If a man knows not to which port he sails, no wind is favorable.
--Seneca
Knowing when to walk unhindered and not use what one thought yesterday as a crutch today is a critical nuance to learn. The impression I had coming into this week is no longer what I hold today. Two key indicators I use to market time have both aligned bullish and this is a cue for me to begin to look for long opportunities. In addition, there were 1950 stocks in my universe up 4%+ on higher volume then yesterday bringing the breadth ratio I watch to 1.98 indicating a thrust is imminent
In an unexpected twist, after the worst Thanksgiving since 1932, the market rebounded suggesting it may be a Merry Christmas after all. While it's still early to call, developments look promising as the market responded well to the news that the NBA lockout has ended and will tip off in sync with the holiday. The correlation to the market was uncanny as the labor talks after weeks of going no where and breaking down offered a positive surprise and the NASDAQ responded in kind with a 3.52% increase.
When pressed about the recent developments, NBA commissioner David Stern responded that: “We realized we were all being selfish and unfair in our approach and that we should start thinking of the bigger picture. The rumors of Occupy Wall Street moving into Madison Square Garden made us really think about our effect upon the economy as a whole and where all those executives receiving their well deserved bonuses would be spending it this holiday season. We thought, what better place than Madison Square Garden? Also, after getting a call from sponsors we realized that not only had the specter of and NFL lockout put a gloom on the sports related economy, but an NBA lockout as well would be too much. We didn't fully understand our responsibility in delivering our product on time even if it is overpriced and watered down”
In response, couch potatoes across the country rejoiced and market participants did as well in anticipation of an all you can eat buffet for couch potatoes across the country: PZZA and BWLD responded well gaining 5.68% and 8.24% respectively while SAM gave cheers with a healthy gain of 3.41% as MSG finished the day up 10%.
Looking at some of the headlines this week I couldn't help but be reminded of the refrigerators I use to see littered with magnetized words displaced across the surface with the occasional attempt at haiku or limerick. Grab a salad bowl and toss in the the phrases “Worse week since” or “Biggest drop since” or “Fastest rebound since” and mix in some dates of the most notable market years like '29', or '32', or '33', or '74', or '87', and the ensuing article nearly writes itself. It seems this is the worst Thanksgiving week since '32' and not simply because the mystery shoppers are using pepper spray to gain an edge on their competitors!
Considering this is the worst Thanksgiving week in 80 years, it does give pause how much worse this week could have been if a day and a half wasn't lopped off due to the holiday. The Russell gave up 7.4% this week, closing at a near demonic 666.16. 639.85 now becomes a key price point as this was the August 9th low which held as the floor for the majority of the ensuing price action and as such will be viewed as support. The next price point that will be of significance is 601.71 as this is the price that has been construed as the market bottom and if challenged will weigh heavy on the market psyche like an anchor.
Of note this week is that pessimism has increased as indicated by the AAII survey showing and increase in bearishness by 7.8%, and in conjunction with this the overall health of the market is still showing deterioration.
Russel Weekly Chart
Primary
Secondary
$BPNYA
$USHL5
With the Market Monitor Primary moving bearish this week and New High/New Low continuing downward the preponderance of evidence continues to indicate a market ill suited for my style and horizon. With a number of indexes such as the Russel and NYSE approaching the bottom of their range and key price points coupled with a continued influx of news, my belief is that there is a lot of emotion playing out right now that has yet to become exhausted. These ingredients are a mixture for volatility and in this state negative surprises can result in disproportionate moves.
A good quality leadership stock in a bear market is like a camp counselor in a horror flick; generally the counselor survives in order to tell the tale and pass on the mythos of horror only to find themselves the first victim of the sequel. Looking over the landscape of leaders, many managed to escape the first down leg from late July into early August unscathed, but as the market appears to be deteriorating further, it is worth keeping an eye on these.
Stan Weinstein shares a method in Secrets or Profiting in Bull and Bear Markets entitled "As GM goes"
Four Month Rule: If GM doesn't make a new high (or low) within four months it is a signal that GMs prevailing trend is reversing.
When it completes a Stage 3 top and breaks down into Stage 4, it's time to worry even if a new GM high was hit last month.
When GM refuses to make a new high (or low) in tandem with the DJI and the other leading averages, it's an early warning that you'd better be alert.
