Creative articulation, baby

Joined May 6, 2012
10 Blog Posts

Creative articulation, baby

Joined May 6, 2012
10 Blog Posts

Do I bet it all? Do I ?!

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1,344 views

Gambling title seems oddly appropriate, especially after watching David Einhorn taking down $4.3M in the ‘One Drop’  WSOP $1M buy-in tournament (which he’s donating to charity, by the way).

If you’re checking in on the 4th after an Nth round of debauchery with levels of inebriation approaching ‘that one time in college’ levels, you might want to come back and read it later. There’s a bunch of numbers and charts here that are liable to put you to sleep and miss out on the next round of ‘hey, y’all !!! watch this!’ fireworks display.

Wanted to write a quick update on the assessment of where we are in the market at this point, especially since signals I described in my ‘I bet it all’ post have just triggered (If you haven’t read the original post, it might be a good idea to do that in order to understand the 1st signal here).

First, ‘Planes, trains and automobiles’ signal update.  The breadth thrust signal triggered today. Here’s an update on performance of the signals I mentioned in that post:

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  • As you can see, there are 2 new signals for 7/2 and 7/3/2012 with one on 7/3 being especially strong and fitting well within  Whaley parameters. Typically breadth thrust like this indicates the beginning of a new sustained move higher. However, there is indeed a caveat to that. As you can see, the one outlier of poor performance in the whole set of data (at least thus far) is the 7/1/2011 signal. It certainly appears that when a breadth thrust occurs near 52wk highs it is much more likely to indicate a blow-off top than a beginning of a new bullish move. I would be much more comfortable with levering up long had we had this thrust when the market was down 10% than at this point – we are not even 3% off 52wk highs.
  • Is there anything else that can support the bull case then? Something that would increase one’s confidence in this ferocious rally? Well, there’s the 13EMA of NAHL that I like to use as the long term indicator of where the market is heading. Something like this doesn’t really catch the very tops or bottoms, but is a decent indicator for a long term direction. 13EMA first waded into the positive territory on 6/20 and after a brief dip has quickly recovered and is now firmly above 0. That has certainly been a bullish signal in the past and bolsters the bull case on intermediate and long timeframes.
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  • We are also approaching the earnings season, and with expectations that have been severely beaten down are likely to see a series of reports that are way over analysts expectations.
  • 50SMA on SPY has finally started to tick up today, possibly indicating the end of the correction as well.
  • And finally, election year seasonality is decisively bullish:

So based on these signals and assessment, should you lever up long and leave for a long vacation as it will be undoubtedly paid for (and more!) by the bountiful gains simply given to you by mother market?!

One thing to keep in mind is that we are severely overbought at this point, so much so that the value of NYMO reached 4th highest level in 14 years. Something like that absolutely has to be worked off through either price (moderate pullback) or time (few relatively flat sessions with indexes just drifting sideways). So hold off on getting that 2nd mortgage and selling wife’s jewelry to put it all in on a bunch of triple leveraged ETFs for just a few days.

When I look at the instances when NYMO reached very high levels (79+ in this study), short term picture (next few days) looks rather bearish (average 0.81% loss with 83% probability the next day and 1.75% with 70% probability over the next 2 days). Could it be skewed by horrendous losses of 2008/2009? Sure, but hard to guess just how much role that played in the overall picture.

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Then there’s also the surprisingly well fitting analog of 2011 and 2012 charts of SPY (well, more precisely 9/2010-8/2011 with an overlay of 9/2011-now). I did cheat a bit by shifting this year’s numbers by about 2 weeks to ‘make it fit better’. While I don’t think there’s a great chance of repeating the last year’s summer debacle, especially in light of election year seasonality, considering that European shenanigans are far from over, keep this picture in mind.

click to enlarge

So where does this leave us? While things can certainly change (even tomorrow since for some reason Europeans don’t celebrate the wonderful Independence Day of the United States and keep their markets open), as of the time of this writing things are looking up for the bulls on the intermediate and long timeframe. On the short timeframe we are WAY OVERBOUGHT and need to get these conditions relieved (through time or price). I did buy some TZA and SQQQ to hopefully take advantage of the pullback, but would not hesitate to cut them if it appears that we are just basing and not pulling back. Once the pullback is over (you’ll know it when you see it, but 1338-1340 levels seem like a good pullback target IF we pull back), I am certainly prepared to allocate a significant portion of my portfolio to the long side.

Enjoy the holidays, folks, and remember to let those bottle rockets out of your hand BEFORE they go off.

 

 

Revenge trading and shorting crazy momo stocks … like mating hedgehogs.

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1,003 views

What do shorting momo stocks and mating hedgehogs have in common? The answer is simple (as provided in the old corny joke) – both have to be done very carefully for in both cases there is a serious risk of enduring tremendous pain in the ol’ kibble and bits.

I’ve had my eyes on COCO for a couple of days now as it’s morphed into a monster squeeze candidate. MACD crossover, swift recovery from a big down day, RSI in the oversold territory- all markings of a potential bottom (as with all the indicators and signals confirmation is required). My thought was that if it started to squeeze, it could run as high as 200SMA.

Well, as it often happens (or maybe it just often happens to me?), due to circumstances beyond my control I was away when COCO-the-monkey broke out this morning and started squeezing shorts with tenacity and ruthlessness reminiscent of the famous Nicky Santoro in ‘Casino’. The shorts were told  ‘ I got your head in a fuckin’ vise. I’ll squash your head like a fuckin’ grapefruit’ and once a few eyeballs were lost, they cried uncle and COCO rippage ensued. Needless to say I was none too happy about missing the opportunity (COCO was up close to 10% when I finally got to the trading station), and was tempted to take my revenge on COCO by shorting it.

Thankfully, the cooler voices in my head prevailed this time. Not sure if it was due to anticipation of upcoming 3-day weekend and all the debauchery and shenanigans associated with that, but regardless of the reason, I decided that if I do take my revenge on missing this rippage, I have to wait for the right time to do so. And yes, I realize that seeking revenge on a stock and a missed opportunity sounds about as rational as Charlie Sheen’s ‘Winning’ interview on ABC, but hey as he said during that interview –  ‘we are entitled to interpret things as we must’.

