Ships Ahoy!, Part 2

A while back I wrote a post relating to what I was seeing in the shipping industry, Ships Ahoy! Thus far my analysis has yet to come to fruition, but I still believe this is a sector that could very well begin to make a sharp move sometime in the near future. Over the past few days shippers have continued to pop up on the largest percent gainers list and a number of them are at or near their 52-Week high, even in a weakening tape. It's obvious from looking at the monthly charts of a few shippers that they're at or near historical lows. When an industry gets this depressed and neglected, should there be a change of perception about its future potential and it it catches a bid and momentum kicks in there will be opportunity for out sized gains.

DRYS Monthly

DSX Monthly

PRGN Monthly

In part what is beginning to catch my attention again is the number of shipping related stocks that are near their 52-highs.  Of the 47 stocks in the Worden Shipping Sub-Industry, 27 are within 15% of their 52-Week high. 

Along with new highs, I'll be looking for confirmation on the Baltic Dry Index which is very close to breaking a year and a half long range.

$BDI

In anticipation I've added the following list to Finviz and will continue to watch stocks that are up 100% over a 6-month to year period to weed out the strongest in this sector along with scanning for those that are showing higher volume on the monthly time frame.

Potential bounce, but...

The downside gap from Thursday has continued to follow through, stretching the $SPX to potential exhaustion on the short term time frame as evident by the index being extended through it's lower Bollinger Band.  Further, this breach is under the much watched 50 period moving average, a key psychological barometer for many market participants.

SPX

This potential short term exhaustion is also showing up in the McClellan Oscillator which has a current reading of -270.24.  Periods where this is below -300 have a tendency to be a zone where bounces occur.

T2106

However, the percentage of stocks above their 40 period moving average as shown by Worden's T2108 is at 31.  As indicated by the lower green line on the following chart, the more sustainable and longer duration moves occur when this drops to below 20, but below 30 also has a tendency to be a zone of exhaustion where bottoms form as well.

T2108

Through much of this year the weakness has been short lived and only a few percentage points from peak to trough before the dips were bought.  The years largest correction thus far has been slightly above 5% on the SPX.  So the question I have is will this dip mimic the one in February and April or be more akin to May through June? I suspect the later.  Ideally I'd like to see the T2108 dip below 20 and further market weakness occur before a continued move higher.  A rally from the current levels will most likely be led by fewer participating stocks which increases the challenge of being in the right stock at the right time.  A broader based longer duration move is just simpler to trade.

Be Calm and Mind the Gap

Thus far this year every market hiccup has been met with hyperventilating and each dip has been bought in short order punishing early shorts and exiting longs. With this recent gap down the psychology has once again become a battle of: is this it or buy the dip? Thinking in terms of the market exerting the most pain upon the most participants, what scenario might likely cause this? Given that buy the dip has become conditioned, what scenario might cause maximum pain: dip buyers returning, shorts sitting sidelined, and the market continuing to erode comes to mind. But it's difficult to see this with conviction when at a moments notice the Hand of Bernanke can sweep across the market like Maradona's Hand of God.

Through 2013 I've noticed I've become conditioned to this and to ignore market breadth and divergences because they haven't really mattered. Each FED kerfuffle has been met with FED assurances as they continue to inject the market with steroidal liquidity where the long ball going yard has trumped the underlying basic fundamentals of market mechanics and structure. What this has reinforced to me is that market structures modify and that not everything works all the time. It has also made me more mindful that when it comes to the utmost rudimentary basics of market participants, not much has or will change for regardless of what the influence upon the market is –there will always be something –because it's the reaction to it and recognizing the nuance of it and being able to plan accordingly that will continue to matter.

What this has also affirmed is that the market is a constant testing ground of one's style and method, process and discipline, especially when something is not working in expectation or according to historical precedent. There's the constant lure of style drift or chasing the tail mentality to mold to the flavor of the month and what is working today.

Be calm and mind the gap and think in terms of not what this means about the market, but what this means about you as a participant in the market and what you do from here.

The Slap Heard 'Round the World

Nobody knows better than me. This statement may come across as hubris, and when it comes to life I fully admit this is not completely accurate; however, when it comes to trading and putting up my own capital this egocentric statement is closer to truth than fiction. The problem is that I don't always know any better and sometimes when I do know better I don't necessarily act any better. Where this weakness has become glaringly obvious is how I interpret and react to news events.

Recently I started thinking about a number of different news stories and the effect they had upon my decision making process and subsequent actions. More often then not I found myself on the zig instead of zag treadmill. What I've concluded is that I've given too much credit to folks who get paid for their ideas or the number of words per article instead of what truly matters –market reaction. I've even been seduced by the opinions of those who have more experience than myself and those that have shown a track record of taking money out of the market, but what I've ultimately decided is that as someone who trades their own capital, I'm the only one who knows better.

