What is the Russell 2000 Telling Us?

Today I wanted to show you guys a six year weekly chart of the Russell 2000. I think there is a lot of information in this one. We’ll use the iShares ETF $IWM to keep things nice and simple.

The first thing we notice is the resistance going back to the 2007 highs that was tested last year, again this March, and again in September (S&P500 isn’t acting like this). The next thing that catches your eye is the fact that these tests of all-time highs are coming quicker and quicker and not taking 4 years like it did between the 2007 & 2011 tests. (Click Chart to Embiggen)

If you take a look at the action over the last 2 years, the classic price pattern guys would tell you that this looks like an inverse head & shoulders. The problem with calling it that this early is that we won’t know if it is or isn’t until the “Neckline” is taken out. To me, the left shoulder was last Spring, the Head came at the, “Europe is coming to end”, Fall lows last year, and the right shoulder at this year’s June lows. This gives us a $22 measured move, which puts the Russell 2000 up near 110. I’m being conservative with this number by using weekly closing prices. But you more aggressive technicians might use $27. Either way, it would be a nice argument to have down the road. Let’s worry about it then.

From an intermarket perspective, I think there is a ton of valuable information we can gather from this action in Small-caps. If you think Equities are the place to be, then you really need to see those highs taken out. Until then, this chart gives us a little bit more of a neutral reading, but with HUGE potential.

This is definitely an interesting one…



I’m a Technician

To me, Technical Analysis is a study of the behavior of the markets and market participants. This is as opposed to spending time worrying about all of the goods and the services that a particular market deals with. The way we look at it, if the only thing that’s going to pay us is price, then we should probably focus the majority of our attention on it.

Howard Lindzon was nice enough to invite me out to beautiful Coronado for this year’s Stocktoberfest. So I tried my best to explain our thought process when it comes to analyzing markets as well as our approach to portfolio management. Then we looked at some of our favorite trends and what we’re watching for 2013.

Here is the video of my presentation:

The charts might not be very clear in the video so I posted the slideshow here.



Stocktoberfest Friday Afternoon Part 1 (10.26.12)


The Little Book of Stock Market Cycles

Jeff Hirsch has recently put out a must read book titled, “The Little Book of Stock Market Cycles”. In case you didn’t know, Jeff is the editor-in-chief of the annual Stock Trader’s Almanac. And if you don’t keep a copy of this almanac on your desk, I promise you’re at a huge disadvantage in the market.

Lucky for us, Jeff published a book where he really gets into all of the details behind the secular, cyclical, and seasonal trends that occur way too often to ignore. I wanted to share some of my thoughts with you guys because I think this is one of the best written and coolest books I’ve read in a long long time.

In the book, Jeff walks us through over a century’s worth of secular and cyclical bull and bear markets. “Being in a bull or bear market is the single greatest influence on stock prices”, says Hirsch. From the Panic of 1901 all the way through the recent global financial crisis, sub-prime mortgage fiasco and everything in between. He details the inflationary impacts from all of the Wars and the ensuing bull markets that came as a result. For example, “The Dow has never achieved a lasting high during wartime”. Inflation (CPI) rose 110% during WWI and was followed by a 504% rise in stock prices throughout the roaring 20s. During WWII inflation rose 74%, which preceded a 523% rise in the Dow. In the Vietnam era, the inflation of the 1970s came just before the monster bull market that got going in the early 80s.

Jeff goes on, “War, peace, and inflation have an incredible impact on the stock market. They are the foundation of the cycle of boom and bust and of secular bull and bear markets”. He believes that once this secular bear market that we’re in is complete, we could see another 500%+ rise in the stock market that could take us to 38,820 in the Dow Jones Industrial Average by some time around the year 2025. As hard as that might be to believe, this number represents an average gain of just 8.6% per year. This is well within historic annual gains for US stocks.

The Presidential Cycle is another fascinating part of the annual almanac and is explained really well in the book. The greatest gains can be noticed in the 3rd years, or “Preelection Years”, while the weakness is seen in the first two of the traditional four-year term. Since Andrew Jackson, the last two years of the cycles have produced a total net market gain of 724%, dwarfing the 273% gain of the first two years of the administrations. That can’t be ignored. Also, since 1949 the greatest gains are seen when there is a combination of a Democrat as President and a Republican Congress (19.5% annual avg gain).

Within the year, there are some incredible seasonal trends. The six month switching strategy might be the most amazing market statistic that I’ve ever seen. We’ve talked about this before, but I think it’s worth mentioning again: Owning the Dow Industrials from November through April and sitting in cash for the other 6 months. A compounding $10,000 investment in 1950 performing this simple task would have returned $674,073. If you had done the opposite and owned the Dow from May through October and sat in cash from November through April, you would have actually lost $1,024. Crazy.

Taking it one step further, the Nasdaq actually has an eight month run from November through June. “A $10,000 investment in these eight months since 1971 gained $384,337 (as of May 31, 2012) versus a loss of $3,196 during the void that is the four-month period July to October”. These are some amazing numbers. It’s mind-boggling to me that some people choose to ignore this stuff.

The seasonality analysis continues with all of our favorite late December and early January tendencies. This is another major topic that we like to cover here on the blog. From the “January Effect”, to the “Free Lunch” strategy, to the annual “Santa Clause Rally”, there’s a lot going on this time of the year. But the most amazing to me of all of them is the January Barometer. Devised by Jeff’s father Yale Hirsch in 1972, this indicator has an unprecedented 88.7% accuracy rate since 1950. Essentially, as goes the S&P in January, so goes the year: “Every down January since 1950 was followed by a new or continuing bear market, a 10% correction, or a flat year. Down Januarys have been followed by substantial declines averaging -13.9%”. On the other hand, a year where you get a combination of a Santa Clause Rally, a positive first 5 days of the year and an up January has only occurred 27 times in the last 63 years. Full-year gains followed in 24 of those previous 26 occurrences. And it appears as though 2012 will make it 25 of 27. The S&P500 has gained an average of 17.5% in these years.