And as I waited, lo and behold, things started falling into place. Check out notes on the attached 2m chart, but these are the main points that I considered for shorting and entry selection (as they unfolded, in chronological order):

  • Bearish MACD divergence
  • Violent rejection of short-term resistance (large price candle and a huge volume dump)
  • And finally bearish crossover of 20 and 9 EMAs – good entry point. 
Considering short term resistance was just a few pennies away (which served as a well defined stop), it was a good risk/reward ratio. I was thinking it’d fall to about 2.81 (previous resistance/base area) and it actually overshot that a bit. I was also thinking that traders would want to lock in their profits and would be reluctant to hold into the long weekend, but that was obviously just a small factor in the decision process.
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I did cover 1/2 a little too soon at 2.88 from 2.98 entry (there was really no reason to rush into covering as it was dropping like a rock), but I’m still working on this whole shorting game, trying to do it like hedgehogs mate… very carefully. Final cover – 2.81 from 2.98.

Comments and feedback are much appreciated – as always.

 

 

 

Titanic update – did you see that goddamn iceberg?!

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446 views

As a reader of ibankcoin you’re undoubtedly aware that market looks like a thousand miles of bad road right now. There seems to be no escape anywhere except for cash and bonds (which is where I’ve parked my long term retirement accounts based on the seasonal investment strategy).  As many astute traders have mentioned already, the stubborn bulls are – ironically – keeping the market from finding a tradeable bottom. In most cases a flush/capitulation event is what will put the floor under the market (even if short term). So far we’ve had the painful slow drip, which is in many ways analogous to the old anecdote of a frog slowly being boiled to death.

Markets like this emphasize the importance of having a plan for each of your positions and sticking to it. Don’t be a frog. If you aren’t disciplined and continue to just give it another day, you’ll quickly find yourself with large loss, wondering ‘how could this have possibly happen?’ and  – to paraphrase Blake from ‘Glengarry Glen Ross’ (if you haven’t seen it yet, rent it tonight!) – ‘sitting around in a bar: ‘Oh yeah, I used to be a trader. It’s a tough racket.’

Remember why you were in the trade to begin with and stick to your plan. If you entered the trade based on a ‘good looking chart’, don’t forget to exit based on the chart as well and don’t let a trade become ‘an investment’ (sadly, I’ve done that myself many a time, but I’m getting better).

But back to the Titanic update. There was a lot of disbelief and talk about ‘crazy voodoo breadth signals’ (mostly from my friends who think this whole breadth research is a load of crap) when I first shared the results of this research, however those who haven’t considered it now certainly wish they had. Take a look at the updated chart and see for yourself. And to be completely honest and fair, I haven’t taken advantage of this ‘Titanic syndrome’ call nearly as much as I should have. While I made some money on the short side and saved my long term accounts from this disaster, it was really but a fraction of what it should have been. It was the first time I calculated it and saw it play out in reality, so I suppose next time I’ll trade it with a lot more conviction.

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And as horrific as that looks, keep in mind that DOW is only 5.39% off 4/4 close, while other major indexes fared much worse.

SPY down 7.24%, QQQ 9.64%, IWM 8.85% (that’s from 4/4 close, numbers are slightly worse from 52wk highs)

The question that is on most traders’ minds at this point is – where do we go from here? Well, unfortunately Titanic Syndrome doesn’t specify the maximum drop target (I wish it were that simple), but it does state that the typical drop is at least 10%. We are just about there at this point (at least on some indexes). There’s the question of a H&S pattern on SPY, which calls for a measured move of low 1280-ish, so we are nearly there as well (say, another 1.1% down or so). There is, however, more in the ‘bad news department’ as we just had a ‘Dow theory sell signal’ as reported by Stock Trader Almanac group, which may suggest that the worst is yet to come.

Also some of the breadth signals I track have gone from ‘Buy’ to ‘Strong buy’ over the last couple of days. However it’s important to remember that any long trade at this point would be going against the trend, and therefore will carry a much higher amount of risk. So far I have said ‘tomorrow’s the bounce day fo’ sho!’  several days in a row and have been obviously wrong (keep in mind that I meant a ‘relief bounce’, not another leg up just yet).

As many experienced traders note in their rules, it’s correct to be neutral or bullish in an uptrend and it’s correct to be neutral or bearish in a downtrend. So what’s a trader to do? That really depends on your trading style, personality and risk tolerance. If you try to catch every intermediate top and bottom and ‘milk the mother market for every drop she’s got’, you might start initiating long positions thinking that the bounce is near and a snap-back relief rally (which could be quite viscous as shorts pile in to lock in their gains) is just about to unfold. If that isn’t your style and you prefer a sold base before you commit to a trade, then cash continues to be king and a valid position in times like this. Remember that election year seasonality in May is bearish right through the end of the month and so far this year it’s played out perfectly. Also remember that market breadth is a valuable tool and really paints the picture of what the collective participants are doing (as opposed to thinking, pondering, considering while they answer sentiment surveys). It will tell you when to step out of the market as well as when to be ‘take a 2nd mortgage on the house’  aggressive. (FB IPO wasn’t one of those occasions – there’s the mandatory mention of Facebook for today).

 

 

For a few silver dollars more…

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255 views

As I’m looking through some of the breadth signals tonight, I find myself surprised that we haven’t had a relief bounce just yet. These days the market seems to be under a triple threat of bearish seasonality, the -rare-and-oh-so-obscure Titanic syndrome signal and, of course, the shitstorm that we used to call ‘European Union’. In these conditions it certainly seems that oversold signals really have to go to 11 to be of any value. While I am not going to pontificate on my macro thoughts on EU cluster.. ahem..bomb resolution as I certainly do not possess qualifications to do that (although it seems that anyone with a 3rd grade education has recently become an expert and advises everyone else on what to do), market crashes are rare events and since trading is a strategic game of odds, at this point I think the odds of a bounce are quite substantial. Whether it’s going to be just a relief bounce or a start of a legitimate new leg higher remains to be seen (I tend to think the former is more likely), should it occur, it will provide  opportunities to at least lock in some profits. Hopefully you’ve listened to @chessNwine market reviews and find yourself with plenty of cash you can quickly deploy on the long side.

Looking at the assets that were once known as ‘precious metals’, from my point of view silver is the most attractive one at this point and provides decent risk/reward for a long trade (buying AGQ or shorting ZSL would suit the most aggressive traders). Obviously managing risk is the most important job of a trader, so always keep that in mind. It’d actually be great to get a gap down and a flush everyone’s been begging for for a few days, so let’s see if our EU friends can bump the futures that are now up down and make that happen.

As cliche as it sounds, ‘plan your trade and trade your plan’ is as important as ever in these conditions. Looking at the stream of consciousness that is social media this days it’s certainly been emotional. 

 

Any way you want it …

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387 views

As 2012 revision of economical and financial Armageddon looms (again), let’s take a quick look at the $SPY and see if we can ascertain what’s going on here.

