Breadth Tracker

I have not always found the time to track breadth or I’ve either forgotten to save afterwards, or forgotten to track it, but I’ve been trying to make a more conscious effort to put up the breadth readings. An interesting observation is that the total average breadth is the worst it has been since I started tracking (at least worst I remember and if it was ever worse I didn’t record it).
breadth tracker
I do know that in some of the better days in which I wasn’t tracking it that the % of stocks up 4% was over 10%, but unfortunately I don’t have record of it saved. The sudden shift from earlier on being under 3% to over 9% signals a decisive move in direction by a number of stocks in both directions.

The unfortunate thing (and in some ways the fortunate thing) about breadth is there are different ways to interpret it. It has to be put into context. Breadth is only a measurement of advancers vs decliners. The major index or indicies are weighted heavily by the largest cap names and can’t tell you when a lot of stocks are up a little, when a few stocks are up a lot, or when a lot of stocks are down but a few megacap stocks are up. Breadth can help you look behind the curtain a little and interpret what’s going on under the surface. Alternatively, it can be used as a sentiment indicator and you can correlate it to interpretations of sentiment cycle to confirm risk aversion. You can look for leadership the way I set it up, and even analyze if it is “market of stocks”.

Although the numbers are objective, you can either see more oversold and value in buying the blood, or you can wait until things improve dramatically and follow after a “breadth thrust” (sentiment shift). This flexibility can be frustrating for some, but also very adaptive to your way of trading. An allocation strategy might wait to begin to shift allocation until there has been a decline and slowly begin to rotate in and then do so more aggressively after the oversold levels follow with a sustainable shift in breadth that is more than a couple days long. It tracks multiple time frames and you can look for whether or not there is substantial leadership making extreme moves one way or another, and the percentage of extreme moves that are bullish vs bearish.

The fact breadth is so bad in the context of believing this uptrend is not yet over, yet still vulnerable to an intermediate correction while still showing “aversion” in some growth names provides a lot more actionable ways to play my bias on different time horizons as breadth develops. I am in a bit of conflict here, but I believe the sell off in the russel is a precursor to the selloff in the S&P but that there will be some mean reversion. I would eventually expect growth stocks to lead on the next go around but it may be longer than usual until it sets up as first we may have to have some rotation. Additionally one of the CAUSES for aversion may be a reduction of risk ahead of earnings season. After that plays out whether positive or negative the market will have to react, and then eventually rotate their capital SOMEWHERE. I doubt see with yields so low that bonds are attractive, commodities aren’t exactly that attractive either, and so currency and stocks are the only places the vast pools of money will go. Eventually the pension funds will either start to become insolvent and go belly up or aggressively have to rotate into risk more aggressively, and possibly both. Their models of making 8% in the late 70s and early 80s when interest rates were 10-15% may have been fine in the past when the bond yield was super high in the 80s but there isn’t enough yield for that to remain viable at 2.5% 10 yr treasury. Eventually until we have public participation and euphoria, we will continue to find higher prices, although it may take substantially more time before the market sets up for the next rotation and it may correct in the mean time before it will chase into stocks so that may not help you as a trader over the next month or so.
Another breadth reading (McCllelan Oscillator) is also as low as it has been in a long time.
nymo

 

Market Breadth Update 7/17 Very Little Leadership

The leadership we do have at least is finally bullish after a few days of what may be just temporary risk aversion.
However, there is a greater concern…
stock market

That concern is that individual stock bets have failed to pick a direction. These conditions, should they continue, is very dangerous for short dated option trading strategies, but may just be pre-earnings uncertainty. Nevertheless, until things turn around in the short term, it is a “stock market” rather than a market of stocks.

I haven’t been following breadth for very long and I only recently started looking at the % of stocks that are up making significant moves, but nevertheless, I have seen readings where over 10% of all stocks that are up have made +4% moves. I thought 5% was low, but a reading under 3% right now is pretty rough, especially considering with such low VIX we should see some individual leadership. As I have not tracked breadth in this much depth for very long I cannot be substantially confident in my interpretation, but I suspect the divergence between a VIX suggesting a “market of stocks” while breadth has increasingly suggested an increasing shift into a “stock market” means we are on the verge of some kind of turning point where in hindsight this signal will seem obvious.

The russel diverging from S&P and dow, and the breadth suggesting investors are hesitant to aggressively accumulate or sell any particular theme could simply confirm the gameplan of “aversion” that OA has mapped out. Alternatively, if the glass is half empty, instead you might see this as an early indication and precursor to volatility increasing, the smart money reducing positions ahead of it and selling into any strength while there simply aren’t a lot of people that have caught on and joined in selling yet, and the “calm before the storm” type of logic. Last time the “market of stocks” got put into question it only took a week or two until it turned back around and remained a “market of stocks” before then selling off sharply in a slightly more correlated way than desired and remaining there (bloop, bloop) as Janet Yellen decided to give grandma stock advice, warning the kids to avoid playing with firecracker stocks.

Translating this ambiguous view into a gameplan is actually much easier than one might think. One should always have their own way of deciding “what” to buy, but equally important is how to position size, what time frames to look at, and how defensive of a strategy to use. Regardless of the viewpoint of “the market” going forward, the mere suggestion that the “market of stocks” is being put into question yet again suggests following a more concentrated approach (fewer names with normal or slightly above normal position size for about equal or less total capital at risk in options) going forward. The lack of clear leadership suggests that if I must buy options, more time is advised. So remaining a bit more patient with some extra cash, not leaping into the riskier names just yet, giving more time for setups to develop and sticking with what you do well looks like a good gamplan going forward from my point of view. Perhaps a more defensive strategy of cutting losses a bit more quickly to not get stuck in stuff that takes too long to develop, and counting your blessings if you have a gain in a stock run over 4% in your anticipated direction rather than expecting it to defy the even longer than usual odds. If you cannot trade that way and want to stick to stock picking and letting winners run more so than worrying about salvaging premium, just gear down for awhile and make sure you have enough capital ready to position more aggressively again once we get some leadership and more positive signs.

 

asinine disclaimer:I’m not certified as a broker or financial planner so this isn’t “advice” legally speaking, just “entertainment” and education.

 

 

breadth end of day is interesting. More time in the day leads to greater chance of larger moves and with very few positive stocks, it’s not all that surprising that market would dive into the few runners:

breadth 7-17

System simulation and position sizing

Assuming the following system and $25,000 starting capital:
results(ROI by “event”):
1:397% (average was skewed by a +1500% in GMCR, a 1000% in YELP and a few 500-800% gains in AAPL,BAC,GMCR(2),LNG,AMZN,PCLN)
2:57.51%
3:0.28%
4:-69.69%
5:-100%
Odds (of corresponding “event”)
1:23.44%
2:9.38%
3:4.69%
4:9.38%
5:53.13% (I assumed all current trades on the books went to zero to prevent unfair bias of only counting the completed trades while the open positions were negative)

Simulated expectations and probabilities over 200 trades…
1% position size:
median result:$45,000? Mean:$51,574
46.5% chance of double over 200 trades ($50,000)
7.5% chance of 200% over 200 trades ($75,000)
1.1% chance of 300% over 200 trades ($100,000)

(note:drawdowns are measured from highs and count if they occur at any point in time over 200 trades)

Chance of 20% drawdown 10.7%
Chance of 30% drawdown 0.9%
Chance of 40% drawdown 0%
Chance of 50% drawdown 0%

1.5% position size:
median result:$60,000? Mean:$73,800

79.1% chance of double over 200 trades ($50,000)
41.8% chance of 200% over 200 trades ($75,000)
18.7% chance of 300% over 200 trades ($100,000)
9.5% chance of 400% over 200 trades ($125,000)
4.5% chance of 500% over 200 trades ($150,000)
2.2% chance of 600% over 200 trades ($175,000)
1% chance of 700% over 200 trades ($200,000)

Chance of 20% drawdown 40.6%
Chance of 30% drawdown 6.5%
Chance of 40% drawdown 0.2%
Chance of 50% drawdown 0%

