TSP Trader

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