First we’ve got regular ol’ SPY daily chart, which shows a much-discussed-by-now-and-oh-so-obvious H&S pattern with a close below neckline.

click to enlarge

Measured move for completion of this pattern is low 1280-ish. For those of you who’ve had a chance to read my Titanic Syndrome  post, which calls for at least 10% decline off a recent high, this target – while, perhaps painful – should be of no surprise.

As clear as H&S pattern on SPY may be now, I first noticed it when I looked at the equal-weighted SPY index – SPXEW. I like to take a look at it every now and then as it represents a more accurate picture of breadth in the market. Here’s the same look on SPXEW chart:

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We can take another look at the index by employing Renko charts. The beauty of Renko charts is that they filter out all the noise and allow you to see the price movement rather clearly. Some traders follow a Mechanical Trading System based on Renko charts, so if you’re interested, give it a read (h/t to @FibLine for introducing me to Renko charts) . As is pretty clear from this chart, we do indeed have a ‘Sell’ signal.

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And yet another look comes from an Ichimoku chart of SPY. I have just recently started reading up on these and am far from being an expert, but from what I do know, being below this cloud thing is pretty bearish. You can also notice a ‘Sell’ signal issued on 4/17 when base and conversion lines crossed (or whatever the proper Japanese names for them are, I know I’m going to get some crap from the experts on this one 🙂 ).

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Well, there you have it. As well-liked-by-everyone-until-Sopranos-ended-with-their-song ‘Journey’ sings – ‘Any way you want it’… The picture is rather bleak. As I am not a permabear (or perma-anything for that matter), I do hope I’m wrong.

On a brighter side, we are due for at least a short term bounce. Bonds gapping up and closing above their BB and VIX being above its BB ( h/t to @ukarlewitz  for pointing that out) as well adds to the probability of a short term bounce. However with May seasonality and the way the charts look at this point it may be but a short reprieve.  What’s also a bit disconcerting is – as @chessNwine pointed out – we should be bouncing already, but we are not. In the meantime keep plenty of dry powder on hand until it’s time to be aggressive and good luck!

 

 

 

 

Just DON’T do it! or the power of ‘JUST’

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558 views

While many people realize the power of language patterns over outcome of many endeavors, few make a conscious and substantial effort to actually use positive patterns in their speech and – perhaps most important – thinking.

Countless psychology books describe a – now well known – fact that human brain will attempt to find answers to whatever questions are asked of it. It’s the way the neurons are firing inside that roughly 3-pound hunk of gray matter of ours. If after a streak of trading losses you ask yourself ‘WHY have I been sucking so badly lately?!”, your brain will seek, and undoubtedly find, several compelling answers, further reinforcing the mistakes you’ve been making and paving the way for more of them in the future.

If, instead, the question is phrased in a positive and optimistic fashion – ‘What changes do I need to make to correct my recent and uncharacteristic mistakes?’, your always accommodating brain will quickly come up with improvement steps, which – if implemented, of course – will lead the way to better results. Framing of the questions in one’s internal dialogue is one of the relatively easy, but very important steps we can take to enhance performance in any endeavor, including, of course, trading.

Following this theme, take a moment and think about recent instances when you used the word ‘just’. In my opinion, ‘just’ is a dirty word that should be eliminated from trader’s lexicon. It creates a haze of false optimism around reality, along with a fresh dash of hopium. It whispers things like ‘I’m not wrong, I’m JUST a little early’. ‘Just’ is a word we often use to soften the blow to breaking previously established (and well thought out) plans. It creates an excuse to not be disciplined as it eases the negative impact of what we are about to do right when we are about to break a promise or abandon a plan. Sure, there’s the famous Nike’s ‘JUST DO IT’ slogan, which is meant to deliver a positive message, but take an inventory of  your ‘just’ usage patterns in your internal dialogue or in your speech; you’ll be surprised at how disproportionate the negative/positive ratio is.

More often than not ‘just’ is not ‘JUST another push up’, ‘JUST another 10 minutes of preparation for tomorrow’s trading day’. It is ‘I’ll have JUST another donut before I start this weight loss plan’; it’s ‘JUST another cigarette before I quit’; it’s “I know I shouldn’t drive after drinking at this party, but it’s JUST a couple of miles’; it’s ‘I’ll give it JUST 20 more cents from my stop-loss’.

So before you say ‘just’ next time, think ‘am I giving myself an excuse to not be disciplined and do what’s necessary to achieve the best results that I can?!’ We all know that discipline is one of the important key differences between successful traders and the ones that blow up over and over again. Next time you catch yourself thinking “I’ll JUST give it 20 more cents below my hard stop” or ‘I’ll JUST give it one more day’, realize that nothing’s more important than executing your trading plan. While losses are an unavoidable part of the game, make sure you keep them at ‘JUST a flesh wound’ level. Do yourself a favor and next time you catch yourself using ‘just’ to soften the blow…

JUST DON’T DO IT!

 

But as for me and Grandpa, we believe

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1,601 views

Obviously way too early for Christmas song references, but I don’t really have much time at the moment to come up with a witty title, so you’d have to settle for this one.

Echoing Fly’s ‘Grandpa stocks’ theme, here are some of the heavy-barely-moving-except-when-momo-stocks-get-killed-in-summer-months stocks that typically perform well in time of bearish seasonality. If you were to play it completely conservatively you’d heed my previous advice and hide your hard earned/stolen/inherited/received in a divorce settlement (clearly received before Fly banned all divorces) money in a bunch of bonds, which have been killing lately (just ask Bill Gross). But if you decide that equities is still the name of the game, take a look at these names:

KO – outperforming most of other grandpa stocks, perhaps stock market bears are kind to it due to the whole polar bear commercial that’s been running for decades now.

KFT – what hardworking mother wouldn’t want to ‘cook’ Kraft’s macaroni and cheese for her kids, especially with Mother’s day dinner coming up in the next couple of days.

PFE – with US (and world’s for that matter) population growing older and living longer, the ultimate grandpa boner stock continues to impress.

Hope you’ve caught on to the theme of the post, but if not – it’s pretty simple, really. Consumer staples and healthcare sectors (preferably with decent dividends)  hold up pretty well during ‘Sell in May’ season, so give that sector a quick look-see if you haven’t already.

I BET IT ALL!!! (or when to be aggressive)

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833 views

Much has been written on similarities between trading/investing and poker. Both are gambling activities (and yes, any trading/investing is gambling by definition); and in both cases while you can certainly have ‘bad beats’ and losing streaks short term, in the long run skill certainly dominates over luck. In both cases you have to have the chips/capital in the portfolio to bet aggressively when a great trading opportunity/poker hand presents itself/dealt to you. It’s important to have the discipline to not trade iffy setups (or play marginal hands with little or no edge), to preserve the capital and not get chopped up. While it’s obviously important financially, psychological impact of ‘getting chopped up’ is perhaps much more profound. After many losing trades/hands one can be easily driven off his or her ‘A game’ and start playing either overly tight, missing out on excellent opportunities out of fear of losing even more of his bankroll or – even worse – start playing overly aggressive, chasing after losses, which inevitably leads to throwing good money after bad and – sooner or later – more losses.