2% position size:median result:$85,000? Median:$112,200
40% drawdown kill switch:4.4% chance of hitting
87.6% chance of double over 200 trades ($50,000)
65.8% chance of 200% over 200 trades ($75,000)
46.6% chance of 300% over 200 trades ($100,000)
29.6% chance of 400% over 200 trades ($125,000)
18.9% chance of 500% over 200 trades ($150,000)
13.8% chance of 600% over 200 trades ($175,000)
10.5% chance of 700% over 200 trades ($200,000)

Chance of 20% drawdown 75.1%
Chance of 30% drawdown 41.17%
Chance of 40% drawdown 4.8%
Chance of 50% drawdown 0.4%

3% position size: median result:$135,000? Mean: $234,500
78.3% chance of double over 200 trades ($50,000)
73.4% chance of 200% over 200 trades ($75,000)
64.6% chance of 300% over 200 trades ($100,000)
54% chance of 400% over 200 trades ($125,000)
49% chance of 500% over 200 trades ($150,000)
44.5% chance of 600% over 200 trades ($175,000)
38.8% chance of 700% over 200 trades ($200,000)

Chance of 20% drawdown 99.2%
Chance of 30% drawdown 66.6%
Chance of 40% drawdown 28.8%
Chance of 50% drawdown 8.3%

Latest OABOT Addition – YOLO Trader

So I started  working on an addition to the OABOT today. What I want to do is identify shorter term 1-3 day trades.The strategy will be to ride the coattails of the capital flows of an industry rotation, by looking for stocks that are not yet extended in those industries. Since it’s a 1-3 day trade, I am not concerned about any of the usual weekly or monthly trend action (at least as a primary indicator).

I start with an INDUSTRY scan of sorts. I want to actually identify industries with at least half of those names positive on the day, with at least a positive average stock move in the industry. I also want above average relative volume AND over 10 names in the industry, but may be willing to settle for results that don’t include those last two filters.

Meanwhile, I want a view on breadth 0% movers and 1% movers by TYPE across the industry, to identify what the daily action is signaling in terms of risk rotation which may later help confirm the anticipatory score and risk cycle that will be more designed for a 5-15 day trade.
oa1

What the primary purpose of this is, is to allow me to have a preset watchlist so that any of the stocks I am watching that start to show industry strength I can quickly check the charts and jump on if I like the action and the industry is taking off. I am really just going to watch the options that trade weeklies and then a list of a few smaller market cap stocks under $10 that tend to make large swings with decent balance sheets that I would consider for a day trade or quick swing, and possibly also a normal watchlist of a few names and use this tool to better help me time the intraday buy of stocks.

oa2

But there’s more. Even though a lot of the momentum move and rotation may retrace at some point, particularly if the longer term trend runs counter to the action, I hope that with a relatively few amount of details and information that I will be able to have some kind of edge in prediction direction just based upon 1-3 day momentum. The result of this action SHOULD change not only the individual scores AFTER this action occurs, BUT ALSO may indirectly set up certain themes for the 5-15 day time period. What I mean is this….
Say energy is down but solar is up. Lets say the larger cap solars have already rallied and may pull back while a result a number of Chinese solars, high beta, low float, high short interest, speculative smaller cap names are anticipated to rally and play catchup. As a result, we then can project that THIS action will provide not just a boost to those specific stocks, but in conjunction with all other anticipated moves, say the china names, the low float names, the high short interest names, the high beta names, etc will then begin to create a theme for the market that will provide a boost in score in 1-3 days . As a result of those themes providing a boost, names heavily tied to each of those themes, such as a few highly speculative, low float, high interest chinese internet names now will have a boost. The act of paying attention to the shorter term momentum will serve as CONFIRMATION on TIMING of those chinese internet names, and also potentially help anticipate a transition to higher risk into the short squeeze and hopefully boost the accuracy rate.

In other words, where as normally you might look at a wedge pattern and can’t be sure if you are going to have a name breakout of a pattern, breakdown, consolidate sideways into a triangle, or begin a trend, with the 1-3 day momentum and short term action you have helped to better fine tune that the Chinese internet plays should be more likely to work on the 5-15 day time horizon based upon market’s tendency to herd and find the “closest cousin” as a derivative to what is currently in favor. Potentially you can see what others can’t and do it without even having any DIRECT evidence of Chinese internet doing anything but consolidating for the time being. By the time many of these start to break out, you normally may be too late, or you may end up chasing… Without factoring this in you are guessing which setups will work and to what extent. With this model, I hope that the short term action (and projecting an adjustment to the score as a result of the short term prediction) can strengthen the 5-15 day score into a prediction…..

IN TURN, I hope to also use the same concept to project forward the 5-15 day action and look a few more stages ahead and have what may evolve in the distant future into a full stock market simulator that can be used to practice trading and give you real time adjustments to scores and stock prices after projecting a few periods forward at a time. If this works properly, a small edge on 1-3 day time horizon, in conjunction with a healthy edge with a 5-15 day ranking fined tune using the 5-15 day time horizon…. will then project forward to say a 10-30 day longer term swing/trend with one’s own chart reading ability, will allow you to see many moves ahead, plan out trades many moves ahead. Since options are priced to decay exponentially, capturing a move that moves 1% per day for 30 days straight on a 30 day option would be much more profitable than an option with 3 days left that moves 1% per day for 3 days straight. The hope is to find out stocks which are the most mispriced according to the market’s tendency to herd and chase, and rotate up risk and shift from industry to industry and assimilate “what’s working” in so many number of different groups. Imagine a contract on say GOOGL with 40 days left and capturing a 30% move on an option 10% OTM even a small percentage of the time when the implied volatility is near it’s lows. Grabbing that LARGER swing will be unbelievable if you can do it… For now, this is just a concept I am working towards, but the idea in itself is stunning. Some further fine tuning and tweaking may allow a full map of the entire stock market’s anticipated moves in every stock (with a certain margin of error and probability of occuring) for an entire leg of a larger sector rotation,and possibly beyond.

Breadth – A Market of Stocks Being Challenged?

Before the market was weak into 6/24 close the 4% movers were non existent, the correlated selloff could be displayed even if it was an only one day move and the vix remained around 12 it still potentially could be cause for concern going forward. On 6/24 85% or so of stocks were down to close out the day. Today 6/25 the 0 and 1% movers were moving and the 4% were but not by greater than the 1 and 0%. This could just be a return to a stock market rally rather than a market of stocks and the start of more correlated moves. But it is very early to say. An alternative, more optimistic view is that the leaders first made a strong move and lead and now are only moving in line with the rest of the market and the appetite towards risk is just approaching the accumulation more cautiously. I know, everyone hates people that hedge their predictions, so I will give another metric to look at. % of all up movers that moved 4%. When there was lots of leadership and the pickings were easy, about 10% of all stocks that were up were up 4% or more. Now we are down to 5.6% today. That’s still not terrible, but it requires a bit more skill to be a stock picker in this environment.

If I had to guess, I would say the reason we are still seeing some chop like this is because there is a lot of charts in the “aversion” and “denial” and “anxiety” for a smaller amount still not heading into their aversion points. This has the market a little bit on edge on both sides, and will display itself with a bit more chop and a little bit less leadership until we break right through. So in the next week or two, I would put these numbers in the context of continuing to display “aversion” (hence why you see a lot of weakness and lack of leadership to the upside for stocks over the last 3 months), for a bit longer in the longer term, while we will see some leadership emerge over the coming weeks months ahead but in the meantime, because of the volatility associated with these states, even as the VIX is down and on average volatility is low, there is still a lot of small jittery rotation back and forth as market may struggle to find leaders that stick until we enter more “returning confidence”. When you put the numbers into that context, the entire story adds up.
I’m still not going to go without mentioning that today as of the close the bearish moves caught on and stuck a bit better than the bullish ones GIVEN that they WERE down even though over 60% of all stocks were up. That may not be too alarming as it can be explained by the logic “if a stock can’t rally in this environment with all stocks up, I better sell it”, and without context around it to support cautiousness other than the move yesterday (6/24/14) signalling across the board selling

breadth

Either way, the environment suggests that it no longer is the type of market where you can be gung-ho long with much larger than usual positions that you let ride until expiration, and instead you should go back to the normal risk and normal management (or perhaps slightly larger position size with the VIX where it is if you can manage it more carefully)

Breadth Signal: Dips are Being Bought, Advancers are Being Chased

6/16/2014 Just the action we look for in the market.

