TSP Trader

Starting anew and branching out

2010-06-18T11:07:00.000-07:00

After an extended absence from this blog (over 2 years), I'm posting one last time here.

Although it was easy to focus on just writing here about just the TSP funds, I have always had much broader investing interests: trading stocks, ETFs, and options. I enjoy reading many trading blogs around the web, and subscribe to several. I decided to take the opportunity to start my own personal investment/trading blog, calling it AbjectAvarice.com .

The name has a couple layers of meaning: the emotions of fear and greed drive the markets, and my style is to trade based on indicators of those (bullish percents, market breadth, and the like). I'm also trying to imply that both the motivations of fear and greed are not healthy for the investor. I'll be writing about how I try to profit from the market's gyrations while trying to overcome my own fallacies.

Please take a look - I'll be posting my current portfolio, as well as documenting my profits and losses.

Thanks for reading.

Put your money where your mouth is

2009-05-13T10:59:00.000-07:00

Initiated three short positions this morning. Looking at the big picture, it appears that technology and consumer sectors appear weakest. I looked at scores of charts, starting with the point and figure (P&F) charts to look for sell signals - then transitioning to the yearly charts to identify medium term trends and tops.

This was my list of worthwhile short ideas:

GD, EMN, STX, EBAY, GOOG, RIMM, JNPR, GSPMS, RL, INTC, GLW, VFC, NOK, VOD, PTNR, AAPL, DELL, PMTC, T, AVP, KMB, AMZN, NSIT, COST, LOW.

I then looked at analyst research to identify the weakest fundamentals of the group, and narrowed to STX, JNPR, PMTC, AMZN.

All four looked good, but the bid/ask spread wasn't as attractive for PMTC. I bought at the money June puts on STX, JNPR, and AMZN, with equal position sizing. Stops are based on short term trend reversal, expected holding term is to expiration. I'll definitely sell early if positions fall to former support levels (around a 50% drop!)...

Inflection Point

2009-05-06T20:46:00.000-07:00

The recent rally has surprised most investors. The bears were caught off guard - just as everything seemed to be going their way... The retail investors weren't ready - most just finished selling at the bottom and were too stung to jump back in. Many in the finance industry weren't expecting what we've seen - how many "experts" have you seen wringing their hands lately wondering whether it's time to get back in?

My thought is that if you're not already in, it wouldn't hurt to watch and wait. The aggressive, fast move up off the bottom is done and past. Now, we're up against several big technical reasons for the indexes to pause:

200 day moving average
Matching the most recent intermediate top (established in January 09)
The 38% fib. retracement line from the Aug. 08 rally just before the "big plunge"

Here's my thoughts, graphically:

I'm currently "all in" - so I'll be watching for reasons to sell to protect profits.

Warning - Investor Running Yellow Lights

2007-11-01T06:00:00.000-07:00

Following a systematic approach to investing is crucial. Much like my day job of flying airplanes, successful investing relies on instruments rather than "seat of the pants" instinct. I highlighted recently that my primary indicator of market direction and risk, the NYSE bullish percent, had moved onto defense. In that same post, I stated that I thought a move back up off of support was expected - and that the bullish percents might reverse back up to offense as a result of that move. Sure enough, the market moved back up from support...

No, this isn't a bullish bias on my part. Instead, it's the application of technical analysis that tells me what the market is LIKELY to do. What do we do from here?

There's two factors at play:
1) The market is on defense as per the bullish percents discussed above. This tells me to sell at market resistance points in anticipation of oversupply driving prices lower.
2) My secondary market indicator, cumulative market breadth, came close to confirming the bullish percent's defensive status - but then reversed back up. Note that bullish percents tend to react more slowly.

This leaves me with a yellow light at the intersection, and I chose to accelerate. This has nothing to do with "helicopter Ben Bernanke" lowering interest rates on Weds. Rather, my supply and demand indicators tell me that there are still more buyers than sellers. I am more interested in making profit than I am protecting against minor losses, and in this case I think chart analysis puts the reward/risk ratio in my favor.

Here's what I'm seeing in the market breadth indicators:
Looks like the bullish percents have stopped the bleeding:

So, I'm still concentrated on mid to small caps in the Wilshire 4500 and in the international stocks of the EAFE. Currently the internationals are strongest by far, thanks to the dollar's freefall:

If it gets any worse, we'll have to rename our currency the US Lira.

Thanks for reading!

- Divot

The art of bluffing

2007-10-25T10:45:00.000-07:00

I'm writing this from Las Vegas, where I've been flying this week. America's recent obsession with poker provides a lot of lessons applicable to the stock market. Remember, you only get to see your own cards - at least, until the money's on the table. Seeing the other cards requires you to bet, and sometimes it costs more to play (higher stakes). That's the price of poker.

As we're moving through earnings season, volatility has been high with really little net movement in prices. Some individual stocks are getting a beating with the ugly stick, but others are flying high. This volatility has actually resulted in the bullish percents to go "on defense" - indicating a recent concentration of point & figure sell signals.

Remember, the offensive/defensive status of the market is not a timing device. Rather, this gives focus to our risk management - whether to operate in wealth accumulation or wealth preservation mode. In other words, do we "buy the dips" or "sell the highs". Since we're "on defense", I'll operate in the latter fashion. That means I'm not intending to sell everything right now, since we're still resting on the 50 day moving averages (read also: NOT at a high point, but still hovering near the lows). I'll look to sell as the market moves back up to its most recent high - assuming that we don't go back on offense in the meantime (which is likely).

On the other hand, market breadth has survived reasonably better than the bullish percent indicators.

Market breadth shows me that in spite of the new P&F sell signals that influenced the BP charts, the overall market remains balanced. To put it another way, it only takes 6% of all stocks to move from a buy signal to a sell signal in order to put the BPs on defense. Although this has happened, enough other stocks have moved up to keep the advance/decline line rather neutral. My read on the situation is to bet on the bulls to carry us higher after this "pause that refreshes."

Notice in the following chart of the S&P 500, that we continue to close above the 50 day MA. Although Weds was actually a down day, I look at that high volume during the wall-to-wall trading session and conclude that a short term low was confirmed.
Similarly, the EAFE and Wilshire 4500 are even farther above their 50 day MA. I'm happy to be in these two indices, as their relative strength is significantly better than the S&P 500.

Thanks for reading and commenting.

- Divot

I'm Buying More

2007-10-15T21:09:00.000-07:00

We interrupt this market dip to inform you that this blog's author is buying stocks.

I posted last Thursday about "Zen and the Art of Confident Investing", and my point was that it's OK to buy and hold (and buy more if you can) - AS LONG AS THE MARKET IS "ON OFFENSE". This of course is defined as the bullish percents in a rising trend, which they are:Please note that buying and holding does not work when the bullish percents turn around and start to fall. That's when I seek to protect my money rather than look for ways to put it to work.

See, I bought into some of the leveraged ProShares funds promptly after the market went on offense, and they've done quite well so far. Here's my portfolio and current results:

ProShares Ultra Oil and Gas (symbol DIG): +29.0 %
ProShares Ultra Industrials (symbol UXI): +9.2 %
ProShares Ultra Basic Materials (UYM): +25.7 %

I'd also purchased the Ultra Financials fund (UYG), but sold with only a minor gain last week due to relative strength lagging the pack. This left some cash to hunt bargains, and the tech sector appears healthier than others. I found Synchronoss Technologies (SNCR) which is really on a tear with great fundamentals, technicals, and insider buying to boot.

I bring all that up simply to illustrate my recent theme - don't panic at the market's little wiggles when we're on offense. Price dips are good buying opportunities here. Take a look at the S&P 500: I've highlighted the rising price channel, and we're nowhere near breaking out of this one. If you consider that the current uptrend was really based on the Federal Reserve's September actions, Monday's price falls right at a 38% retracement level. That's good news for bulls - closing lower than the 50% line would be bad. Even then, I wouldn't really consider selling until the lower trendline was broken or the BP's reversed down.

The Wilshire 4500 looks nearly identical:

The internationals (EAFE) continue to look stronger than US markets, and prices are currently at the bottom of the trend channel. Support from buyers looks very good.

The EAFE is of course running with the wind at its back due to the dollar's freefall in value. Here's the latest damages to our purchasing power:
Thanks for all the comments and questions - I'm honored to have you reading.

- Divot

Zen and the Art of Confident Investing

2007-10-11T20:43:00.000-07:00

After Wednesday and Thursday this week, some investor's confidence is sure to be shaky. Is this the time to sell?

Nope.

That was easy, any more questions?

How can I be so sure? Because I have a quantitative measurement showing supply and demand at work in the stock market. The bullish percent charts keep rising, which tells me that more stocks are being bought than sold.

That's not to say that charts won't wiggle a little lower. There's certainly a little more room in the basement than the attic right now - if you get the analogy.

Little wiggles are not, however, a reason to sell and wait for ensuing Armageddon. Little wiggles can be timed by day traders - but most people don't have the time to sit in front of a computer all day with a hair trigger mouse. I wouldn't want to - I like my day job much better! Amateurs trying to jump in and out of the market is a sure recipe for lost opportunity, and probably also for lost cash.

Instead, let's consider a little risk management. The S&P 500 shows a very tight rising trading band. Trend lines were made to be broken, and this price channel is just asking to be crushed. Add to that the high volume on Thursday's drop, and chances seem good that the lower line will be the first to go. The good news is that there seems to be obvious price support immediately lower.

Take a look at the bigger picture (a weekly chart of the S&P 500). We've seen quite a steep rise in prices lately, which shouldn't be expected to continue indefinitely. Looking at past trends, there is a pattern of steep rises followed by continued, shallower up slopes. Why am I showing this? Simply to highlight that just because the short term looks like there's room to fall, the longer term should give confidence. Especially so, given that the market is "on offense".

With that being said, a picture is starting to develop showing significantly higher strength among the international and mid/small cap stocks. Based on this chart, it looks like money put to work places other than US large caps is being rewarded significantly better.

Given this trend, I'm going to reallocate my portfolio as of close of business Friday to 50% Internationals and 50% Small caps.

Thanks for reading!

- Divot

Investing versus Speculation

2007-10-08T19:50:00.000-07:00

What a great weekend! I took the family "camping" up near Flagstaff, and the aspens were simply ON FIRE up behind San Fransisco peak. That's my photography on the right. Lots of relaxation with friends and family, crisp cool weather, and now I'm writing as I watch the third quarter of the Buffalo Bills / Dallas game. My apologies if you're a Dallas groupie, but watching the humiliation of Tony Romo / T.O. simply tops off this excellent weekend for me. (Update - I realize the cowgirls won, but the point is they're not America's team with that many turnovers).

Investing has so many parallels with football. If you've read this column for any time, you know we went "on defense" back on 27 June - and returned to "offense" on 8 August. I discussed both events in detail in my blog. So where are we now? I'd describe this week's market conditions as "3rd and 3" - it'd be nice if we could move the chains on 1st or 2nd down, but we can't expect to throw to the end zone every play! What we're seeing now is a steady uptrend, so keep running offensive plays and don't even think about punting right now.

Here's why I titled this post "Investing versus Speculation." There are some technical aspects to current charts that question whether this drive will soon lose momentum. I'll point some out on the following charts, but first I want to show the bullish percent and market breadth charts. (Click to expand the charts...) These CLEARLY show the markets are dominated by demand, NOT supply. The price charts will wiggle - let 'em. Whether the market goes up or down on any given day is PURE SPECULATION, and should be relegated to polite conversation over a drink. You absolutely should not make day to day decisions on the basis of feelings. I'm not preaching "hold and hope" - overwhelming demand is currently driving prices higher, so let your positions GAIN value and don't pull the rug out from under yourself!

With that being said, let's take a look at the index charts. All three are interesting, as their relative performance is nearly identical since the August lows.

For both the S&P (above) and the Wilshire 4500 (below), I've highlighted in blue the area where a price retracement would be perfectly acceptable. Not that I expect this, but the charts do look a little stretched to the upside.

Finally, there's the internationals (the EAFE). This is actually the best positioned and best behaved chart.
This week has some meaningful headlines - Monday's FOMC minutes, jobless claims on Weds, then the producer price index on Thurs. Should be interesting...

Thanks for reading!

- Divot

God and the Existence of Beer

2007-10-01T21:28:00.000-07:00

Beer, I believe, proves three things:

There is a God
He loves us
He wants us to have fun

For my regular readers who wondered at the lack of a weekend update... Oktoberfest was this weekend. Good thing the stock market escaped without a hangover.

Some folks, I think, were caught off guard by the market's performance Monday. Some of my readers are familiar with Ebb - who was all cash. Nice call, Nostradamus. The bottom line here is that we are in a bull market. I haven't the foggiest how long it will last, and neither does anyone else. But let there be no doubt which way this market is going. Look, for Pete's sake - even Tim Knight (perma-bear numero uno) acknowledges the market's bullish trend!

In a more coherent moment this weekend, it occurred to me that although I disagree with the platitude-driven buy and hold mentality (see also: "you need time, not timing") - there's really no reason to bounce in and out of a market that's on offense. In this poker game, when you know you've got a money hand and you can read "bluff" in everyone else's eyes... you need to put some money in the middle of the table!

Of course, first you must be able to read the situation. Otherwise it's just shooting from the hip. I read the market via the clear and easily applicable bullish percent charts. Here's the latest:
Note how all three of these index bullish percent charts are in rising columns (marked by "X"s in the far right column - X's always go up). My regular readers understand what this means, wouldn't even have to see the charts to know that bulls are making money right now. If you've never heard of a bullish percent, I give a brief explanation here. Also note on the NYSE BP that August marked the lowest levels since 2002. That's an amazingly low risk level!

So let's check out the charts. Not much to say on the S&P 500, except to point out volume patterns that confirm the bull market.
The Wilshire 4500 chart of the mid to small caps looks just as good. I do note that it's right up against a pretty steep trendline - it'd be healthy to have a couple down-to-sideways days for the rest of the week. Then again, trend lines were made to be broken...
And then there's the internationals... The EAFE is screamin' hot right now, and with the accelerating fall of the dollar, I don't see why this chart should take a breather.
For perspective on the strength of the international markets, consider this relative strength chart among the aforementioned indices. The EAFE is almost 30% stronger since the August lows. That boost is due predominantly to interest rates.
Bottom line: The market is on offense. Let's make some money, and have a beer. (Bill - I'll get you a root beer.)

Thanks for reading!

- Divot

The Calm after the Storm?

2007-09-23T20:15:00.000-07:00

As promised, last week was busy. Ben Bernanke and team didn't just give the market what it wanted - they showed up with Christmas in September! For the week:

S&P 500: UP 2.8%
Wilshire 4500: UP 2.6%
EAFE: UP 3.1%

My sincere regrets to my bearish and/or cynical friends out there... (And by the way, that's my own amateur photo work on the right!)

Bottom line remains that the market has been and continues to be ON OFFENSE. I'm not even going to post a chart of the bullish percents this time - I think you know which way that index moved this week. All the market breadth measures show that buyers are out in force. My advice here is: Don't Fight the Market.

This week will still be busy on the news front, with a focus on inflation. Shouldn't be nearly as exciting by comparison with last week's news.

For all the indices, we're now above the 50 and 200 day Moving Averages. This is going to provide strong support for prices going forward.

