Monday, August 22, 2011

High Correlation and Downward Momentum

History never repeats itself but it rhymes
-- Mark Twain

Talking about some statistics of the market, here are some good facts to know from Bloomberg

  • High Correlation

Stocks in the S&P 500 are moving in lockstep with each other by the most since at least 1990, a sign that the market's biggest retreat in three years may not be over, according to MF Global Holdings Ltd. The average correlation coefficient between the 500 companies and the index was 0.8268 on Aug. 18, using 60 days of data, according to MF Global.

High correlation is usually the case in a bear market, when investors are liquidating equities as an asset class, Craig Peskin, co-head of technical analysis at the New York- based firm, wrote in an e-mail on Aug. 18. In a bull market, when investors are differentiating, we see low or falling correlation.

Correlation among S&P 500 stocks exceeded 0.78 twice previously, according to MF Global. After the first time, on Dec. 1, 2008, the S&P 500 declined 17 percent to a 12-year low on March 9, 2009. Correlation peaked again on July 26, 2010, when the benchmark slipped 6.1 percent over the next month, data compiled by MF Global and Bloomberg show.

  • The momentum of downward spiral
History shows the S&P 500 may keep sinking. The index plunged 16 percent between July 25 and Aug. 8. The eight declines of that size over similar amounts of time since 1928 led to additional losses averaging 17 percent, according to data compiled by Bespoke Investment Group LLC, a Harrison, New York- based research company.

Sunday, August 7, 2011

Tuesday, August 2, 2011

The Case of a Bear Market ...

For all the hoopla in the stock market, 2011 has been an extremely choppy market. At this writing, S&P 500 has gone no where since the start of the year. However the time is finally ripe for a bear break ...

In my last market missive, I talked about some dangerous signs pointing to market internal deterioration, let's review what has happened since May 15, 2011.

Nasdaq made a nominal high of 2887.75 on May 2nd after the relief rally from the Japanese earthquake and tsunami disaster. The high surpassed the 2007 Oct high of 2861.51 (It is simply eye popping to watch how powerful Fed could lift all asset classes by its massive influx of cheap money to the market). From early May to the middle of June, the Nasdaq dived 10% due to the European mess on bailing out troubled Greece. At the middle of June, the Greece problem was put aside and the anticipation of good corporate 2rd quarter earnings started the summer rally in earnest, with some big multi-national US corporations reported solid numbers, including IBM, GOOG, AAPL, BIDU etc. Here comes today, as the debt ceiling debate is over, this market is yet again in a critical juncture, where is it heading? The indices don't tell a full picture.

One striking fact about the last 5 months' market activity, shown in the above Nasdaq picture, clearly demonstrate repeated heavy selling from the institutions. Heavy volume sell off from the top (early march), followed by low volume rally to new highs (Mid March to end of April), followed by another boat of concentrated high volume liquidation (May to Mid June), followed by low volume summer rally. This pattern can be seen in many stocks and sector ETFs, e.g. oil ETFs, XOP, XLE, OIH; metals and ming ETF XME; industrials ETF xli etc. Repeated high vol sell off followed by low vol rally points to market topping process. Smart $$$ is leaving the market.

The internals of the market is rapidly deteriorating. The above picture shows the percentage of Nasdaq stocks above 200MA for the last 3 years. It is clear that the number of stocks participating the market rally since March 2011 shows strong negative divergence. With more and more stocks breaking below 200MA, the indices are only a few percent below their all time highs. What is holding up the market? One pillar (or the single remaining one should I say?) of the strength comes from some big cap tech stocks, AAPL, GOOG, BIDU, IBM, AMZN. When they finally start to top (they have yet to show signs of topping), the flood gate will open.

Looking at the market sectors, financials (XLF) and Semi conductors (SOX) are mired in their bear land; Industrials (XLI) finally breaks down last week. As the pillars of any bull market, these three areas are pointing further market weakness to come.

On the growth stock land, the whole cloud computing stocks are gone (look at RVBD, ARUN, APKT, FFIV, VMW, CRM etc); Some small innovative or niche market growth stocks from the March 2009 bull market are taken to the woodshed (e.g. OPEN, ACOM, PAY, etc). There are some selected retail stocks targeting the American affluents (and a few medical stocks) are still holding up (e.g. LULU, CMG, GMCR, FOSL, TIF, TPX, HLF, ULTA etc), however the names are getting thinner and thinner. (These stocks are yet another fact to know that those rich are less affected by this rapidly polarizing society where poor becomes poorer and rich becomes even richer ... how to protect your family and kids from this wealth zero sum game? learn to invest properly is certainly one way !!!)

How is the market sentiment now? No bears, the latest Market sentiment survey continues to show more bulls than bears, bulls 50%, bears 21% which is a remarkable contrast to Sept 2010, where bull/bear ratio is 40% bears to 30% bull.

As I went to an IBD meetup here in the bay area on late July, 2011, more than 60% of participants are bulls and one bullish argument they constantly cite is the fact that the average bull market length is 3.8 years and this bull market is only 2.3 years old and also the fact that we are in the 3rd year of presidential election which is usually bullish.

Let's look deeper into the length of the bull market. This article was written in Jan 2011, so the current bull market length was shown to be 1.8 years.

Here are some important fact to know, as of the last bull market of 2002-2007, among the 15 market cycles from 1930

  • The average duration of bull markets since 1932 is 3.8 yrs (median of 3.6 yrs)
  • 80% of bulls lived past their 2nd birthday.
  • Barely half saw their 3rd birthday.
  • The average gain of these past 15 bull markets is 136.4%; The median gain is 101.5%.
  • The last bull market lived less than 3 years is 1987 bull market which lasted 2 years 7 month.

