ROC Indicator Has Been Cleared for Lift Off

After a year of whipsaw, this long-term trend indicator may finally be cleared for lift off.

The blue line is the 252 day rate-of-change and the red line is the 5 day rate-of-change. The ROC252 has not seen this level since July 2011. While it certainly could start trending back downwards and resume the whipsaw, past history shows that it spends most of its time above the red line.

Going long and short, but not including commissions and slippage, the ROC indicator when applied to $SPY has produced gains of 15.49% year-to-date.

And now I must finish packing to meet The Fly, Chess, Cajun, Thaler, Gap&Yap, Jeremy, and all the other iBC crew in NYC.

Read this post from July 24th for a brief background on this set of indicators…

The indicators are near bounce thresholds. Another down or weak day tomorrow will likely push the indicators past their bounce trigger levels. A buy at the close on any weakness tomorrow may make a good 1-3 day swing trade.

Yours truly is happy to note that the Woodshedder Blog has made the Quant tab of  The Whole Street.

Also noteworthy: While many in the financial blogosphere are unwilling to link to Fly’s blog, The Whole Street has him linked on their Blog tab, alongside other excellent bloggers of the first tier. (Except for Krugman. Alas, nobody is perfect.)

Be sure to check out The Whole Street as it is obviously run by a fearless, impeccably honorable gentleman with the highest caliber of taste and a vast amount of wisdom.

I have written many posts about abnormal markets. On Friday, $SPY met a basic criteria for being abnormal with a bias to the upside.

There are times to short and there are times sit on our hands. How do we determine when to short and when to sit? One method I like is to use the upper Bollinger Band (50,2) as an abnormal market filter. I have found through backtesting that a close above the upper BB signals a market that may be entering or continuing a sustained uptrend. In other words, it is a market that is less-likely to revert to the mean and more likely to trend. This may be counter-intuitive as we typically view a market that has been sharply rising as one that is due for a correction, or at the very least, a pullback. What I have found after a close above the upper Bollinger Band is that instead of a sharp pullback or correction, we see some consolidation and then a resume of the uptrend.

Let me demonstrate.

The Rules:

Buy $SPY at the close if the close yesterday was NOT above the upper Bollinger Band AND the close today IS above the upper Bollinger Band (50,2).

Sell at the close X days later.

The Results:

These results compare buying $SPY according to the rules above vs. buy and hold. To generate the buy and hold results and have them comparable, I split all of the $SPY history into 50 day segments and then averaged the segments.

The buy and hold results show the clear bias to the upside that has been prevalent over the past 20 years. The setup results show a market that has closed more than 2 standard deviations above the 50 day mean and still manages another surge almost 2 months later to close higher on average than buying and holding.

And that is why this triggers the abnormal market filter. It is not a market that we want to aggressively short. We may also not want to be aggressively long. The results show we may have a few weeks to consider our positioning and bias.

The bottom line is that I am looking for the market to trend more than swing. Since the June 4th low, we’ve seen fairly predictable swings. These results suggest that the swings may be less predictable and the market may shrug off bad news as it climbs the wall of worry.

The Fidelity Select Sector Rotational System is holding two funds which have met the required 30 day hold. When these two funds drop out of the top 3, they will be sold and replaced with the new top ranked funds.

Currently held funds:

FSUTX (Utilities)

FIUIX (Telecom and Utilities)

FBIOX (Biotech – purchased on July 20th)

Top Ranked Funds:

1. FSUTX (Utilities)

2. FIUIX (Telecom and Utilities)

3. FDFAX (Consumer Staples)

4. FBIOX (Biotech)

5. FPHAX (Pharmaceuticals)

The top ranked funds demonstrate that investors are still taking a defensive posture. Until this posture changes, the system is not likely to rotate out of FSUTX or FIUIX.

And to see what it is you are going to have to click on this post.

You may remember that this stock was covered in a previous high tight flag post about two weeks ago. When/if the market firms up, the HTFs will start developing again.

  I consistently make calls like this:

 These short-term breadth indicators are at levels which typically signify that a  bounce is near…My best guess is that a quick 1-3 day bounce will occur within a  day or two.

And then the second day after the post the Dow Jones rallies over 200 points. Yet these posts don’t get clicked enough to get me into the iBC “Trending” section.

Just look back over my Market Breadth archive. You’ll find I don’t post bullshit.