 

Dips are being bought and advancers are being chased (lots of positive up trend day for stocks).

breadth

While it was a relatively flat day in the market, there are signs of leaderships. The percentage of stocks advancing is only around 50%. However, filter that to be a 1% move to filter out some noise and you have nearly 55% advancing. Filter it to a +4% move to represent stocks showing signs of extreme strength and it jumps to nearly 68%. This kind of action is great for a good stock picker and swing trader as the winners will be chased, and buying the dip will offer a good chance of seeing the stock rebound. This has happened for several days the last few weeks.

The only real negative is that the last 3 months many stocks have declined big, while there haven’t been a lot of huge advancers. However, the ship has begun to turn around as the monthly data now shows really positive action, and many stocks have simply been building up a base for the next round of leadership.

rotation2

With that being said, the energy sector has lead, and now the solar sector, a derivative of the energy sector is starting to go while utilities are building a base from prior uptrend and may follow. This may support the view that we are in the “later innings”. Nevertheless, there are still individual opportunities out there. Keep an eye on the vix for signs of caution and the market detaching from risk.

OABOT Demonstration: Looking For Top Industries

So using the “OABOT” (in development) I wanted to demonstrate how I was able to come up with a few ideas for strong industries.
First You press a button to update the data based upon the most recent FINVIZ data available:
update

Then I wanted to focus on industries with a large number of stocks that have been categorized into risk cycle types (I selected those with 35 or more per industry).
copy2
Next I wanted to look at the metrics provided which include breadth, average individual stock score (before adjusting for group score which provides bonuses for the stock being in favorable industries), and a weighted score that combines those factors.
sort3
Finally, I looked for stocks that either had a high enough absolute average of individual stock score OR a high enough weighted score and 35+ individual categorized stocks, then sorted them by their average individual score and limited the names to a handful.
listsort4

 

From here it is useful to look at what “risk cycle” the industry is predicted to be in and then “what’s next” in the cycle. Note: Many of the industry don’t have enough stocks in each category to provide reliable information for the time being, the OABOT will still make a “guess” but I will only be listing those which have enough sample size to provide a guess I am confident in.

detailed industry info

NOW… you have 3 industries with plenty of stocks telling you what is working and what is next.

Let’s use the OAbot to give us a list of stocks in each industry AND category of what is next sorted by score.
score1

score2

score3
And the list
list
Finviz list

From there we can narrow down the list a bit manually.
FLS,NBR,PTEN,SD,MRC,EXH,VNR,HLX,LGCY,SYRG,IO,NGS,MNTX,IPWR
Then we can have OAbot sort from highest score (adjusted for things including what’s working in terms of market cap, industry strength, risk cycle classification in the market, what’s working in the industry and sector, and many other things) to lowest score.

score4

Here are the 1000+ adjusted score for the stocks I manually selected

1000

There are other features. You can plug it into portfolio management tool listing a stop and target to compare risk reward on eligible candidates and determine which offers the best R/R,or you can run a position size simulator, or you can sort by any number of many categories among others.

What’s next?

I hope to automate some of this process a bit more so I don’t have to do sorting and comparing and such from the anticipatory group to the “what’s working” scores. By integrating the information it will require less effort to identify the top industries that also have enough stocks to be relevent. A lot of this will need to be updated to provide a large “anticipatory boost” automatically and I want to generalize “quality and momementum” into “early stages” category “laggard” into a middle stages category and short squeeze and trash into a late stage category. This will be in addition to the anticipatory scores but it will help me get more stocks actually graded with an anticipatory boost where I don’t otherwise have enough relevant information.

But beyond that the next phase needs to adjust risk cycle classification based upon the industry so they can be compared on more of a relative basis rather than just how they are compared to the highs. Then I will have two ways to sort of confirm the OAbot’s prediction of “what phase” of the risk cycle each industry is in. This will prevent the greatest moving industries from having a bunch of quality and momentum stock and be able to find which ones are taking longer OF this particular group. I also will run through anticipatory boost for all the other categories I used when coming up with the individual score based upon what “groups” are working.

I have a lot of other plans in store for the OAbot but for now it still functions to assist me

Breadth: Why Look At Substantial Movers?

Most people look at breadth as advancers vs decliners. You can either look at the ratio of advancers to decliners, or the percentage of advancers vs all stocks (or percentage of decliners vs all stocks) expressed as a percentage bullish or bearish.
I like to narrow that list down by only considering “significant” moves. Why?
Day to day stocks move up and down chaotically for many reasons. Much less often, people are willing to chase a stock after it is moving upwards and continue to bid it higher beyond 1%, or continue to sell a stock after it has declined 1%. Even more rare than that, will you see them chase a stock up 2% or 3% or 4% or more.
Why Look at stocks that have made substantial moves when looking at breadth? By looking at significant movers I am eliminating the noise of day to day emotions to some extent. I am both looking at the percentage of extreme optomism (chasing stocks up) vs extreme pessamism (continuing to sell stocks much lower) as well as looking at positive economic, liquidity, and business cues (substantial earnings surprises for example will drive stocks much higher or lower than a 4% move). Either one when interpreted in proper context is a higher quality sample size then simple “advancers vs decliners”. Also a bullish swing trader’s dream is for stocks down big not to continue to go down and instead reverse and stocks up to continue their upside momentum. By looking at the data, you can determine as the moves get larger if the signals are more bullish as a sign of leadership and ideal swing trader’s conditions. You might also look at it from the perspective of Leaders vs typical market movement and compare a divergence.
Stockbee’s blog has a good article on using market breadth, and you’ll notice that his attention to 4% movers was something I adopted to one of the pieces of my litmus test of the market. But rather than track it at the end of day every day, I like to examine how it changes intraday and the “divergences” between the smaller movers and bigger movers, (and also consider it in terms of the context of “sentiment”).
Take today (06/05/14) for example.

 

breadth
Above is the image of the excel breadth info that I use and update with a click of a button when I want in which I showed you the typical advancers vs decliners, the 1% or more movers, and the 4% or more movers. An hour prior to the update shown above, I actually saw all (0%+) advancers vs decliners less than 50% bullish while the 1% and 4% movers were more bullish. Look past the noise of just the chaotic range and almost random like behavior of stocks hovering near +1% and -1% and you would see that stocks up more than 1% vs more than down 1% are actually showing more bullishness than all 0% movers. Look beyond that to the names that are being chased for more substantial gains due to things like earnings, leading stocks, significant capital inflows signalling the start of significant accumulation, and explosive returning confidence, optomism and depending on the context of sentiment, could represent euphoria type moves at times, and you will see a DRASTIC shift from slightly bullish to substantially bullish. If you first see 4% over 50% while 1% and 0% movers are not and build on a previous signal to signal that the 0% and 1% have begun to become more bullish, that may signal that the leadership of the big movers is lifting the market.

You’d like to ideally see this kind of action to signal that some leadership is catching on, and that the market is reacting positively to the positive leadership, particularly since this is coming off of an environment where stocks long term have shown bearish leadership on say a 3 month time period until oversold levels were reached. The concern is that some of the strongest short term rallies come in a bear market and if you look past the rotation into the large and megacap stocks that has brought the “market” higher, you actually have bearish leadership that has occurred via significant movers. Now overall stocks are still more likely to be above shorter and longer term moving averages, and near highs than lows, but the market does have the appearance of mostly just upwards grind while a failure to catch a lot of trends to the upside and more likely to catch a trend to the downside. That has not been a very favorable conditions for investors and allocators, so hats off to anyone that has done well or hung on with those strategies, and even those remaining bullish over the last several months had fewer bright spots than usual, and a signal to consider getting to work swing trading.