His logic behind this is:
The market is not a democracy. The bullish and bearish votes that each stock casts toward the major trend most definitely do not count equally. The most heavily traded and institutional favorites matter far more... Of all these shakers and movers, there is one that you must always keep your eyes glued to --General Motors. Never listen to the message of this key stock in a vacuum, but when it flashes a major signal that is in sync with the majority of the gauges in this chapter, do not ignore it! pg 297-297
It's safe to say that General Motors does not wield the significance and sway it once had. There are new leaders that have emerged and clearly the most watched and mentioned is Apple. Not only is it discussed and defended with zealotry on message boards, chat rooms and social media outlets, but people are also willing to make pilgrimages cross country to where it all began or will wait in line for hours if not days to be the first to get a new product. In fact, recent studies involving fMRI scans have indicated that Apple has the same effect upon its followers as religions do among theirs.
So, while it is simple enough to replace GM with APPL, there are a number of other institutional darlings that should also grab one's attention. Stocks such as AMZN, BIDU, CMG and PCLN are note worthy in their own right. Given that many of these stocks managed to act well and stave off the first wave of clawing, how these stocks behave given the current market action will be telling. If there is another round of clawing, will these stocks survive the opening scene of the sequel?
My trading universe is dynamically generated, but has been consistently in the range of 2600-2700 stocks which constitutes a little less than half of the current Worden universe of 5778. Using one of the more common gauges of momentum, Price Percent Change 26-Weeks results in 352 above 0. If I wanted to get picky and reduce this list further I could remove the buy-outs, but this would do nothing to change the fact that 2286 stocks in my universe are negative.
As a budding trader, one of my goals has been to study market breadth from different perspectives to better pinpoint trading zones. Through numerous posts I've delved into various methodologies and measures to get a pulse on what the market is currently doing. With each study I've become better informed of the merits, nuances, pluses and minuses of these various indicators. At some point however it becomes important to take ownership of them and make them my own.
Having analyzed my trades and journals over the past month, I've increased my awareness of my trading style and the periods where I've had success and the periods where I've broken form. As I further clarify and hone in on my style and the strategy and tactics I will begin to execute, I've also filtered various market breadth tools through these methods to create a more cohesive model. My focus is locating periods of confluence between these indicators suggesting the market is healthy enough to take action.
Looking at the market this week I see absolutely no reason to be involved in trading what-so-ever. The indicators I use are showing confluence –to the downside. As a trader of momentum based swing techniques, the primary vehicle selection I use is small cap stocks. Considering this, the index that is of primary significance to me is the Russell 2000 as this indicates not only the over all health of the small caps, but also is construed as an indicator of a risk averse or risk taking market. A look at this index using stage analysis clearly indicates Stage 4 is in progress as price is below a declining 30 week moving average.
Russell 2000 Stage 4
Next, looking at a graph of the Primary and Secondary indicators of the Market Monitor, there is a jagged down trend on the Primary, and a cascading downward slope on the Secondary. As the Secondary is a measure of stocks moving over the past 34 days and with this bounce commencing 34 days ago, there is a high probability that this indicator will go bearish this upcoming week and if so, the Primary moving bearish is likely to follow.
Market Monitor Primary
Market Monitor Secondary
The 5 day NH/NL has continued to decline since peaking on 10/28. A decrease of highs suggest there are not participants willing to buy dearer, so it makes little sense to buy if I won't be able to find sellers later.
$USHL5 11/18/11
One last technical indicator I will be using from this time forward is the $BPNYA, which currently flashed “Bull Correction.”
$BPNYA 11/18/11
Given that the market moves of 1%+/- are the norm, the current market is acting quite “emotional.” As I've come to understand with greater clarity, emotional states can lead to unexpected outcomes. This chop is not the environment that I choose to trade and given my current read of the indicators I'm using, the market is not in cadence with my methods and as such sitting on the sidelines is in my best interest until they begin to firm.
Over the past year I've accumulated nearly 4 volumes of hand written journals, coupled with a daily market journal. I don't have to rely upon my memory alone to recreate the accounts which is beneficial since having a series of notes in real time has been useful to envision with better accuracy what exactly I was thinking or feeling at the time. Themes clearly stood out.
I expressed in a recent post a disheartening experience: going through my journal posts and noting the same theme from a post a week previous that extended a run on sentence from my second journal entry a year previous. I wasn't completely ignoring the issue as evident by the numerous entries, however I was clearly –perhaps intentionally –oblivious to investigating further and/or modifying the behavior regardless of it being in my best interest to do so. I wasn't so much blind as myopic since I could see it – however fuzzily, but...
Upon repeated readings a disturbing thought evoked, I was a victim of an internal domestic dispute and each hollow promise took on the intonation associated with the phrase, “I promise baby, I'll never hurt you again!” Suddenly my journals felt like a never ending episode of Cops projected on my eyelids and I couldn't find the remote to change the channel. For a period of time I was dejected and demoralized, but I realized this state of mind would accomplish little and that if ever there was a time to change this behavior it was now.