Here's some charts, with my comments annotated over them. Note that you can click on the charts for an enlarged view:

I'm going out on a limb, and here's a point and figure chart of the Wilshire 4500. What I'm showing here is the long term, big picture view - which doesn't show much resistance above 700.

Finally, the EAFE was the strongest of the three this week - but (surprisingly) it's relative strength since the August lows is very even with the S&P and Wilshire!

Thanks for reading!

- Divot

The witching hour has come...

2007-09-16T15:14:00.001-07:00

... technically "quadruple witching." This term, of course, refers to the volatility that tends to accompany the simultaneous expiration of four types of equity contracts. This happens four times every year, on the third Friday of March, June, September, and December - and typically means wild price swings for the markets. Following Friday's trading session, these September contracts will expire:

stock index future
stock index option
stock option
single stock future

This alone would make for a crazy week in the markets.

But wait, there's more! Take a look at the weekly economic calendar (courtesy Yahoo Finance, my highlights in red):

Date	Time (ET)	Statistic	For
Sep 17	8:30 AM	NY Empire State Index	Sep
Sep 18	8:30 AM	PPI	Aug
Sep 18	8:30 AM	Core PPI	Aug
Sep 18	9:00 AM	Net Foreign Purchases	Jul
Sep 18	2:15 PM	FOMC policy statement	-
Sep 19	8:30 AM	CPI	Aug
Sep 19	8:30 AM	Core CPI	Aug
Sep 19	8:30 AM	Housing Starts	Aug
Sep 19	8:30 AM	Building Permits	Aug
Sep 19	10:30 AM	Crude Inventories	09/14
Sep 20	8:30 AM	Initial Claims	09/15
Sep 20	10:00 AM	Leading Indicators	Aug
Sep 20	12:00 PM	Philadelphia Fed	Sep

That's a lot of data to digest.

To make things even more interesting, there's a bit of a "perfect storm" building in the charts. Converging trendlines and moving averages that are normally predicable support and resistance levels, now provide very little wiggle room.

This is why it's so important to have an emotionless system that can show you the big picture and keep you focused on your gameplan. I spell out my gameplan here, and the indicator it is fundamentally based upon (the NY Stock Exchange Bullish Percent) tells me that we are currently on offense. The following bullish percent charts show a steady bullish march.

This means "capital accumulation" takes priority over "capital preservation". Even though we can expect wild mood swings this week, there's good reason to have the confidence to be invested.

Check out the following stats - over the last 20 years:

The NYSE Bullish Percent entered September "on offense" 11 of 20 years.
The NYSE Bullish Percent finished September "on offense" 8 of those 11 years (72%).
Of those 8 years, the S&P 500 averaged a 1.12% gain during the week of "quad witching."

With that being said, let's take a look at the charts:

I've scribbled all over the following S&P 500 chart - my comments speak for themselves:

The Wilshire 4500 actually looks pretty strong going forward - last week almost looks like consolidation for another leg higher.

The EAFE seems to face the most upward resistance of these three indices:

This is going to be a wild week - hang on and don't let your emotions take over!

Thanks for reading,

- Divot

Don't Panic (Really!)

2007-09-09T20:03:00.001-07:00

If I were investing based upon my emotions, this might shape up to be a sleepless night. Premarket futures are down significantly as I write this, and the Asian markets are taking a beating with the ugly stick.

Pleasantly, I have reliable market indicators that tell me whether supply or demand are currently in control of market prices. These are currently squarely aligned in favor of the bulls - so I'm invested.

When I apply any technical analysis tools, I try to approach the chart from two perspectives - as both a potential buy or a potential short. In other words, I play devil's advocate; regardless of whether my current position is long or short. (I blogged a piece earlier this summer, titled "Bias and Self Validation" that discusses this investing psychology in greater depth.) In my current analysis, I tried to see the charts as if I were bearish - looking for an entry point to go short... but such a trade would be foolhardy with current chart patterns.

Let's look at some charts:

The S&P gives me several bullish signals: a supporting trendline, an unbroken 38% Fibonacci retracement level, and steady (not declining) volume. Of course, the key preliminary understanding is that the market Point & Figure Bullish Percents are "on offense." Read my earlier posts if this is a new concept for you.

The Wilshire 4500 shows me more of the same from the S&P 500. Still lots of volatility here too.

The EAFE (the internationals) shows some interesting consolidation. Fundamentally, I'm invested due to exchange rates working in favor of the overseas markets.

Finally, here's a little study I did this weekend on one of my market indicators - the percentage of stocks trading above their 200 day moving averages. What you'll notice from the chart on the left is a series of relatively flat "plateaus" divided by sudden dips. This is because when the markets are "on offense" from the perspective of Point & Figure bullish percents, most stocks tend to trade above their 200 day moving averages. The times when there's a sudden drop in this percentage historically points to some good market entry points. I'll show you:

Just a glance at these two charts shows an easy way to exploit and profit from fear in the markets.

Thanks for reading!

- Divot

Labor Day: Family, Football, and a few good Stock Charts

2007-09-03T15:53:00.000-07:00

Happy Labor Day weekend to all.

The inlaws are in town this weekend - so I'm tempted to make this a LONG update... Instead of writing a novel for your reading pleasure, I thought I'd take a different approach with this post. Along the lines "a picture is worth 1,000 words", I've marked up some charts with my observations. I'm afraid that these charts will just look like spaghetti to some, so I'm eager for your feedback on this format.

Remember that you can click on any of the charts for a close up view. The first on the menu is my primary market indicator: the bullish percent charts. Notice that all these plots are steadily rising! There is absolutely NO OTHER explanation for this than buyers overpowering sellers.

Next chart on deck is a little historical study of the advancer/decliner breadth on the New York Stock Exchange. This is a weekly chart, and gives some perspective on the little correction we've experienced last month.

Read the date stamp carefully on the next two charts! One is the current chart of the S&P 500 (with my comments). The other is a chart of the S&P from last summer's correction. Interesting little pattern comparison.

The bottom line on the S&P right now is that it looks far more likely to rise over the next month than fall. Same goes with the following chart of the Wilshire 4500:

Relative strength has been remarkably equal for the S&P, Wilshire 4500, and EAFE over the last two weeks. That being said, the chart for the EAFE looks much better behaved and stronger than the preceding two US indices:

The bottom line (for those uninterested in my colorful scribblings) is that the markets look good going into the next week. Premarket futures point to a very positive open (probably a gap up). The news wires should be busy this week - look for some fireworks in response to the following events: (Calendar courtesy of Yahoo Finance.)

Date	Time (ET)	Statistic	For
Sep 4	10:00 AM	Construction Spending	Jul
Sep 5	10:00 AM	Pending Home Sales	Jul
Sep 5	10:30 AM	Crude Inventories	08/31
Sep 5	2:00 PM	Fed's Beige Book	-
Sep 6	8:30 AM	Initial Claims	09/01
Sep 7	8:30 AM	Nonfarm Payrolls	Aug
Sep 7	8:30 AM	Unemployment Rate	Aug
Sep 7	10:00 AM	Wholesale Inventories	Jul

I hope I haven't disappointed anyone by not analyzing Ben Bernanke's Friday speech - but you should know by now that I prefer to focus on WHAT is happening and HOW to plan ahead, rather than guessing at "why."

Thanks for reading!

- Divot

Not So Fast!

2007-08-30T10:02:00.000-07:00

Fans of ESPN's College GameDay will recognize the trademark title of this article - it's as if Lee Corso rang the NYSE opening bell on Wednesday, saying "Not so fast, my friend!" Really, Tuesday and Wednesday this week defy explanation. I DID state in my blog on 26 Aug, 22 Aug, and 21 Aug that a retest of the market's August lows was likely - and that it would be a good buying opportunity. This is why it's so important to NOT react emotionally to the markets - why you must invest/trade based on the supply and demand forces at work.

You may have noticed that the market was moving dramatically before the headlines hit the public wires that seemed to "explain" the move. Obviously, a lot of people know what's going on before you or I. That's OK - I have another job that I happen to really like, and I wouldn't WANT to be stuck in front of a trading screen all day. Once again, this is why you must approach the market with a gameplan and the discipline to execute. My gameplan told me that the market went on offense 22 Aug. From that point on, I was going to scale into the market - of course I'd like to buy the dips perfectly, but if the market shows further technical strength... don't be left behind!

As far as our primary indicators - the market bullish percents - we continue to be "on offense", with more and more stocks displaying Point & Figure buy signals. The following charts show these rising percentages. This is very good (from a bullish perspective), because it means that demand is overpowering supply.

Our primary confirming indicator is the market breadth - advancers versus decliners, and new highs versus new lows. These following charts show that buyers continue to step in (and trample on) the sellers. For both the BP and breadth charts, don't get too hung up on microscopic wiggles in the line. We're concerned with the big picture trend (which is currently UP), and I don't use a hair trigger to jump out of the market at the first sign of a reversal.

It's interesting to note that the S&P closed right back above it's 200 day moving average, as a result of Wed's action. For the "technician geeks" in the crowd, the larger chart pattern looks a lot like an "inverted head and shoulders" to me. For the rest of us, this would indicate an intermediate term market bottom. I don't put much weight on that sort of "tea leaf reading", because I really just care what the bullish percent charts are doing.

Same story goes for the Wilshire 4500, though it didn't return above its 200 day MA.

Internationals are looking even stronger than ever lately. It's as if the world markets consider this recent uncertainty contained to US markets - and are ready to get back to their own business.

That's all for today, thanks for reading!

- Divot

Cue up the fight song and start running plays

2007-08-26T15:17:00.000-07:00

The other team - call them the "Bear Market Maulers" - have put together a drive that has taken more than a month off the clock and pushed most of the way down the field. A few of the roster have left the field on a backboard (American Home Mortgage), and more will be on the "injured" list for a while (Countrywide). The "Maulers" drive ran out of momentum at the home team's 32 yard line, where they turned over the ball on downs. Now the offense is back on the field, and most of the team is healthy. It's time to run some plays - in other words, make some money investing in stocks!

The football analogy works really well to explain Bullish Percents on a point and figure chart. I wish I could take credit for the concept, but I learned it first in Tom Dorsey's excellent book on Point and Figure charting:

The offensive/defensive team analogy can be very helpful to understanding the mid-to-long term market trends. Take a look at the following point and figure style bullish percent charts for the major market indices. You can see how both the broader New York Bullish Percent and the more focused S&P 500 Bullish Percent have both turned upward into a column of "X"s. The NASDAQ appears to be close to following suit.

This isn't to say that every day will be up from here - please understand that these bullish percents are not a short term market timing tool. I still wouldn't be completely surprised a retest of the lows, but the bullish percents tell me that the buyers have lined up to support prices.

Not only the bullish percents, but the market breadth has dramatically turned around. The following chart shows that the number of advancers has begun far outpacing decliners, and the numbers of new 52 week highs versus lows has evened out. These are LEADING indicators that strongly signal demand in the market.

I re-entered the market last week Thursday, just in time to catch Friday's strong move higher. At the time, I had some concerns about the 200 day moving average providing resistance to the small caps. After Friday, all the TSP stock funds are now trading above their 200 day moving averages (the Wilshire 4500 was the last to join the party). It's noteworthy that so many were willing to commit to buy on a Friday, especially ramping up in the afternoon. Based on market action:

I'm going to commit the remainder of my capital to stock funds as of close of business Monday.

Put another way, I don't know HOW much higher the stock funds will finish the year, but I absolutely believe that they will finish higher than they are now. In fact, this is the lowest risk buying opportunity the market has seen in over a year. (My IRA trading account is currently fully invested and rather leveraged - I like the Proshares funds.)

The following chart shows the relative strength of the TSP funds, showing nearly equal performance of the stock funds. I'll be watching for changes developing in this chart over the next few weeks to refine my fund allocation.

In some recent posts, I've been concerned about the EAFE's performance based on the the possibility of a recovery by the dollar. The following chart shows that the dollar floated little higher than it's 50 day moving average before resuming its slide. That's right sports fans, the LOWER moving average is the 50 day...

Bottom line:

30% S&P 500 (The "C Fund")
35% Wilshire 4500 (The "S Fund")
35% EAFE (The "I Fund")

This will be effective at close of business 27 August 2007. Thanks for reading!

- Divot

Back on offense

2007-08-22T19:12:00.000-07:00

First: some administrative business. It was brought to my attention yesterday that clicking on my charts caused some browser problems - those are now fixed, feel free to click away!

Yesterday, I noted that the bullish percent for the S&P 500 had reversed up. Today, the New York Stock Exchange bullish percent reversed up. See the chart on the right, and notice how the latest column is rising in "X"s.

This is a big deal.

Let me be clear - bullish percents are not market timing signals in and of themselves. I actually still expect a retest of last week's lows.

But I will not be dissuaded by fear. I did a study earlier this year where I shaded a chart of the S&P 500 showing when it was on offense versus defense. The periods of offense are shaded blue, and defense is shaded orange. (I didn't intentionally pick Denver Bronco's colors at the time, but all the more reason to like the chart.) The most important piece to study on this chart is the bottom of last summer's reversal. Notice how we went on offense, then retested the lows, then climbed for the next six months!

My point is that getting in now is a great time to buy, even if there will be even better opportunities in the future. I'm not one to flip flop in and out of the markets, so I plan on being a buyer for a significant time to come.

These kinds of decisions are never black and white. Yes, there are some inconsistencies to this market. But there's no reward without risk.

So, what to buy and how much? The following chart shows the relative strength of the TSP funds since the low of last week. Right now, it looks like the US markets are a bit stronger than the overseas - with the small caps at the top. Just for the sake of diversification, I'll take a little of each, just a bit less of the internationals for now.

My total "buy in" at this point will be just half my capital. Remember, I still expect a retest of last week's lows. A successful retest (defined as near but not lower than) those levels would trigger me to buy in with my remaining capital.

Bottom line:

20% S&P 500 (The "C Fund")
20% Wilshire 4500 (The "S Fund")
10% EAFE (The "I Fund")
25% AGG (The "F Fund")
25% Gov't Bonds (The "G Fund")

This will be effective at close of business 23 August 2007. Thanks for reading!

- Divot

Signs of life

2007-08-21T19:38:00.001-07:00

Good morning. I wrote in a recent blog post, Time to Start Thinking about Offense Again, that demand had returned to the market. This was based on the S&P 500 bullish percent reversing UP on a point and figure chart. I noted in that post, "This doesn't mean that it's time for me to buy stocks with both hands - YET. "

I didn't touch my TSP allocation at that time, and that bullish reversal turned out to be short lived. Now, two weeks later, it is noteworthy that the S&P bullish percent has again reversed UP. (Click on the chart to the right for a closer view.) Remember, bullish percents are not pure market timing tools - but they are excellent measures of supply vs. demand in the market. Once again, it looks like buyers are showing back up with cash to spend.

What does this mean, and where do we go from here? I'm glad you asked. Let's talk about the TSP funds, one at a time. (Lots of charts follow, click on them to enlarge.)

For the S&P 500, having the bullish percent on offense is a meaningful vote to consider. There's some serious "votes" against jumping in with both feet at this point. Most importantly, it's rather OMINOUS that today's action finished right up against the 200 day moving average. This is classic resistance territory, and also right up against the down trend line. Now, I didn't go and draw lines on the chart below - because Mr. Market doesn't respect lines on charts. This chart looks (short term) overbought to me.