Fortunately with the VIX lower it signals many of the option players, hedgers and speculators have been flushed out and that attempting to speculate with options is now more affordable. With the lower volatility may come the consolidation needed for the eventual break of the range and trend higher, and confidence in holding and adding to stocks that have trended up to return… Breadth certainly is not the only tool in the tool box, but there are so many ways to use breadth and a lot of information that can be gained by different methodologies of looking at it that it is an important tool. You can use it like most do to neutralize the market weighted indices to see if the bulk of the market is declining or advancing and by effect deduce whether the larger cap stocks are moving more significantly than the smaller cap stocks. Or if you monitor the significant movers, you can use it to identify whether stocks making leading moves are to the upside or downside and what those with a lot of capital are doing. You can then interpret whether the leaders are likely to lift or hold down the market, as a result of divergences and you can see what the underlying sentiment is doing to confirm your look at stocks and what part of the cycle the market is in, and you can use it to come up with a gameplan for the day or analyze results relative to the underlying conditions of the market.

I’m still getting used to learning the language of interpreting the various aspects that breadth can provide, but an active and dynamic breadth monitor as said can be a very important tool in the arsenal.

A Primer On Hedging For Your Personal Needs

I plan to buy a house soon, and like many people, I would care for low interest rates. If Interest rates go even lower, it is a win because not only does that mean cheaper borrowing costs, but that also may mean that there is a rotation away from assets into bonds as well as a NEED to ease rates and the conditions from which the need develops means cheaper prices. (in theory, but perhaps not in my particular area). That “win” is not necessary, in order for me to be able to afford a house. Through finding the right deal and saving I can afford the type of house I am interested in.  It is a question of having the stars align and being able to close on the deal in the right neighborhood for the right price with the right features to the house,etc. But if interest rates skyrocket it may be problematic. My borrowing power will decline and the availability of the types of houses I am looking at may decline. In my view, this is a perfect scenario to hedge.

Since a house is affordable based upon current interest rates and it is a matter of me finding the right house in the right area at a reasonable price, it may make sense to hedge. I want to avoid the possibility that interest rates will require me to save more money for a larger down payment or keep less per month, or resort to frugality, so hedging makes sense.

Since higher prices in TLT (treasury bonds) corresponds to LOWER yield and lower interest rates, In order to protect myself from a decline, I would want to profit from lower prices in TLT and higher yield and interest rates.

With the implied volatility in the TLT historically so low, we want to BUY premium.

Time frame? We have to take into account both the actual chart AND the time one anticipates taking before no longer needing a hedge (buying a house). In the short term, the bond futures on just over a 10 year chart shows the following volume profile.

bonds

Timing? The actual timing of the entry is important, but remember, we are currently completely unhedged from a very large cash purchase and about to borrow a lot of money relative to the account size since much of the capital has gone towards saving of the down payment. So what I’m going to do is buy a small TMV position now (3x treasury bear), and consider getting some Jan 2016 puts on the TLT further strength to retest the initial breakdown that I had mentioned may happen.

In theory you could work out what rise of interest rate would impact your affordability and ensure you have a large enough position to offset that and use options and such to try to match your gains to offset your loss as best as possible, but I’m not going to get that carried away. The key thing is that I give myself SOME flexibility so I can be patient on buying a house without having to rush into a decision prematurely without doing my due diligence and so I can make a calm emotionless decision as much as it is to worry about the exact dollar amount.

Protecting Your Home Equity through Hedging

Let’s say I’ve bought my house, lived in it for a couple years and the market has skyrocketed along with the value of my house. I don’t want to sell, but I am concerned about the housing market crashing. NOW how might I hedge? Now I want to actually take out as much equity as I can from the house and I might actually want to put it into TLT. I would have to sell at a rate or collect from dividends and covered calls at a rate at which would allow me to collect the cash needed to make the payment on the refinance mortgage. If the market crashes and Interest rates go lower or even negative, my loan becomes a gift at home equity levels that were at bubble levels, and I’ve locked in interest rates BEFORE they declined in attempts to ease the economy. This will compensate for the lost equity in the house. If more people are aware of hedging and can use it to fit their needs, then the “next 2008″ will be less likely to domino into a contagion as homeowners won’t be forced out, foreclosures won’t cause a contagion of forced liquidation of real estate and job losses will be not as steep. Unfortunately I think many people are living paycheck to paycheck unhedged (and the increased taxes and austerity certainly haven’t helped) and they are VERY susceptible to an economic downcycle. Until people learn to hedge, each decline will just cause more volatility and fear, more pressure to leverage the system further. And each up cycle will be filled with panic buying as people are forced to buy while the house is still affordable, or else be forced to wait for the next downcycle.

Say you bought residential real estate ETFs when the cost was low and you weren’t in a position to buy a house and while the borrowing cost is affordable you also hedged vs interest rate increase; then even when market is near extremes near the top, you can still afford to buy. If you become concerned that you bought too late in the cycle, you might still be able to buy some puts and profit from a decline to offset your risks since your profits from hedging plus additional savings will provide you with more capital which you can use to now hedge a decline.

The time to commit excess capital into savings and hedging and investment is before you need to. That way, when problems come up, they aren’t really the problems they would have been. Maybe you want to be long natural gas and gasoline and heating oil futures contracts or options on futures contracts as well to hedge your costs so that if gas prices increase, you still have added capital to draw from from the investment. You don’t have to get too carried away as investment in companies at the right time with some attention paid to your own day to day financial needs and risks, will allow you to make money. However, ultimately taking away the possibility of bankruptcy no matter what life throws at you (within reason) through hedging, may, in many situations be a great form of insurance, and allow you to be more aggressive with the rest of your money and potentially at times with your life path (such as buying a house late in the cycle or quiting your job earlier to take a shot at a business opportunity knowing you have investment in things that will protect against rising food costs, gas prices, and savings that will last you long enough. )

If you want to quit your job and “take a shot” at whatever, you need to buy yourself a specific amount of TIME. Convert your money into “time” and through hedging you can most likely keep that time no matter what prices do. Simply count how much “TIME” worth of expenses you have. Count all the costs you will incur per month. Food, oil, heating, etc. Then multiply the current cost by the number of months you need. You need a minimum of that dollar amount to buy yourself that many months. Say you need at least 12 months. $2000 per month times 12 months is $24000. Now you need to convert that amount of capital or more into hedges. Each item over 12 months in this case will contribute to a specific dollar amount of cost. That is the target amount for which you use to hedge. Say food takes up $10,000 of that $24,000. $10,000 should go into buying food and hedging by putting capital into a basket of stocks and ETFs that profit from food or agriculture, or give you exposure to the food items and agriculture themselves. If you deploy that capital into things that will rise along with food prices, and in non-perishable food yourself, then an increase in food prices won’t disturb the amount of time (months or years worth of savings) that you have deployed towards your food.

Of course, that hedging capital is in addition to whatever OTHER costs you might incur such as the startup capital for trying to build a business in that time or whatever. You also need to consider the lifestyle you will have to live if the plan doesn’t pan out and you can’t get the same quality of job you had before and plan for some contingencies. I would carry at least 6 months of additional expenses worth of capital in CASH for needs that pop up, and at least another 6 months extra in hedges than you intend on using for additional time in which you are trying to find another job if things don’t pan out, or the job you were told you could always come back to isn’t there, but that is just me. Your needs and risk tolerance may be different, and so this article isn’t for everyone, but just a primer on how you might get started hedging. The average joe paycheck to paycheck should actually cut back first on expenses first, pay off debt second, save up cash third, hedge forth, and THEN go back to living their reckless rockstar lifestyle as they were, if they must. At least that way they will have a cushion that will give them an edge as costs increase and their paycheck doesn’t.

