20 years.  A picture was painted of three scenarios and Scenario 2 played out.

Scenario 2 is if SPY is lower for the day and if we continue to trade lower post the FOMC, then expect an up Thursday. This was a bit sloppy but that was what we got.

Wednesday saw SPY open at $189.58 and then trade up to a peak of $191.56 before coming back to $190.32 at 2:00 with the FOMC Announcement. From there it traded to a close of $188.12. Today we closed at $189.13 effectively higher by a $1.

That said it was a struggle with eight programs that drove stocks higher or lower through the course of the day. Each one lasted an hour.

The low last week was $181.02 so we are higher by $8.11 or 4.48%. This is sloppy trading but you need to be thinking ahead to capture gains.

4.48% in 6 trading days is pretty amazing the problem is that few if any capitalized  on this move.

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Interview On Current Thinking

Each week I do an interview with my long time partner in crime Steve Beaman. Steve was a co-founder of Chicago Investment Analytics that was sold off the Charles Schwab so that Schwab could use the CIA models to create the Schwab Equity Ratings.

Steve went on to invest and build a variety of businesses post CIA. Now he is leading the charge to educate the investing public.

We did our interview on Tuesday night. So it is timely and I think you might learn something if you spend the 10 minutes watching the video. Here is a link to the video:

https://www.societytoadvancefinancialeducation.org/professional-investor-series-1-26-2016/

 

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Locking In Gains On ABX

Sunday we recommended ABX. It opened on Monday at $8.74 and is now at $9.72. It is higher by $0.98 or 11.21%. We will lock in 50% of the position here. And see where it can go from here. Anytime we make such “fast money” it makes sense to take some of the profits.

If you bought some share, then enjoy the nice gain!

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How To Play The FOMC Announcement From 2:00 Today Through Thursday

I have observed a very specific pattern for FOMC Announcement Days over the last 20 years. Come 2:00 a trend that lasts from 2:00 until around 3:00 and then reverses typically follows through into the end of Thursday trading.

So as an example, SPY trades lower from 2:00 to 3:00 moving from 189 to 187 and then reverses to close at 189.50. Thursday should see more follow through to the upside. This is Scenario 1.

Today we are lower and if we continue to trade lower post the FOMC, then expect an up Thursday. This is Scenario 2.

The worst case would be a lower day that rights itself by mid day and trades higher post the FOMC, then expect a down Thursday. This is Scenario 3.

Therefore, the best scenarios IMO are 1 and 2. We will look back at how this played out on Thursday after the close.

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TED Spread Versus CDS

I received an email from a good friend of mine about how Credit Default Swaps (CDS) levels are rising. Yesterday they rose sharply as markets struggled. So

cdsrise

So on the one hand CDS is rising which shows a risk off attitude. Meanwhile the TED Spread is falling since the beginning of the year, 45 to 33. This drop is similar to what happened in early 2012 after a tough 2011. 2012 ended up being a decent year. Pay attention to the TED Spread as we move forward for clues that we might be through the worst of the pain.

TED Spread

The chart above is monthly so click on it for more granularity.

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