Beyond the simple price chart, the volume seems to fade during this recent upswing. We want to see rising prices and rising volume. The Wilshire 4500 chart below is significantly weaker than the S&P 500. Today's action finished right at the 38% Fibonacci retracement level - which would lead one to expect the current trend (DOWN) to continue. The Wilshire 4500, like the S&P 500, has also failed to top its 200 day moving average.

The EAFE chart that follows doesn't really show the exuberant return to buying we've seen in recent overnight foreign market sessions. Some of the Asian markets in particular have rebounded 5%, but the chart seems to be milling about. Although the dollar has resumed its downtrend recently, I can't see jumping back in as a buyer here. Charts below the 200 day MA are generally not healthy, and we don't want to fight the trend.

Now, the AGG bond chart... Wow, a gap up today - an unusually large move! Note that today's action pushes as high as the former highs in May. Based on the current interest rate environment, I would expect the future to be higher for this sector.

Bottom line: The rest of this week could become really important, IF the indexes climb above their 200 day MAs. Without beating their own 200 day MAs, the rest of the market breadth CAN'T turn around - which I would consider ESSENTIAL to signal reentry as a buyer. I expect (near term) we'll see prices fall back down to near last week's lows. I'll strongly consider buying back into a small position at those levels, especially if the S&P bullish percent remains on offense.

Thanks for reading!

- Divot

Changing the playing field...

2007-08-19T19:27:00.000-07:00

Good morning. Friday was a very interesting day, and fortunately I wasn't watching the markets. "Fortunately", I say, because I might have reacted emotionally to the news or the chart. In the end, I'm glad I'm still out of this market. Let me explain why:

One of my readers asked me over the weekend, "did yesterday's bounce change your charts?" He was referring, of course, to the bullish percent charts. The short answer is, "not so much". The following charts show the major market bullish percents:

I spent some time Sunday afternoon researching Friday's news. If you Google "surprise Fed funds rate cut", you find interesting headlines. Like the following:

Fed makes surprise rate cut

"Wall Street responded immediately with one of its strongest rallies on record."

Will it do the trick? History sides with the bulls

"For now, most economists and strategists agree that it looks as if the Fed's easing will head off a recession this time around. If that's the case, it's likely the bears will be wrestled to the ground."

Fed cuts rates again

"...it set a bottom on stocks, but it's definitely a very good move I think for the Fed."

What you may find surprising is that the first two headlines date from Jan, 2001 - and the last from April 2001. With astonishingly clear, 20/20 hindsight, I note that:

The Jan 2001 response rally didn't last.
The Fed's action is Jan 2001 did not head off a recession, and the bears were not "wrestled to the ground" for another couple years.
April 2001 did not mark a bottom for stocks, just another month in a long slide lower.

For perspective, here's the New York Bullish Percent chart from 2001-2002, followed by a chart of the S&P 500 from the same time period:

The point here, is that the headlines don't matter - just the market's reaction. Note that April 2001's rate cut actually sparked a bit of a short lived rally. We could see something like that again, but the key observation here is that the bullish percent simultaneously moved higher. This confirmed the April rally, and allowed for aggressive investors to profit on the way back up. I would expect similar behavior again.

This should prove a fascinating week ahead, thanks for reading!

- Divot

Catching a Cold vs. Pneumonia

2007-08-15T18:43:00.000-07:00

This stock market is not healthy.

How sick is the market? At this point it's gone past the "healthy correction" level, since S&P 500 is currently trading below both the 50 and 200 day moving averages. A healthy market will occasionally correct to the 200 day MA, and that's not a big deal. Instead, we've seen two failed rallies at the 200 day MA, followed by strong moves lower over the past few days.

So what do you do when you're sick? You take measures to protect your family and coworkers from catching what you've got. Then, you rest and treat the symptoms. Note that the beginning of a week long head cold starts out very similar to a potentially dangerous upper respiratory infection that could last much longer.

A similar thought process needs to apply to this market. What started off as a little sniffle has worsened significantly. In my last post, I said that the S&P 500 bullish percent showed signs of reversing. Well, that was a short lived wiggle (and a good example why we don't just blindly buy into a bullish percent reversal.)

The S&P 500 bullish percent is in a full blown retreat to the lowest level seen since early 2003. This is really important, because it clearly signals two things:

The stock market is not the place to have your money right now.
When this thing turns around (could be tomorrow or quite a while - no telling this timing), the market will be at it's lowest risk levels in nearly five years.

I can't overemphasize that last point. When the bullish percents and breadth charts turn around (don't sweat it, I'll let you know) - I will begin buying with both hands. Point & Figure savvy investors will break out into a chorus of the "Happy Happy Joy Joy" song.

Until that time, we don't know if this market simply has a "bad cold" or a case of ebola. Either way, it's worthwhile for me to completely step away.

Until this point, I've had 10% of my portfolio in the S&P 500, and 20% in the EAFE. The following chart of the S&P 500 looks like it's due for a little bounce tomorrow, but I don't think it'll make it all the way back up to the 200 day MA. Whatever the market gives us tomorrow will be good enough for me to complete my step aside.

The EAFE chart that follows is so ugly it hurts me to look at it. High volatility, gaps up and down, and a thrust lower through that 200 day MA that should cause you to shudder. Perhaps the world markets believe there's more to this subprime debacle?

It would be nice to exit on a little bounce higher in the EAFE, but right now it looks like all the Asian markets are down around 3%. Ooof.

I'll close this post with a look at how the market breadth has been lately. The following charts of market cumulative advancers vs. decliners and new highs vs. new lows really show that the end is not in sight yet.

Bottom line: As of close of business Thursday, I'll be 60% Gov't Bonds and 40 % Fixed Income (AGG).

Thanks for reading!

- Divot

Time to start thinking about offense again

2007-08-08T21:07:00.000-07:00

This is important. The S&P 500 bullish percent reversed back up today, from a rather low risk level only seen three times in the last three years.

I know that many of my readers are not familiar with point and figure charts, but the important thing to note in the chart on the left is the little green column of "X"s on the far right side. That means that at least 6% of all stocks in the S&P 500 have gained buy signals - clearly indicating a return of demand to the market.

This doesn't mean that it's time for me to buy stocks with both hands - YET. Nearly every market sector is still on defense, swamped with overwhelming supply (ie: sellers outgunning the buyers). Further, the New York, AMEX, and NASDAQ cumulative Advancer/Decliner breadth charts are all still in clear downtrends. These latter charts are key indicators of the supply/demand big picture. The NY advancer/decliner chart is shown below, and I would want to see the chart line break above the overlaid moving average to confirm this shift in market conditions:

In my blog post dated 5 August, I identified some Fibonacci retracement levels on the market indices. If the prices failed to exceed the 38% levels, I would expect the current down trend to continue. For the S&P 500, that price was 1480 (which was blown away). The 50% Fibonnaci level is 1494 - which is coincidentally very close to where we closed today. What this means to me? This market's showing some signs of health, but I think I'll have the opportunity to buy below 1460.

Still, the small caps of the Wilshire 4500 showed significantly less strength than the mega caps. I pointed out earlier that the first Fibonacci retracement level to mark here was at 663. This is pretty much where we closed, and at an area of considerable resistance to higher prices. I'm thinking this chart will see 640 again before it sees 680.

And now for my favorite, the EAFE. World markets are definitely buoyed by the falling dollar, and the following chart says it all: a gap up (!) from a significant base. Of course, the 50 day MA looms as imminent resistance. If the EAFE punches higher through it's 50 day MA it would be a significant sign of strength and worthy of serious buying consideration. If that happens, "we'll burn that bridge when we come to it" and consider the state of world BPs and currency.

Speaking of currency, the dollar's downtrend continues. Just off the cuff, this does smell a bit like a base forming. Note how there's a lot of price support at 80. It's still too early to tell, but it does appear that the dollar's move higher over the preceding two days could be a positive reaction to Ben and Co. holding rates steady - a Fed Funds rate cut would have further devalued our currency.

Continuing on the subject of Government lending and rates (damn my writing segues are on FIRE tonight), it appears that the bond markets DID NOT like Mr. Bernanke's decision to leave rates alone. Remember, lower rates would make the higher rate bonds already on the market more valuable. I have a considerable position in the AGG right now, but given the proximity of support at the 50 and 200 day MAs, I'm still bullish on these bonds.

Bottom Line: I expect a near term retreat in the stock markets. If that's accompanied by further deterioration in my supply vs. demand indicators, then chalk up this week to a sucker rally. If not, then I expect we'll see price support around the lows of last week - and I'll be watching closely to buy in.

Thanks for reading and commenting!

- Divot

Mirror, mirror, on the wall...

2007-08-06T19:52:00.000-07:00

Today was mirror image (reverse) of Friday. While Friday was marked by panicked selling, today was an orgy of buying.

My only regret was not putting in a "sell" order this morning for my remaining stock positions.

Although the price ranges between the last two trading days are remarkably similar, there are similar differences under the hood. Take a look at the raw breadth data in the chart below:

Market Momentum		Advances	Unch.	Declines
Today	+0.25%	3118	117	2696
Yesterday	-2.35%	961	119	4851

While Friday was absolutely dominated by the sellers, today's breadth was nearly a 50/50 split (cue sound effect: party music screeching to a halt). The biggest gainers were also the biggest company's stocks.

What I'm saying here is - this isn't the bottom yet. Demand is what drives prices higher, and you can see that move in when advancers outpace decliners. Take a look at these latest charts of cumulative market breadth. When the lines turn back higher, we can think about talking about a bottom.

Even a turnaround in breadth isn't really conclusive at first - those lines can wiggle around a lot. For the confidence to jump back into the market with both feet, we need to see some bullish percent charts reverse back up.

Today didn't move any bullish percent charts up - in fact, every bullish percent chart in every index and every sector moved lower today. Fear not, I will make a big deal about it when these "BPs" turn around to go higher.

Finally, for the "perma bulls": just because the breadth and bullish percent charts are freefalling doesn't necessarily mean you're guaranteed more losses in the markets (although the environment is certainly conducive to further corrections) - it just means I wouldn't expect the markets to reestablish an up trend until these "defensive" conditions change.

Thanks for reading,

- Divot

For those surprised by the market's recent downturn...

2007-08-05T10:02:00.000-07:00

The mass media shows a lot of surprise and distress concerning the stock market's recent downturn. Were YOU surprised? You shouldn't have been. This market showed all the signs of topping out back in June, and I'd like to teach you how to recognize these signs for yourself.

I've been writing in my blog for the last 6 weeks that the intermediate direction of the market was not going to be up. Now, I didn't "call the top" exactly - and I don't think anyone can do that consistently. But I do have reliable instruments that show me whether supply or demand is in control of the market. I can't tell you which way the market is going tomorrow, or how far it'll move in that direction. For 24-72 hour market predictions, this isn't the right column - you want EbbChart for that. Currently, my market indicators show that our emphasis should be capital preservation rather than accumulation.

My primary instrument - the market bullish percent - is like a barometer for the market. A barometer is a simple instrument that provides a quantitative measurement of the surrounding air pressure. According to Wikipedia (with my added emphasis):

A barometer is commonly used for weather prediction, as high air pressure in a region indicates fair weather while low pressure indicates that storms are more likely. ... If the barometer is falling then deteriorating weather or some form of precipitation will fall, however if the barometer is rising then there will be nice weather or no precipitation.

As a fighter pilot, I know that high pressure is generally associated with clear air, but can quickly turn into thunderstorms. Low pressure is generally associated with low clouds and overcast. In the same way that the barometer's reading and direction of movement can help to predict the weather, we can use the level and trend of market bullish percents to manage investment risk. When bullish percents are rising, demand is in control. This is comparable to rising barometric pressure. Conversely, falling bullish percents indicate supply is in control.

When supply takes control, you get a chart that looks like this:

Both the S&P 500 and the Wilshire 4500 broke authoritatively through their 200 day moving averages - typically a last ditch area of strength for buyers. In terms of relative strength, the larger companies in the S&P are holding up modestly better than the small companies in the Wilshire 4500.

Where do we go from here? For the S&P, you should now treat 1480 as a resistance to the upside. That price is the 38% Fibonacci retracement level, and also happens to be well established as the top of recent buying efforts. It's probable that the S&P will revisit this price range, but I would use moves up to this level as an opportunity to lighten up stock positions (playing defense) rather than a buy in point.

I'll describe the Wilshire 4500 with three words only: Look Out Below. Fibonacci resistance to the upside is at 663.

The EAFE is still the strongest of the three indices so far named, but don't forget that US markets are still the "dog that wags the world's tail."

The EAFE is absolutely being helped by the falling dollar, which is still in an obvious downtrend.

For the coming week, there should be plenty of fireworks with the Fed meeting minutes on Tuesday. We'll see if "Helicopter Ben" Bernanke comes to Wall Street's rescue.

- Divot

Be right and sit tight

2007-08-02T20:16:00.000-07:00

Watching the intraday market action can be unhealthy for your sanity. Worse, it can cause you to lose the big picture - being unable to see the forest due to all the trees in the way.

You bet, we've seen some interesting end-of-day buying action the last couple days. You might be tempted to get back into stocks here... Do these thoughts sound familiar?

"The market's gone down so far, it's due for a good bounce..."
"I sold too late, after the damage was done - now I can't afford to miss out on any gains!"
"I'm just in for the long haul - just buy and hold!"

But consider what the emotionless supply and demand indicators are telling us:

Every US index's bullish percent is currently "on defense".

For those unfamiliar with point and figure analysis techniques, note that this condition is black and white - not a matter of individual interpretation.

The New York, AMEX, and NASDAQ breadth charts of advancers vs. decliners indicate a clear trend of sellers drowning out buyers.

Now, please note that I'm NOT in the habit of carrying signs like this:
No, I don't carry signs - but I think the market does, and they're available to be read. Here's the Bullish Percent charts over the last year:

Friends, the only way a bullish percent chart makes a dive like that is by over a third of the stocks that were previously on buy signals, falling to break their price support levels.

I'm not making predictions as to what the market will do tomorrow! But I KNOW that the market will not reestablish an uptrend as long as supply is overpowering demand. This is simple economics.

I expect any near term upwards moves to be limited by these levels of resistance:

S&P 500 upward resistance is at 1493

Wilshire 4500 upward resistance at 670

EAFE upward resistance at 80

Please don't think I'm a "permabear". I'm all about making money in the stock market - when demand is in charge of prices rather than supply.

Thanks for reading!

- Divot

Wall to Wall Trading

2007-07-31T21:40:00.000-07:00

Yogi Berra said, "you can observe a lot by watching." Today, we saw the market gap open (premarket futures were ludicrously high), then climb up to the Fibonacci retracement levels I identified for you yesterday (nearly EXACTLY), then drop back down for a high volatility wall to wall trading day.

This is why it's so important to understand where the flow of supply and demand is pushing the market currently. Risk management is the key here - It's not about trying to hit home runs all the time, but minimizing your losses at appropriate times. This doesn't mean being a "market sissy", running away every time the charts look scary. There's no reward without risk - but the risk must be calculated and appropriate for the situation. When the situation looks bad, a reduced exposure leaves cash available to act with audacity when confidence is restored.

I wrote a blog post on 3 June about this idea, where I used a bit of statistics to show the impact of this concept. I ran a simulation with a notional stock market and two investment accounts:

The simulated market had random gains/losses on a monthly basis that always resulted in a 10% annualized return.
Both accounts invest $400 every month over 40 years.

