Posts Tagged ‘Signals’
Bond Model Positive = Risk Off
Tuesday, August 7th, 2012
by Guy Lerner, The Technical Take
Our bond model turned positive one week ago, and since the bottom in March, 2009, this has generally meant “risk off” for the markets.
Figure 1 is a weekly chart of the SP500. In the lower panel is an analogue representation of our bond model. Currently with the value “up”, the bond model is positive and we should expect higher bond prices and lower yields. Looking at the SP500, I have put buy and sell signals on the price bars that corresponds to those times when the bond model is positive. As you can see, the bond model was positive during the market tops of 2010 and 2011. In each instance, rising bond prices was forecasting economic weakness that ultimately led to QE2 and Operation Twist.
Figure 1. SP500 v. Bond Model/ weekly
Since March, 2009 with the bond model positive (i.e., falling yields), the SP500 has gained 14.99% on a cumulative basis, and as you can see, the majority of the gains occurred in the initial thrust from the lows. Since 2010, buying equities when the bond model is positive has produced a little gains for your efforts. But there has been a lot volatility. Clearly, this has been the “risk off” period. In contrast, since March, 2009 with the bond model negative (i.e., rising yields), the SP500 has gained 39.04% cumulatively. All 9 trades have been winners.
In summary, our bond model is positive. Over the past 2 years, this has coincided with economic weakness and an equity market top in 2010 and 2011.
Copyright © The Technical Take
Tags: Analogue, Bond Market, Bond Prices, Cumulative Basis, Economic Weakness, Figure 1, Guy Lerner, Initial Thrust, Lows, Market Tops, Qe2, risk, S&P500, Signals, Trades, Volatility
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Should You Trust Your Trading Intuition?
Thursday, July 12th, 2012
Guest contribution by Ivan Hoff, Ivanhoff Capital
I’ve heard from many traders that they often take decisions based on instincts. Actually, all non-quants use intuition in some form or another. If you are not using a program that takes all signals that your system produces, how do you decide between several equally good looking trading setups with similar risk to reward? Do you take them all or do you concentrate on only a few? The odds are that you are doing the latter and your ultimate choice for capital allocation is subconscious.
Even though we are defined by our decisions, we are often completely unaware of what’s happening inside our heads during the decision-making process.
Feelings are often an accurate shortcut, a concise expression of decades’ worth of experience.
The process of thinking requires feeling, for feelings are what let us understand all the information that we can’t directly comprehend. Reason without emotion is impotent.
This is an essential aspect of decision-making. If we can’t incorporate the lessons of the past into our future decisions, then we’re destined to endlessly repeat our mistakes.
Nothing can replace personal experience:
Unless you experience the unpleasant symptoms of being wrong, your brain will never revise its models. Before your neurons can succeed, they must repeatedly fail. There are no shortcuts for this painstaking process.
This insight doesn’t apply only to fifth-graders solving puzzles; it applies to everyone. Over time, the brain’s flexible cells become the source of expertise. Although we tend to think of experts as being weighed down by information, their intelligence dependent on a vast amount of explicit knowledge, experts are actually profoundly intuitive. When an expert evaluates a situation, he doesn’t systematically compare all the available options or consciously analyze the relevant information. He doesn’t rely on elaborate spreadsheets or long lists of pros and cons. Instead, the expert naturally depends on the emotions generated by his dopamine neurons. His prediction errors have been translated into useful knowledge, which allows him to tap into a set of accurate feelings he can’t begin to explain.
The best experts embrace this intuitive style of thinking. Bill Robertie makes difficult backgammon decisions by just “looking” at the board. Thanks to his rigorous practice techniques, he’s confident that his mind has already internalized the ideal moves. Garry Kasparov, the chess grand master, obsessively studied his past matches, looking for the slightest imperfection, but when it came time to play a chess game, he said he played by instinct, “by smell, by feel.”
Our decision making depends on our expectations. Our expectations are defined by our experience, our memories in a similar situation. Intuition helps only if you have enough experience. The quantity of practice is certainly important, but the quality matters even more. The most effective way to get better at anything is to focus on your mistakes and learn from them. In other words, you need to consciously consider the errors being internalized by your dopamine neurons. This needs to become an ongoing process of constant reminding, because most of what we learn lives in our short-term memory, which by definition doesn’t last long.