A story I have gone back to and reviewed has been Greece. The reason I have done so is that I was reminded of Greece because I've no longer been hearing about Greece. For a period of time this was the only story discussed and it was becoming a very negative one. Where I last left off before turning away from the subject in disgust was when the banter began to become sophomoric political theory verging on xenophobia. When the story started to become about black shirted jackbooted thugs romper stomping the streets of Athens I had reached my limit. Would Greece really go down that road?

Then there was this:

Clearly the answer to me was becoming yes, Greece was going down that road. But then an odd thing happened. That slap heard round the world coincided with the Athens market bottoming and moving up 100% trough to peak. Funny thing is, I don't recall seeing this in the news at all. With the exception of the fear published about a run on Cypress banks, it was as if this story just disappeared without a trace while the index quietly doubled.

$ATG

As a market participant it's crucial to keep an open mind and be vigilant and keep on alert and focused for opportunities as they arise. Sometimes these happen to be counter-intuitive and some times these happen to come when there is literally blood on the streets. Sometimes these happen when everyone forgets what is was they were worried about to begin with.  Now that Greece is back on my radar the follow up for me is, is there opportunity and a potential theme playing out that should be paid attention to going forward?

Float Turnover Analysis

On any given day there are only 5 pieces of information given by stocks, the open, the high, the low, the close, and volume.  This is the skeletal structure of the market from which numerous calculations and abstractions have been fleshed out as a means of giving traders a clearer view and understanding of the underlying structure and essence.  It’s almost as if there is a constant pursuit to get further and further away from price and volume, but the farther one travels away, the smaller the observed object becomes until eventually it disappears from sight altogether.  

For the past year I’ve been increasingly focused on price/volume relationships and what I’ve found bemusing is the often times polarizing debate around the significance of the only two pieces of information the market gives.  There’s an argument that only price matters since only price pays and on the flip side there are arguments along the lines of price without volume is suspect.  There’s a number of variations on this theme, but the resoluteness with which each side speaks comes across as if the chicken or the egg has been solved.

So, which is it?  One of the few structural edges in the market is momentum.  It has been shown that by calculating a price rate of change over 3, 6, and/or 12 month periods and ranking these by baskets, that the top 10% will outperform the next 10% which outperform the following 10% etc... From this we can state that in order to have an enduring edge in the market all one needs to trade is price.  

However, the old adage that price follows volume can also hold true as well, but from my perspective in order for this to be more effective price must be lacking momentum in the first place.  This makes sense empirically for if price is already rising and the momentum effect has already kicked in, then this in and of itself is sufficient for expectation of higher prices in the near future, whereas if price is in neglect and volume historically anemic, then a spike in volume can put one on alert that there is a potential supply/demand of the underlying stock occurring as stronger hands begin their accumulation period.

Two recent examples I’ve noted have been WLT and FB.  Walter Energy has clearly been in a downtrend for the past three years and is in the range of historical lows which is an indication of neglect. Currently price is showing no signs of a momentum shift, but it may be showing signs of a supply/demand imbalance.  A glance at the weekly with attention on volume suggest this.

WLT

Facebook has been a pariah since its IPO, but any left over disdain for this stock should be thrown out with the bathwater.  Since its debut, price continued a descent which erased nearly 60% of the value over the next 4 months.  There were some indications that a bottom may have been in place around the $18 range, but the November 2012 momentum phase stalled and the action since has been mostly range bound.  On July 25, an earnings catalyst propelled price 30% on volume that was about 20% of the float.  In conjunction, momentum on a 3 and 6 month period kicked in as well.

FB

There’s a concept called float turnover ratio analysis which is the study of volume relationship to a stock’s float and the amount of turnover in a given period.  One of the inherent problems with this is that it can’t be easily replicated.  I’ve found no public source of information and my scanning programs do not allow for a stock’s float to be used in calculations.  Seems to me the only option is building and maintaining a database, but the time consumption of daily maintenance and upkeep as well as accuracy of source has been a hindrance, so I’ve opted to make due with what I have.

At the end of each month I run a scan that looks for the highest volume over a 12 month period, and at the end of each week I run a scan that looks for the highest weekly volume over a 2 year period.  One of the things I’m looking for are the outliers that stick out like sore thumbs and come close to or eclipse the stocks float, especially when followed shortly thereafter by momentum.