One of the accounts always stays in the market
The other participates in 80% of the gains but only 25% of the losses.

Put another way, the second account buys after 20% of a market upswing is already history - and then sticks with the market for the first 25% of a downswing before selling. After 50 iterations through the monte carlo:

The "buy and hold" account averaged 9.9% annualized return (+/- 1.5% standard deviation) and an average final account balance of $2.92 million.

The "risk managed" account averaged 12.6% annualized return (+/- 0.9% standard deviation) and an average final account balance of $6.22 million.

Some of my readers will doubtless accuse me of using statistics the way a drunk uses a lightpost - for support rather than illumination. However, it's worth noting that this scenario of random monthly returns is an unrealistic handicap to any trend following technique (including my own). The mid-to-long term trends that develop on Wall St. over months actually play to the strength of bullish percent analysis.

I'm not completely out of stocks at this point - I still have about 30% exposure as an insurance policy to participate in some early gains should the market make a "V" bottom and move straight back up from here. Given that the supply and demand indicators - bullish percents and market breadth - show us clearly on defense, I'm not anticipating that. The S&P 500 is resting right on its 200 day MA, but tonight's market futures seem to indicate that line may not hold up prices.The Wilshire 4500 is in pretty much the same boat as the S&P, but being more volatile and lagging the large caps in terms of relative strength - I expect any future dips on this chart to be more severe. The EAFE is by far the "least ugly" of the charts. It also rose right to its 38% Fibonacci level, and then plunged. Regardless, losses were significantly smaller here than on the US markets.
Thanks for reading!

- Divot

A deceased feline

2007-07-30T21:33:00.000-07:00

Last week was an interesting one for the markets. In fact, the week was one of the worst seen in years. What’s going on here is a shift from a market controlled by demand to a market controlled by supply.

It’s worth reviewing what brought us to this point:

The markets initially showed weakness during the first week of June, when they fell out of rising trend channels. Reference the following chart of the S&P 500, and note the first retracement to the 50 day MA.

The rest of June saw a series of lower tops and lower bottoms, within a mostly horizontal trading range. Note the similar action between the S&P chart above the the Wilshire 4500 chart below:

This action demonstrated that buyers were drying up, even as the markets charted new highs. The real question is, where do we go from here?

I answer that question by looking at a chart that illustrates supply and demand - and the best way to do that is a bullish percent chart. Bullish percent charts track how many stocks within a group are on a point and figure "buy signal". What we see in the three charts below is that the New York, S&P, and NASDAQ bullish percents have fallen sharply recently. This has some correlation to the pricecharts above, but what it really shows is that price support levels have been broken through on an epidemic scale.

Note that these charts were earlier up in the 70% range - which is very high for a bullish percent chart. In my blog, I noted that the bullish percent charts reversed down on 28 June. This event is not a signal to immediately short the market, but instead puts us into a defensive mindset.

I can find confirmation that the market is being controlled by supply rather than demand by looking at cumulative breadth charts of the broad indexes. The charts below show that the number of declining stocks has begun to overwhelm the number of advancing stocks lately.
Again, this clearly shows that there are more sellers than buyers. Further, it establishes a downward drag on the markets. This confirms for me that near term, future stock prices will be lower rather than higher.

My response to this is to treat rebounds higher as opportunities to lighten up on stocks. This doesn't mean sell everything, but I'll scale out of funds that aren't holding their own. When the market dips lower, I'm not treating pullbacks as buying opportunities - at least, until the market goes back on offense.

I can identify which funds are performing better by comparing the relative strength - the percentage gains - of the funds against each other. The following chart shows that over the last month, the EAFE (or "I Fund") has enjoyed only half the losses of the small caps. Meanwhile, the AGG bond index (or "F Fund") has gained around a percent.
This isn't an effort to chase performance, but knowing that stocks are on defense, I need to protect capital by avoiding what's lagging.

Speaking of the AGG, or "F Fund", this chart shows a rather bullish scenario. The fund is trading above both its 50 and 200 day moving averages. Keep in mind that bonds and stocks are generally uncorrelated, so this looks like a good choice currently for some diversification within the defensive mindset I discussed earlier.

Now, taking a look at the EAFE, or "I Fund", we see that it has been well behaved until lately. This chart displays pullbacks that are not as dramatic as the US markets shown up top, and the trend WAS rather consistently up.
One thing to remember is that a primary influence on the I fund is the exchange rates against the US Dollar. The following chart shows that the overall trend for the dollar is lower. Although there's been a little try for higher ground in the last week, it appears that there's strong resistance around the 82 level, and the expectation from there would be lower still. This would lend some strength to the I Fund, but the same supply and demand logic that applied to US markets should be used here. Now isn't the time to overload on the I Fund, and up days are good opportunities to trim a little if you've been fully invested.

Let's wrap up with some specific expectations for the coming week. By applying some Fibonacci retracement analysis to the charts above, I've highlighted resistance levels where I would expect a rebound to stall out before proceeding lower. The S&P, Wilshire 4500, and EAFE charts have green horizontal lines drawn at these levels, which are (respectively): 1493, 670, and 80. Notice how each of these charts has shown earlier support/resistance at these same levels. This strengthens my expectations for a near term reversal down at those levels, given the supply-oriented market conditions.

Based upon the above analysis, I will personally move an additional 10% away from both my stock fund holdings (the I and C funds), and add to my bond holdings. This will leave my account configured:

20% International (EAFE)
10% Common Stocks (S&P 500)
30% Fixed Income (AGG)
40% Gov’t Bonds

This change will be effective as of close of business tomorrow.

Thanks for reading!

- Divot

What I've been waiting for...

2007-07-27T06:10:00.001-07:00

Short post this morning as I've got a 0715 tee time with my Dad and brother in law. Yesterday was confirmation for why I'm not "all in" with this market. I've been saying for a long time that risk levels were extremely high - and then I've been preaching since 28 June that this market is on defense. Yep, the downturn didn't happen right away - but when on defense the primary concern is capital PROTECTION, not accumulation.

I'd like to be all out today, but TSP's end-of-day transactions would leave me out at the bottom today.

I expect another UGLY day today, since none of the pros want to take a "wait and see" approach over the weekend. Monday will likely be a bit of a bounce, and I'll trim some more from my account holdings then.

Thanks for reading!

- Divot

A shakeout.. OR?

2007-07-24T20:10:00.001-07:00

Today the broad market sold off throughout the afternoon. Volume was significantly high, and breadth was authoritatively negative. Remember what I said yesterday about support levels? The S&P crushed the first two I identified for you, and stopped (really saved by the bell) just above 1510. The 50 day moving average didn't even seem to offer any friction (that's not a good sign for bulls), and the "last ditch" of support I can see lives in the 1490 to 1500 area.
All the bullish percents are now in full retreat, while the advance/decline charts show an obvious and significant downslope. Both these signs are also not good for bulls over the next few months.
Comparing the following chart of the Wilshire 4500 to the S&P 500 above, you'll notice today's drop was significantly more severe to the small caps. This goes right along with my comments yesterday about the relative strength of the larger cap stocks. Again, I've highlighted the "last ditch" support level, which is less than 1% lower.
This talk of "last ditch" support levels sounds rather desperate - but it's just a term identifying a meaningful signal point. Buyers have already shown a willingness to step in at these levels in the past - a future failure to do so would show a change to the supply/demand balance. I've been saying that the market was on defense since 28 June. That alone should have already influenced the degree to which you'll commit to the markets.

I believe that today's action was a bit of an overreaction for one day's work - leaving us somewhat oversold. Tomorrow morning should give a bit of a bounce, but who knows if the close will be higher. Either way, tomorrow is a good opportunity to make a minor adjustment - not a jump completely out of stocks, but an opportunity to trim back the fat.

You've got to seek out what is working, then make a move at a meaningful point. The EAFE is showing considerable relative strength over the US markets. This chart shows exceptionally strong support at current price levels, with prices at the bottom of an upward sloping channel. Add to that fact that the Dollar continues its downward march, and I'm reiterating my support for the international markets.
Now, as for bonds... It takes a big man to admit he was wrong, and a bigger man to make fun up him. So go ahead! Honestly, I expected bond rates to jump with the treasury auctions this week, especially as prices met with the convergence of their 50 and 200 day moving averages.
Instead, the AGG is now trading above both its 50 and 200 day MA's, and rates have established an obvious downslope from their early June highs.
Bottom line here is that I consider the AGG to be at least equivalent to cash (the TSP G fund) for the near term. As I post this online, I'll be moving out of the Wilshire 4500 and into the AGG. This will leave my account:

30% EAFE (TSP "I Fund")
20% S&P 500 (TSP "C Fund")
20% AGG (TSP "F Fund")

I'll be watching the remaining support levels on the US markets and the EAFE as signals to shift funds away from weakness and into strength. Overall, remember the market supply and demand balance is tilting further away from the bulls - so stock allocations should be conservative.

Thanks for reading!

- Divot

Catching a breather

2007-07-23T22:06:00.001-07:00

Both I and the markets have been catching a breather over the past couple of trading days. I've been enjoying San Diego with my family, while the market has revisited the June 18 highs. These are showing strong support for prices and leaving open the path for continued advance by the markets. In fact, charts show a strong "formation" of multiple support levels just below current prices, which lends a lot of evidence that supports this "new" uptrend. I expect bullish markets to continue through the rest of week.

For example, S&P 500 support levels:

1535 (0.5% lower)
1525 (1 % lower)
1510 (2 % lower)
1490 (3.3 % lower)

Wilshire 4500 support levels:

Right here at 693
686 (1 % lower)
673 (2.9 % lower)

What's interesting about having all this price support right behind current prices is that market indicators I trust are not indicating clear sailing. I put a lot of credit in market breadth as a gauge. The NASDAQ "tech country" looks bad, the New York and Amex still look ugly, and nothing really looks good. What I'd really like to see here (for clarification), is these cumulative breadth charts popping up like Harry Potter book sales to confirm the recent break out on the price charts. Instead, they look pretty lethargic.With more to muddy the waters, the bullish percent charts (which I give the most credence to) seemed to slide dramatically lower due to Friday's action.
These charts tell me there are more sellers in the small caps than the large, which makes sense when you look again at the S&P vs. Wilshire charts above. Remember, bullish percent charts are not weighted for market capitalization while the S&P 500 is. Impact to me: give me a reason to shift away from the Wilshire to the S&P (break a support level, for instance) - and I'll not hesitate!

Finally, the EAFE continues to be buoyed by the US Dollar's slide lower. Foreign markets technicals look significantly better than US for a lot of reasons right now. This is actually the cleanest game to call right now, so I have a lot of confidence in my decision to overweight the foreign stocks.

Thanks for reading and commenting!

- Divot

Oh, no you don't!

2007-07-18T19:29:00.000-07:00

That's how the buyers reacted today.

Take a look at the intraday chart of the S&P 500:
As always, there are plenty of reasons WHY - in fact, if you ask 10 different analysts you'll get 50 different answers... Still, it doesn't matter why: WHAT happened was that a 1% pull back was eagerly bought up. Pull back a little for the big picture perspective:
Notice how the previous highs were support for today's low. Also, today's low (1533) was pretty close to - and just above - a 38% Fibonacci retracement of 1528. All of this on a high volume day.

The Wilshire 4500 had a very similar performance today:
The small caps of the Wilshire 4500 closed almost exactly at the support level created by the early June high. The day's retracement low of 691 was also a near perfect Fibonacci rebound (as measured from the late June lows to last weeks high.)

This adds up to be some nice confirmation for an upward trend.

The EAFA picture isn't as clear cut as the above - it looks like there's room for another 1% consolidation down to support. On the other hand, the dollar's fall through support is pretty obvious at this point - and there's no telling how low this can go. That's going to be beneficial for the EAFE and large cap US companies that profit overseas.
One place NOT to be right now is Aggregate Bonds (AGG). Not only is it bumping up against the convergence of the 50 and 200 day moving averages, but the yields are all trending lower.

Based on all this, I'm going to add 10% to each of my TSP stock funds. After close of business tomorrow, I'll be:

30% EAFE (I Fund)
20% S&P 500 (C Fund)
20% Wilshire 4500 (S Fund)
30% cash (G Fund)

Thanks for reading!

- Divot

The Planning Process (continued)

2007-07-17T20:26:00.000-07:00

This post will be a little different from my usual market commentary on the market indices tracked by the TSP funds. I'm expecting tomorrow to be a down day for most of the markets, but that discussion will wait for later in the week.

Since the markets have recently proven the ability to move above their triple tops, I'm now working to reenter long positions. My TSP account is now partially invested, and today I'll address how I'm managing my more flexible brokerage account. As I consider my strategy in the latter account, I have a couple of key considerations:

What is the market direction?
What is the market risk level?

To answer both these questions I'll look at the bullish percent charts. This gives me trend information that a price chart won't necessarily reveal.I'm not concerned with every little wiggle here, but general position and trend direction are important. In the above charts, it appears that supply was overpowering demand on the New York and in the S&P500, but a resurgence of demand is pushing back recently. Both these indexes above the 70% mark - indicating that a lot of cash has already been put to work and most of the underlying stocks are already on buy signals. There's a tight balance between supply and demand on the NASDAQ, but risk levels are significantly lower since this index sits close to the 50% mark.

Based on the above, it appears that cautious investing in NASDAQ issues (think technology) and/or small-to-mid cap names will be preferable to the mega cap names of the S&P. I didn't show the Dow Jones 30 bullish percent chart above, but it's at 100% (big surprise there since it's been on a tear.)

Now that I know what the market conditions are, the next question is:

3. Which sectors are preferable?

Based on my sector screens, I'm looking at the following sectors:

Gaming
Wall Street
Software
Aerospace
Textiles
Semiconductors

Because of the overall market conditions at high risk levels, I'm not going to buy individual stocks. ETFs are a great way to avoid picking the one member of a sector that was about to tank while the rest fly away. Of course, there's more than one ETF associated with some of these sectors - and others may not provide me any ETF choices. I'm not a big fan of mutual funds, so I won't consider those (but the whys will have to wait). Now, to narrow the field I consider the following:

Fundamentals of the ETF's holdings - P/E, earnings growth rate, etc.

I find that this will often quickly differentiate between funds

Average Volume - needs to be at least in the high thousands to avoid "low volume no man's land"

With usually only a handful of names remaining, now I'll compare their relative strength. The following 30 day performance chart shows the finalists I'm considering in the software and semiconductor areas:
And the top three contestants seem to be XSD, IGW, and SMH, in order of increasing average P/E. IGW has the highest average earnings growth rate, and a quick look at its composition shows its top 10 holdings make up only 55% of total assets. This is a preferable situation to SMH, which shows its top 10 holdings comprise almost 83% of assets. I'm trying to buy diversification here.

After careful consideration, my preferences are IGW (iShares S&P GSTI Semiconductor) and PPA (PowerShares Aerospace & Defense), and IAI (iShares Dow Jones US Broker-Dealers). However, I won't just buy them straight out. I'll discuss entry points separately for these in a follow on post.

If anyone's read this far - thanks!

- Divot

The Planning Process

2007-07-16T21:20:00.000-07:00

As of this afternoon, my TSP account is back in the market:

20% - EAFE
10% - S&P500
10% - Wilshire 4500

The remaining 60% is still in government bonds.

