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

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)

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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).

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.

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.

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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:

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).

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.

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.

 

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.

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.

And the 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.

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

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

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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.

 

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.

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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.

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.

 

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This morning people were flipping out. They saw a lot of red across a lot of stocks. Many normal breadth indicators would point to a large percentage of stocks down overall today. But there is a silver lining. A large percentage, even if not a majority of stocks making large moves are going up. This means not everyone is selling. Leadership may be emerging in areas and the buyers aren’t shying away from today’s tape. The longer term perspective of the underlying businesses and/or economy are good, in other words (or at least not as bad as advertised). Another way of saying it, is today’s sell off is largely noise. Certainly, it may be possible, and even likely that at some point the negativity will spill over to even the leading stocks and people want to position so that they can avoid the margin clerks. However, put into context of the initial underlying signal and you may find that to be a good buying point. Conversely, it also is perfectly reasonable for the leading stocks to take the majority as the most beaten down stocks rebound and the entire market goes with it. At any rate, you might either abstain from selling or reducing, or look to buy names that are red now, and possibly consider buying the current 4% movers if they dip and retest their daily breakouts on F.E.A.R. (false evidence appearing real).

 

Some additional notes. Although we are still near highs and more stocks are near highs than lows, the longer term breadth has not yet shown leadership and only is seen on a daily and weekly basis. Keep in mind that the moves to the downside are adjusted to cancel out the upside move. In other words, a 60% increase is equal to a 37.5% decrease because if a stock increased by 60% it would only take a 37.5% decline to erase the move. Nevertheless this could be interpreted to corroborate sentiment. Alternatively, it could also be used to identify leadership (or lack thereof). Sentiment is more about either identifying extreme oversold levels and/or waiting for a signal that it may be shifting. Leadership is more about waiting until you have some positive momentum in the underlying economy and market developing. With that being said, quarterly data has been oversold for quite some time signaling that there is not “complacency” like the vix may have suggested, but nevertheless, if new leadership does not emerge soon, there is concern that we may see more significant declines from the rest of the market.

You could also use this as a lagging measurement of your odds of hitting a big winner vs a big loser on whatever timeframe. Since it is only on a lagging basis, you can really only use it as a benchmark vs your own performance, unless you have some sort of indication that the momentum/trend is just starting and should continue. If you didn’t snag any big winners on stocks you held the last 3 months, that may not mean that your system, strategy, or abilities have “broke”, just the conditions the market has gone through.

Bottomline:Nothing super actionable, but enough information is provided to develop a gameplan such as buying weakness and waiting for a retest on leading movers… or if you’d prefer to remain prudent, abstaining from any selling and remaining patient until the longer term conditions begin to turn around a bit.

 

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update:Breadth has deteriorated on 4% movers. I did not see a reading of the 4% movers get over 50% which would have actually indicated accumulation overall in leaders. Instead it was just a positive divergence with moderate leadership deterioration that was still much less than the rest of the market, and an early sign that once the fear is out that there could easily be a lot of buying. It’s not uncommon for even the leaders to flush before we begin a stronger rotation into the market, but the early chasing action signals the tape isn’t all that weak and/or complacent as it might look. Correlation still down and volatility low, it is a market of stocks and although tody there may be some mild pressure, I interpret the signals as more likely than not to be short lived.

 

6/4:Today started off very similar, only this time the 4% movers were above 50% and it pulled up the 1% movers. Looks like yesterday was a precursor to the initial signal. At any rate, so far it appears that interpreting the selling pressure as mostly “noise” was correct. The fear did spill over but today it looks as if things are turning around and leadership again is emerging. Today it is a bit less likely to spill into late day selling because not only are there more bullish movers than bearish movers over 4%, but the bullishness on strong movers is stronger than moderate movers. That translates into leadership pulling the market higher as opposed to still a large amount of chasers showing that the sell off may be short lived.

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Overall, in general the market rewarded Momentum today with Quality not far behind. That suggests we may be transitioning from quality to momentum phase with laggards up next.