WE CAN NOW begin to understand the surprising wisdom of our emotions. The activity of our dopamine neurons demonstrates that feelings aren’t simply reflections of hard-wired animal instincts. Those wild horses aren’t acting on a whim. Instead, human emotions are rooted in the predictions of highly flexible brain cells, which are constantly adjusting their connections to reflect reality. Every time you make a mistake or encounter something new, your brain cells are busy changing themselves. Our emotions are deeply empirical.
This doesn’t mean that people can coast on these cellular emotions. Dopamine neurons need to be continually trained and retrained, or else their predictive accuracy declines. Trusting one’s emotions requires constant vigilance; intelligent intuition is the result of deliberate practice. What Cervantes said about proverbs—”They are short sentences drawn from long experience”—also applies to brain cells, but only if we use them properly.
Source: Lehrer, Jonah; How We Decide – Houghton Mifflin Harcourt. Kindle Edition.
Copyright © Ivanhoff Capital
Tags: Capital Allocation, Concise Expression, Decision Making Process, Emotion, Explicit Knowledge, Fifth Graders, Flexible Cells, Hoff, Instincts, Intuition, Ivan, Knowledge Experts, Neurons, Personal Experience, Puzzles, Quants, Signals, Spreadsheets, There Are No Shortcuts, Unpleasant Symptoms
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Investor Sentiment: Bull Signal Awaits
Sunday, June 10th, 2012
by Guy Lerner, The Technical Take
The “dumb money” indicator is now showing that investors are extremely bearish, and this is a bull signal. On average, the best time to buy is 1 week after the signal. Several caveats are worth noting.
First, about 80% of the signals will produce positive results within a reasonable draw down. What is meant by “reasonable”? The SP500 should bottom within 6% of next week’s buy point. If the SP500 drops below next week’s buy signal by more than 6%, then this is a failed signal. A failed signal is the market’s way of saying that what we expect to happen has not happened, and failed signals can lead to very strong moves opposite to those expectations.
Second, the current extreme reading in the “dumb money” indicator is not supported by other measures of investor sentiment. For example, the Rydex market timers are still showing extremes in bullishness and in some sense, they have been unwinding their bullish positions over the past several months. By no means are they bearish, and this data series is looking more like a market top than a market bottom. Corporate insiders did hit extremes in buying 2 weeks ago, but like the current “dumb money” indicator reading, these were only “mild” extremes. So what does it mean? The resulting snap back rally is likely to be weak and unlikely to carry as far as a rally that begins when all of our measures of investor sentiment are showing much greater extremes of bearishness.
The market has bottomed where one would expect it to have bottomed — near its 200 day moving average. I am sure this has brought a sense of order and relief to the bulls and to those investors who were buying the kool-aid only 2 short months ago. Ahh, this is how bull markets function. Now that this temporary blip (mis-pricing) is over, we can get back to the business of being bullish. I am not trying to discount the current bull signal. A bottom is being forged. It would be nicer to have seen greater extremes in bearish sentiment at the bottom as this leads to stronger future returns. I could just as easily make the case that this is the last gasp of an aging bull market.
The “Dumb Money” indicator (see figure 1) looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio. This indicator is showing extreme bearishness.
Figure 1. “Dumb Money”/ weekly
Figure 2 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel. From the InsiderScore weekly report: “S&P 500: Sentiment Remains Positive But Volume Declines…. Russell 2000: Number of Buyers Drops But Sentiment Remains Positive. ”
Figure 2. InsiderScore “Entire Market” value/ weekly
Figure 3 is a weekly chart of the SP500. The indicator in the lower panel measures all the assets in the Rydex bullish oriented equity funds divided by the sum of assets in the bullish oriented equity funds plus the assets in the bearish oriented equity funds. When the indicator is green, the value is low and there is fear in the market; this is where market bottoms are forged. When the indicator is red, there is complacency in the market. There are too many bulls and this is when market advances stall. Currently, the value of the indicator is 62.78%. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops. It should be noted that the market topped out in 2011 with this indicator between 70% and 71%.
Figure 3. Rydex Total Bull v. Total Bear/ weekly
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Tags: Bearish Sentiment, Best Time, Blip, Bull Markets, Bulls, Caveats, Corporate Insiders, Dumb Money, Extremes, Guy Lerner, Investor Sentiment, Investors, Kool Aid, Market Bottom, Market Timers, Measures, Moving Average, Rally, S&P500, Signals, Snap Back
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Will ECRI’s Call for Recession Prove Accurate?