It was during this moment of perturbation that I decided to rephrase the questions I asked myself. It isn't so much about asking the right questions since this presupposes knowing the corresponding answer, but merely asking any and all questions because it can not be known which one will be jarring. Through asking questions it became clearer that if I simply took the time to address what I neglected to begin with, and it wasn't a very difficult task really, then not only is a burden lifted, but the knowledge gleamed from this process could be applied to other behaviors that needed to be altered as well. Instead of being blinded by the problems like sun through a windshield, they'd begin to tip over like dominoes.
Proceeding through each journal I began to maintain a bucket list of key words and phrases, as well as core ideas and concepts that repeated throughout. There were plenty of “promises” clustered through the pages, the usual suspects: trade the plan, keep the stops, exit at profits, don't do this or that again, why the fuck did I do it again; page after page of discomfort and pain like stick figure illustrations found in the corner pages of a grade school text book that when flipped animate.
One of the values of journaling every day is that unbeknownst to be at the time I was in essence building a composite of myself –if I was willing to listen. Since each book is specific to one task at hand- trading and the frame work thereof, I have built over time a self-character and have pinpointed quite clearly where my strength and weaknesses are. From this, I am better informed of where my attention should be drawn and more importantly have a better understanding of my trading persona. From this I can now become better specified in what works for me, what methods and strategies to employ, and how to build working methods around my personality that mesh and feel like a natural extension of who I am.
It is said that insanity is trying the same thing over expecting a different outcome, however when the outcome results in a light bulb it is called genius. Perseverance as exhibited by the likes of Edison is considered virtuous, but the same thought repeated ad infinitum in a note book –neurotic compulsiveness. Perhaps this is a legitimate differentiation, and perhaps in doing the same thing every day I'm skirting the thin veil of insanity, but perhaps one time I'll have that AHA! sensation after a thousand disappointments as well.
Approximately a years worth of journals
I thought I'd share some of the thoughts that have come to my attention through this process:
First go through and create a bucket list of what repeats time again. Consistent repetition of an idea signifies importance.
Identify and separate habits and problem spots and prioritize by those that can be broken and/or managed the easiest and are the most controllable, even if it is something as simple as not getting enough rest, or poor diet, or exercise. Resolving the simplest will be an accomplishment, and build skills and insight on dealing with others, and perhaps some might be instantly resolved or simplify from there forward. It's important though to complete one before moving onward.
Research as thoroughly as possible the problem spots that time and again manifest in the journal and are the most difficult to break. Find skills to resolve them, study how others have resolved them or reach out and ask someone else.
Categorize the consistent themes of trading ideas and concepts. Build your personal composite trader. What style is that trader drawn to? What captures that traders imagination? What comforts or discomforts that trader? Ask as many questions of who that trader is and then ask questions about the trader you are now. Do they mesh or are you choosing to be a trader you want to be and not the trader you are?
The move from the 10/02 bottom began to sputter 8 days in and over the past month another range has formed. Moves of 1% to 2% up or down are the daily norm, yet most indexes haven't even budged 1% total during this time.
There's a market maxim: Bulls make money, Bears make money, but P.I.I.G.S get slaughtered. The narrative over the past few months has been headline driven by news from Europe, but this isn't anything recent as “Greece” has been the word for over a year now. Not to be outdone, Italy dominated the financial headlines thus far this week, and perhaps next week Spain sheepishly will regain the spotlight. I have no pretense I can make heads or tails of this, but one thought did pop up today as I found myself looking at some recent earnings as well as the SPX YTD and recalled a passage from Tom Dorsey's Point and Figure Charting.
The market of 1994 has been dubbed the “stealth bear market.” The indexes were holding up, coming in even for the year, but the sector rotation in the market was unbelievable. As one sector was getting hit, another was recovering from its sell off; the effect of this was to cancel each other out in the broad market indexes. However, individual stocks and many investors did not fare as well.
Looking at the SPX, YTD -1.37% as of today. Coming into the close of the year the index is basically where it started the year.
SP Year To Date
What struck me from observing earnings this season is how swiftly those with poor earnings or perceived poor earnings are getting punished. This theme is evident today from the charts of ROVI and NILE, both taking 30% cuts. Whether or not the 2011 year closes out analogous to 1994 with earnings playing the predominant roll remains to be seen, but the tone is being set.