So how do we recognize the opportunities to be aggressive? There are many setups and opportunities, depending on your style of trading and I wanted to share just one of them, something I came across while reading Dow-award-winning paper ‘Plains, trains and automobiles. A Study of Various Market Thrust Measures’ by Wayne Whaley.

As with other research on the topic of ‘breadth thrust’, Whaley concludes/confirms that large market moves start with a huge increase (thrust) in either the number of traded issues, positive volume of issues, or, alternatively, just a sharp jolt higher in an index over several days.

I decided to put Whaley’s theory to the test with last 3 years of data and track performance of SPY, IWM and TNA 3, 6 and 12 months from the time of purchase. In the table below you’ll find  instances of issues or volume thrust (per Whaley’s definition) with values over 70% (I removed signals occurring within a few days of the initial one, although one could use them as confirmation and add to long positions at that time). I have not had the time to calculate maximum drawdowns from the purchase points, which is an important system parameter, something that’s still on my ‘To do’ list.

To be fair to the spirit of Whaley’s research, only signals on 7/13/2010 and 7/1/2011 ) dark green in the table) would be the ones he would consider, however other buy points in the table appear to have fared very well.

What struck me as odd is poor performance of a couple of instances, specifically 12/7/2010 and 7/1/2011 (especially surprising as this fit the definition of the ‘true signal’ per Whaley). Once I’ve added another parameter to the table – ‘% off 52wk high’ it became rather clear. It appears that market thrusts near the recent top of the market could be viewed as a warning sign of a blow-off top, exactly what happened in July of 2011. The most recent signal actually occurred on 3/13/2012, at the new 52wk high on SPX, and at this point SPX is 1.76% lower, supporting the thesis of a market issuing a warning sign when such market thrusts occur near the recent top.

So what about the results of these signals? Let’s take a look at the 6-months (126 days) performance for TNA, which is a vehicle I’d be employing to take advantage of the signals. If we exclude the signals that occurred too close to a recent market top, at this point we have results on 9 data points.

Min gain – 20.43%, Max gain – 114.34%, Average gain – 49.9%.

At this point all  of the 6-month trades are winning ones, although as you can see there are some drawdowns on the 3-month timeframe.

(click to see a full size image)

While these signals didn’t pinpoint absolute bottom (understandably so as they key off market upward thrusts), they did do a good job of catching the next significant move higher and an astute investor equipped with this information could benefit quite significantly by betting aggressively at the correct time.

Bottom line is – know when you have an edge that fits your trading style and personality and pursue it aggressively (obviously that’s not a reason to completely throw caution in the wind, risk management should always be of utmost importance). Aces don’t come around all that often, so make sure to take advantage of that opportunity and don’t gamble on seven deuce offsuit. Market breadth studies will often tell you where the market is heading, are you listening?

I BET IT ALL

 

Detecting market tops and Titanic syndrome (triggered 4/4/2012)

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2,093 views

While I’m by no means an expert on market breadth, I do follow a few breadth indicators and research as I believe them to be a true reflection of what market is actually doing, as opposed to various sentiment reviews, which are subjective at best. One of the signals that has triggered relatively recently was the – rather obscure-  ‘Titanic syndrome’, which was first coined by Bill Omaha in 1968 and detailed in ‘Patterns that detect stock market reversals’ paper. Interested readers are free to peruse the paper itself (I do think it’s worth it), but in summary, it aims to detect a major market top, predicting a market drop of at least 10%. Assuming I calculated the signal parameters correctly, the ‘Titanic Syndrome’ signal triggered on 4/4/2012. While it’s not unusual for the market to make a yet another attempt at recent highs (sometimes even surpassing them), it should be viewed as a bull trap and an opportunity to close long positions and – if you are an aggressive trader – open new short positions.

It’s of little value to reiterate what’s already stated in the ‘Patterns that detect stock market reversal’ paper, so I’ll leave you with the chart that I originally posted inside 12631 over a month ago on 4/5/2012:

 

In addition to the Titanic Syndrome signals there were certainly other clues, which I’ll leave for another post after my friend Don Julio is gone after his annual May 5th visit.

 

 

Seasonality update (long term accounts)

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840 views

Clearly by now every Joe Plumber has heard of the beaten down ‘Sell in May and go away’ cliche, so here we are, it’s May. And there are just as many pundits defending the veracity (or, more accurately, profitability) of following that system, as ones attacking it and pointing out that ‘this time it’s different’.

One of the Seasonal Timing Strategies  (and one that I have started following) was introduced by Sy Harding n 1998 and ‘ has gained 190.6% to year-end 2011 compared to a 64.4% gain for the Dow, a 20.3% gain for the S&P 500, and an 18.8% gain for the Nasdaq.’ 

Anyone following this system could have saved oneself some grief during awful summer months drawdown periods of 2010 and 2011, not to mention made quite a bit more money as can be clearly demonstrated by this SPY chart.

‘Stock Trader’s Almanac’ guys follow a similar seasonality strategy, which triggered a “sell signal’ on 4/3/2012, which came very close to nailing the top on SPX.

However we shouldn’t forget that we are in the presidential election year, which can have a tremendous impact on market performance.

Compare overall seasonality chart: 

 

With that of an election year:

If the patterns holds true, while May looks atrocious, June should be quite strong and July and August are screaming ‘lever up long’.

McClellan seems to agree with that as well, pointing out similar charts and stating ‘A big strong June and July is wholly contrary to the old saw about “Sell In May…”.  Most of the time that rule does work, at least in part, but in election years a whole different rule goes into effect.  If the correlation persists this year as well as it has been doing up until now, we can look forward to a big rally in June before the market finally enters a plateau in July, when the media’s attention is tuned to the campaign promises being slung by the presidential candidates. 

Considering the fact that Operation twist is quickly drawing to an end (and should end around June) and the upcoming upheaval in the market will raise further demands for continuing easing efforts, Uncle Ben should start rolling up his sleeve to fire up those printing presses (in whatever easing/twisting form printing manifests itself this time) right around June timeframe. Incumbent propping-up is likely to drive the market higher – whatever the cost – and why not ride that wave?

I have been happily in bonds in my long term accounts at the moment, escaping the upcoming carnage  (which is far from over) and awaiting the buy signal for the summer rip higher. While the market is likely to go down swinging at least 10% from the recent high and volatility is likely to explode (another post on why I think that), all will be well in just a few short weeks.