 

Breadth Tracker

I have not always found the time to track breadth or I’ve either forgotten to save afterwards, or forgotten to track it, but I’ve been trying to make a more conscious effort to put up the breadth readings. An interesting observation is that the total average breadth is the worst it has been since I started tracking (at least worst I remember and if it was ever worse I didn’t record it).
breadth tracker
I do know that in some of the better days in which I wasn’t tracking it that the % of stocks up 4% was over 10%, but unfortunately I don’t have record of it saved. The sudden shift from earlier on being under 3% to over 9% signals a decisive move in direction by a number of stocks in both directions.

The unfortunate thing (and in some ways the fortunate thing) about breadth is there are different ways to interpret it. It has to be put into context. Breadth is only a measurement of advancers vs decliners. The major index or indicies are weighted heavily by the largest cap names and can’t tell you when a lot of stocks are up a little, when a few stocks are up a lot, or when a lot of stocks are down but a few megacap stocks are up. Breadth can help you look behind the curtain a little and interpret what’s going on under the surface. Alternatively, it can be used as a sentiment indicator and you can correlate it to interpretations of sentiment cycle to confirm risk aversion. You can look for leadership the way I set it up, and even analyze if it is “market of stocks”.

Although the numbers are objective, you can either see more oversold and value in buying the blood, or you can wait until things improve dramatically and follow after a “breadth thrust” (sentiment shift). This flexibility can be frustrating for some, but also very adaptive to your way of trading. An allocation strategy might wait to begin to shift allocation until there has been a decline and slowly begin to rotate in and then do so more aggressively after the oversold levels follow with a sustainable shift in breadth that is more than a couple days long. It tracks multiple time frames and you can look for whether or not there is substantial leadership making extreme moves one way or another, and the percentage of extreme moves that are bullish vs bearish.

The fact breadth is so bad in the context of believing this uptrend is not yet over, yet still vulnerable to an intermediate correction while still showing “aversion” in some growth names provides a lot more actionable ways to play my bias on different time horizons as breadth develops. I am in a bit of conflict here, but I believe the sell off in the russel is a precursor to the selloff in the S&P but that there will be some mean reversion. I would eventually expect growth stocks to lead on the next go around but it may be longer than usual until it sets up as first we may have to have some rotation. Additionally one of the CAUSES for aversion may be a reduction of risk ahead of earnings season. After that plays out whether positive or negative the market will have to react, and then eventually rotate their capital SOMEWHERE. I doubt see with yields so low that bonds are attractive, commodities aren’t exactly that attractive either, and so currency and stocks are the only places the vast pools of money will go. Eventually the pension funds will either start to become insolvent and go belly up or aggressively have to rotate into risk more aggressively, and possibly both. Their models of making 8% in the late 70s and early 80s when interest rates were 10-15% may have been fine in the past when the bond yield was super high in the 80s but there isn’t enough yield for that to remain viable at 2.5% 10 yr treasury. Eventually until we have public participation and euphoria, we will continue to find higher prices, although it may take substantially more time before the market sets up for the next rotation and it may correct in the mean time before it will chase into stocks so that may not help you as a trader over the next month or so.
Another breadth reading (McCllelan Oscillator) is also as low as it has been in a long time.
nymo

 

Market Breadth Update 7/17 Very Little Leadership

The leadership we do have at least is finally bullish after a few days of what may be just temporary risk aversion.
However, there is a greater concern…
stock market

That concern is that individual stock bets have failed to pick a direction. These conditions, should they continue, is very dangerous for short dated option trading strategies, but may just be pre-earnings uncertainty. Nevertheless, until things turn around in the short term, it is a “stock market” rather than a market of stocks.

I haven’t been following breadth for very long and I only recently started looking at the % of stocks that are up making significant moves, but nevertheless, I have seen readings where over 10% of all stocks that are up have made +4% moves. I thought 5% was low, but a reading under 3% right now is pretty rough, especially considering with such low VIX we should see some individual leadership. As I have not tracked breadth in this much depth for very long I cannot be substantially confident in my interpretation, but I suspect the divergence between a VIX suggesting a “market of stocks” while breadth has increasingly suggested an increasing shift into a “stock market” means we are on the verge of some kind of turning point where in hindsight this signal will seem obvious.

The russel diverging from S&P and dow, and the breadth suggesting investors are hesitant to aggressively accumulate or sell any particular theme could simply confirm the gameplan of “aversion” that OA has mapped out. Alternatively, if the glass is half empty, instead you might see this as an early indication and precursor to volatility increasing, the smart money reducing positions ahead of it and selling into any strength while there simply aren’t a lot of people that have caught on and joined in selling yet, and the “calm before the storm” type of logic. Last time the “market of stocks” got put into question it only took a week or two until it turned back around and remained a “market of stocks” before then selling off sharply in a slightly more correlated way than desired and remaining there (bloop, bloop) as Janet Yellen decided to give grandma stock advice, warning the kids to avoid playing with firecracker stocks.

Translating this ambiguous view into a gameplan is actually much easier than one might think. One should always have their own way of deciding “what” to buy, but equally important is how to position size, what time frames to look at, and how defensive of a strategy to use. Regardless of the viewpoint of “the market” going forward, the mere suggestion that the “market of stocks” is being put into question yet again suggests following a more concentrated approach (fewer names with normal or slightly above normal position size for about equal or less total capital at risk in options) going forward. The lack of clear leadership suggests that if I must buy options, more time is advised. So remaining a bit more patient with some extra cash, not leaping into the riskier names just yet, giving more time for setups to develop and sticking with what you do well looks like a good gamplan going forward from my point of view. Perhaps a more defensive strategy of cutting losses a bit more quickly to not get stuck in stuff that takes too long to develop, and counting your blessings if you have a gain in a stock run over 4% in your anticipated direction rather than expecting it to defy the even longer than usual odds. If you cannot trade that way and want to stick to stock picking and letting winners run more so than worrying about salvaging premium, just gear down for awhile and make sure you have enough capital ready to position more aggressively again once we get some leadership and more positive signs.

 

asinine disclaimer:I’m not certified as a broker or financial planner so this isn’t “advice” legally speaking, just “entertainment” and education.

 

 

breadth end of day is interesting. More time in the day leads to greater chance of larger moves and with very few positive stocks, it’s not all that surprising that market would dive into the few runners:

breadth 7-17

System simulation and position sizing

Assuming the following system and $25,000 starting capital:
results(ROI by “event”):
1:397% (average was skewed by a +1500% in GMCR, a 1000% in YELP and a few 500-800% gains in AAPL,BAC,GMCR(2),LNG,AMZN,PCLN)
2:57.51%
3:0.28%
4:-69.69%
5:-100%
Odds (of corresponding “event”)
1:23.44%
2:9.38%
3:4.69%
4:9.38%
5:53.13% (I assumed all current trades on the books went to zero to prevent unfair bias of only counting the completed trades while the open positions were negative)

Simulated expectations and probabilities over 200 trades…
1% position size:
median result:$45,000? Mean:$51,574
46.5% chance of double over 200 trades ($50,000)
7.5% chance of 200% over 200 trades ($75,000)
1.1% chance of 300% over 200 trades ($100,000)

(note:drawdowns are measured from highs and count if they occur at any point in time over 200 trades)

Chance of 20% drawdown 10.7%
Chance of 30% drawdown 0.9%
Chance of 40% drawdown 0%
Chance of 50% drawdown 0%

1.5% position size:
median result:$60,000? Mean:$73,800

79.1% chance of double over 200 trades ($50,000)
41.8% chance of 200% over 200 trades ($75,000)
18.7% chance of 300% over 200 trades ($100,000)
9.5% chance of 400% over 200 trades ($125,000)
4.5% chance of 500% over 200 trades ($150,000)
2.2% chance of 600% over 200 trades ($175,000)
1% chance of 700% over 200 trades ($200,000)

Chance of 20% drawdown 40.6%
Chance of 30% drawdown 6.5%
Chance of 40% drawdown 0.2%
Chance of 50% drawdown 0%