Weekend Review 07/06/2013

A holiday shortened light volume week ended with the Russell 2000 at an all-time-high on a closing basis. Within one week I've noted a sentiment change from a market undergoing a counter-trend bounce with a high probability of failure to a market with small-caps outperforming but the volume is weak so should this rally be trusted. In some respects, hasn't this been the market of the past four years since the March 2009 bottom? There just seems to be a rush to the exits mentality of which I've noted I've suffered a number of times as well which thus far has been proven unwarranted.

Two things I found noteworthy this weekend has been the relationship between the Russell and the SPX. The market started this correction on May 27^th but the Russell had begun to show outperformance to the SPX well before that which has continued to this day. Additionally while the $BPSPX and $BPNYA are in Bear Confirmed on their respective point and figure charts, the $BPCOMPQ is currently in Bull Confirmed. From my point of view these are the indices that matter most and both are indicating stregnth.

RUT:SPX

$BPCOMPQ PnF

Two questions I asked myself this weekend are: How are the stocks that have the dollar volume to suck the wind out of the market's sails and drag down the indices behaving? Are they holding up well and trending, ranging, and breaking to new highs, or are they looking top heavy and showing decaying price patterns? The second question is how are IPOs and small caps performing. In going through the charts and the all-time-high list a number of institutional darlings are at their peak price, such as AMZN, CEEE, and WFM. Additionally there are a number of IPOS that are holding up well and are near or making fresh all-time-highs, such as BLOX, ANGI, AMBA, TSLA, NOW, DWRE, YY, YELP and SPLK. Some of these names are despised stocks that are heavily shorted and considered very richly valued and overpriced, but this has yet to be confirmed by the market so as long as this is the case I view the current state as positive because the story stocks are doing what they do during bullish phases which is punishing early shorts until they capitulate.

Unless and until there is evidence of selling either indicated by breadth or crowded stocks being exited en mass and IPOs starting to crumble, my current view is that the story the market is telling is a happy tale. Let the stocks explain how the headlines should be interpreted.

The Observer Effect

If I were to answer why I started to blog about trading I would begin with where I left off long ago, the desire to write. Through trading I wanted to satiate an appetite that was better left suppressed and hungry, my creativity. I believe being clever and coming up with something novel is a consistent theme in the early stages of trading and instead of pursuing the path to riches, the highway of brilliancy is sped down like the autobahn. I thought for a while I could come up with some unseen nuance to the market that would give me an edge that 10,000 Ph.D.'s monkeys with 10,000 supercomputers had not found. Eventually rationalization set in and I realized this energy was better spent elsewhere and it was time to return to writing.

I thought blogging would be a disciplined process of journaling, something that I could do for enjoyment as well as being a trail of bread crumbs that would lead me to the fruits of my labor: some edible and some rotten. One of the difficulties I've found in penning on paper is the inability to search key words or find key graphs and images that tell a story. I've tried to compensate by using different colored pens and drawings to highlight important sections to return to but I honestly rarely do. In addition to a number of sketch books inked from front to back there are thousands of files on my lap top to peruse as well, but often these documents do not see the light of day. It's too easy to stow these away as if they were a legend of antiquity, only to be opened for ritual or ceremony. By publishing some of my notes and thoughts publicly there would be an audience that at anytime could access them which gave me the sensation of some exposure. I felt that my ideas were no longer under lock and key rattling around my skull but open to rebuttal and feedback.

There were some unintended consequences of all this as well. I began to suffer the observer effect. Besides simply expressing some ideas I started to become those ideas, or felt responsible enough for those ideas that even if I changed my perspective or view a few days later I had an obligation to abide by them regardless. I was becoming self-aware of the process itself and seeking validation in the number of responses or hits for encouragement to continue to post at all and if so, to post what was getting the most views rather than where I was heading as a trader. It was becoming a self-referential cycle that was actually stagnating me somewhat as I was morphing into a composite of my most read pieces, some of which were mostly experimental or merely thought exercises.

What this led to was a decision to stop blogging for a period and take a step back. To stop journaling as much and take another step back. To stop thinking so much and take a further step back until I was a few yards outside myself observing the observer. From this vantage point I started to turn the self-awareness into mindfulness and instead of constantly writing free-flow association of the process of me doing, I merely jotted down a few notes daily of what I observed myself doing and what was most significant to begin changing. Instead of having an essay I simplified into haiku form and posted an index card next to my lap top as a daily reminder of the two to three trading task that were most important for me to instill into habit over a 28 day cycle. Everything else was stripped out and streamlined so that these few task took precedence above all else.

In the end I realize there is little difference between what I observed from what I've been writing down over the past couple of years. The primary distinction is that one is through my eyes and the other the projection upon my eyelids. One vision was trying to tackle everything imaginable and the other is trying to resolve what is manageable. One is who I am in general and the other through cohesion and conciseness. Sometimes moving one step forward requires three steps back.