ETF

Performance of $QQQ during GMI signals; GMI to issue new signals; GLB: $FOXF, $FLT

@ 9:31 pm
GMI6/6
GMI-28/9
T210850%

Below is a plot of the QQQ during periods when the GMI was on a Sell (red) or Buy (green) signal. Decide for yourself if this signal would have helped you stay out of bad markets, as it did for me. The GMI signals are rather conservative because the GMI tends to turn green well after the bottom of a major decline and a new up-trend has become firmly established. It also tends to turn red well after market tops. Such is the nature of trend following indicators!

gmisignals2006-2016

A plot of the shorter time period, from 2014-2016, shows more clearly that while the GMI is red during longer declines of the QQQ, it has had a number of times when it turned red right at the bottom of a very brief decline. I therefore do not necessarily exit all positions when the GMI flashes a “Sell” signal but look at additional indicators for confirmation. I am therefore changing the GMI signals from Buy/Sell to Green/Red.   Green signifies to me that conditions favor being in stocks, while Red means the opposite and that extreme caution is needed.

gmi2014-2016

Speaking of short declines, the GMI  turned Green at last Thursday’s close after being Red for just 8 days. As noted in the charts above, the GMI turns Red after registering 2 consecutive days below 3 and turns Green after 2 consecutive days above 3.

All of the indicators measured by the GMI and GMI-2 are currently positive. In addition, Friday was the 6th day of the new QQQ short term up-trend, which is assessed differently than the GMI signals. Note that the SPY is still (for 3 weeks) below its critical 10 week average.

gmi09242016

FOXF had a GLB on its highest weekly volume since it came public in 2013. FOXF is being added to an index ETF.

screen-shot-2016-09-25-at-3-18-14-pm

FLT also had a GLB last week.

screen-shot-2016-09-25-at-3-27-48-pm

 

Nicolas Darvas, on the value of studying one’s trading losses; RWB stocks, COST, RVBD

@ 7:00 am
GMI6/6
GMI-R10/10
T210867%

I am reprinting below some of my writings from a few years ago in order to give my new students some understanding of my approach to the market.

“it is utterly useless for us on the outside, who buy and sell comparatively small blocks of stock, to conjecture about what “they” are doing.   We cannot know what the insiders intend to do, but we can see their orders on the tape when they execute them.   That is why my plea is for everyone of us to have no mere opinions of his own, but to allow the actions of the market to tell him what is passing.”

(Humphrey B. Neill, Tape Reading & Market Tactics, 1931, New York: B.C. Forbes Publishing Company; 14th printing, 2003, Vermont: Fraser Publishing Company)

When Nicolas Darvas was interviewed by Time Magazine in the early 60’s and it came out that he made almost 2 million dollars in the market in 18 months (while he was dancing around the world!), he noted that he read and reread Neill’s book (along with Gerald Loeb’s).   Neill’s book has been reprinted many times and I happened to find it on the shelf of my local Barnes and Noble store.   Neill dedicates his book, “to my losses, with a deep appreciation for the experience and knowledge which each loss has brought me.”

If anyone tells you that the market is different today, refer them to the successful traders from the 1929 post-crash era–Livermore, Baruch, Loeb.   Darvas, who made his fortune in the 60’s, clearly learned something from Neil’s original writings–and so have I.   (See list of books about these people to the lower right of this page.) Livermore used to say that when you have a losing trade, you were paying the tuition required by the market. As a college professor, I sometimes see students who pay tuition (more accurately, their parents pay) but are not focused on learning.   Losses can provide knowledge–but you have to study them.

Perhaps the most important thing I did a few years ago was, after a series of losing transactions, to print out their charts and write down my precise buy and sell points.   It looked like I had followed exceptionally accurate rules that flawlessly led me to buy at the top and sell at the bottom of moves!   So what did I do?   I reversed what I was doing and began to trade profitably.   Every great trader (including IBD publisher William O’Neil) urges us to study our losses.   However, most of us rarely do this important exercise in the market, or in other areas of our lives.