2% position size:median result:$85,000? Median:$112,200
40% drawdown kill switch:4.4% chance of hitting
87.6% chance of double over 200 trades ($50,000)
65.8% chance of 200% over 200 trades ($75,000)
46.6% chance of 300% over 200 trades ($100,000)
29.6% chance of 400% over 200 trades ($125,000)
18.9% chance of 500% over 200 trades ($150,000)
13.8% chance of 600% over 200 trades ($175,000)
10.5% chance of 700% over 200 trades ($200,000)

Chance of 20% drawdown 75.1%
Chance of 30% drawdown 41.17%
Chance of 40% drawdown 4.8%
Chance of 50% drawdown 0.4%

3% position size: median result:$135,000? Mean: $234,500
78.3% chance of double over 200 trades ($50,000)
73.4% chance of 200% over 200 trades ($75,000)
64.6% chance of 300% over 200 trades ($100,000)
54% chance of 400% over 200 trades ($125,000)
49% chance of 500% over 200 trades ($150,000)
44.5% chance of 600% over 200 trades ($175,000)
38.8% chance of 700% over 200 trades ($200,000)

Chance of 20% drawdown 99.2%
Chance of 30% drawdown 66.6%
Chance of 40% drawdown 28.8%
Chance of 50% drawdown 8.3%

Latest OABOT Addition – YOLO Trader

So I started  working on an addition to the OABOT today. What I want to do is identify shorter term 1-3 day trades.The strategy will be to ride the coattails of the capital flows of an industry rotation, by looking for stocks that are not yet extended in those industries. Since it’s a 1-3 day trade, I am not concerned about any of the usual weekly or monthly trend action (at least as a primary indicator).

I start with an INDUSTRY scan of sorts. I want to actually identify industries with at least half of those names positive on the day, with at least a positive average stock move in the industry. I also want above average relative volume AND over 10 names in the industry, but may be willing to settle for results that don’t include those last two filters.

Meanwhile, I want a view on breadth 0% movers and 1% movers by TYPE across the industry, to identify what the daily action is signaling in terms of risk rotation which may later help confirm the anticipatory score and risk cycle that will be more designed for a 5-15 day trade.
oa1

What the primary purpose of this is, is to allow me to have a preset watchlist so that any of the stocks I am watching that start to show industry strength I can quickly check the charts and jump on if I like the action and the industry is taking off. I am really just going to watch the options that trade weeklies and then a list of a few smaller market cap stocks under $10 that tend to make large swings with decent balance sheets that I would consider for a day trade or quick swing, and possibly also a normal watchlist of a few names and use this tool to better help me time the intraday buy of stocks.

oa2

But there’s more. Even though a lot of the momentum move and rotation may retrace at some point, particularly if the longer term trend runs counter to the action, I hope that with a relatively few amount of details and information that I will be able to have some kind of edge in prediction direction just based upon 1-3 day momentum. The result of this action SHOULD change not only the individual scores AFTER this action occurs, BUT ALSO may indirectly set up certain themes for the 5-15 day time period. What I mean is this….
Say energy is down but solar is up. Lets say the larger cap solars have already rallied and may pull back while a result a number of Chinese solars, high beta, low float, high short interest, speculative smaller cap names are anticipated to rally and play catchup. As a result, we then can project that THIS action will provide not just a boost to those specific stocks, but in conjunction with all other anticipated moves, say the china names, the low float names, the high short interest names, the high beta names, etc will then begin to create a theme for the market that will provide a boost in score in 1-3 days . As a result of those themes providing a boost, names heavily tied to each of those themes, such as a few highly speculative, low float, high interest chinese internet names now will have a boost. The act of paying attention to the shorter term momentum will serve as CONFIRMATION on TIMING of those chinese internet names, and also potentially help anticipate a transition to higher risk into the short squeeze and hopefully boost the accuracy rate.

In other words, where as normally you might look at a wedge pattern and can’t be sure if you are going to have a name breakout of a pattern, breakdown, consolidate sideways into a triangle, or begin a trend, with the 1-3 day momentum and short term action you have helped to better fine tune that the Chinese internet plays should be more likely to work on the 5-15 day time horizon based upon market’s tendency to herd and find the “closest cousin” as a derivative to what is currently in favor. Potentially you can see what others can’t and do it without even having any DIRECT evidence of Chinese internet doing anything but consolidating for the time being. By the time many of these start to break out, you normally may be too late, or you may end up chasing… Without factoring this in you are guessing which setups will work and to what extent. With this model, I hope that the short term action (and projecting an adjustment to the score as a result of the short term prediction) can strengthen the 5-15 day score into a prediction…..

IN TURN, I hope to also use the same concept to project forward the 5-15 day action and look a few more stages ahead and have what may evolve in the distant future into a full stock market simulator that can be used to practice trading and give you real time adjustments to scores and stock prices after projecting a few periods forward at a time. If this works properly, a small edge on 1-3 day time horizon, in conjunction with a healthy edge with a 5-15 day ranking fined tune using the 5-15 day time horizon…. will then project forward to say a 10-30 day longer term swing/trend with one’s own chart reading ability, will allow you to see many moves ahead, plan out trades many moves ahead. Since options are priced to decay exponentially, capturing a move that moves 1% per day for 30 days straight on a 30 day option would be much more profitable than an option with 3 days left that moves 1% per day for 3 days straight. The hope is to find out stocks which are the most mispriced according to the market’s tendency to herd and chase, and rotate up risk and shift from industry to industry and assimilate “what’s working” in so many number of different groups. Imagine a contract on say GOOGL with 40 days left and capturing a 30% move on an option 10% OTM even a small percentage of the time when the implied volatility is near it’s lows. Grabbing that LARGER swing will be unbelievable if you can do it… For now, this is just a concept I am working towards, but the idea in itself is stunning. Some further fine tuning and tweaking may allow a full map of the entire stock market’s anticipated moves in every stock (with a certain margin of error and probability of occuring) for an entire leg of a larger sector rotation,and possibly beyond.

Breadth – A Market of Stocks Being Challenged?

Before the market was weak into 6/24 close the 4% movers were non existent, the correlated selloff could be displayed even if it was an only one day move and the vix remained around 12 it still potentially could be cause for concern going forward. On 6/24 85% or so of stocks were down to close out the day. Today 6/25 the 0 and 1% movers were moving and the 4% were but not by greater than the 1 and 0%. This could just be a return to a stock market rally rather than a market of stocks and the start of more correlated moves. But it is very early to say. An alternative, more optimistic view is that the leaders first made a strong move and lead and now are only moving in line with the rest of the market and the appetite towards risk is just approaching the accumulation more cautiously. I know, everyone hates people that hedge their predictions, so I will give another metric to look at. % of all up movers that moved 4%. When there was lots of leadership and the pickings were easy, about 10% of all stocks that were up were up 4% or more. Now we are down to 5.6% today. That’s still not terrible, but it requires a bit more skill to be a stock picker in this environment.

If I had to guess, I would say the reason we are still seeing some chop like this is because there is a lot of charts in the “aversion” and “denial” and “anxiety” for a smaller amount still not heading into their aversion points. This has the market a little bit on edge on both sides, and will display itself with a bit more chop and a little bit less leadership until we break right through. So in the next week or two, I would put these numbers in the context of continuing to display “aversion” (hence why you see a lot of weakness and lack of leadership to the upside for stocks over the last 3 months), for a bit longer in the longer term, while we will see some leadership emerge over the coming weeks months ahead but in the meantime, because of the volatility associated with these states, even as the VIX is down and on average volatility is low, there is still a lot of small jittery rotation back and forth as market may struggle to find leaders that stick until we enter more “returning confidence”. When you put the numbers into that context, the entire story adds up.
I’m still not going to go without mentioning that today as of the close the bearish moves caught on and stuck a bit better than the bullish ones GIVEN that they WERE down even though over 60% of all stocks were up. That may not be too alarming as it can be explained by the logic “if a stock can’t rally in this environment with all stocks up, I better sell it”, and without context around it to support cautiousness other than the move yesterday (6/24/14) signalling across the board selling

breadth

Either way, the environment suggests that it no longer is the type of market where you can be gung-ho long with much larger than usual positions that you let ride until expiration, and instead you should go back to the normal risk and normal management (or perhaps slightly larger position size with the VIX where it is if you can manage it more carefully)

Breadth Signal: Dips are Being Bought, Advancers are Being Chased

6/16/2014 Just the action we look for in the market.