 

 

Creative articulation, baby

Joined May 6, 2012
10 Blog Posts

Creative articulation, baby

Joined May 6, 2012
10 Blog Posts

Do I bet it all? Do I ?!

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1,344 views

Gambling title seems oddly appropriate, especially after watching David Einhorn taking down $4.3M in the ‘One Drop’  WSOP $1M buy-in tournament (which he’s donating to charity, by the way).

If you’re checking in on the 4th after an Nth round of debauchery with levels of inebriation approaching ‘that one time in college’ levels, you might want to come back and read it later. There’s a bunch of numbers and charts here that are liable to put you to sleep and miss out on the next round of ‘hey, y’all !!! watch this!’ fireworks display.

Wanted to write a quick update on the assessment of where we are in the market at this point, especially since signals I described in my ‘I bet it all’ post have just triggered (If you haven’t read the original post, it might be a good idea to do that in order to understand the 1st signal here).

First, ‘Planes, trains and automobiles’ signal update.  The breadth thrust signal triggered today. Here’s an update on performance of the signals I mentioned in that post:

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  • As you can see, there are 2 new signals for 7/2 and 7/3/2012 with one on 7/3 being especially strong and fitting well within  Whaley parameters. Typically breadth thrust like this indicates the beginning of a new sustained move higher. However, there is indeed a caveat to that. As you can see, the one outlier of poor performance in the whole set of data (at least thus far) is the 7/1/2011 signal. It certainly appears that when a breadth thrust occurs near 52wk highs it is much more likely to indicate a blow-off top than a beginning of a new bullish move. I would be much more comfortable with levering up long had we had this thrust when the market was down 10% than at this point – we are not even 3% off 52wk highs.
  • Is there anything else that can support the bull case then? Something that would increase one’s confidence in this ferocious rally? Well, there’s the 13EMA of NAHL that I like to use as the long term indicator of where the market is heading. Something like this doesn’t really catch the very tops or bottoms, but is a decent indicator for a long term direction. 13EMA first waded into the positive territory on 6/20 and after a brief dip has quickly recovered and is now firmly above 0. That has certainly been a bullish signal in the past and bolsters the bull case on intermediate and long timeframes.
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  • We are also approaching the earnings season, and with expectations that have been severely beaten down are likely to see a series of reports that are way over analysts expectations.
  • 50SMA on SPY has finally started to tick up today, possibly indicating the end of the correction as well.
  • And finally, election year seasonality is decisively bullish:

So based on these signals and assessment, should you lever up long and leave for a long vacation as it will be undoubtedly paid for (and more!) by the bountiful gains simply given to you by mother market?!

One thing to keep in mind is that we are severely overbought at this point, so much so that the value of NYMO reached 4th highest level in 14 years. Something like that absolutely has to be worked off through either price (moderate pullback) or time (few relatively flat sessions with indexes just drifting sideways). So hold off on getting that 2nd mortgage and selling wife’s jewelry to put it all in on a bunch of triple leveraged ETFs for just a few days.

When I look at the instances when NYMO reached very high levels (79+ in this study), short term picture (next few days) looks rather bearish (average 0.81% loss with 83% probability the next day and 1.75% with 70% probability over the next 2 days). Could it be skewed by horrendous losses of 2008/2009? Sure, but hard to guess just how much role that played in the overall picture.

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Then there’s also the surprisingly well fitting analog of 2011 and 2012 charts of SPY (well, more precisely 9/2010-8/2011 with an overlay of 9/2011-now). I did cheat a bit by shifting this year’s numbers by about 2 weeks to ‘make it fit better’. While I don’t think there’s a great chance of repeating the last year’s summer debacle, especially in light of election year seasonality, considering that European shenanigans are far from over, keep this picture in mind.

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So where does this leave us? While things can certainly change (even tomorrow since for some reason Europeans don’t celebrate the wonderful Independence Day of the United States and keep their markets open), as of the time of this writing things are looking up for the bulls on the intermediate and long timeframe. On the short timeframe we are WAY OVERBOUGHT and need to get these conditions relieved (through time or price). I did buy some TZA and SQQQ to hopefully take advantage of the pullback, but would not hesitate to cut them if it appears that we are just basing and not pulling back. Once the pullback is over (you’ll know it when you see it, but 1338-1340 levels seem like a good pullback target IF we pull back), I am certainly prepared to allocate a significant portion of my portfolio to the long side.

Enjoy the holidays, folks, and remember to let those bottle rockets out of your hand BEFORE they go off.

 

 

Revenge trading and shorting crazy momo stocks … like mating hedgehogs.

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What do shorting momo stocks and mating hedgehogs have in common? The answer is simple (as provided in the old corny joke) – both have to be done very carefully for in both cases there is a serious risk of enduring tremendous pain in the ol’ kibble and bits.

I’ve had my eyes on COCO for a couple of days now as it’s morphed into a monster squeeze candidate. MACD crossover, swift recovery from a big down day, RSI in the oversold territory- all markings of a potential bottom (as with all the indicators and signals confirmation is required). My thought was that if it started to squeeze, it could run as high as 200SMA.

Well, as it often happens (or maybe it just often happens to me?), due to circumstances beyond my control I was away when COCO-the-monkey broke out this morning and started squeezing shorts with tenacity and ruthlessness reminiscent of the famous Nicky Santoro in ‘Casino’. The shorts were told  ‘ I got your head in a fuckin’ vise. I’ll squash your head like a fuckin’ grapefruit’ and once a few eyeballs were lost, they cried uncle and COCO rippage ensued. Needless to say I was none too happy about missing the opportunity (COCO was up close to 10% when I finally got to the trading station), and was tempted to take my revenge on COCO by shorting it.

Thankfully, the cooler voices in my head prevailed this time. Not sure if it was due to anticipation of upcoming 3-day weekend and all the debauchery and shenanigans associated with that, but regardless of the reason, I decided that if I do take my revenge on missing this rippage, I have to wait for the right time to do so. And yes, I realize that seeking revenge on a stock and a missed opportunity sounds about as rational as Charlie Sheen’s ‘Winning’ interview on ABC, but hey as he said during that interview –  ‘we are entitled to interpret things as we must’.