So, one of the major exercises that my class completes during the semester is to trade for nine weeks in a trading simulation   with a pretend $100,000 margin account.   They must keep careful records of all of their transactions and analyze them after the trading simulation ends to determine the technical mistakes behind their losses.   They then revise their rules for entering and exiting positions. We   should all review our transactions at least once per year……..

Meanwhile, the GMI and GMI-R remain at their maximum values. These two sets of indicators keep me on the right side of the market.   Most stocks follow the trend of the general market averages and it is absurd to fight the trend. There were 380 new 52 week highs on Friday in my universe of 4,000 stocks.   Buying stocks at new highs has been a good strategy lately;   79% of the stocks that hit a new high 10 days ago closed higher on Friday than they closed   10 days ago. The QQQQ (Nasdaq 100 Index) has been in a short term up-trend for 53 days.   And the longer term up-trend of the SPY (S&P 500 index ETF) and DIA (Dow 30 index ETF) has lasted for 21 weeks. The Worden T2108 indicator is at 67%, in neutral territory.   45% of the Nasdaq 100 stocks closed with their MACD above its signal line, a sign of short term strength.

It is therefore okay for me to have long (versus short) positions in this market.   My scan of the market has found a number of promising candidates.   Below is the weekly GMMA chart for COST. An RWB stock has all of its short term averages (red) above its rising longer term averages (blue).   This is a pattern of a stock in a strong up-trend. COST closed on Friday at $74.13, very close to its all-time high of $75.23. A close above $75.23 could be a sign of considerable strength for COST.   COST reports earnings on March 2nd.

Another RWB stock with a nice chart pattern is RVBD.   It looks like it bounced off of support recently and is not far from its all-time high.   If I bought RVBD, I would place a stop loss   below its 30 day average, around $34.95. The two “NA’s”on the chart indicate when IBD wrote about this company in its New America column, highlighting promising visionary companies. Next earnings for RVBD come out in April.

By the way, all of my students are required to get a student subscription to IBD and to read the newspaper daily.   IBD provides an abundance of technical and fundamental information about the types of growth stocks I buy.   Furthermore, most of my purchases come from stocks on their prior IBD 100 lists, now superseded by the IBD 50 list.   I never consistently made money trading until I started reading IBD in the 1980’s.

Warning: India stocks; QQQQ short term up-trend in jeopardy; IBD50 list performance

@ 7:00 am
GMI5/6
GMI-R7/10
T210854%

I noticed over the weekend the incredibly weak price trend of just about all stocks and ETF’s   that are related to India.   I learned a long time ago that when the U.S. Federal Reserve raises interest rates to combat inflation, it eventually leads to a   market decline.   When the Fed thinks that the economy is growing too fast and likely to produce inflation, it applies the brakes by raising short term interest rates.   Higher interest rates mean   higher costs for businesses and consumers who borrow money, and the economy slows.   Because fine tooling the economy is an inexact science, the Fed usually errs by applying the brakes too hard, bringing on a larger slow down than intended, and often a recession.   Thus, a series of rate hikes usually kills a market up-trend.   The very smart stock analyst, Martin Zweig, many years ago published a careful empirical analysis of the impact of the Fed’s actions on the U.S. stock markets.   Of course, in the United States the Fed is still stimulating the economy by buying securities and printing money.