OAbot rewards stocks with contracting volatility, it classifies stocks, and it grades stocks differently depending on which risk cycle classification it is in (and other data). It then looks over multiple categories and awards bonuses based upon how well each category is doing. (market cap, classification, industry, sector, above/below $10,etc)
The OAbot is not yet set up to anticipate rotations. It can either rate stocks based on “what’s working right now” (and average scores of individual stocks in categories and looking at relative volume) from a multitude of categories. Or it can give you a good picture of what is working and you can manually find some picks based upon that if you do some manual work… it will all be automated eventually so that “what’s next” also get’s rewarded. The easiest thing to improve it will be to adjust and tweak the existing formulas, the difficulty is in finding the time and setting up the formulas to pull from the necessary areas. So as of right now I have not put the required effort into making the ranking perfect just yet.
Right now, OAbot says that momentum is working in every sector today except financials where quality is still ahead by a narrow margin, and basic materials where it’s neck and neck but momentum still has the lead. So laggards as a whole may be a good spot to look, or momentum names that have not yet moved just yet.

OABOT is in the early stages of development to be able to anticipate, and can at least provide guidelines where manual work can be done to both confirm it and look at the names.

I will look at all the stocks names in each industry+category that OABOT highlights based upon it having enough stocks in each category to draw a conclusion, and based upon anticipating what is working next, after looking at what is working now. This is still very incomplete as the current version only looks at the “larger fractal’ by looking at which categories have been “working”(making extreme moves) including daily, weekly, monthly, quarterly, 6mo and 12mo returns. As such, the number of industries that qualify are always limited.

The following industries are popping up as relevant in risk rotation:
(listed by the stock type you should anticipate)
Laggards
Business Services
Medical Appliances & Equipment
Industrial Metals & Minerals
Semiconductor Equipment & Materials

Momentum
Oil & Gas Drilling & Exploration
Credit Services

Short Squeeze
Independent Oil & Gas

Full list of stocks that are in both the risk cycle and industries that you can use to anticipate according to OABOT:
http://finviz.com/screener.ashx?v=111&t=ABCO,ABMD,ACI,ACRX,ADS,AMDA,ARC,ASM,ASPS,BLOX,BTU,CARB,CASS,CATM,CNSI,COHU,CSII,CVG,CVO,CYBX,CYNO,DLX,DNN,DSS,EDAP,ENOC,ENV,ETRM,EXAC,EXLS,G,GMED,GNMK,GPN,GSM,GSOL,HBM,HOLX,INWK,ISRG,IVC,KLIC,KOOL,LDRH,LMNS,LPSN,LTXC,MCO,MDXG,MIL,MMS,NANO,NAVB,NRP,NSP,NSPR,NUVA,NVMI,NXTM,OFIX,ONE,PFMT,PFSW,PKE,PLAB,PLG,PLM,POWR,PRGX,PVG,PZG,REE,REIS,RIOM,RRD,RTIX,SFE,SMA,SNN,SNPS,SNX,SPNC,SSH,STJ,STXS,SURG,TAHO,TAS,TCK,TER,TGB,TISI,TNET,TRQ,TSRA,UMC,UPI,URG,URRE,URZ,USAT,UTEK,VALE,VASC,VOLC,VRSK,WMGI,ZLTQ,GDP,SFY,CLR,PVA,CRK,UPL,KWK,MILL,EOX,END,COF,SLM,DFS,CACC,CSH,AGM,DLLR,CSE,AXP,NBR,BBEP,VET,VNR,CRT,REXX,MHR,PWE,FXEN

When it comes to anticipating, you also have to come up with a way to anticipate a rotation of industry and/or sector…. That is a tricky task because in certain cases, the market should reward industries which are just slightly off high, other times, you want industries that are “working” right now, and other times you want the beaten down industries that have been neglected the most. I don’t know if I am sophsiticated as a trader just yet myself to really master industry rotation or how to put sector rotation into code so I’m not sure how far I can get on this regard. But I have counterbalanced OAbot answering “what’s working? and how much?” with bonuses applied after answering “What industry/sector has a high average (multiple stocks with good setups)?”

I have a feeling I’m not explaining myself very well because I don’t have the time, but ask if you have questions and I will answer when I can.

 

p.s.LANFORCE (sorry, put here strictly for traffic and page views of lanforce deprived AH members… lol)

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Bad Janet Yellen breath leads to bad market breadth.
One of the features I have implemented into OAbot is a sort of market breadth overview to give me a “big picture” idea of what is going on. Here is what it looks like:

I took the % advancers divided by the amount of significant movers (advancers+decliners) to get the % of stocks of that particular move that are bullish. I made an adjustment since obviously a stock cannot be down 150% over a year so that it was the equivalent down move needed to bring a stock back to where it started. For example if a stock was 100% a 10% up move would bring it to $110. A $10 loss would take it back to $100 or a 9.09% decline. Therefore when I say “10%+ monthly movers” I am really comparing 10% up movers to 9.09% down movers. When I talk about 50%+ movers I am comparing the number of 50% up movers with 33.33% down movers.