Earlier in the morning, I closed the short positions in my brokerage account. I was in a couple very leveraged positions, anticipating an interest rate run up that would have pulled the rug out from under the utility sector. That didn't happen, and my losses were limited to about 1%.

I spent the evening evaluating current market opportunities in light of developments over the last 6 weeks. The market has proven the ability and will to break out higher, and I have to honor this bullish trend in spite of ample warning signs. As I stated in yesterday's post, market action could continue higher for some time - although I wouldn't be surprised to see a significant correction before year's end.

In the mean time, I want to position both my brokerage and TSP accounts to profit from the potential for an extended bull run. Small cap stocks, with a bullish percent around 50, definitely look to be the lower risk cap weighting (vs the mid-to-large caps around 70%). I ran some sector screens to identify the damaged and strong sectors this evening. Here's what I see, in order of descending preference:
Because risk is high, I'm going to use ETFs to move into these new positions rather than single stocks. I'll explain the rest of my selection process tomorrow.

Thanks for reading!

- Divot

"Doctor, it hurts when I do this..."

2007-07-15T21:03:00.000-07:00

"Then don't do that!" comes the snappy reply.

I stated last week Tuesday that if the S&P closed above 1535, I would consider that to mark a new uptrend. Sure enough, the market managed that on Thursday alone and continued the move up on Friday. It kinda stings a little to be out of that action, (thank you to all the permabulls for your mature comments) but I say lost opportunity was worthwhile to be convinced of a new uptrend. Indeed looking at both the S&P 500 and the Wilshire 4500 charts, it's clear that both broke out of their trading range with little resistance waiting above.So I'm a believer - sort of. My risk indicators (major market bullish percents) still tell me that the market is at VERY high risk levels, with good evidence that supply is gaining in power. Therefore, I can't fully buy in. If this "new uptrend" survives the coming week's earnings reports, I can't see it lasting through the end of the year before supply will gain sufficient control to force a very significant correction. That's not to say the market won't wiggle its way higher up the wall of worry, and if it does I will gradually commit more funds as it proves the trend.

So, how much will I allocate to the market, and how? It appears the dollar has proven it will far further, while international markets show greater strength than US domestic equities. Therefore, I'll put double weight on the EAFE (the "I Fund") than any US sector. With larger cap companies getting as much as 50% of their income from foreign sources, the exchange rate will work in their favor - but that's a tough relationship to quantify.

Bottom line - I'll be allocated 20% I Fund, 10% C Fund, and 10% S Fund as of close of business tomorrow.

Thanks for reading and commenting.

- Divot

Acting locally, but thinking globally

2007-07-11T19:55:00.000-07:00

A bit of a bounce back from yesterday's sell off, and the S&P 500 held at it's 50 day moving average (again). Is it time to jump back in? From what I'm seeing in the bullish percents, it looks as if the internal damage to the markets is still building.
Furthermore, nearly half of all stocks on the New York and NASDAQ are now trading below their 50 day moving averages. Note the downtrend in numbers of stocks trading above their 200 day MAs:
I'm still thinking the US stock funds are due for more down action.

Internationally, however, is starting to look interesting. The dollar is acting as if it may fall through support at multi-DECADE lows. This, of course, would be a tailwind to the EAFE.
Regardless of the exchange rates, the EAFE is substantially outperforming US stocks over the last 30 days anyway:
I'll be watching for breakouts by either the dollar (lower) or the EAFE (higher) to signal a re-entry here. Risk levels remain moderate in international bullish percentages, but those signals currently don't have a consensus for a bullish or bearish risk perspective. Put another way, a continued trend higher would be completely reasonable for the EAFE, unless the US markets completely melt down. Our superpower's markets are still the dog that wags the tail...

Still happily all cash,

- Divot

As Expected

2007-07-10T20:20:00.000-07:00

This is the kind of day that it's really nice to be out of the market (plus a couple leveraged short positions in my brokerage account.) I often say about the markets, "it doesn't matter why, but what happened." Nevertheless, today's intraday chart DEMANDS a second look - what happened just after 1 PM?
Prior to 1 PM - sure, the market gapped down - but a nice up trend was established, and it looks to me that the market could have closed even for the day. And then... our friend Ben spoke. Click the photo to link to the AP story, but I think the expression says a lot.
Today's action knocked out all of last weeks gains, taking the S&P 500 back down through its 50 day moving average.
Far more important was the internal damage to the market's bullish percents. The S&P bullish percent was down almost 2% today... which would be a bad WEEK. There's a lot of chatter lately about how large cap is supposed to be outperforming small cap. But take a look at a relative comparison between the bullish percents on the New York, NASDAQ, and S&P! There's around 50% more new sell signals (in the time period shown) in the S&P vs. the NASDAQ.
Although some might argue that the S&P will find support at the 50 day MA, the fact that demand is losing the battle to overwhelming supply tells me that the future is lower for the S&P.

Currently, futures point to a mild rebound - but the overseas markets seem to be following today's lead.

The rest of this week will be very interesting to watch. No trend has emerged as yet - a break below 1490 on the S&P would set the down trend, breaking above 1535 would set the uptrend.

Thanks for reading and emailing.

- Divot

Earnings Season

2007-07-09T19:28:00.000-07:00

Last week was truly the calm before the storm, for we've now entered earnings season. This is the time every quarter when many publicly traded companies report their results - and the impact on the market is significant.

Today was a bit of a continuation of last week's quiet - take a look at the market breadth numbers to the left. Light volume, indices nearly unchanged, and breadth tightly balanced. It looks as if the big players are waiting too see how these earnings turn out before committing one way or the other.

At this point, I'm out of all the stock market funds, and I outlined in the last post my reasons why. Now my job is to identify a point to reenter the market. The worst case scenario for me would be for the market to simply drift along in this trading range. Although very playable in my brokerage account, that makes end-of-day TSP transactions a thing of guesswork. No, what I really want is for the market to establish direction one way or the other. Don't think for a second just because I'm out of the market, I'm a committed bear. I'm just as ready to put my money back to work in the market.

Earnings season should make this problem easy - because quarterly results are always overreacted to. Fear and greed make the markets. Either results are going to blow away expectations, or they will totally underwhelm (I know, that's a real heavyweight call I made there). My point is that this massive amount of new earnings data will give the markets something to digest, and I expect a trend will soon emerge. If that trend is to the upside, I will jump on and ride it!

With that being said, remember not to take earnings headlines at face value. Earnings expectations are completely artificial, and just because a company beats analysts expectations doesn't mean the stock is going higher. This is sometimes called "buy the rumor and sell the news." The headlines, the quarterly reports, and the conference calls are irrelevant. The price movement - the market's reaction - is all that matters.

Besides all the earnings releases, there's some noteworthy economic news items also due this week. Consumer credit (released today) is not a real market mover, but tomorrow's wholesale inventories, Thursday's jobless claims, and most of Friday's reports have the potential to cause a reaction.

This is a very interesting time for me to watch the markets! Tons of data about to hit the street, a tight trading channel to break out of (one way or the other), and warning signs last month on my supply and demand/breadth indicators. It's my opinion that the trend established in the next week or two will be powerful, setting the market direction for the rest of the year. Time will tell!

- Divot

The Calm Before...

2007-07-05T18:06:00.000-07:00

The US stock markets only close for two holidays that can occur mid-week: the 4th of July, and Christmas.

This, obviously, was one of those weeks. The impact of this holiday is that volume is very light - all the big players are on vacation.

As much as I'm a technical analysis geek, I don't really care as much for volume. It's not irrelevant, but price is king. With that being said, I think this week's volume largely discounts the importance of the week's price action.

The following chart shows the daily progress of the S&P500. I've outlined the previous bullish trend channel and the new horizontal trading range. This brings about a few observations:

The bullish trend channel was definitely broken the first week of June.
The bottom of the bullish trend channel (extended) seems to have provided resistance.
The horizontal trading range (so far) is comprised of progressively lower tops and lower bottoms.

In the above chart, I also circled the low volume days from this week and last Christmas. Now, I'm not into candlesticks, but notice how there's very similar price action between the two periods:

Both holiday periods were preceded by a bullish trend and then a pullback.
During the holiday period, the price made an incomplete recovery.
The peak of the holiday recovery was marked by a healthy intraday pullback, but closed nearly unchanged (this is marked with arrows).

What does that mean? Probably nothing. However, the S&P has paused at the top of this horizontal trading range. I noted on 25 June that a move back above the 50 day MA would cause me to reenter long (a bullish position). This happened during a couple of intraday moves (which should have warned me), before jumping higher on Monday 2 July. So I missed my entry point. However, since we're only 1% above that line right now, I'm going to see how the market deals with this new trend channel over the next two days before I rush into a new position. Based on market breadth and momentum continuing to break down, I don't expect the market to continue higher.

In spite of the broad index charts sitting basically at the same level as they were in the beginning of June, a look at the percentage of individual stocks trading above their moving averages shows that there's a lot of internal weakness and damage:
This means I will not give the market the benefit of the doubt for the time being.

The Wilshire 4500 (the TSP "S Fund") actually broke out of its horizontal range and crested the previous high. Note, however, that it bounced off the bottom of the bullish trend channel once before - and at this pace it will meet it again about 1% higher than its current position. I'm also going to give this one the old "wait and see" before I rush in.
The EAFE (the TSP "I Fund") looks to be about a day or two ahead of the S Fund in terms of the action I just described. Notice how it bounced right off the bottom of the previous channel, and now rests on a support/resistance line.
All other things being equal, I would normally take this as an opportunity to add to my bet on international stocks, but...

The Bank of England raised rates today, with very hawkish language re: inflation. This does not bode well for international stocks (and is likely to have repercussions into US equities.)
The US dollar is actually rebounding higher from a pretty obvious support level:

Therefore, I'll step aside from international equities tomorrow.

This move abroad should actually increase the attractiveness of bonds versus stocks. Here's how our own treasury rate landscape looks now:
A definite move higher in mid term rates. Of course, this means trouble for the AGG (the TSP "F Fund").
Looks to me like an extraordinarily high volume day earlier this week followed by a gap down. I may be a touch late, but it looks like the rats are leaving this ship. I'll sell out of the F fund tomorrow with a little profit and a large moral victory from calling that short term bottom.

Bottom line - I'll be 100% cash as of tomorrow afternoon.

Perhaps someday I'll repent of my bearishness as Trader Tim did today. Funny, sad, and too true!

Thanks for reading and commenting.

- Divot

Why I'm Bearish (at least for the moment)

2007-07-01T20:21:00.001-07:00

Lots to talk about from the past week, so buckle your seat belts and hold on. I've got a few charts for you...

Here's the bottom line up front:

The best case scenario is that the market has established a trading range that it could bounce around in for some time. However:
All the supply and demand indicators show unmistakable evidence that sellers are overpowering buyers on a broad scale.

One of my readers asked me to explain in plain English what I meant when I said the market was "officially on defense." This terminology is borrowed from Tom Dorsey's excellent book, Point and Figure Charting, and simply refers to the trend direction of a bullish percent chart.

First, some background knowledge of what a bullish percent measures - it's not a sentiment survey! Rather, a bullish percent, or BP, simply measures how many of a given group of stocks are on a Point & Figure buy signal - a direct measure of supply and demand. When a bullish percent is charted on a point and figure chart (as it should be), a reversal in direction is plotted in a new column. Reversals up are plotted in a column of "X"s, reversals down are plotted in a column of "O"s. Point and figure charts do not record every wiggle of these indicators, so a reversal doesn't happen unless the reading backtracks at least 6% from its previous limit. This means that BPs don't reverse very often - but when they do, it should be noticed.

The bottom line - in English - is that a significant number of stocks are losing price support. Put another way, the bullish percents on "defense" are a quantitative way to show that supply is overpowering demand. We can say with certainty that there are more sellers than buyers.

What this means to YOU is that THIS is the time to think carefully about the protecting your capital. This doesn't necessarily mean sell everything immediately (which I was admittedly a bit too spring loaded to do earlier in June.) This is a very clear message that you don't want to just ride this one lower, and lower, and lower... You must preplan a line in the sand at which point - if you haven't already - you will sell.

There's further evidence that the markets are breaking down - the percentages of stocks trading above their 50 and 200 day moving averages have dropped to rarely seen levels. If you don't count February's short lived Shanghai overcorrection, the last time these levels were seen was just prior to a pretty serious correction last summer.

Now for some specific market comments:

The S&P 500 is now trading below its 50 day MA, and has definitely established a double top and a double bottom. The fact that the second top/bottom were lower than the previous should be attention getting. While it wouldn't be shocking to see a recovery this week up to the 1535 level, the negative market breadth makes that (in my opinion) unlikely.

The Wilshire 4500 Completion (the "S Fund") has also established the same double top/bottom, but the second top is indisputably lower. This makes the small caps look distinctly weaker than the large caps. For what it's worth, the index is above its 50 day MA. I'm not expecting to see this one move higher this week.

The EFA ("I Fund:") has the same comments regarding a double top/bottom as the preceding, but in this case the second bottom is significantly higher. Also trading above its 50 day MA, this is strongest looking of the three stock funds. Further, the US Dollar index (right) is definitely trending lower.

It remains to be seen whether the Glasgow incident from this weekend will negatively impact the international markets. So far this evening the Asian markets seem to be brushing it off.

The AGG ("F Fund"), here shown on a weekly chart, looks very strong with a near perfect Fibonacci retracement and rebound. This shows confirmation of the previous uptrend. Although both the 50 and 200 day MAs loom as resistance, rates would have to really rise to cause these to become a glass ceiling - and that would have a far more devastating effect on stocks.

Thanks for reading and commenting!

- Divot

Officially on Defense

2007-06-28T04:37:00.000-07:00

Just a quick post to note that the market is officially "on defense" as of yesterday. Both the NYSE and S&P bullish percents reversed down as seen on a point and figure chart. This doesn't mean it's time for me to do anything differently, rather it's confirmation of the market behavior I've been noting for some time.

One reader asked me yesterday, "how much cash do you hold or raise once the indicators have gone onto defense?"

My answer was, "it depends." As your investments prove that they're no longer working, you should move out of them (or use hedging strategies.) Your sell decisions can be based on a number of things, but indicators I consider worthwhile include: P&F sell signals, relative strength comparisons within a sector/class of asset, other technical indicators such as breaking moving averages or Fibonacci retracement levels. Knowing the specific behavior characteristics of each investment is also important: if it's demonstrated a tendency to "wiggle" its way lower within a trading band, then you can chose a more advantageous exit at the top of the band rather than the first time it trips your sell signal.

That's all for today, thanks for reading.

- Divot

Drag of Gravity

2007-06-26T20:14:00.000-07:00

The title "Drag of Gravity" pretty well describes the market's behavior. It's as if all the little candlesticks were just really heavy and tired at the end of the day...

On a completely unrelated note, "Drag of Gravity" also happens to be an excellent local Phoenix band. Not appropriate for those who don't appreciate rock and roll.

Not much to add to yesterday's post - the distribution raged on, as shown by the bullish percents:
In yesterday's post I highlighted the last remaining psychological supports before the chasm opens below. Those levels remained inviolate today, but their future looks grim to me.

The EFA didn't respect it's 50 day MA today - so I figure I've got about a 1.5% downside risk before I will stop out at the early June lows. Of course, I'd prefer some action to the upside...

For the first time in a while, overnight futures seem to show capitulation rather than optimism. Tomorrow will confirm the market's short term direction one way or the other.