Sunday, May 13th, 2012
ECRI’s Lakshman Achuthan was making the rounds yesterday, with yet another defense of his firm’s recession call – the first claim which came early last fall. I do think (from memory) he has pushed out the time frame a bit from when the initial call came, but since early this year has claimed we will see it by mid year. Perhaps the very warm winter hurt the call as well – who knows with these black boxes. Below we have a video with CNBC and there is one nugget in there I did not know. Conventional wisdom is a recession is back to back quarters of negative GDP… but according to the NBER (and Achuthan) that is but one of a group of potential signals.
The Committee does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve’s index of industrial production (IP).
10 minute video – email readers will need to come to site to view
Tags: Black Boxes, Cnbc, Conventional Wisdom, Economic Activity, Economy, Federal Reserve, GDP, Lakshman, Lakshman Achuthan, Measures, Memory, Nber, Nugget, Quarters, Real Gdp, Recession, Signals, Time Frame, Video Email, Warm Winter
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Reading the Tea Leaves When There is No Tea (Tchir)
Tuesday, April 17th, 2012
by Peter Tchir, TF Market Advisors
Everyone is trying to figure out what is going to happen next. Investors are looking clues and signals as to the next big move. The problem is that liquidity is so poor, moves that might normally signal a shift in sentiment or risk, are now just noise.
We can look at 10 year Spanish yields. Definitely a useful signal, but back to exaggerated moves on little volume. Liquidity is abysmal.
Things like the EUR/USD basis swap was once an indicator, but how useful is something when the Fed has provided unlimited swap lines and banks are encouraged to use them. Hardly an indicator of anything, though I would argue any weakness in the face of all that central bank effort is more meaningful than signs of strength.
It was easy when the EUR/USD rate itself was a key indicator. Sometimes it still is, sometimes it isn’t. It is flow driven, but the flows are confusing as some money is just being shifted from one Eurozone country’s bonds to another’s, and there is growing confusion over what it means that each country’s debt is being held in an ever greater proportion by its own banks.
For myself, I’m looking more at yield curves than any particular bond. The curve flattening is still a bearish indicator, though Spain is a weird one today, where currently the 2 year yield is higher, the 5 year yield is better, but the 10 year is higher, though all have rebounded significantly.
CDS seems to remain a better indicator of the true state of the credit market, though the technicals from any potential “whale” trade unwind are hard to account for. I am seeing bid/offer spreads normalize in the U.S. which is a good sign, but they are still wider than normal in Europe. IG18 is basically unchanged on the day, in spite of the moves in stocks, another sign that the rally isn’t very deep yet.
The size of the moves in all markets is getting scary. We have now seen stock futures move more than 1% today from their overnight lows. Were the retail sales data really that good? Some of it looked strong, but the “core” numbers were less compelling. Empire manufacturing was bad. We are quickly heading back to a period where you need to have small positions, because news that would have caused a 0. 5% move in the market a couple of weeks ago, is now moving it 1%. Maybe today is somehow a turning point, but I don’t think it is, so we will see selling pressure into every rally as total return players have to “rightsize” their positions for the increased volatility. This is the real intraday volatility that investors experience as they do their intraday P&L estimates, not VIX or any other form of implied vol.
With no liquidity be careful reading too much into any move (positive or negative) but expect some weakness as these moves will force investors (hedge funds in particular) to make smaller bets.
Twitter: @TFMkts
Tags: Basis Swap, Bonds, Confusion, Curve, Eurozone, liquidity, Nbsp, Proportion, Rally, Sentiment, Signals, Spite, Stock Futures, Tea Leaves, Technicals, Tf, True State, Weird One, Whale Trade, Yield Curves
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Howard Marks: On Common Sense and Contrarian Signals
Wednesday, March 21st, 2012
Here without further comment is Oaktree Capital’s Howard Marks’ highly anticipated letter to investors. In it Marks draws the parallel between now and the 1979 when BusinessWeek broke “The Death of Equities” magazine cover, stating:
“What a negative article, ostensibly the death knell for an entire market. What was the shift that it marked? Simply this: the end of a lost decade for equities and the beginning of the greatest bull market in history.”
You’ll have to come to the site to read from the slidedeck if you cannot see it, and/or to download the letter. Fullscreen for the easier read.