Within the time it took my mind to register something was amiss I felt that queasy feeling in the pit of my stomach I usually experience a time or two as a boat pitches from a turbulent sea. Prior to this I was, not unlike usual, searching for something during a time when I shouldn't have been and I was conscious of my thoughts and reminded myself, “Didn't I just say I wouldn't distract myself?” The impulse gripped me however which I at least found entertaining for a moment because it highlighted exactly what I was addressing, only this time I was aware of the act itself and not letting it go without acknowledging. As I was admonishing myself for this modes transgression I saw the Java splash screen and thought, “This can't be good.”
As if that wasn't enough of a sign, my browser crashing and the dozens of pop up alerts layered like pancakes followed by an alert that my drive was malfunctioning and informing me to click “Yes” if I wanted to fix this heightened the sinking feeling. I thought against that and did a quick scan which alerted me to 4 trojans which I quarantined and restarted. I was thinking I was in the clear as I rebooted but that feeling didn't last long as everything came to a screeching halt when the screen went black and a cursor began blinking in the upper left corner.
After another reboot and letting some minutes pass I knew I was screwed on this and it was simply a matter of dealing with it. As I dual boot on my Mac Book, I booted up OS X and took the time to do a complete system back up before opening up the patient hoping the guts wouldn't spill out. This took over 4 hours, but at least I managed to back up all documentation on both partitions. After this I spent an hour researching the problem and came across a number of solutions that I proceeded to move through one by one with each step getting closer to the least desired result, completely hosing the partition and reinstalling everything.
As hour after hour passed and the sun set I became increasingly frustrated and more despondent. I managed to resolve the blinking cursor, only to encounter another stumbling block- “missing or corrupted hal.dll.” In researching this I found out it is a common problem with dual boot Macs so I figured with 100s of hits there should be a one size fits all problem. Yes and No. There were a few solutions but most did involve a complete partition reformatting. After spending more time not succeeding at this and questioning how much more effort I wanted to put into this I finally decided to wipe and start over.
The irony does not escape me that Hal would have something to do with this. Nor does the irony escape me that what I was focused upon for the past two weeks manifest itself in a computer malfunction, after all this is something I know much better about and yet... I still don't do anything about it. I know periodic back ups and I know up to date virus protection and the periodic disk management and hard ware diagnostics are important but I continually opt to be neglectful of this. This isn't even the fourth time something like this has happened to me- for whatever reason having MBRs swiped, hard drives click to death, mother boards fry, and the occasional complete system collapse, I obviously haven't found these negative events significant enough to apply best practices.
The serendipity of this system crash carried weighted significance this time because it uncannily coincided during a period where I was documenting and researching exactly this phenomena –the gap between knowing and doing. I was in the process of starting a series about what I have come to understand about this disconnect inspired from going through my trading journals and coming across a post that I found disheartening. It was my second journal post and I felt the knife twist in my belly as I recognized it was virtually the same post from a week previous.
Things worsened as I noted this crept up time again through my post and I documented a consistent theme, tone, verbiage, and insight that permeated this body of work until I felt like I was in Borges' “Library of Babel.” The sheer repetition page after page after page had gone unaware for so long I felt like staring at a spring leaf wondering if I'd notice the moment of discoloration the fall brings. Also, it wasn't like I was unaware of this, there were plenty of post where I noted my previous notes and that this was beginning to be a narration of neurosis but even that was not enough to make a behavioral change.
Making behavioral changes has become the theme I've committed to over the past few weeks, absorbing as much modern research as possible and documenting points that are significant to me. Having gone through my past journals and trades I've come to a realization that I don't know what I am doing correctly, but what I am doing erroneously is a clear as Bart Simpson and a chalk board.
“If I knew then what I know now I would have...” What would I do? Now is my opportunity, an opportunity to start with that blank slate and choose what is important for me to rebuild. The confines of my habits have been broken. I can no longer boot up and move from A through Z before I even realize I've done just that. The dozens of TC2000 V7 scans I have and don't even know why any more but found myself attached to regardless because one day they might prove useful –gone. All the book marks I'd cycle through on my browser and I didn't know why –gone.
What at first started off as a soul crush morphed into a lightness. Yeah, it's a pain in the ass rebuilding, but now it's a clean install and a fresh environment devoid of habituation. OK, it's not like I've lost all my scans and book marks, they are backed up after all, but it's an opportunity to simplify and rebuild my user space around a behavioral change of intention and action. I've become accustomed to a process flow that was counter-productive and was beginning to make key changes to my process loop, this simply expedited the situation by force.
A number of my past post have been about market breadth and I've been looking for a new topic to approach and this seems like the time to do such. It's my plan over the upcoming weeks to begin a series of post relating to topics involving modern neuroscience and the light it sheds upon trading and in turn shed light and increase awareness of my own knowledge about a subject that I've come to realize effects me much greater than I originally believed.