However, a series of interest rate hikes is   currently occurring   in India. I found this article after the weakness in India stocks prompted me to search for any explanation. I first wrote   about the India auto manufacturer,   TTM, last August, when it closed at $22.49, an all-time high. TTM subsequently peaked at $37.65 near the end of November and began a sustained down-trend, closing Friday at $24.71. Note on this daily chart (click on to enlarge) when TTM closed below its 30 day average (red line), which was a perfect sell signal. With the 30 day average now heading down, this stock is in a sustained short term down-trend, according to my definition. (It all looks so simple with 20:20 hindsight! Actually, it is if we just ignore the media noise and concentrate on the stock’s price trend.) This India automaker, was, perhaps, reflecting the impact of higher interest rates on consumer demand for cars. (But the putative rationale for the decline is not as important to me as the price action. The bad news usually comes out long after a stock has peaked.)   I could short TTM, but I prefer buying put options this week on an India ETF or bank.   The following India related stocks have closed below their 30 week averages and look ominous to me: INDY, PIN, EPI, IIF, IFN,INP,HDB, INXX.

By the way, I do not want to alarm you, but while the trend of India stocks looks the worst, it has plenty of company in the stocks/indexes of other countries, including China (CAF, CHIQ), Brazil (BRF), Turkey (TUR), Chile (CH), and Thailand (TTF). And I guess we should not omit Egypt (EGPT)…………

But the technicals for the U.S. markets look   a lot stronger— for now. The GMI is   5 (of 6) and the more sensitive GMI-R is 7 (of 10).   The GMI-R contains more   short term indicators and can signal a change in trend earlier than the GMI. Both the short and longer term up-trends are intact, although the QQQQ is sitting right on critical short term support.   A couple of down days this week could end the QQQQ short term up-trend, which completed its 48th day on Friday. The SPY and QQQQ completed their 21st week above their 10 week averages. When the QQQQ is above its 10 week average I am most likely to make money buying tech and growth stocks.   A close of QQQQ below its current 10 week average (54.70) would signal to me to exit the long side of the tech market.   The Worden T2108 indicator is in neutral territory, at 54%. A sign of short term weakness is the fact that only 32% of the Nasdaq 100 stocks closed with their MACD above its signal line……

So where do I stand with my accounts?   My university pension remains 100% invested in mutual funds.   I only exit them when my longer term indicators are very weak. However, my trading IRA and margin accounts are mainly in cash or a little on the short side. Fortunately I exited most of my long positions over a week ago when I became worried about the impending municipal bond crisis. While the pundits blame Friday’s market decline on the crisis in Egypt, those who have been following this blog understand that there are a lot of other reasons to expect market weakness. The very low percentage of advisers who are bearish (19.1%), the sudden selling   in   previously strong stocks (FFIV, CAVM, PANL, CREE, CTXS, APKT, AMZN)   and the failure of AAPL and GOOG to go to new highs after their great earnings were released are especially troubling signs to me. With the end of 4th quarter earnings announcements, there may not be a whole lot to inspire stocks to advance over the next few weeks….

You may recall that IBD announced at the end of December that they were abandoning the IBD100 list published every Monday for the IBD50 list. During QQQQ up-trends I typically selected my buys from the IBD100 list. In past posts I have shown that the types of high growth momentum stocks that meet the criteria for inclusion on the IBD100 list typically outperformed Nasdaq100 stocks in an up-trending market but underperformed them during a falling market.   This is because   stocks that climb rapidly usually are abandoned quickly by traders when the market turns down.   I analyzed the performance of the IBD50 list published on January 10, 2011, using the prior Friday’s close (1/7) as the starting point and going through Friday, 1/28.   I found that during this period, 32% of the IBD50 stocks rose; 12% rose 5% or more, and 1% rose 10% or more (TSCO, +7.6% and NFLX, +21.6%).   In addition, 10% declined more than 10%, with FFIV falling the most (-20.8%).   The first stock listed in this   IBD50 list, RVBD, declined -7.4%. In comparison, during the same period, 42% of the Nasdaq100 index stock advanced, 17% rose 5% or more, and 7% rose 10% or more. 4% declined -10% or more, including FFIV.   The IBD50 list is designed to use more stringent criteria than the IBD100 list did.   At least for this limited case and time period during which the Nasdaq100 index declined (-.25%), the IBD50 list   apparently underperformed the Nasdaq100 stocks. I will replicate this analysis in the future with subsequent IBD50 lists.