And as I waited, lo and behold, things started falling into place. Check out notes on the attached 2m chart, but these are the main points that I considered for shorting and entry selection (as they unfolded, in chronological order):

  • Bearish MACD divergence
  • Violent rejection of short-term resistance (large price candle and a huge volume dump)
  • And finally bearish crossover of 20 and 9 EMAs – good entry point. 
Considering short term resistance was just a few pennies away (which served as a well defined stop), it was a good risk/reward ratio. I was thinking it’d fall to about 2.81 (previous resistance/base area) and it actually overshot that a bit. I was also thinking that traders would want to lock in their profits and would be reluctant to hold into the long weekend, but that was obviously just a small factor in the decision process.
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I did cover 1/2 a little too soon at 2.88 from 2.98 entry (there was really no reason to rush into covering as it was dropping like a rock), but I’m still working on this whole shorting game, trying to do it like hedgehogs mate… very carefully. Final cover – 2.81 from 2.98.

Comments and feedback are much appreciated – as always.

 

 

 

Titanic update – did you see that goddamn iceberg?!

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As a reader of ibankcoin you’re undoubtedly aware that market looks like a thousand miles of bad road right now. There seems to be no escape anywhere except for cash and bonds (which is where I’ve parked my long term retirement accounts based on the seasonal investment strategy).  As many astute traders have mentioned already, the stubborn bulls are – ironically – keeping the market from finding a tradeable bottom. In most cases a flush/capitulation event is what will put the floor under the market (even if short term). So far we’ve had the painful slow drip, which is in many ways analogous to the old anecdote of a frog slowly being boiled to death.

Markets like this emphasize the importance of having a plan for each of your positions and sticking to it. Don’t be a frog. If you aren’t disciplined and continue to just give it another day, you’ll quickly find yourself with large loss, wondering ‘how could this have possibly happen?’ and  – to paraphrase Blake from ‘Glengarry Glen Ross’ (if you haven’t seen it yet, rent it tonight!) – ‘sitting around in a bar: ‘Oh yeah, I used to be a trader. It’s a tough racket.’

Remember why you were in the trade to begin with and stick to your plan. If you entered the trade based on a ‘good looking chart’, don’t forget to exit based on the chart as well and don’t let a trade become ‘an investment’ (sadly, I’ve done that myself many a time, but I’m getting better).

But back to the Titanic update. There was a lot of disbelief and talk about ‘crazy voodoo breadth signals’ (mostly from my friends who think this whole breadth research is a load of crap) when I first shared the results of this research, however those who haven’t considered it now certainly wish they had. Take a look at the updated chart and see for yourself. And to be completely honest and fair, I haven’t taken advantage of this ‘Titanic syndrome’ call nearly as much as I should have. While I made some money on the short side and saved my long term accounts from this disaster, it was really but a fraction of what it should have been. It was the first time I calculated it and saw it play out in reality, so I suppose next time I’ll trade it with a lot more conviction.

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And as horrific as that looks, keep in mind that DOW is only 5.39% off 4/4 close, while other major indexes fared much worse.

SPY down 7.24%, QQQ 9.64%, IWM 8.85% (that’s from 4/4 close, numbers are slightly worse from 52wk highs)

The question that is on most traders’ minds at this point is – where do we go from here? Well, unfortunately Titanic Syndrome doesn’t specify the maximum drop target (I wish it were that simple), but it does state that the typical drop is at least 10%. We are just about there at this point (at least on some indexes). There’s the question of a H&S pattern on SPY, which calls for a measured move of low 1280-ish, so we are nearly there as well (say, another 1.1% down or so). There is, however, more in the ‘bad news department’ as we just had a ‘Dow theory sell signal’ as reported by Stock Trader Almanac group, which may suggest that the worst is yet to come.

Also some of the breadth signals I track have gone from ‘Buy’ to ‘Strong buy’ over the last couple of days. However it’s important to remember that any long trade at this point would be going against the trend, and therefore will carry a much higher amount of risk. So far I have said ‘tomorrow’s the bounce day fo’ sho!’  several days in a row and have been obviously wrong (keep in mind that I meant a ‘relief bounce’, not another leg up just yet).

As many experienced traders note in their rules, it’s correct to be neutral or bullish in an uptrend and it’s correct to be neutral or bearish in a downtrend. So what’s a trader to do? That really depends on your trading style, personality and risk tolerance. If you try to catch every intermediate top and bottom and ‘milk the mother market for every drop she’s got’, you might start initiating long positions thinking that the bounce is near and a snap-back relief rally (which could be quite viscous as shorts pile in to lock in their gains) is just about to unfold. If that isn’t your style and you prefer a sold base before you commit to a trade, then cash continues to be king and a valid position in times like this. Remember that election year seasonality in May is bearish right through the end of the month and so far this year it’s played out perfectly. Also remember that market breadth is a valuable tool and really paints the picture of what the collective participants are doing (as opposed to thinking, pondering, considering while they answer sentiment surveys). It will tell you when to step out of the market as well as when to be ‘take a 2nd mortgage on the house’  aggressive. (FB IPO wasn’t one of those occasions – there’s the mandatory mention of Facebook for today).

 

 

For a few silver dollars more…

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As I’m looking through some of the breadth signals tonight, I find myself surprised that we haven’t had a relief bounce just yet. These days the market seems to be under a triple threat of bearish seasonality, the -rare-and-oh-so-obscure Titanic syndrome signal and, of course, the shitstorm that we used to call ‘European Union’. In these conditions it certainly seems that oversold signals really have to go to 11 to be of any value. While I am not going to pontificate on my macro thoughts on EU cluster.. ahem..bomb resolution as I certainly do not possess qualifications to do that (although it seems that anyone with a 3rd grade education has recently become an expert and advises everyone else on what to do), market crashes are rare events and since trading is a strategic game of odds, at this point I think the odds of a bounce are quite substantial. Whether it’s going to be just a relief bounce or a start of a legitimate new leg higher remains to be seen (I tend to think the former is more likely), should it occur, it will provide  opportunities to at least lock in some profits. Hopefully you’ve listened to @chessNwine market reviews and find yourself with plenty of cash you can quickly deploy on the long side.

Looking at the assets that were once known as ‘precious metals’, from my point of view silver is the most attractive one at this point and provides decent risk/reward for a long trade (buying AGQ or shorting ZSL would suit the most aggressive traders). Obviously managing risk is the most important job of a trader, so always keep that in mind. It’d actually be great to get a gap down and a flush everyone’s been begging for for a few days, so let’s see if our EU friends can bump the futures that are now up down and make that happen.

As cliche as it sounds, ‘plan your trade and trade your plan’ is as important as ever in these conditions. Looking at the stream of consciousness that is social media this days it’s certainly been emotional. 

 

Any way you want it …

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As 2012 revision of economical and financial Armageddon looms (again), let’s take a quick look at the $SPY and see if we can ascertain what’s going on here.

First we’ve got regular ol’ SPY daily chart, which shows a much-discussed-by-now-and-oh-so-obvious H&S pattern with a close below neckline.