Déjà Vu All Over Again 03_19_12a
Tags: Businessweek, Common Sense, Death Knell, Decade, Equities Magazine, Fullscreen, Investors, Negative Article, Oaktree Capital, Signals
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Retail Investor Crowd Finally Joins the Party
Thursday, January 19th, 2012
We are currently in one of those teflon markets where nothing affects it. Thus far (very early in the season) earning reports are beating expectations by the lowest % since the recession ‘ended’. Usually that would be a bad thing. But right now the market could care less – any piece of good news is enough to buy and crowd out the noise from the misses.
If you are keeping track at home, we are on pace for a 50%+ type of gain this year. And it could be the first year on record with no weekly losses. 
At this point everyone (and their mother) is pointing to S&P 1350 as the next rest stop. Rarely is “everyone” correct. So more likely the index either stops short of that level or blows right past it. I would be shocked to see a scenario where a figure every silicon and carbon based life form is pointing at, conveniently serve as accurate.
Mutual fund inflows have been negative for a long time. The teflon market has finally turned that tide – we see the first inflows since August 2011. For some this will be yet another contrarian indicator. That said, this market has been steamrolling over anyone who is listening to any contrarian signals. It is punishing anyone not fully long or utilizing hedging…. or as David Tepper says “balls to the wall”.
Domestic stock funds saw infllows of $753 mil per ICI. First weekly inflows since Aug 17, 2011.
Disclosure Notice
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
Tags: Amp, Balls To The Wall, Contrarian Indicator, Crowd, David Tepper, Disclosure Notice, Domestic Stock Funds, Earning Reports, Losses, Misses, Mutual Fund, Personal Portfolio, Portfolio Securities, Recession, Rest Stop, Retail Investor, Signals, Silicon, Teflon, Tide
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Double Top Breakout on this Morning’s Gap Up
Tuesday, January 17th, 2012
As we mentioned Friday, it’s not so much the news but the reaction to the news that was important to take note of. Markets shook off bad news quite easily, and we are seeing the celebration of that translated in this morning’s gap up. Thus far 2012 has been an interesting year at the index level. Aside from 1 session (Friday’s) we’ve only seen completely flat opens – with very little volatility all session – or gap ups (this morning’s will be the third). Gap up, flat, flat, flat flat, gap up, flat flat flat, etc. And one session all year that differed from that pattern. Interesting.
While almost the entire rally has been contained to 3 sectors, we have to look at the indexes and respect the movement. As we exited 2011, it was a coin flip in terms of the next move – there was no clear set of signals at the time. However, over the past few weeks we see there has been a break to the upside, and some intermediate term indicators are flashing far more positive. This morning’s gap will take the S&P 500 over November highs creating a ‘double top breakout’. Further we can see an inverse head and shoulder that has resolved to the upside with the action of the past 4-6 sessions. This is generally quite positive.
We can see the next major resistance area is not until 2011 highs of 1350ish, which is about 4% higher from where the index should open.
Now with that said, the move since Dec 19th has been relentless in nature with only two sessions of any real selling – and even those two were very modest by second half 2011 standards. Thus the move this morning will certainly have those who are missing it anxious and throwing in the towel and wanting to chase. Generally when the last holdouts want to buy the market you are most prone to shorter term corrections, so these holdouts should begin converting soon. But with the intermediate term market structure changing to a more positive tone, any of the nearer term (and necessary) corrections would be seen as buying opportunities, rather than “run to exit” calls, by those who read this market in a technical way.
What does this have to do with the real economy? Not much at all – indeed there are some very real concerns growing. (Adding to that is more news of slowdown in the “official” GDP numbers out of China – but as we now know, slowdowns are good because they mean more intervention) And the market is not the economy… and even less so in an era of near constant intervention by governments and central banks. As outlined last week, if we do get a new round of quantitative easing, this part of the rally will be the “those in the know get in” part. And as long time readers know from many stories posted in latter 2011, “those in the know” is a broadening group.. which certain circles can now pay for for access.
This week we enter the heart of earnings season – Thursday being the most interesting day. Certainly sometime here in the next 2 weeks we shall see someone of note blow up, and we have to see how a now increasingly extended market absorbs that. If the answer is “well” it puts another feather in the cap of a potential multi month move to the upside ahead. Keep in mind a Fed meeting comes the week after this and market expectations for even more ‘assistance’ on Bernanke’s behalf grow. Of course, no one asks what is so fundamentally wrong that this economy needs constant and ever growing assistance … as long as it gooses asset values (even if temporarily), that’s all that matters to the speculator class.
