Slim Pickings

Since January I've run the same scan 5 days a week to generate a watch list to peruse before each trading session.  From this list I use a few filters to whittle down to a manageable number to focus the most attention to after the opening bell -usually 6.  I've found selecting my stocks in this manner to be beneficial because my scans are based upon known anomalies in market structure which allows me to quickly move through my universe and select stocks based upon probability stacking; additionally  it helps keep my subjectivity down to a minimum.  

Over this period I've also noted another benefit that was not obvious to me at the time -increased market awareness.  In repeating the same scan consistently I've noted the differences when my list is robust with a plethora of opportunities and when my list begins to dry up like a lake bed.  Currently my list is looking like it suffers vitamin deficiencies.

24

What I have to start this week off is a list of 24 and even that is misleading as some of these are buyouts.  Given that I generate this in a quantitative fashion, other than the criteria of the scan there is no interference on my part in the generation of this list.  What this in turn allows me to do is have a stop gap to my general market bias so when my mood becomes too bullish or bearish I can use this process as a filter.  Coming into this week my general bias is neutral learning towards negative and currently my watch list isn't disagreeing with this sentiment.

Weekend Review 04/20/12

Looking at the Russell chart this weekend a couple of patterns popped out:

1. The recent price action is looking like a bearish flag/pennant and
2. The longer term pattern going back to February is beginning to look like a head and shoulders topping pattern.

Russell 2000 04/20/12

The Russell in general has underperformed and continues to vacillate within a 50 point range. During this time the NDX has clearly outperformed which gives two key pieces of information: The general attitude of market participants has been risk off and money has been flowing into an increasingly fewer group of stocks resulting in some very crowded trades.

Three of these institutional quality market leaders AAPL, CMG, and PCLN are beginning to send some price action and volume warning signs. AAPL in particular is worth noting since it has pulled back 10% from the APPL 1K calls and is approaching its 50MA which is a psychological level of support to many market participants. In the methodology of William O'Neil this is a key moving average which indicates institutional support or disinterest so from this perspective it will be worth noting the reaction to this level. CMG and PCLN still have a distance to go yet.

AAPL 04/20/12

CMG 04/20/12

PCLN 04/20/12

One point of interest this week has been the divergence occurring between the indexes and the number of 4% break outs/downs. I rely upon this indicator to give me a daily context of the buying/selling interest and over the past couple of weeks with the exception of one 406 4% down day and one 267 4% up day, it has been muted on both sides.

4% Break Outs to Break Downs

Looking at the NASDAQ over this period, there have been a number of 1% days to the positive and negative as well as volume picking up above the 50 Day average on a number of these down days.

NASDAQ 04/20/12

 This leads me to believe that under the surface there has been greater selling occurring but it has done so in a more stealthy fashion. There hasn't been a rush to the exits mentality and the distribution has been occurring in drips- not entirely noteworthy at the time but adding it up still results in a cup of coffee.

Additionally the positioning over the month of April has become more defensive as indicated by sector rotation with the ETFs holding up the best over this period being Consumer Staples, Utilities, and Dividend paying stocks.

ETF by Relative Strength 

   

One thing I've begun to focus more upon is probability stacking. Looking to be in the market during favorable situations and using market mechanics and anomalies to extract an edge. Even so, I'm correct in my trades approximately 54% of the time -basically a coin flip. However I've documented in market conditions like the current I am well below this which means that when the market direction does flip I need to be correct much more than 54% to return to balance. Trading is challenging enough without putting one's self in the hole.

The current conditions are trend less, basically a ghost ship floating along the Pacific. It's been a rotational market and one not exactly conducive to swing trading because as soon as you think you've caught the hot stock in the hot sector you get flushed as the money moves elsewhere. It's been a market of  “Here today, gone tomorrow.” So while a number of stocks continue to set up well and break out one always has to be aware of the Siren's song and I'd rather sail a more quiet sea.

Rhymes with "Double" For $200, Alex

Currently there are 5788 components in my Worden “Common Stock” watch list. I run a simple scan on this daily to check the number of stocks up 4% with volume that must be higher than yesterdays and above 100K. 158 met this requirement today. Given that the NASDAQ was up 1.8% this number is very anemic. Further, of these 158 only 8 had dollar volume greater than 100 million.

Looking at the current leg of the rally that started from the 12/19/11 pivot, volatility as expressed by market closes of 1% or greater magnitude has been increasing in frequency over a much shorter time frame since the peak close on 03/26. Trends tend to have their greatest instability in the beginning of a move and at the end.

Volatility Over Time Comparison

I'm still of the mindset that there is more room to the downside and anticipate a correction on the NASDAQ of 7-10% overall. Should this scenario play out I'll then focus on the signs to dip toes back into the water.

Top 50 Stocks by RS as Compared to the NDX

The following is a list of the top 50 stocks with 100K+ average daily volume over the past three days ranked by relative strength to the NDX from the time period of 02/03/12 through 04/02/12.  Included is Volume(Dollar), Price Per Share, % increase over this period, and proximity to 52-Week High.

Top 50 by RS to NDX

Weekend Review 04/13/12

One characteristic of US equities markets is that tops occur over time and due to the vicious nature of sell offs it's better to be in a risk reduction mode before the cascading of selling kicks in as participants capitulate. Tops also have a tendency of exhibiting a multitude of complex chart patterns such as rounded tops, head and shoulders, broadening top, diamonds etc... A combination of these factors amongst others makes pinpointing the apex of the top almost impossible.

The main focus of market breadth should not be to obsess and pinpoint the exact top, but to have a general understanding of the formation of topping action -signs and characteristics -then having a plan and risk profile to circumnavigate the churning waters. During these times capital preservation through money management and a focus upon reducing account draw down becomes imperative. Currently the market looks quite sickly from an overall breadth perspective and has been under duress since February.

For this weekends chart porn I thought I'd pan out a bit and address the move over the past two months as a breadth model for future reference.

$USHL5 04/13/12

$RUT to $NDX

$COMPQ 04/13/12

Primary Ratio Differential

Secondary Ratio Differential

10 Day Breadth Buying - Selling

10 Day Breadth Ratio

What begins to stand out is that breadth peaked in February and has shown signs of erosion since.  What also stands out is that the Russell was range bound during this period while the NDX continued 10% further.  This decoupling was noteworthy given that through the close of December there was a historical high in market correlation so this was clearly a divergence.  Additionally it's been two months of breadth deterioration and the Russell which moved the least during this period took the brunt of the damage while the NDX has pulled back the least.   

This week earnings begin to increase and expectations are low so there should be plenty of surprises.  Whether or not these individual stock catalyst will begin to stabilize the general market or whether or not macro factors will continue to influence a currently jittery market remain to be seen.  This may end up a "lost" earnings season with negligible impact upon the indexes.

Bull Trap?

Price/Volume Divergence

With the current price/volume divergence coupled with eroding breadth, another sharp sell off may be on the horizon.