 

Dips are being bought and advancers are being chased (lots of positive up trend day for stocks).

breadth

While it was a relatively flat day in the market, there are signs of leaderships. The percentage of stocks advancing is only around 50%. However, filter that to be a 1% move to filter out some noise and you have nearly 55% advancing. Filter it to a +4% move to represent stocks showing signs of extreme strength and it jumps to nearly 68%. This kind of action is great for a good stock picker and swing trader as the winners will be chased, and buying the dip will offer a good chance of seeing the stock rebound. This has happened for several days the last few weeks.

The only real negative is that the last 3 months many stocks have declined big, while there haven’t been a lot of huge advancers. However, the ship has begun to turn around as the monthly data now shows really positive action, and many stocks have simply been building up a base for the next round of leadership.

rotation2

With that being said, the energy sector has lead, and now the solar sector, a derivative of the energy sector is starting to go while utilities are building a base from prior uptrend and may follow. This may support the view that we are in the “later innings”. Nevertheless, there are still individual opportunities out there. Keep an eye on the vix for signs of caution and the market detaching from risk.

OABOT Demonstration: Looking For Top Industries

So using the “OABOT” (in development) I wanted to demonstrate how I was able to come up with a few ideas for strong industries.
First You press a button to update the data based upon the most recent FINVIZ data available:
update

Then I wanted to focus on industries with a large number of stocks that have been categorized into risk cycle types (I selected those with 35 or more per industry).
copy2
Next I wanted to look at the metrics provided which include breadth, average individual stock score (before adjusting for group score which provides bonuses for the stock being in favorable industries), and a weighted score that combines those factors.
sort3
Finally, I looked for stocks that either had a high enough absolute average of individual stock score OR a high enough weighted score and 35+ individual categorized stocks, then sorted them by their average individual score and limited the names to a handful.
listsort4

 

From here it is useful to look at what “risk cycle” the industry is predicted to be in and then “what’s next” in the cycle. Note: Many of the industry don’t have enough stocks in each category to provide reliable information for the time being, the OABOT will still make a “guess” but I will only be listing those which have enough sample size to provide a guess I am confident in.

detailed industry info

NOW… you have 3 industries with plenty of stocks telling you what is working and what is next.

Let’s use the OAbot to give us a list of stocks in each industry AND category of what is next sorted by score.
score1

score2

score3
And the list
list
Finviz list

From there we can narrow down the list a bit manually.
FLS,NBR,PTEN,SD,MRC,EXH,VNR,HLX,LGCY,SYRG,IO,NGS,MNTX,IPWR
Then we can have OAbot sort from highest score (adjusted for things including what’s working in terms of market cap, industry strength, risk cycle classification in the market, what’s working in the industry and sector, and many other things) to lowest score.

score4

Here are the 1000+ adjusted score for the stocks I manually selected

1000

There are other features. You can plug it into portfolio management tool listing a stop and target to compare risk reward on eligible candidates and determine which offers the best R/R,or you can run a position size simulator, or you can sort by any number of many categories among others.

What’s next?

I hope to automate some of this process a bit more so I don’t have to do sorting and comparing and such from the anticipatory group to the “what’s working” scores. By integrating the information it will require less effort to identify the top industries that also have enough stocks to be relevent. A lot of this will need to be updated to provide a large “anticipatory boost” automatically and I want to generalize “quality and momementum” into “early stages” category “laggard” into a middle stages category and short squeeze and trash into a late stage category. This will be in addition to the anticipatory scores but it will help me get more stocks actually graded with an anticipatory boost where I don’t otherwise have enough relevant information.

But beyond that the next phase needs to adjust risk cycle classification based upon the industry so they can be compared on more of a relative basis rather than just how they are compared to the highs. Then I will have two ways to sort of confirm the OAbot’s prediction of “what phase” of the risk cycle each industry is in. This will prevent the greatest moving industries from having a bunch of quality and momentum stock and be able to find which ones are taking longer OF this particular group. I also will run through anticipatory boost for all the other categories I used when coming up with the individual score based upon what “groups” are working.

I have a lot of other plans in store for the OAbot but for now it still functions to assist me

Breadth: Why Look At Substantial Movers?

Most people look at breadth as advancers vs decliners. You can either look at the ratio of advancers to decliners, or the percentage of advancers vs all stocks (or percentage of decliners vs all stocks) expressed as a percentage bullish or bearish.
I like to narrow that list down by only considering “significant” moves. Why?
Day to day stocks move up and down chaotically for many reasons. Much less often, people are willing to chase a stock after it is moving upwards and continue to bid it higher beyond 1%, or continue to sell a stock after it has declined 1%. Even more rare than that, will you see them chase a stock up 2% or 3% or 4% or more.
Why Look at stocks that have made substantial moves when looking at breadth? By looking at significant movers I am eliminating the noise of day to day emotions to some extent. I am both looking at the percentage of extreme optomism (chasing stocks up) vs extreme pessamism (continuing to sell stocks much lower) as well as looking at positive economic, liquidity, and business cues (substantial earnings surprises for example will drive stocks much higher or lower than a 4% move). Either one when interpreted in proper context is a higher quality sample size then simple “advancers vs decliners”. Also a bullish swing trader’s dream is for stocks down big not to continue to go down and instead reverse and stocks up to continue their upside momentum. By looking at the data, you can determine as the moves get larger if the signals are more bullish as a sign of leadership and ideal swing trader’s conditions. You might also look at it from the perspective of Leaders vs typical market movement and compare a divergence.
Stockbee’s blog has a good article on using market breadth, and you’ll notice that his attention to 4% movers was something I adopted to one of the pieces of my litmus test of the market. But rather than track it at the end of day every day, I like to examine how it changes intraday and the “divergences” between the smaller movers and bigger movers, (and also consider it in terms of the context of “sentiment”).
Take today (06/05/14) for example.

 

breadth
Above is the image of the excel breadth info that I use and update with a click of a button when I want in which I showed you the typical advancers vs decliners, the 1% or more movers, and the 4% or more movers. An hour prior to the update shown above, I actually saw all (0%+) advancers vs decliners less than 50% bullish while the 1% and 4% movers were more bullish. Look past the noise of just the chaotic range and almost random like behavior of stocks hovering near +1% and -1% and you would see that stocks up more than 1% vs more than down 1% are actually showing more bullishness than all 0% movers. Look beyond that to the names that are being chased for more substantial gains due to things like earnings, leading stocks, significant capital inflows signalling the start of significant accumulation, and explosive returning confidence, optomism and depending on the context of sentiment, could represent euphoria type moves at times, and you will see a DRASTIC shift from slightly bullish to substantially bullish. If you first see 4% over 50% while 1% and 0% movers are not and build on a previous signal to signal that the 0% and 1% have begun to become more bullish, that may signal that the leadership of the big movers is lifting the market.

You’d like to ideally see this kind of action to signal that some leadership is catching on, and that the market is reacting positively to the positive leadership, particularly since this is coming off of an environment where stocks long term have shown bearish leadership on say a 3 month time period until oversold levels were reached. The concern is that some of the strongest short term rallies come in a bear market and if you look past the rotation into the large and megacap stocks that has brought the “market” higher, you actually have bearish leadership that has occurred via significant movers. Now overall stocks are still more likely to be above shorter and longer term moving averages, and near highs than lows, but the market does have the appearance of mostly just upwards grind while a failure to catch a lot of trends to the upside and more likely to catch a trend to the downside. That has not been a very favorable conditions for investors and allocators, so hats off to anyone that has done well or hung on with those strategies, and even those remaining bullish over the last several months had fewer bright spots than usual, and a signal to consider getting to work swing trading.