Disclosure Notice
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
Tags: Bad News, Breakout, Flat Gap, Gap, Gap Ups, Head And Shoulder, Holdouts, Index Level, Indexes, Market Structure, Positive Tone, Rally, Second Half, Sectors, Signals, Term Indicators, Third Gap, Throwing In The Towel, Ups, Volatility
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Investor Sentiment: Are Investors Rushing Towards the Edge of a Cliff?
Monday, January 9th, 2012
The article below is a guest contribution by Guy Lerner, writer of the Technical Take blog.
Last week, I stated that “higher prices should be supported by increasing number of bulls, and this would be a signal that a sustainable rally, that everyone so desperately wants, is unfolding.” So this past week, the SP500 gained about 1.6% and bullishness increased dramatically both in the Rydex data set and with the “dumb money” indicator. Yet, despite these positive developments to recruit more investors into the bullish camp, much work needs to be done. Volume is the probably the biggest issue, and the lack of volume means lack of investor conviction. So while there are more bulls, they are chasing prices higher with one hand already on the eject button. My data still suggests a mixed sentiment picture, and at this stage of the rally (relative to the time elapsed from the October lows), prices and bullish sentiment should have been much greater. The fact that the bulls have yet to take the reigns of this market suggests caution. These are still not the makings of a sustainable rally. This still looks like investors are rushing to the edge of a cliff as opposed to the promise land and nirvana of a bull market.
The “Dumb Money” indicator (see figure 1) looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio. This indicator shows neutral sentiment.
Figure 1. “Dumb Money”/ weekly
Figure 2 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel. From the InsiderScore weekly report: “Our key sentiment readings all flashed Neutral signals as transactional volume across the market was low due to the holidays and trading windows closing at many companies as Q4’11 ended. Volume will be seasonally low for the next three weeks as insiders are pushed to the sidelines with their companies preparing earnings announcements.”
Figure 2. InsiderScore “Entire Market” value/ weekly
Figure 3 is a weekly chart of the SP500. The indicator in the lower panel measures all the assets in the Rydex bullish oriented equity funds divided by the sum of assets in the bullish oriented equity funds plus the assets in the bearish oriented equity funds. When the indicator is green, the value is low and there is fear in the market; this is where market bottoms are forged. When the indicator is red, there is complacency in the market. There are too many bulls and this is when market advances stall. Currently, the value of the indicator is 61.49%. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops.
Figure 3. Rydex Total Bull v. Total Bear/ weekly
Let me also remind readers that we are offering a one-month free trial to our Daily Sentiment Report, which focuses on daily market sentiment and the Rydex asset data. This is excellent data based upon real assets and not opinions.
Source: Guy Lerner, Technical Take, January 7, 2012.
Tags: American Association Of Individual Investors, Bullish Sentiment, Bulls, Caution, Conviction, Dumb Money, Extremes, Figure 1, Guy Lerner, Investor Sentiment, Lows, Market 1, Marketvane, Nirvana, Promise Land, Put Call Ratio, Q4, S&P500, Signals, Sustainable Rally
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Dow Rings in 2012 With a “Golden Cross”
Thursday, January 5th, 2012
I often refer to the 50- and 200-day moving averages in my commentary as indicators of the intermediate and primary trends respectively. In a perfectly bullish scenario the price series should trade above both the 50- and 200-day lines, with both these lines rising, and also with the 50 DMA trading above the 200 DMA.
In the case of the Dow Jones Industrial Index, the 50 DMA has just breached its 200 DMA, thereby forming a so-called golden cross. This is the first time the 50-day line trades above the 200-day line since August 2011. However, as always with charting signals, it is wise to wait a few days in order to guard against a false break.
The Dow has experienced 20 golden crosses over the last 50 years. Although historically the Dow traded in positive territory after six months in 65% of the instances following a golden cross, the average return of 2.9% is not all that exciting as it lags the 3.5% average of all six-month periods (research via Bespoke Investment Group).
As far as the S&P 500 Index, the Nasdaq Composite Index and the Russell 2000 Index is concerned, the 50 DMAs were still trading below the 200DMAs by 1.56%, 1.69% and 4.34% respectively as of yesterday’s close.
Source: Arthur Hill, StockCharts, January 4, 2012.
Tags: Amp, Arthur Hill, Crosses, Dma, Dmas, Dow Index, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Index, Few Days, Golden Cross, Instances, Investment Group, January 4, Moving Averages, Nasdaq Composite Index, Russell 2000 Index, Signals, Six Months, Stockcharts, Stocks
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