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Measured move for completion of this pattern is low 1280-ish. For those of you who’ve had a chance to read my Titanic Syndrome  post, which calls for at least 10% decline off a recent high, this target – while, perhaps painful – should be of no surprise.

As clear as H&S pattern on SPY may be now, I first noticed it when I looked at the equal-weighted SPY index – SPXEW. I like to take a look at it every now and then as it represents a more accurate picture of breadth in the market. Here’s the same look on SPXEW chart:

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We can take another look at the index by employing Renko charts. The beauty of Renko charts is that they filter out all the noise and allow you to see the price movement rather clearly. Some traders follow a Mechanical Trading System based on Renko charts, so if you’re interested, give it a read (h/t to @FibLine for introducing me to Renko charts) . As is pretty clear from this chart, we do indeed have a ‘Sell’ signal.

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And yet another look comes from an Ichimoku chart of SPY. I have just recently started reading up on these and am far from being an expert, but from what I do know, being below this cloud thing is pretty bearish. You can also notice a ‘Sell’ signal issued on 4/17 when base and conversion lines crossed (or whatever the proper Japanese names for them are, I know I’m going to get some crap from the experts on this one 🙂 ).

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Well, there you have it. As well-liked-by-everyone-until-Sopranos-ended-with-their-song ‘Journey’ sings – ‘Any way you want it’… The picture is rather bleak. As I am not a permabear (or perma-anything for that matter), I do hope I’m wrong.

On a brighter side, we are due for at least a short term bounce. Bonds gapping up and closing above their BB and VIX being above its BB ( h/t to @ukarlewitz  for pointing that out) as well adds to the probability of a short term bounce. However with May seasonality and the way the charts look at this point it may be but a short reprieve.  What’s also a bit disconcerting is – as @chessNwine pointed out – we should be bouncing already, but we are not. In the meantime keep plenty of dry powder on hand until it’s time to be aggressive and good luck!

 

 

 

 

Just DON’T do it! or the power of ‘JUST’

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While many people realize the power of language patterns over outcome of many endeavors, few make a conscious and substantial effort to actually use positive patterns in their speech and – perhaps most important – thinking.

Countless psychology books describe a – now well known – fact that human brain will attempt to find answers to whatever questions are asked of it. It’s the way the neurons are firing inside that roughly 3-pound hunk of gray matter of ours. If after a streak of trading losses you ask yourself ‘WHY have I been sucking so badly lately?!”, your brain will seek, and undoubtedly find, several compelling answers, further reinforcing the mistakes you’ve been making and paving the way for more of them in the future.

If, instead, the question is phrased in a positive and optimistic fashion – ‘What changes do I need to make to correct my recent and uncharacteristic mistakes?’, your always accommodating brain will quickly come up with improvement steps, which – if implemented, of course – will lead the way to better results. Framing of the questions in one’s internal dialogue is one of the relatively easy, but very important steps we can take to enhance performance in any endeavor, including, of course, trading.

Following this theme, take a moment and think about recent instances when you used the word ‘just’. In my opinion, ‘just’ is a dirty word that should be eliminated from trader’s lexicon. It creates a haze of false optimism around reality, along with a fresh dash of hopium. It whispers things like ‘I’m not wrong, I’m JUST a little early’. ‘Just’ is a word we often use to soften the blow to breaking previously established (and well thought out) plans. It creates an excuse to not be disciplined as it eases the negative impact of what we are about to do right when we are about to break a promise or abandon a plan. Sure, there’s the famous Nike’s ‘JUST DO IT’ slogan, which is meant to deliver a positive message, but take an inventory of  your ‘just’ usage patterns in your internal dialogue or in your speech; you’ll be surprised at how disproportionate the negative/positive ratio is.

More often than not ‘just’ is not ‘JUST another push up’, ‘JUST another 10 minutes of preparation for tomorrow’s trading day’. It is ‘I’ll have JUST another donut before I start this weight loss plan’; it’s ‘JUST another cigarette before I quit’; it’s “I know I shouldn’t drive after drinking at this party, but it’s JUST a couple of miles’; it’s ‘I’ll give it JUST 20 more cents from my stop-loss’.

So before you say ‘just’ next time, think ‘am I giving myself an excuse to not be disciplined and do what’s necessary to achieve the best results that I can?!’ We all know that discipline is one of the important key differences between successful traders and the ones that blow up over and over again. Next time you catch yourself thinking “I’ll JUST give it 20 more cents below my hard stop” or ‘I’ll JUST give it one more day’, realize that nothing’s more important than executing your trading plan. While losses are an unavoidable part of the game, make sure you keep them at ‘JUST a flesh wound’ level. Do yourself a favor and next time you catch yourself using ‘just’ to soften the blow…

JUST DON’T DO IT!

 

But as for me and Grandpa, we believe

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Obviously way too early for Christmas song references, but I don’t really have much time at the moment to come up with a witty title, so you’d have to settle for this one.

Echoing Fly’s ‘Grandpa stocks’ theme, here are some of the heavy-barely-moving-except-when-momo-stocks-get-killed-in-summer-months stocks that typically perform well in time of bearish seasonality. If you were to play it completely conservatively you’d heed my previous advice and hide your hard earned/stolen/inherited/received in a divorce settlement (clearly received before Fly banned all divorces) money in a bunch of bonds, which have been killing lately (just ask Bill Gross). But if you decide that equities is still the name of the game, take a look at these names:

KO – outperforming most of other grandpa stocks, perhaps stock market bears are kind to it due to the whole polar bear commercial that’s been running for decades now.

KFT – what hardworking mother wouldn’t want to ‘cook’ Kraft’s macaroni and cheese for her kids, especially with Mother’s day dinner coming up in the next couple of days.

PFE – with US (and world’s for that matter) population growing older and living longer, the ultimate grandpa boner stock continues to impress.

Hope you’ve caught on to the theme of the post, but if not – it’s pretty simple, really. Consumer staples and healthcare sectors (preferably with decent dividends)  hold up pretty well during ‘Sell in May’ season, so give that sector a quick look-see if you haven’t already.

I BET IT ALL!!! (or when to be aggressive)

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Much has been written on similarities between trading/investing and poker. Both are gambling activities (and yes, any trading/investing is gambling by definition); and in both cases while you can certainly have ‘bad beats’ and losing streaks short term, in the long run skill certainly dominates over luck. In both cases you have to have the chips/capital in the portfolio to bet aggressively when a great trading opportunity/poker hand presents itself/dealt to you. It’s important to have the discipline to not trade iffy setups (or play marginal hands with little or no edge), to preserve the capital and not get chopped up. While it’s obviously important financially, psychological impact of ‘getting chopped up’ is perhaps much more profound. After many losing trades/hands one can be easily driven off his or her ‘A game’ and start playing either overly tight, missing out on excellent opportunities out of fear of losing even more of his bankroll or – even worse – start playing overly aggressive, chasing after losses, which inevitably leads to throwing good money after bad and – sooner or later – more losses.