Fortunately with the VIX lower it signals many of the option players, hedgers and speculators have been flushed out and that attempting to speculate with options is now more affordable. With the lower volatility may come the consolidation needed for the eventual break of the range and trend higher, and confidence in holding and adding to stocks that have trended up to return… Breadth certainly is not the only tool in the tool box, but there are so many ways to use breadth and a lot of information that can be gained by different methodologies of looking at it that it is an important tool. You can use it like most do to neutralize the market weighted indices to see if the bulk of the market is declining or advancing and by effect deduce whether the larger cap stocks are moving more significantly than the smaller cap stocks. Or if you monitor the significant movers, you can use it to identify whether stocks making leading moves are to the upside or downside and what those with a lot of capital are doing. You can then interpret whether the leaders are likely to lift or hold down the market, as a result of divergences and you can see what the underlying sentiment is doing to confirm your look at stocks and what part of the cycle the market is in, and you can use it to come up with a gameplan for the day or analyze results relative to the underlying conditions of the market.

I’m still getting used to learning the language of interpreting the various aspects that breadth can provide, but an active and dynamic breadth monitor as said can be a very important tool in the arsenal.

A Primer On Hedging For Your Personal Needs

I plan to buy a house soon, and like many people, I would care for low interest rates. If Interest rates go even lower, it is a win because not only does that mean cheaper borrowing costs, but that also may mean that there is a rotation away from assets into bonds as well as a NEED to ease rates and the conditions from which the need develops means cheaper prices. (in theory, but perhaps not in my particular area). That “win” is not necessary, in order for me to be able to afford a house. Through finding the right deal and saving I can afford the type of house I am interested in.  It is a question of having the stars align and being able to close on the deal in the right neighborhood for the right price with the right features to the house,etc. But if interest rates skyrocket it may be problematic. My borrowing power will decline and the availability of the types of houses I am looking at may decline. In my view, this is a perfect scenario to hedge.

Since a house is affordable based upon current interest rates and it is a matter of me finding the right house in the right area at a reasonable price, it may make sense to hedge. I want to avoid the possibility that interest rates will require me to save more money for a larger down payment or keep less per month, or resort to frugality, so hedging makes sense.

Since higher prices in TLT (treasury bonds) corresponds to LOWER yield and lower interest rates, In order to protect myself from a decline, I would want to profit from lower prices in TLT and higher yield and interest rates.

With the implied volatility in the TLT historically so low, we want to BUY premium.

Time frame? We have to take into account both the actual chart AND the time one anticipates taking before no longer needing a hedge (buying a house). In the short term, the bond futures on just over a 10 year chart shows the following volume profile.

bonds

Timing? The actual timing of the entry is important, but remember, we are currently completely unhedged from a very large cash purchase and about to borrow a lot of money relative to the account size since much of the capital has gone towards saving of the down payment. So what I’m going to do is buy a small TMV position now (3x treasury bear), and consider getting some Jan 2016 puts on the TLT further strength to retest the initial breakdown that I had mentioned may happen.

In theory you could work out what rise of interest rate would impact your affordability and ensure you have a large enough position to offset that and use options and such to try to match your gains to offset your loss as best as possible, but I’m not going to get that carried away. The key thing is that I give myself SOME flexibility so I can be patient on buying a house without having to rush into a decision prematurely without doing my due diligence and so I can make a calm emotionless decision as much as it is to worry about the exact dollar amount.

Protecting Your Home Equity through Hedging

Let’s say I’ve bought my house, lived in it for a couple years and the market has skyrocketed along with the value of my house. I don’t want to sell, but I am concerned about the housing market crashing. NOW how might I hedge? Now I want to actually take out as much equity as I can from the house and I might actually want to put it into TLT. I would have to sell at a rate or collect from dividends and covered calls at a rate at which would allow me to collect the cash needed to make the payment on the refinance mortgage. If the market crashes and Interest rates go lower or even negative, my loan becomes a gift at home equity levels that were at bubble levels, and I’ve locked in interest rates BEFORE they declined in attempts to ease the economy. This will compensate for the lost equity in the house. If more people are aware of hedging and can use it to fit their needs, then the “next 2008″ will be less likely to domino into a contagion as homeowners won’t be forced out, foreclosures won’t cause a contagion of forced liquidation of real estate and job losses will be not as steep. Unfortunately I think many people are living paycheck to paycheck unhedged (and the increased taxes and austerity certainly haven’t helped) and they are VERY susceptible to an economic downcycle. Until people learn to hedge, each decline will just cause more volatility and fear, more pressure to leverage the system further. And each up cycle will be filled with panic buying as people are forced to buy while the house is still affordable, or else be forced to wait for the next downcycle.

Say you bought residential real estate ETFs when the cost was low and you weren’t in a position to buy a house and while the borrowing cost is affordable you also hedged vs interest rate increase; then even when market is near extremes near the top, you can still afford to buy. If you become concerned that you bought too late in the cycle, you might still be able to buy some puts and profit from a decline to offset your risks since your profits from hedging plus additional savings will provide you with more capital which you can use to now hedge a decline.

The time to commit excess capital into savings and hedging and investment is before you need to. That way, when problems come up, they aren’t really the problems they would have been. Maybe you want to be long natural gas and gasoline and heating oil futures contracts or options on futures contracts as well to hedge your costs so that if gas prices increase, you still have added capital to draw from from the investment. You don’t have to get too carried away as investment in companies at the right time with some attention paid to your own day to day financial needs and risks, will allow you to make money. However, ultimately taking away the possibility of bankruptcy no matter what life throws at you (within reason) through hedging, may, in many situations be a great form of insurance, and allow you to be more aggressive with the rest of your money and potentially at times with your life path (such as buying a house late in the cycle or quiting your job earlier to take a shot at a business opportunity knowing you have investment in things that will protect against rising food costs, gas prices, and savings that will last you long enough. )

If you want to quit your job and “take a shot” at whatever, you need to buy yourself a specific amount of TIME. Convert your money into “time” and through hedging you can most likely keep that time no matter what prices do. Simply count how much “TIME” worth of expenses you have. Count all the costs you will incur per month. Food, oil, heating, etc. Then multiply the current cost by the number of months you need. You need a minimum of that dollar amount to buy yourself that many months. Say you need at least 12 months. $2000 per month times 12 months is $24000. Now you need to convert that amount of capital or more into hedges. Each item over 12 months in this case will contribute to a specific dollar amount of cost. That is the target amount for which you use to hedge. Say food takes up $10,000 of that $24,000. $10,000 should go into buying food and hedging by putting capital into a basket of stocks and ETFs that profit from food or agriculture, or give you exposure to the food items and agriculture themselves. If you deploy that capital into things that will rise along with food prices, and in non-perishable food yourself, then an increase in food prices won’t disturb the amount of time (months or years worth of savings) that you have deployed towards your food.

Of course, that hedging capital is in addition to whatever OTHER costs you might incur such as the startup capital for trying to build a business in that time or whatever. You also need to consider the lifestyle you will have to live if the plan doesn’t pan out and you can’t get the same quality of job you had before and plan for some contingencies. I would carry at least 6 months of additional expenses worth of capital in CASH for needs that pop up, and at least another 6 months extra in hedges than you intend on using for additional time in which you are trying to find another job if things don’t pan out, or the job you were told you could always come back to isn’t there, but that is just me. Your needs and risk tolerance may be different, and so this article isn’t for everyone, but just a primer on how you might get started hedging. The average joe paycheck to paycheck should actually cut back first on expenses first, pay off debt second, save up cash third, hedge forth, and THEN go back to living their reckless rockstar lifestyle as they were, if they must. At least that way they will have a cushion that will give them an edge as costs increase and their paycheck doesn’t.