Thanks for reading and all the feedback!

- Divot

A Slippery Slope in US Markets

2007-06-25T19:22:00.000-07:00

The best word to describe Wall Street today was "parabolic." As I discussed in yesterday's post, going long at the open with tight stops could have turned out quite profitably. Assuming you became bored around mid-day and sold before the crowds.

The big news of the day was the bullish percents. These were completely clobbered today. Whacked. Crushed. Beaten with the ugly stick. Today's declines in bullish percents would have been significant if they took place over the course of a week, but THIS MUCH in one day should cause notice.
There is a distinct downward trend in these bullish percent charts - supply is overpowering demand.

The only remaining psychological restraint that could preserve 2007's stock market uptrend is the S&P's level of 1490, or the Wilshire 4500's level of 670. This is where the last downtrend stopped - and where buyers stepped in. Interestingly, both numbers also happen to be very close to a 38.2% retracement of their uptrends since March (an important number to practitioners of fibonacci voodoo.)

To summarize US markets, a move back above the 50 day MA or a rebound off the above mentioned support levels (1490 or 670) must be respected. Either would cause me to re-enter long positions in the markets. I would not be surprised by continuing market declines.

And now (as Monty Python would say), now for something completely different.

I've been avoiding the "I Fund" for the last two weeks, otherwise known as stock symbol EFA. In the meantime, I assess that global bullish percents have fallen significantly below US markets - and are now rising in some of the more important foreign exchanges. This indicates that, unlike US markets, in the foreign exchanges demand is overpowering supply. Also, the US greenback seems to have resumed its decline (a tailwind for overseas investments).

The EFA is performing much better than US indices, and today nearly held its 50 day MA. Furthermore, the relative strength of the EFA over the last 10 days is significantly better than the US indices. This chart shows a nearly 2% gain by the EFA, while the US indices barely held their ground.

The bottom line is this: I'm going to move 20% into the TSP "I Fund", or EFA, effective COB tomorrow. I am BETTING that the international markets will rebound.

If the EFA continues lower, than I will accept the small loss and return to the safety of bonds.
BUT, if the EFA turns around breaks through the double top shown above right - then I will add to this position.

This will bring my current allocation to 60% G / 20% F / and 20% I. Later this week I'll discuss re-entry points into US markets.

Thanks for reading!

- Divot

Avoiding Distractions

2007-06-24T20:37:00.000-07:00

There's so much to talk about:

Investor sentiment, market breadth, interest rates, subprime fiascos, initial public offerings, seasonality...

I hope I don't disappoint my fans, but I'm not going to touch most of those topics in this post. You see, I feel quite strongly - rather, I know - that only SUPPLY and DEMAND will actually affect the prices of investments.

When supply overpowers demand, then prices WILL fall. It's as simple as that. It doesn't matter how people feel about the market, or what the news headlines are, or how the market has performed in the past. This is also why you should not watch CNBC. Now, that doesn't mean that all the prices will move equally or simultaneously.

Chances are (and pre-market futures are currently pointing to) a positive bounce for the markets tomorrow morning. Some are considering the market "oversold" at this point - but I find little confidence in such qualitative terms. Looking a little further than the most immediate near term prospects, I find that supply is authoritatively overpowering demand. The following chart shows the cumulative weekly advancer/decliner sum on the New York Stock Exchange:
Remember what I said earlier - when supply is greater than demand, prices WILL fall. When a stock's price falls over the course of the day, it is termed a "decliner" for the purposes of market breadth. The above chart shows that only rarely does the weekly A/D line fall below its 50 day moving average. The last time this happened was before last May's market stumble - and notice that it didn't even come close during February's "Shanghai Slapstick".

We sit at an inflection point currently. The following chart of the S&P500 shows that we've hit the 50 day MA a second time - and PENETRATED. (Go on, click the chart for a closer view.) Some have already pointed out to me that the magical 1500 point level held - but I reply that 1500 was a clean kill earlier in the month. The most credible support the market has right now is around 1490, where the damage stopped last time.

If I could actually behave as a trader with my TSP account, I might be inclined to buy at market's open with VERY tight stops. There's some chance that Monday could be a modestly positive day. Unfortunately, the end-of-day account moves that TSP allows leave that tactic with good potential for being left holding the bag.

Here's what I see as the important market facts right now:

Market breadth has turned the corner south. If that doesn't change, the market WILL NOT go higher.
The market failed to break through the previous high of 1540. That shows buyers are running out of ammo.
The market penetrated the 50 day moving average. Trading below the 50 day moving average is usually not a healthy sign.
Bullish percents have been near or above 70% for some time now, but are now starting to decline. This shows me that the shift in market breadth isn't just slightly declining prices, but resulting in actual individual stock sell signals.

I'll look later this week at the volatility index, the US dollar, and interest rates. Thanks for reading and commenting!

- Divot

It's not a question of why - but what

2007-06-20T21:01:00.000-07:00

I've skimmed quite a bit of market analysis this afternoon/evening. Ask ten analysts why the market sold off lower today, and you'll get at least 15 opinions. Their opinions - blame interest rates, oil inventories, whatever - are irrelevant. It doesn't matter WHY.

The important thing is WHAT happened today. Most markets had recovered from their 2-3 percent stumble earlier this month. They spend the first two days of this week wallowing around in light volume, right up against their previous highs. Then today happened:The market - supply and demand - just declared that prices are high enough. Here's another way to look at the significance of today's shift: the volatility index.
Today was the green bar at the far right, and notice how tall it is. This was a huge spike in volatility - which means that options just got a lot more expensive. Options are, of course, a tool to hedge risk. Amateurs tend not to trade options seriously, rather, this is the heavy hitters. Now, there are equations to figure out what an option SHOULD be worth, Black-Scholes being one of the better known examples, but the reality is that good old supply and demand plays a big role as well. Put another way - just try trading options on the basis of what some formula tells you they should be worth... Good luck with that trading account!

Remember, bullish percents are (predominantly) around 70%. There's a lot of profits to be protected right now, and those that aren't hedging with options are likely to have itchy "sell" trigger fingers.

Looking at the TSP indices, it looks like all are still above the support levels of their 50 day moving averages. If they pause or reverse off the 50 day MA - I'm in! Support at that level will have proven itself three times, and the markets will likely still be on offense. If they crash through those blue lines... oh brother, hold on. Here there be dragons. If that happens, I'm already very protected by my current position.
Who cares WHY today's action happened, what's more important is the message available for those listening.

- Divot

And listened - to the sound - of silence...

2007-06-18T20:52:00.001-07:00

After visiting a half dozen of my favorite financial web sources this evening, I can find little in US markets worth commenting on:

Breadth was slightly negative (but not notably).
Volume was light.
The markets finished close to unchanged. (Yawn)

However, international markets are starting to look more interesting:

The dollar looks like it may be on the way back down...
World bullish percents are (like the US) on offense, but at rather lower risk levels.
However, the EFA is right up against resistance (although still on a buy signal from a pure P&F standpoint.)

Premarket futures look slightly negative as I write this, but who cares about that? Certainly no definite near term direction was set today.

- Divot

Bias and Self Validation

2007-06-16T14:18:00.000-07:00

It's important to look at the markets without bias. Being unaware of one's own bias can result in at least missed opportunities, or worse, swimming upstream with a poor risk/reward profile. For most, it's tough to avoid a "bullish" bias. This is, of course, the predominant "retail investor" perspective. This perspective on the markets believes that the only way money is made is for prices to rise. "Buy low and sell high." At least as far as our TSP accounts go, that's true. The TSP doesn't offer any inversely correlated funds, and there's definitely no way to short the markets.

This perspective is very one dimensional. Instead of just asking the above questions, it's worthwhile to approach your trading/investing with some "devil's advocate" style thinking - even if your account doesn't leave you tools to profit from a bearish scenario. Instead of just asking the question, "what should I be buying now" - look at the perspective, "is this a good setup to short?"

Self validation is even more dangerous than bias. Having made a decision, the investor faces the mind numbing onslaught of self-validation. We've all experienced this - and it's easiest to see third hand. Picture your friend who just bought a new car/house/computer/etc, and now wants to explain to you why their decision was superior to the alternative products available. You may agree - or you may perceive their arguments as a shield for buyer's remorse.

Self validation always affects investors - those who have already bought in, tend to focus on the data that confirms their long position. Those investors out of the market will tend to downplay the former's data and focus on bearish analysis. This doesn't seem like a big deal when you're "right", ie: the market is confirming your analysis. This is where complacency can set in, because the market's trend will not last forever. Eventually, you'll become "wrong" - the market will start to move opposite your position - and it's here we must beware of the trap of self validation. It's OK to change your mind, accept new data, and reanalyze the situation. The point of this is to prevent your small losses from becoming big losses. "Don't fight the market" goes the platitude. The challenge is to understand your margin for error - your pain tolerance.

Now that I've discussed those concepts, I'm a stationary target for accusations of personifying either.

Last week, both the Wilshire 4500 (S Fund) and the S&P500 (C Fund) recovered nearly all the setbacks from earlier this month. Both bounced cleanly off their 50 day moving averages (twice), and look to have established a floor of support. The question is whether there's a ceiling of resistance waiting next week.

If the SPX and EMW top their highs of early June, I'll be back in stocks due to the following:

The NYSE Bullish Percent is (currently) still on offense.
Support has been confirmed at the 50 day MA.
The market will have shown buying interest above the previous highs.

However, given that I'm currently out of the market, the risk/reward profile is not conducive to me buying in anticipation of the last point above. There is much evidence to show supply is overpowering demand:

4 of 10 Stockcharts.com's sector bullish percents have moved to defense, including Finance, Health Care, Materials, and Utilities.
The NYSE weekly advance/decline chart broke below its 50 day MA. I discussed the significance of this in an earlier post. See the sidebar chart for the latest.
So far, the market hasn't topped the highs of earlier this month. In fact - Friday's market rose quickly to just short of those highs, and then started a slow steady decline.

The more likely scenario in my mind (here come the accusations of self validation), is a retest of the 50 day MA next week. If that happens, I think supply pressure would be sufficient to put the S&P bullish percent on defense. Either way, I've got a gameplan.

- Divot

Sometimes you can be right and wrong

2007-06-13T20:05:00.000-07:00

Good morning. As the title of my post suggests, I was right about interest rates - and my move to the AGG (F Fund) was well served. Boy, I would have been more profitable in any of the other stock funds, though...

Watching a day like today from outside of the market sucks. But I'm not going to play the sucker's game - of jumping in and out of the market on a emotional whim. On the contrary, my market indicators (even after a day like today) still don't show me a healthy market. Instead, the NY Stock Exchange bullish percent actually declined today, and there was less participation (from a breadth standpoint) in today's rally than there was in yesterday's sell off.

I think the worst thing to do in market conditions like this is to obsess over Wall Street's tea leaves. That will only lead to unprofitable overtrading and not seeing the forest for the trees. So, I stand by my earlier commentary and remain in fixed income.

As I'm writing this Wednesday evening, I'll leave you with this week's "Mid-Week Mid-Life Crisis of the Week": The Harley-Davidson Softail Deuce.
Yeah, it looks tough. But you should hear how it sounds...

- Divot

Knife Catching

2007-06-12T23:56:00.000-07:00

Good Morning. Tuesday's markets were a good-old-fashioned ass kicking to those invested... almost anywhere. With decliners outvoting advancers by 3 to 1, don't kid yourself if you thought that's just a little consolidation.

As an aside, this should serve to highlight what a nice thing the G Fund is to Thrift Savings Plan participants... 4.9% for the trailing 12 months is not a shabby place to keep your money while waiting out the market's storms and looking for a better place to invest. I'll tell you this much, my E*Trade account sure don't give me that on my uninvested cash!

First off, an explanation of my nibble at the F Fund: What I'm doing here, folks, is called trying to catch a falling knife. Typically, you don't want to touch a chart that looks like this with a ten foot pole: (note that, as a fighter pilot, my risk tolerance may be higher than yours...)

The fire I'm playing with here is based on two concepts: Fibonacci regression and a resistance level on the 10 year bond interest rate. I'll explain. Note on the above chart that from the double bottom the AGG established middle of last year around 93 to the top just north of 100, it has now retraced right around 38% of that upward march. Don't ask me why (and I don't really care why - it just works), that tends to mark a turnaround point. Unless it doesn't.

Which gets me to my second concept - the resistance level on the 10 year bond interest rate: Looking at the next chart, notice that interest rates haven't exceeded 5 and a quarter since 2002. Due to the coincidence of these two observations, I've established a 20% bond position on the belief that mid-term interest rates likely will not rise further - which would stop the bleeding in bond prices. In fact, if this marks the top for rates - compare the two charts to see what bond prices did the latter half of 2006...

If rates continue to rise (pushing the F Fund lower), my stop loss for the position is at the 61% fibonacci regression level, equivalent to an AGG price of 95.7 or a 1.7% loss on my position. I haven't taken the time to crunch all the numbers (hey, I have a family and a day job too) - but I think my reward/risk ratio on this trade sits around 4/1.

In other news, I still say stocks are NOT where it's at right now. Yes, prices seems to have held to the 50 day MA (see charts below), which you'd think would be support. Notice, though how Friday's "rally" actually just established a lower high than the previous. It remains to be seen if a lower low will ensue - setting up a downtrend.

Meanwhile, bullish percents continue to turn lower. The markets are close to officially going on defense - which I've already started playing. I'll keep you informed.

Thanks for reading, your comments are always welcome.

- Divot

No, no - you go first

2007-06-11T23:45:00.000-07:00

Buyers and sellers had on their best poker faces today. No one really wanted to lay anything on the line, which is interesting from both the bullish and bearish points of view.

From the bullish viewpoint, that was bad news. After a big rally on Friday, the bulls should have charged out of the gate to take charge of the new week. The "heavy hitter" buyers were few and far between.
From the bearish stance, today was also bad news. Many bears had hoped for panic selling after retail investors had a weekend to digest the news. With a minor but fairly painless correction out of the way, today set up a plausible base for the market to continue to climb the "wall of worry."

Either way, I'm happy out of stocks for now. Why is that?

Far more important than how I feel, or a silly personification of large mammals: The numerical measurements of market supply and demand - the bullish percents - moved lower today. This tells me that supply is actually in charge (by a thin margin). Furthermore, the shorter term measurements of market breadth continue to show that the wheels are starting to come off of a market fattened by demand. (Large caps are more vulnerable than small.)

I think there will be another trip down for stocks, and until my metrics cause me to believe otherwise, I'm not a buyer.

On another note, I'm going to take a nibble at the F Fund (effective close of business tomorrow.) Some will find that strange following my comments yesterday, but the fund is at a 37% Fibonacci retracement currently. I think a 20% allocation is sufficient for now.
Thanks very much for reading, bookmarking, commenting, and subscribing.

- Divot

A day early, and a dollar short

2007-06-10T19:38:00.000-07:00

After my last post, and the market's Friday rally, some might be waiting for my public retraction and repentance from all thoughts bearish. I hate to disappoint my readers... but don't hold your breath.

To be sure, Friday was an impressive day to the upside - but it is most useful to highlight a breakdown in my discipline. I said Wednesday, that if Thursday's markets showed continued weakness I would move to only 50% Government bonds. So, I will publish an apology for my hasty move to 100% Gov't bonds. Adding insult to injury, keeping an "oar in the water" with a 50/50 allocation would have recovered a bit of the week's losses.