You may notice some deteriorating breadth. It started with a big bearish move on the daily on Friday which continued on Monday on the daily and started turning the weekly bearish. Tuesday showed a lack of conviction on the dip buy and today on Wednesday the Weekly breadth is sharply lower and even the monthly is starting to turn. Various measurements via looking at stocks above their moving average have declined. The market had been overbought for some time and the sharp change on the daily is concerning.

If we are to see aggressive conviction buying it will look like this: The extreme moves will not only make a dramatic shift from oversold to become bullish, but it will be lead by the larger of the two numbers will be signalling leadership. In other words, the 4% movers on the day will be even more bullish than the 1% movers on the day. The weekly 15% will be greater than the weekly 5% and the weekly 30% should be greater than the 10%. That is a bullish divergence in breadth that means business. A lot of breadth moves depends upon the context. Afterall, it really is just looking at movement independent of market cap to see what the market is doing. But put in context it can be powerful. But doing so some times is tricky. Overall breadth is still bullish, but it is difficult to tell if this is just a shakeout to the downside before another leg higher and the longer term signals to get aggressively bought and more overbought, or if the market is showing signs of rolling over.

Further analysis can be done to the individual sectors to spot oversold areas, or areas that are leading off of significant lows, or just a more in depth litmus for the market. Unfortunately there is not always enough movers of a particular type within a sector to draw any conclusions. a 0% or 100% signal or an error message may just be a small sample size of movers.

The information may be more valuable if one were to track this data and provide a moving average of sorts over time to smooth out the results over the last 3-5 days or even over the last 10 days.

I am a bit confused, mostly because the bull run has been going on for 5 years so it is hard to interpret a shift off of every signal showing aggressive, perhaps some may say overbought conditions to this sell-off that is spilling over from daily to weekly and even monthly data is starting to shift bearish now. Nevertheless, I will let people know how I see it though.

My interpretation is that one of the bullish things about this is that you are seeing individual leadership with Financials and consumer goods which probably wouldn’t happen if this was the start of a monster correlated rush for the exits pre crash or if this was a MAJOR top. It still could be a high/minor top before a substantial orderly correction, OR there could be a few disillusioned investors in these areas (less likely). The market had been severely overbought in terms of many of the longer term breadth signals, particularly the % of stocks within 1% or 5% of their 52week marks. This could be interpreted as most of the severe laggards on the “larger fractal” (higher time frame) have already gone, which may mean we are setting up for an epic short squeeze and euphoric conditions where the trash stocks start making their explosive moves and the market is just trying to shake people out before the move.

While it easily could go into some kind of euphoric, mania stage as many major tops do, and this is unlikely to be a major high or the top, eventually one of these kind of actions will lead to a lot more pain so it is prudent to be cautious. It is usually aggressive selling of everything that happens before significant corrections and bear markets. Even though you have a couple sectors leading for now, that may still change. Conversely it is the aggressive buying of everything that occurs during the early phases of a bull market (2009 as an example).

There are reasons to be cautious until we see some more significant signals. Healthcare which tends to go near tops had been very strong prior to the last couple weeks action particularly fueled by some biotechs really selling off. Utilities have had the best setups, remain strong and have had some days with large relative volume. Also a danger of nearing the tops…. I don’t want to downplay the risks that exist here.

With that being said, a part of me can’t shake the idea I’ve had since the end of last year which is that there will be a correlated selloff or two in early-mid 2014 which will lead to a breakout in late 2014-early 2015. The idea behind that is that the market is attempting to get the masses to miss out on stocks before even the dow begins to enter the secular trend mode and everything with it in a huge rip higher like the 1980s. The pension funds have to rotate into risk to stay solvent, so large and mega cap companies will have to trend higher, and one would think that the smart money would stay ahead of this move and rotate into some large and mid caps as well, sell into the pension fund buying and rotate into smaller and smaller cap stocks over time. Perhaps this is just a big rotation out of the small and mid caps and into the large and mega caps, and to interpret it as a sign of a correction is wrong. Nevertheless, so many stocks suggesting that the market is selling off is still a very cautionary signal that one cannot ignore.