We are now 2 year 4+ month into the bull market. Because the average bull market is 3.8 years long such that we don't have a case for bear market? NO, your conclusion is flawed, the distribution does not suggest you have a strong case.

As I am sitting here in caesars palace in Vegas attending the annual Blackhat hacker conference, I see some hackers constantly refreshing their browsers to read the debt ceiling news on Bloomberg as if the market's softness is purely due to the debt ceiling uncertainties. The fact is the market will go where it wants to go regardless what the solution of the debt ceiling is.

I don't know what will happen tomorrow or a month later. I careless about the news. The price, volume action at hand as of this writing on the indices, sectors, and stocks, however, point to an upcoming bear market.

Friday, June 3, 2011

Trading Like a Sniper: Blending Aggression and Self-Control

As I read the articles over, the "trading like a sniper" resonated with me so profoundly that I decided to make a copy and reference it here in my blog.

Traderfeed is a great educational site on trading psychology. I highly recommend it. Here is the full article on "trading like a sniper".

Trading Like a Sniper: Blending Aggression and Self-Control

In my recent post, I outlined how a trader's very achievement motivation can lead to "pressing": trying so hard to make trades happen that trading plans and rules are abandoned. This often happens when traders become frustrated with losses or slow markets and try to make up for the lack of results by sizing positions too aggressively or by taking too many positions. Traders press when they feel pressure, whether for profits, for action, or to achieve competitive advantage over other traders.

The result is a loss of self-control, as aggressiveness takes over and judgment takes a back seat. Successful trading may be discretionary or system-based, but it should always be rule-governed: controlled by basic considerations of risk management and opportunity. Indeed, this might be an apt definition of poor trading: when the need to trade overwhelms the need to preserve and add to capital.

One of my favorite posters in my office is of a military sniper in the field, peering out from ground cover. The caption beneath the picture reads, "The sniper's greatest weapon is a sharply honed intellect. He combines a mastery of stealth, situational awareness, ballistics and precision shooting skills into one of the most lethal weapon systems to ever strike fear into the enemy."

If the sniper became too aggressive and excessively bored with sitting in the field waiting for the right shot, he might leap from his cover and begin spraying the enemy with fire. Most of the shots would probably go wild, and the out-of-control sniper would quickly be located and mowed down.

No, the sniper waits for the ideal shot: "stealth" and "situational awareness" are essential tools of the trade. Being a sniper means combining aggression with exquisite self-control and judgment. It is controlled aggression.

Over the years, I've learned to trade like a sniper by not placing one trade after another in rapid succession. When a trade is concluded, I go flat and wait for a fresh setup. During the waiting time, I refresh my "situational awareness" (assessment of market conditions, my own condition), and return to my basic trading rules.

The idea is to trade only when I have an unobstructed view of the target. Everything else is waiting and preparing, staying low in a defensive posture. It's the time between those shots at the target that provide the self-control. It is difficult to press if you take the time to reassess, reload, and return to cover after an errant shot. With repetition, that reassessment and reloading become automatic: your default mode becomes one of self-control.

Plan. Trade. Reassess plan. Trade: It's a rhythm that combines the best of achievement motivation and aggression with the best of judgment and forethought. It's a beautiful feeling to plan one good trade, execute it to perfection, and then sit back and wait for the next opportunity. Any performance skill, honed and executed with precision, is a kind of work of art. I think the best snipers understand that.

Sunday, May 15, 2011

Is market going to break wide open this summer?

After more than two years of bear market low of 2009, the case is finally ripe for a significant market break this summer. Although I am not in the business of making market predictions, the dangerous signs are lining up and you should expect a perfect storm soon ...

Although the market indices, Nasdaq, NYSE, SP500 are lingering near the 3 year recovery high, the underlying conditions are not printing a bullish tape and some of them are outright bearish.

First of all, metals and commodities have rolled over. Metals, especially copper, usually lead market higher in recovery phase, and top ahead of the big board in anticipation of economic slow down. Copper peaked in February, which has since seen nothing but distribution. Copper has corrected 15% from Feb high, its correction has no signs to end soon. The climax run on Silver is another sign the commodity run for the intermediate term is over. The sharp run up of the silver and brutal sell off at the end of the April is a text book classic of the climax top, which usually takes months, if not years to recover in the chart world.

Secondly, the growth stocks, which always lead the market cycles are showing signs of topping out. One by one, growth stocks are rolling over, AAPL, BIDU, SINA, OPEN, FFIV, RVBD, SWKS, AAPL, GOOG. The few remaining ones such as PCLN, NFLX are all in late stage bases showing no constructive chart patterns.

Thirdly, defensive industries and sectors are leading the market which usually coincide with the market correction. Medicals, drug, health care, diversified services, chemicals are dominating the top ranked industry groups.

Market sentiment is also painting a bleak picture showing Bull/Bear ratio of 51%/18% in Investor's Intelligence survey, which is a remarkable contrast to Sept 2010, where bull/bear ratio is 40% bears to 30% bull.

History shows the third year of the bull market is usually choppy and difficult. Needless to say the uncertainty in this summer is already paramount: the end of QE2, the slowing of emerging economy, the possibility of restructuring of Greece debt, and incoming political battle on US debt ceiling.

Is market going to break wide open this summer? signs are painting a bleak picture.

Friday, May 13, 2011

I suggest you all to move your 401k to CASH -- perfect storm is brewing ...

After more than two years of bear market low of 2009, the case is finally ripe for a significant market break this summer. The dangerous signs are lining up and you should expect a perfect storm soon ...

I will write a thesie this weekend ... In the mean time, I suggest you take a very defensive stance on your money, espeically if you have a big stake in the market.


2011/05/12 09:39:10




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