At the same time, I'm sticking with my story that a fundamental shift has taken place. Although Friday was more than a "dead cat bounce", one day does not constitute a recovery. I am not expecting this next week to continue skyward. Take a look at the following chart of last week's intraday action: Rather than a recovery, it looks to me to have confirmed this new - downward - trend.
My impression is that Friday was simply the shorts covering their profits - they didn't want to hold positions over the weekend. That sort of behavior sounds like professional work to me. I don't buy the line that the "buy the dip" crowd finally came out in force Friday afternoon. There was plenty of dip to be bought earlier in the week, but the buyers weren't there.

Now, as for the bullish percents: This chart of the S&P 500 bullish percent (while not technically yet on defense), says to me, "supply is large and in charge". The S&P bullish percent hasn't moved this fast since February's market's were "Shanghai'ed".
Thanks, but I'll pass...

Finally (and though it may be too soon for me to take these shots), but I want to point out a bit of an "I told you so." Recently, some other TSP blogs have called for F Fund allocations. I'm not sure of their methodology, but back on 29 May I pointed out that the future was not bright for bonds (other than the G Fund). Please don't take this as a childish taunt, but a call for due diligence. Just make sure you understand WHY you're investing a certain way. Remember, this is your retirement money we're talking about - the SERIOUS MONEY.

Have a great week!

- Divot

Swoop, there it is

2007-06-07T19:33:00.000-07:00

For all those expecting, waiting, holding their breath, knowing it was just around the corner... this was your correction. If my calculations are correct - it may actually be just the start of something more substantial. Don't get me wrong, this was an ugly day in and of itself. Reference the adjacent market overview (courtesy of Yahoo Finance). The important thing to note is the failed "recovery rally" between 2 and 3 in the afternoon. I've got also got a chart widget on the left side of the screen for your TSP charting pleasure.

Even more noteworthy is the summation of the last few day's negative market breadth. This could be as far as the correction goes - but it looks like a substantial momentum shift is taking place. Click on the following chart, showing the weekly cumulative advancers/decliners on the New York, with an overlaid 10 day simple moving average:
Notice that we just violated that 10 day moving average, for the first time in a year. It's interesting that we didn't even touch the line during February's "Shanghai Surprise." I did a study of the previous crossings of this 10 day MA, both falling through and rising above. These color coded lines were overlaid on a chart of the S&P 500. By the way, I did this study earlier in the week, so the chart lacks the last few days of S&P data.For those who like to have it all spelled out for them - there's a pretty good buy/sell signal correlation to the aforementioned advance/decline chart and it's 10 day moving average.

Now, it's worth noting that although the bullish percents were clobbered today, only the NASDAQ composite actually went onto defense today (technically defined as a falling column on a point & figure chart). That's to be expected - bullish percents are a bit of a lagging indicator. Regardless, I'm 100% Government bonds as of this evening, which - for those currently wringing their hands - is a nice feeling right now.

For the time being, US market futures are expecting a bit of a bounce. On the other hand, all the Asian markets are down around 1%. Only time will tell.

Thanks for reading!

- Divot

Yep - that's kinda what I thought we'd see

2007-06-07T08:17:00.000-07:00

Rather than the 11AM buy programs, today we're seeing the 11AM sell programs. This doesn't smell like Mr. Retail Investor to me. I said last night I'd consider going 50% Small Cap / 50% Gov't Bond. Based on what we're seeing (and at the risk of getting whipsawed a second time this year) - I'm going 100% Gov't bond as of close of business today.

- Divot

Warning Signs Ahead

2007-06-06T20:40:00.000-07:00

The last two days in the markets have been really interesting - tomorrow is really important. If this is just a little temporary dip in a continuing uptrend, we'll know it tomorrow. So far, all we've seen is a 1-2 % pause. So, the Bottom Line Up Front: if the markets decline out of the gate tomorrow morning, I will scale out of stocks to a 50% Government bond / 50% Small Cap allocation. Here's some food for thought:

The volatility index rose significantly today. That's gonna happen anytime the market hiccups, but this was a rather significant climb today. I watch market volatility very closely for changes to intermediate term trends. Here's the year to date chart:
The dollar bumped up against its 50 day moving average, and started back down. In theory, this can serve as a tailwind for the international fund. That only works, of course, if the international markets are also climbing in price.
As I write this, the asian markets are down modestly. In case you didn't notice, the european markets had a REALLY bad day yesterday.
I went and looked at price support levels for the S&P, the Wilshire 4500, and the EFA. Based on fibonacci regression, if the market continues lower, we're set up for at least a 3.5-5.5% correction. The least vulnerable fund was the S (Wilshire 4500), and the most vulnerable was the C (S&P 500).

I'll post to this blog in the morning if I'm going to reallocate my account (prior to the deadline, of course).

- Divot

Have your pie (chart) and eat it too

2007-06-05T20:51:00.000-07:00

Permit me a brief rant. I don't know if you've noticed - but there's a lot of financial advice out there. One of the trends I've picked up on lately, is that it seems that so many of those pushing their advice don't seem to really know what they're doing. It's a lot like those hotel commercials:

"How do you know so much about Wall Street?"

"Well, I'm not really a successful investor - but I did stay in a Holiday Inn Express last night!"

If you're a financial professional, please don't take offense. I'm not referring to you, of course - I'm talking about that other guy... My point is, if the person offering me advice has the stock market all figured out - then why is he in the business he's in? If he was really that good, he wouldn't waste his time talking to me about becoming a client. He'd just sit on a beach somewhere with a laptop and a cold beverage and make crazy silly cash every trading day. As for his clients, I guess if you're convinced that the right "asset diversification" will be your key for long term investing success - more power to you.

Now for today's action. Interestingly enough, bullish percents actually climbed a little today although the rest of the market breadth measurements were even more negative than the index charts looked. What I think is most interesting, is the way short term interest rates have fallen off a cliff lately while longer term rates have climbed:

This says to me that there's increasing demand for short term notes versus the longer term paper right now. I guess people don't want to be locked in to a rate right now. On a related note, this also caught my eye. Take a look at this dynamic yield curve animation. You should especially note the action right before the top in 2000 and in the last couple weeks - flat/slightly inverted... and then the short term rates just drop. I'm not saying that means anything, it's just interesting.

For no other reason than it's Wednesday, here's the "Mid-Week Mid-Life Crisis of the Week":
Ah, the Porsche 911 Turbo. Click the photo for the specs... 0-60 in under 4 seconds. Damn that's sexy.

- Divot

The (un)importance of Shanghai

2007-06-04T21:48:00.000-07:00

Lots of discussion on China lately. After all, the Shanghai sell off at the end of February was to blame for our own markets' dip at the end of February... right?

Confession time - I was whipsawed by that little roller coaster, as were many others. Why is that?

It's not because I watch the Shanghai, or any other international market for any investment decisions.
It's not because I saw the market start down, saw all my financial plans flash before my eyes, and sold in a panic.
It's not because I follow the media market commentators (the perma-bulls or perma-bears).

Plain and simple: From 27 Feb until 22 Mar, the market shifted to defense. This is the column circled below. The "3" at the top of the column shows this happened to be the first change to the chart in the month of March. The descending "O"s indicate the NYSE Bullish Percent fell from 74% top 63% during that time period before reversing back up.
If this is your first time seeing a Point and Figure chart, don't sweat it if the charting technique isn't immediately intuitive. There's a bit of a learning curve there. The important point is that my primary market indicator shifted to defense, so I pulled back from the market (and slept very well, thank you). When the bullish percent shifted back to offense, I re-entered the market.

You bet, I gave up a couple percent gain. In this case (20/20 hindsight), I would have been better just to ride it out, or at least not to have completely exited the market. In fact, it would have been great to have the prescience to leave the market early and re-enter at the bottom. I don't think the latter can be done consistently.

Take another look at the top two charts. Notice how Shanghai's diving back into another high-volatility correction. Notice how the S&P doesn't seem to care. It's as if Wall Street is saying to Shanghai, "Fool me once, shame on you - fool me twice... nah, I don't think so."

- Divot

What's more important: Winning bigger or losing less often?

2007-06-03T14:41:00.000-07:00

Time for a mid-year checkup of your Thrift Savings Plan account. How are your retirement plans doing? So far this year, the TSP funds have returned:

G Fund - 1.96%
F Fund - 1.35%
C Fund - 8.80%
S Fund - 11.30%
I Fund - 10.76%

The natural reaction is to look at these numbers, and vow to invest more money in stocks. The only slightly more thoughtful reaction is to note seasonal trends for lagging stock market returns from May until late fall -- and avoid stocks for the rest of the summer. I refer both reactions as "steering the car by staring out the back window." Remember the old cliche, "past performance is not a guarantee of future results."

This is why it's so important to know whether supply or demand is driving the market, and invest appropriately. If demand is driving the market (as is currently the case), then prices will increase - it's that simple. This market is still on offense, and you can't try to "anticipate the anticipators" - expecting an imminent downturn. If the market goes on defense, then we'll move out of stocks and back into bonds.

Please note (and this is important) - this method is NOT a day trading technique. I don't bounce in and out of funds on a daily or even weekly basis, trying to catch half a percent swings. I will probably never ever call an absolute market top or bottom. That's OK. On the other hand, I will be invested when the market is on offense - and not when the market is on defense. Yes, this means I will catch a small loss as the market turns lower.

I'll attempt to use a bit of statistics to show what I mean. I ran a simulation with a notional stock market and two investment accounts. The market has random gains/losses on a monthly basis that result in a 10% annualized return. Both accounts invest $400 every month over 40 years. One of the accounts always stays in the market, the other participates in 80% of the gains but 25% of the losses. Put another way, the second account buys after 20% of a market upswing is already history - and then sticks with the market for the first 25% of a downswing before selling. After 50 iterations through the monte carlo:

The "risk managed" account averaged 12.6% annualized return (+/- 0.9% standard deviation) and an average final account balance of $6.22 million.

The "buy and hold" account averaged 9.9% annualized return (+/- 1.5% standard deviation) and an average final account balance of $2.92 million.

Some of my readers will doubtless accuse me of using statistics the way a drunk uses a lightpost - for support rather than illumination. It's worth noting that this scenario of random monthly returns is an unrealistic handicap to any trend following technique (including my own). The mid-to-long term trends that develop on Wall St. over months actually play to the strength of bullish percent analysis.

You can figure out your own account's year-to-date performance by checking your account balance, subtracting your last six months of contributions, and then dividing by the "Beginning Balance" total on your first quarter 2007 statement.

Thanks for reading, I welcome your comments!

- Divot

Insert Pithy Title Here

2007-06-01T21:43:00.000-07:00

Short post this evening, since no changes are needed for my TSP allocation. Should this market strength continue next week I will move to 100% stocks. Don't worry, I'll give you fair warning.

Today's market action was convincingly strong. I don't really care about volume too much, but all the internal numbers looked good going into the weekend. Demand is solidly in control of this market, and no one knows how long this will last. Another indicator which isn't one of my primary tools, but serves to confirm the trend, is the rise in mid and long term bond yields. These higher rates are driven by supply and demand, just like stocks. Higher yields mean lower bond prices (as reflected in the poor performance of the F fund), and bond prices tend to move in the opposite direction as stocks. Again, not one of my primary indicators.

Since it's the weekend, here's a gratuitous photo of American airpower. Enjoy!

- Divot

Increasing strength... you sure it wasn't "BUY in May"?

2007-05-31T17:37:00.000-07:00

Bottom line up front: Short term indicators strengthened today. No reasons to move away from stocks.

Fund allocation is currently 20% G / 70% S / 10% I.
My YTD gain is 5.7%.

I've been asked quite a few excellent questions from readers concerning how I use bullish percents to accomplish risk management. Bullish percents are based on Point and Figure (P&F) charting, a rare but useful technique. Early use of P&F was by a man named Charles Dow (as in "Dow Jones Industrial Average" ... yeah, that guy) about a century ago. P&F charting filters out insignificant price movements, generally not even displaying changes of less than about 5%. The result highlights trends, showing areas of support and resistance.

Unlike many other "technical" method's signals, a P&F buy signal is simple, objective, and not subject to interpretation. It is simply defined as a higher price than the previous top. For instance: if stock XYZ rose in price to $50, then fell to $42, and subsequently rose above $51 -- that would be a buy signal from XYZ. It doesn't matter how long this process takes, or how much the stock wiggles below $51. Note also that P&F signals are generally based on integer price scales, so in this case, the price would have to exceed $50 (the previous high) by at least $1 to count as a buy signal. For those whose eyes just glazed over, I recommend Tom Dorsey's excellent book on P&F charting.

A bullish percent, then, is just a measure of how many stocks in a group are currently on a buy signal. This is supply and demand in action! If few of the stocks are showing buy signals (say, less than 30%), this tells you that there are more sellers than buyers. If most of the stocks in a group are on buy signals (let's say more than 70%), then demand has been in control of that market. These sorts of situations can continue for a time - but eventually all those interested in selling have nothing left to sell, or in the other case - the buyers run out of money.

This is why I've been saying the markets are high risk currently. Take a look at the BP charts I've posted links to (on the left), and you'll see that a lot of buyers have piled into the market already (moreso the S&P than the NASDAQ). When the last of the buyers has bought, demand will no longer control this market. I don't know when that will happen, so in the meantime I'm (carefully) invested in the lower risk market segment (the small caps).

The percentage level of a BP chart is not the only important consideration, but also its trend or direction of movement. Increasing BPs indicate increasing demand, and the inverse also holds true. The best case scenario is an increasing BP from a low reading, as this indicates demand is returning to an oversold market. Of course, that doesn't guarantee your investment will increase in value immediately... There are other tools that are necessary to ensure success.

With all that being said, Bullish Percents are not exactly a market timing tool. Instead, I use them to gauge risk levels, to determine where best to be invested. I also use a number of other technical indicators, including volatility indices (I'll have to discuss this in a later post), moving averages and their con/divergence, exchange rate trends, and Fibonacci patterns.

You may have noticed that there were some resources I didn't list in my "toolkit": headlines, CNBC commentators, seasonality trends, emotional mood swings, tea leaves, or the like. As a fighter pilot, I have to trust my instruments. Hopefully this helps you understand one of my investment "instruments" more clearly.

- Divot

Keep your eye on the ball

2007-05-30T20:01:00.000-07:00

You may have heard - there was some big trouble in Shanghai yesterday. They're at it again: the Shanghai SSE index was down over 5% earlier in today's trading, but has recovered somewhat to about 3% south from the open.

Shanghai is - honestly - irrelevant to how I manage my money. If you worry about every little news flash, you'll miss seeing the forest due to all the trees in the way. It's much more important that today's markets digested the Shanghai information and Fed Reserve minutes, then pressed higher with authority.

If you're not at all invested in stocks right now ... I think you're wrong. The market is definitely on offense, plain and simple. I know this because the market's bullish percent charts are rising. When increasing numbers of stocks are gaining Point&Figure buy signals - there's no room for pondering imponderables. Demand is in control, so prices are rising.

I don't like the current high risk levels, but they are what they are. I'm still keeping 20% in Gov't bonds - just to keep some powder dry. Otherwise I'm very happy with 70% Small Cap and 10% International exposure.