The trouble of course with breadth is that it is often open to interpretation and is only useful when taken in proper context and when framed according to objectives and risk. Getting the context right is only occasionally easy. I will keep an eye on this as it develops. For now I am happy to be hedged, playing fewer positions and looking to raise a bit of cash when I can while rotating into financials.

Some Financials OAbot likes right now.

http://finviz.com/screener.ashx?v=211&t=AON,AJG,LPLA,RJF,HIG,EGBN,CHCO,ABCB,FBNC,CCBG,HST,BEE

 

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If you are trading stocks you are losing money and you don’t even know it. How? Mistakes. How much? I can only tell you how much money the average person is leaving on the table.

It is estimated that mistakes cost traders on average more than 4 times what they risk (in a single trade) PER mistake. (1)
What does that mean? Besides leaving lots of money on the table let’s translate it into facts?
If you are to place 20 trades a month or 240 trades a year and risk 1% per trade, and your profit on average is HALF of what you risk per trade…
then 1% per trade yields an increase of your account size by half a percent per trade.
Without mistakes and $15 per completed trade (buy plus sell costs) and 100k starting amount your gain is about 224.09% per year!.

BUT, what if every 20 trades (a trade a month) you made a mistake? Rather than gain one half of what you risked, you lose 3.5 times what you risked for a net cost of 4 times what you risked.
A 3.5% reduction in your account every 20 trades translates into a gain of “only” 98.19% per year!
In this instance, the gain cost you $125,900.30 with a $100,000 account! You would gain 63.52% more in a year without mistakes.
What if you make 2 mistakes a month or once every 10 trades? Now your 224.09% gain in a mistake free system in a year is down to a mere 20.93%. In this case, your mistakes cost you $203157.50 and you would have made a 167.99% increase in your final amount if you were mistake free and a 63.885% increase if you just cut your mistakes in half.

Nobody is perfect. I am not suggesting you can eliminate mistakes completely, but you sure can reduce them significantly.
If you are trading an account of 10,000, 2 mistakes a month makes the system lose about 15% a year due to compounding costs of commissions compared to gaining over 50% a year if you can reduce them to one average mistake a month.

Awhile ago, I was like you having just come across this realization. At some point, I decided I was going to make it my goal to reduce everything down to a science without compromising the strength of the system.

With a mechanical system that is as easy as hiring someone to trade for you or building a bot, or paying someone to program a bot to trade for you. However, some of the best traders are discretionary. I do not trade a mechanical system, but a discretionary one that allows me the individual skill of identifying setups. This method was mostly taught to me by the “Option Addict”. This guy made a fortune and have many trading members that can attest to that fact buying puts in bear sterns during the infamous collapse. He recently got me and several other traders in TWTR for 1000% gain the first go around, the same year he delivered a handful of trades that netted around 500% But his skills are not limited to options. Day in and day out he can identify a handful of stocks, many of which go on to mke some of the most explosive moves in the market. This guy is the real deal and I have spent at least hundreds of hours learning from him and thousands in my trading career trying to trade like him.

Nevertheless, I was determined to automate as much as possible. The first step was to build a position simulator that could evaluate and simulate a thousand trades and repeat that process thousands of times and complete a “Monte Carlo” simulation to evaluate the expected distribution of results given certain assumptions.

The next process was to build a spreadsheet that classifies stocks in several ways, then use those classifications to evaluate the stock uniquely based upon this criteria. The stock is first scored according to it’s own variables. Then the score is adjusted based upon the overall market and strength of its peers and rotation of capital in each of its multiple categories. Finally, based upon what is moving, the spreadsheet will anticipate based upon what is “next” to be “in phase” in a particular “cycle”, and rewards stocks that have timing ratings according to this.

After all adjustments you can use this list in one of two ways.
1)Automating your selection of generating a list of ideas from which to filter down into a small handful….
OR you can generate a handful of ideas on your own and only take the top few highest rated stocks to be added and watched.
Meanwhile, the spreadsheet can also tell you what sectors, industries, cycles, and other categories are currently “in favor” automatically.

In the process I built a spreadsheet that would automate and simplify the process as much as possible without sacrificing the quality. The process then can be redefined:

1)Identify top setups automatically for manual scanning to narrow the field
2)Hand pick the names I like to get maybe a dozen or two.
3)Objectively reduce the number of names by choosing the top 5-10 (or however many you choose) scored stocks after entering the names back in.
4)Enter in some more details (stop, target) and get a risk reward analysis and use that to further reduce the list or identify what sort of price you will have to get for each stock to be “on par” with the others.
5)set your limit/stop buy orders, or else alerts or watch and wait for the trigger.