So how do we recognize the opportunities to be aggressive? There are many setups and opportunities, depending on your style of trading and I wanted to share just one of them, something I came across while reading Dow-award-winning paper ‘Plains, trains and automobiles. A Study of Various Market Thrust Measures’ by Wayne Whaley.

As with other research on the topic of ‘breadth thrust’, Whaley concludes/confirms that large market moves start with a huge increase (thrust) in either the number of traded issues, positive volume of issues, or, alternatively, just a sharp jolt higher in an index over several days.

I decided to put Whaley’s theory to the test with last 3 years of data and track performance of SPY, IWM and TNA 3, 6 and 12 months from the time of purchase. In the table below you’ll find  instances of issues or volume thrust (per Whaley’s definition) with values over 70% (I removed signals occurring within a few days of the initial one, although one could use them as confirmation and add to long positions at that time). I have not had the time to calculate maximum drawdowns from the purchase points, which is an important system parameter, something that’s still on my ‘To do’ list.

To be fair to the spirit of Whaley’s research, only signals on 7/13/2010 and 7/1/2011 ) dark green in the table) would be the ones he would consider, however other buy points in the table appear to have fared very well.

What struck me as odd is poor performance of a couple of instances, specifically 12/7/2010 and 7/1/2011 (especially surprising as this fit the definition of the ‘true signal’ per Whaley). Once I’ve added another parameter to the table – ‘% off 52wk high’ it became rather clear. It appears that market thrusts near the recent top of the market could be viewed as a warning sign of a blow-off top, exactly what happened in July of 2011. The most recent signal actually occurred on 3/13/2012, at the new 52wk high on SPX, and at this point SPX is 1.76% lower, supporting the thesis of a market issuing a warning sign when such market thrusts occur near the recent top.

So what about the results of these signals? Let’s take a look at the 6-months (126 days) performance for TNA, which is a vehicle I’d be employing to take advantage of the signals. If we exclude the signals that occurred too close to a recent market top, at this point we have results on 9 data points.

Min gain – 20.43%, Max gain – 114.34%, Average gain – 49.9%.

At this point all  of the 6-month trades are winning ones, although as you can see there are some drawdowns on the 3-month timeframe.

(click to see a full size image)

While these signals didn’t pinpoint absolute bottom (understandably so as they key off market upward thrusts), they did do a good job of catching the next significant move higher and an astute investor equipped with this information could benefit quite significantly by betting aggressively at the correct time.

Bottom line is – know when you have an edge that fits your trading style and personality and pursue it aggressively (obviously that’s not a reason to completely throw caution in the wind, risk management should always be of utmost importance). Aces don’t come around all that often, so make sure to take advantage of that opportunity and don’t gamble on seven deuce offsuit. Market breadth studies will often tell you where the market is heading, are you listening?

I BET IT ALL

 

Detecting market tops and Titanic syndrome (triggered 4/4/2012)

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While I’m by no means an expert on market breadth, I do follow a few breadth indicators and research as I believe them to be a true reflection of what market is actually doing, as opposed to various sentiment reviews, which are subjective at best. One of the signals that has triggered relatively recently was the – rather obscure-  ‘Titanic syndrome’, which was first coined by Bill Omaha in 1968 and detailed in ‘Patterns that detect stock market reversals’ paper. Interested readers are free to peruse the paper itself (I do think it’s worth it), but in summary, it aims to detect a major market top, predicting a market drop of at least 10%. Assuming I calculated the signal parameters correctly, the ‘Titanic Syndrome’ signal triggered on 4/4/2012. While it’s not unusual for the market to make a yet another attempt at recent highs (sometimes even surpassing them), it should be viewed as a bull trap and an opportunity to close long positions and – if you are an aggressive trader – open new short positions.

It’s of little value to reiterate what’s already stated in the ‘Patterns that detect stock market reversal’ paper, so I’ll leave you with the chart that I originally posted inside 12631 over a month ago on 4/5/2012:

 

In addition to the Titanic Syndrome signals there were certainly other clues, which I’ll leave for another post after my friend Don Julio is gone after his annual May 5th visit.

 

 

Seasonality update (long term accounts)

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Clearly by now every Joe Plumber has heard of the beaten down ‘Sell in May and go away’ cliche, so here we are, it’s May. And there are just as many pundits defending the veracity (or, more accurately, profitability) of following that system, as ones attacking it and pointing out that ‘this time it’s different’.

One of the Seasonal Timing Strategies  (and one that I have started following) was introduced by Sy Harding n 1998 and ‘ has gained 190.6% to year-end 2011 compared to a 64.4% gain for the Dow, a 20.3% gain for the S&P 500, and an 18.8% gain for the Nasdaq.’ 

Anyone following this system could have saved oneself some grief during awful summer months drawdown periods of 2010 and 2011, not to mention made quite a bit more money as can be clearly demonstrated by this SPY chart.

‘Stock Trader’s Almanac’ guys follow a similar seasonality strategy, which triggered a “sell signal’ on 4/3/2012, which came very close to nailing the top on SPX.

However we shouldn’t forget that we are in the presidential election year, which can have a tremendous impact on market performance.

Compare overall seasonality chart: 

 

With that of an election year:

If the patterns holds true, while May looks atrocious, June should be quite strong and July and August are screaming ‘lever up long’.

McClellan seems to agree with that as well, pointing out similar charts and stating ‘A big strong June and July is wholly contrary to the old saw about “Sell In May…”.  Most of the time that rule does work, at least in part, but in election years a whole different rule goes into effect.  If the correlation persists this year as well as it has been doing up until now, we can look forward to a big rally in June before the market finally enters a plateau in July, when the media’s attention is tuned to the campaign promises being slung by the presidential candidates. 

Considering the fact that Operation twist is quickly drawing to an end (and should end around June) and the upcoming upheaval in the market will raise further demands for continuing easing efforts, Uncle Ben should start rolling up his sleeve to fire up those printing presses (in whatever easing/twisting form printing manifests itself this time) right around June timeframe. Incumbent propping-up is likely to drive the market higher – whatever the cost – and why not ride that wave?

I have been happily in bonds in my long term accounts at the moment, escaping the upcoming carnage  (which is far from over) and awaiting the buy signal for the summer rip higher. While the market is likely to go down swinging at least 10% from the recent high and volatility is likely to explode (another post on why I think that), all will be well in just a few short weeks.

 

 

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