- Divot

The trend is your friend

2007-05-29T21:23:00.000-07:00

Bottom line up front: I'm transferring out of the F Fund, and the 20% allocation I had there will be split to the I & S funds. My allocation as of tomorrow will be 20% G, 70% S, and 10% I. Read the rest of the post to understand why.

Two needs in the TSP portfolio - performance and risk management. Performance tells us where to invest - risk management tells us how much. Exhibit A: The relative performance of the TSP funds (less the perennial "G" machine). Also note the larger chart showing the lower highs and lower lows put in by the F fund - this funds trend is NOT up:

Note that over the last three weeks, the F fund has lost .75%, while the others are up between 1.4 and 2.6%. Note the "falling off" slope on the F fund line (it's the one at the bottom of the upper chart). Ladies and gents - that's not good. The G fund would be preferable.

So why not shift the F allocation into the G fund, maintaining the same 60/40 stock vs bond balance?

Two weeks ago I moved to a defensive 40% stock 60% bond allocation, due to a rapid shift in some short term indicators. Because I see continued signs of strength from the market, especially the small cap sector, I'm moving a little away from the defensive crouch.

So why not 100% stocks (in any given balance)? The risk levels in the market as a whole are high right now - in the S&P in particular (see chart to the right), and the international markets to only a slightly lesser state.

The lower BP chart is for the NASDAQ, but approximates the risk state for the S fund. Anything above 70% on these charts is considered higher risk. The international markets as a whole are actually at a lower overall risk level than the S&P. In spite of the dollar's recent uptrend, the I fund is preferable to me than the generally lower performance and higher relative risk level found in the C fund.

Thanks for reading, and I welcome your comments.

- Divot

Yes, Virginia. There IS a way to determine the market's direction.

2007-05-28T10:49:00.000-07:00

No, I do not have a crystal ball. But I do have reliable instruments that show me whether supply or demand is in control of the market. Let me use a metaphor to help you understand.

A barometer is a simple instrument that provides a quantitative measurement of the surrounding air pressure. According to Wikipedia (with my added emphasis):

A barometer is commonly used for weather prediction, as high air pressure in a region indicates fair weather while low pressure indicates that storms are more likely. ... If the barometer is falling then deteriorating weather or some form of precipitation will fall, however if the barometer is rising then there will be nice weather or no precipitation.

High pressure is generally associated with clear air, but can quickly turn into thunderstorms. Low pressure is generally associated with overcast/low clouds, decreased visibility, etc.

In the same way that the barometer's reading and direction of movement can help to predict the weather, we can use the level and trend of market bullish percents to manage investment risk. When bullish percents are rising, demand is in control. This is comparable to rising barometric pressure. Conversely, falling bullish percents indicate supply is in control.

On another note, this is a busy week ahead (economically speaking).

Date Time (ET) Statistic For Forecast Expects Prior

May 29 10:00 AM Consumer Confidence May - 105.0 104.5 104.0

May 30 10:30 AM Crude Inventories 05/25 - NA NA 1969K

May 30 2:00 PM FOMC Minutes May 9 - - - -

May 31 8:30 AM GDP-Prel. Q1 - 0.7% 0.7% 1.3%

May 31 8:30 AM Chain Deflator-Prel. Q1 - 4.0% 4.0% 4.0%

May 31 8:30 AM Initial Claims 05/26 - 315K NA 311K

May 31 9:45 AM Chicago PMI May - 54.5 54.3 52.9

May 31 10:00 AM Construction Spending Apr - -0.2% 0.0% 0.2%

May 31 10:00 AM Help-Wanted Index Apr - - 30 30

Jun 1 8:30 AM Nonfarm Payrolls May - 130K 140K 88K

Jun 1 8:30 AM Unemployment Rate May - 4.5% 4.5% 4.5%

Jun 1 8:30 AM Hourly Earnings May - 0.4% 0.3% 0.2%

Jun 1 8:30 AM Average Workweek May - 33.8 33.8 33.8

Jun 1 8:30 AM Personal Income Apr - 0.5% 0.4% 0.7%

Jun 1 8:30 AM Personal Spending Apr - 0.3% 0.4% 0.3%

Jun 1 8:30 AM Core PCE Inflation Apr - 0.2% 0.2% 0.0%

Jun 1 10:00 AM ISM Index May - 53.5 54.0 54.7

Jun 1 10:00 AM Mich Sentiment-Rev. May - 88.7 88.5 88.7

Jun 1 10:00 AM Pending Home Sales Apr - - 0.0% -4.9%

Jun 1 5:00 PM Auto Sales May - 5.1M 5.2M 5.0M

Jun 1 5:00 PM Truck Sales May - 7.6M 7.4M 7.5M

Still 20% G / 20% F / 60% S Fund. Thanks for reading and the comments!

- Divot

DON'T PANIC (written in large, friendly letters)

2007-05-24T20:22:00.000-07:00

For those reading this blog (thank you), I know it's not your only regular source of financial news. There's every imaginable opinion available to you, but you'll find this one distinctly different in two ways:

I'll tell you where the risk IS and ISN'T in the market, as seen through your TSP account. This market risk information is not based on feelings or opinions or sentiment polls or market seasonality or my vague opinions or astrology or any other arcane techniques. Market risk is grounded in the irrefutable laws of supply and demand.
I'll tell you when to focus on offense, and when to focus on defense. For instance: right now risk is high, but the market is still on offense. I'd compare the current situation to 3rd and 5, from inside our own 20 yard line. This isn't the time to risk a sack or fumble (limit our risk), but far too early to punt!

Believe it or not, risk conditions didn't change today. The bullish percents moved lower, and another day or two like today WOULD put us on defense... but DON'T PANIC yet.

As I write this, the Asian markets are down about 1.5%, but all the major US index futures point to a modest rebound. We'll see what tomorrow brings, then make smart decisions.

- Divot

Greenspan Who?

2007-05-23T19:33:00.000-07:00

For those of you that care immensely about the daily action on Wall Street - this was a fascinating day. Mr Greenspan made some comments, oh, I'd have to say right around ... 2 pm?

Though he was speculating about China, notice how each of the TSP stock funds was smacked hard. The I fund (EFA) made the best of the circumstances due to overnight action gapping the price up, so it was the only fund to close with a gain. On the other hand, factor out the higher open and you'll notice it actually ended lower than it began the day.

The far more important fact is that though the major indices closed lower in price, the bullish percents actually increased. This means that more stocks went to buy signals than sell signals. The S&P bullish percent actually had the largest gain for the day, and remains solidly on offense (for those of you invested therein).

So, for those of you wearing the signs that read "The end is nigh, repent and sell all"...

My money says there's more upside room to run.

- Divot

Emerging Clarity

2007-05-22T19:39:00.000-07:00

A brief post this evening, highlighting where NOT to be.

Most importantly - the market as a whole is on offense right now. Risk may be high... call it third and long. But that's no reason to punt. All cash/bonds is the wrong place to be - even if I was going to retire next year I wouldn't be all cash right now.
The dollar - not always almighty, but currently showing some strength at an area of significant support. (See Chart). When the dollar is strong, the international market's gains are blunted. The major world markets are currently at higher risk levels than US markets, so the risk/reward ratio doesn't point to the I fund (stock symbol EFA) as the place to concentrate now. A little - yeah, that's OK.
Now the toss up between the C (S&P 500) and Small Cap fund. I don't think either is a wrong choice. One thing to note:

Risk levels are much lower in small cap stocks right now. Try 50ish % versus almost 80% in the S&P. This means that demand has already pushed nearly all the S&P stocks onto buy signals. I can't say whether you're late to the party, but you're not buying ahead of the gains. Put another way, the ONLY way ... let me emphasize that ... the ONLY way for you to make money on an investment is if more people want to buy it after you own it than before you made the purchase.

By the way, some of the short term indicators that were leaning "south" are starting to reverse. If this continues, I'll shift some more from the G/F funds into stocks.

- Divot

Winning is fun - Losing sucks

2007-05-21T20:35:00.000-07:00

Bottom line up front: Nothing substantially changed in the market risk levels today. I'm moving from 60% bond/40% stock to 60% Small Cap / 20% Fixed Income / 20% Gov't Bonds.

For a little deeper read, consider this. Does anyone know what the current level of the Dow Jones Industrial Average bullish percent (BPDJIA) is?

How about a stratospheric 96.66%? (Click the chart to expand)
This means 29 out of 30 Dow stocks are current on a buy signal... Friends, this is pretty rare. Take a closer look at the chart - this is the highest reading in over five years. The last time the BPDJIA even approached this territory was January 2004. This begs the question... how did the Dow do in 2004? I'm glad you asked:

I've marked a couple key areas with arrows - actually I used the exact same arrow (size, shape, and orientation) copied over. Note the steep push to the intermediate term top in Jan 2004. Gee, does that look familiar to the far right end of the chart?

Here's my point: The market (in general) is still on offense, but risk is high - most of all in the C and I funds. To me, this means stay invested, but be prepared for a correction. There's a lot of ways to play this:

You could move to 100% in stocks - this is the high stress technique, and rather vulnerable to a sudden and swift correction.
You could move to 100% in bonds - low stress, but the market COULD continue up for quite a ways.
You can allocate your retirement account to adjust your risk exposure to the stock market as a whole, and then concentrate the stock funds in the lowest risk sector with the most room to run.

If you have a TSP account, you need to think about how and WHEN you manage your risk.

- Divot

Two roads diverged in a yellow wood...

2007-05-20T14:07:00.000-07:00

Bottom line up front - there's no reason to change a fund allocation on the basis of Friday's markets.

Most notable: The longer term Bullish Percents fell - especially the NDX (down 3% Friday!):

Short term indicators for the broad market are not significantly moved to indicate a momentum shift either direction.

Little economic news early next week, but the market environment "feels" like there's plenty of reasons for the market to continue up. It's a pretty strong vote of confidence in our markets when the Chinese government puts $3B into owning the formerly private equity firm Blackstone. Good thing we don't have to make a decision on that "feeling".

Still 30% G, 30% F, and 40% S. I'm going to continue to only partially participate (in the lowest risk area of the market) until the market clearly choses a road to travel. Risk management, folks - risk management.

- Divot

What is this bullish percent you speak of?

2007-05-17T21:03:00.000-07:00

Bullish percentages are a way to visualize supply & demand across a group of stocks. Just like the name implies, bullish percent charts show the percentage of a group of stocks that are acting "bullish" - or more specifically - on a Point & Figure "buy" signal. It's OK if you don't understand what a P&F buy signal is, or even if you've never heard of P&F.

These buy signals are dirt simple:

A higher price than the top of the previous uptrend signals a buy signal - the inverse is a sell signal.

A bullish percent chart graphs this battle between supply and demand. The trend on a bullish percent chart has a very high correlation with the overall movement of the underlying stocks. In fact, similar to Who Wants to be a Millionaire's "Ask the Audience" lifeline, larger sample sizes have surprisingly useful value.

Bullish percents can be effective to chose the timing and targeting of market participation, and are indispensable for risk management. They tend to change rather slowly, which means I don't have to thrash around in the markets on a daily - or even weekly basis. There's a few other nice effects, best of which is high confidence and low stress.

I'm still 30% each bond fund, and 40% small cap, thanks for reading.

- Divot

Divergence

2007-05-16T20:14:00.000-07:00

Risk levels for the overall market remain high (far right):

Market internals were OK today:

	NYSE	NASDAQ
Advances	2,024 (60%)	1,787 (56%)
Declines	1,205 (36%)	1,235 (39%)
Unchanged	158 (5%)	153 (5%)
Up Vol*	2,076 (71%)	1,467 (67%)
Down Vol*	808 (28%)	682 (31%)
Unch. Vol*	36 (1%)	25 (1%)
New Hi's	170	116
New Lo's	35	117

But not as strong as one would expect on a day when all the major indices gained nearly 1%.

The S Fund is still the lowest risk fund, but is clearly in a transition to defense:

Note that the C Fund is right up against the highs of last week, resulting in short-term outperformance of the others. I'm not thinking this is the time to chase that performance.

All the stock funds still look like they'll test some of the support levels I highlighted yesterday. Thanks for reading!

- Divot

This is what a top looks like...

2007-05-15T19:15:00.000-07:00

Overall market risk remains high with over 74% of NYSE stocks on buy signals. That alone isn't a reason to cash out and run, but the plot thickens...

Daily charts show a fading market - lower highs, lower lows.

These pictures put me in a short-term defensive mood.

Contingency gameplan thoughts:

F Fund is currently at a level of very strong support.
C Fund support levels are at 16.49 and then 16.26 .

The C fund is the highest risk stock fund now (see BP chart, right):

S Fund has support at 20.03.

The S fund is the lowest risk stock fund now:

I Fund has support at 24.04.

Smaller international markets have low risk now, but the larger markets are high risk.

My response to these conditions is the following fund allocation:

30% G Fund
30% F Fund
40% S Fund

- Divot

14 May 2007

2007-05-14T22:11:00.000-07:00

Stock risk levels are high overall. Current risk levels are:

S Fund is Moderate Risk
I Fund is High Risk
C Fund is Highest Risk

Fund performance merits equal weight.

No gameplan changes are indicated at this time.

- Divot

Charts courtesy of StockCharts.com

Welcome!

2007-04-11T19:50:00.000-07:00

Welcome to the TSP Trader Blog. As an employee of our proud Federal government, I am (like many of you reading this) eligible to contribute to my own retirement through the Thrift Savings Plan.

Similar to a 401(k) in the real world, this program allows military members and federal employees to contribute pre income tax funds to a savings account. Although lacking the sophistication of some 401(k) fund setups, the TSP system offers five basic fund choices and some targeted "retirement year" funds. The best aspect of the TSP program is that the member may reallocate funds as often as desired and without transfer fees.

This program highlights both the best and the worst of our culture. On one hand, retirement saving is American self-sufficiency and resourcefulness at its finest. On the other hand, our national financial literacy is at an all time low - and most who contribute don't have a clue how to allocate their savings to the various funds.

Clearly, those who plan ahead by contributing to their personal TSP account are better off than those who don't save at all. But how should one allocate or reallocate savings between the fund choices? Obviously, some funds are much more volatile - at times, growing significantly more than others... at other times, stagnating or even losing significant value. Apparently, being in the right fund(s) at appropriate times could be radically more profitable than: (A) Blindly throwing money into a random choice of funds - or even worse - (B) Being in the wrong fund(s) at the wrong times. Most guidance you can find is tied to the panacea "you need time, not timing" - otherwise known as "hold and hope." The rest of the advice is spasmodically emotional.

I decided that wasn't good enough for me. As an electrical engineer by training and a fighter pilot by profession, my approach to life has always been to ask the question: "how can this be done better/faster/with more efficiency/and less risk?" I like to learn, and I like to read books. I also like to build computer models of complex systems. The point of this blog isn't to brag about me, so that's as far as I'll go with my resume.

What is the point of this blog? I've found that in any work environment, there's always at least one "self professed finance guru." A few really are smart. Unfortunately, most are just parrots for something they heard but couldn't really explain or apply. There's so much bad information out there - with the potential to really hurt people. This is the serious money we're talking about - not cash to play for a weekend in Vegas.

I know, this isn't the only blog of it's kind. My goal is that it will be significantly different - direct, simple, and specific. Here's what I'll provide:

Overall market risk assessment
Fund weighting recommendation
Contingency gameplans

This blog is intended provide a profitable example of educated choices. I hope you find my blog interesting and educational, but most importantly - profitable.

- Divot