The structure of the spreadsheet is done, but some minor tweaks will continue to be done to improve the product.

(1)Van Tharp http://www.vantharp.com/trader-test/mistakes-are-the-downfall-of-most-traders.htm

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The analysis and grading system discussed in part one will look something like this but have more in depth data and calculations and filtering systems along with the ability to categorize based upon the data and pull the information to a coversheet where it will have a summery of the findings that is more clear.

more detailed breakdown and how sub categories will work.

At this point, it is mostly just a concept in my head that I have recently started to get on paper along with a brief draft of one aspect of what it will look like and how it is possible. I don’t even know how far I am going to be able to take this spreadsheet and how much can really be automated, vs how much I will have to manually setup. I have a number of real rough, general pictures in my head of all these spreadsheets and how they will work together so that I just press a few buttons (ideally as few as possible, but as many as necessary for quality results) and get a result, some of which I manually will go into finviz and look over and then look at charts and assess risk/rewards from however many I want, sort those by best available (ideally streaming updates) by expectations per equal unit of risk, and combine them together into the risk simulator to see how the broad strategy will help me meet my goals, so I know how those pieces fit within the broad strategy. With that in mind, the spreadsheet will pull a combination of the possible trades into different categories, make suggestions which I will be able to confirm by adding it to my trading journal for tracking, categorizing and reviewing my results in a way that looks at what I did, what condition the market was in and other variables that I want to be able to track and review over the course of many years to continue to look at areas I need to improve, trades I need to avoid making, trades I should make more of and strategies that could use some tweaking. My trading journal then will be able to adjust to reflect the “best fit” match relative to the target “allocations” and what not, and hopefully account for fees and evaluate whether or not the benefit is worth the costs of “rebalancing” and/or adding new positions and provide a suggestion on position sizing or a look at some simulations of how it would look assuming all opportunities are available and reflect reality.

But to go from conceptual rough draft to an actual concrete set of spreadsheets and what not is a huge leap. One step at a time. The first step will be to really get into the specifics of what I want just one of these spreadsheets to accomplish, and work from there.

Since I have done work on the position sizing/trading system simulator, I have a few adjustments I want to make, likely before year end.

1)Allow the spreadsheet to add in deposits or withdrawals on a per trade basis.

2)Allow the spreadsheet to adjust the “drawdown killswitch” AFTER subtracting the amount added after each trade and adjusting for the drawdown not including deposits.

3)Allow the grand total gain to subtract all capital added and starting amount to get a net gain.

4)Binary Yes/No function if drawdown killswitch is hit so you can track percentage chance that you hit the drawdown killswitch over X trades or less to potentially simulate the percentage of traders over a time frame that meet those results.

5)Consider adding in a “target goal” that functions as a “reverse kill switch” where trading is halted after goal is made

6)Binary Yes/No for “target reached” so you can estimate percentage chance of reaching target in X amount of trades or less given the assumptions you plugged in about expectations of the system(s).

7)Secondary portfolio targets and dynamically adjusted risk – Set it up so IF a particular portfolio target is reached, the risk percentage per trade is then adjusted and/or the amount deposit/withdrawn is adjusted to simulate reaching a goal in which you will attempt to retire from job while managing the sudden need to withdraw from account while being more conservative in your strategy. OR so you can increase the chances of getting to your target so if you get really close you don’t take unnecessary risk to get there at the cost of greater volatility that is not needed if you have traded well

8)Experiment with correlated trades held simultaneously with the same trading system. (the results of one influences the probability of another)

9)If that works, experiment with correlated trades held simultaneously with DIFFERENT expectations (such as a stock trading system combined with an option trading system) with different risk amounts

10)… ideally some sort of adjustment is going to have to be made to allow different average holding periods so the simulation can match up to more accurately reflect the timing of the trades.

11)If you can do 8 and 9, you should be able to set it up for up to 5 simultaneous trades for up to 5 unique “trading systems” simultaneously within portfolio, but may require a lot of busy work.

12)Come up with ideas to test a lot of different assumptions/strategies.

13)Use the spreadsheet to do a lot of testing of those assumptions.

update:You can check out the progress of the OA Bot.

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