I can go on and on, but I think you get the point. We know that Jeff Hirsch does an amazing job every year with the Almanac and his blog. But The Little Book of Stock Market Cycles brings it all together in an easy to read format. Well done Jeff.


Buy it here:

The Little Book of Stock Market Cycles (Hardcover)

The Little Book of Stock Market Cycles (Kindle)

Follow Jeff Hirsch on StockTwits and Twitter @AlmanacTrader

Presentation at Stocktoberfest

This was an awesome couple days out in San Diego. I learned a ton about some startups that are doing incredible things. And more importantly I got to meet and hang out with some of the most brilliant minds that the market has to offer.

A lot of people approached me about sharing my slide presentation so here you go. What I tried to do was to talk about many of the different types of analysis that we do: correlation analysis, sector rotation, momentum analysis, seasonality, sentiment, and most importantly risk management. Then we just talked a little bit about some of the trends that we currently like and what we’re watching closely for 2013. (here is the video)


Also See:

Video of Stocktoberfest Presentation


Don’t Be Afraid To Change The Denominator

I’ve been meaning to write about this topic for a while. And that’s keeping an open mind to what you’re pricing your assets in. Why do they need to be in dollars? Think about it – there’s opportunity cost there.

One of the things I’m going to talk about during my presentation at Stocktoberfest Friday is changing denominators to find stronger trends, or trends in general for that matter. The first example might be my favorite of all time. We know that $AAPL is America’s favorite stock. And in case you didn’t, let me just tell you how much hate mail I received when I brought up the possibility of a decline in Apple stock last month. It’s been one of the biggest winners in a lot of people’s portfolios. But as good as it’s been, the gains were just a fraction of what a Long $AAPL / Short $RIMM trade brought home:

So in this case, we’re looking at a strong trend becoming much stronger by changing the denominator from US Dollars to the Blackberry maker, Research in Motion. The next example takes a non-trending asset and turns it into a super-trending asset. For a couple of years, Crude Oil was in a frustrating trading range that was difficult, if not impossible to trade successfully. But by changing the denominator and shorting Natural Gas against it, we see a beautiful trend that made a lot of money.

This particular trend got somewhat out of control and we liked, and continue to like, the reversion to the mean trade better. So these days, we’ve flipped it around by having Natural Gas as the numerator and Crude Oil as the denominator (see here). But the point is that we shouldn’t be afraid to play around with denominators. Assets don’t HAVE to be priced in US Dollars. You choose to price them that way. And I think there’s opportunity cost there.



Dealing With Losses

I’m not sure if you guys have discovered Gatis Roze, one of the newer bloggers over at StockCharts.com. I mentioned his new blog back in the Spring, and he certainly did not disappoint. He’s been pumping out blog post after blog post. And since I read a ton of technical work everyday, it’s nice to sometimes sit back and enjoy more of a philosophical discussion on trading and investing.

One of his recent posts at The Traders Journal“How I Deal With Trading Losses” is a must read. Here are a few things that stuck out to me:

As I see it, there are two types of losses.  The first type of loss is simply a result of the laws of probability and is to be expected if you follow your methodology.  I tell my classes that I lose about 4 out of every 10 trades.  The novices in the class react by asking themselves why they are taking an investment class from such a loser. The experienced investors nod their heads in approval.  The point is that when I lose, I cut my losses quickly to minimize the costs. When I have a winner, I let it run.  It works out to be a net positive as the winners more than compensate for the losers.  For you sports fans, another way to look at it might be to ask:  how much would a baseball team pay me if I hit only 6 out of 10 times at bat?

The second type of loss requires much more attention, introspection and brutal self-honesty.  Losses that result from ignoring your trading plan or other bad behavior is what we all need to minimize.  There should be no such thing as “learning to live with it” when it comes to the second type of loss as it does with the first kind of loss.  Instead, the objective here is to appreciate and understand the difference between these two types of losses and to not let your confidence get eroded in those instances when you traded your plan but a small loss resulted nevertheless.

Trading is a journey. Don’t let anxiety ruin your experience or your profits. Whenever I book losses, I just consider it as tuition paid to Wall Street University.  It’s not that I’m stupid – I just need to pay for the privilege of learning a very important lesson. Historically, I pay tuition only once for any particular lesson.

After all these years of trading, one piece of advice I’d offer my novice readers is to focus on the process. Don’t focus on the dollars and the results. Your performance will take care of itself if you can follow the game plan.

A few quick caveats:

  1. There is no place for denial in successful investing.
  2. Don’t blame your losses on bad luck or outside manipulators.  Accept the responsibility yourself.
  3. Don’t be dependent upon trading for all your fulfillment and happiness.
  4. Focus on opportunities, not on regrets.
  5. Proper risk control and discipline is non-negotiable for every trade everyday.
  6. Revenge trading – trying to make back a loss – carries with it far too much emotion and is always costly.
  7. Poor money management skills are the number one reason that novice traders wash out.
  8. Learn to recognize your impulsive state of mind and take action to stop it.

Even the best traders in the world book small losses on a regular basis.  If you manage your emotions with consistency and if you strive for a disciplined trading mindset, then you should have no problem surviving a string of bad trades and showing profits at the end of the year.

Go check out the entire post: How I Deal With Trading Losses



The Traders Journal 9.21.12 (Stockcharts)

Rydex Beta Chase Index Shows Investors Are Choosing Safer Funds

Here is an interesting chart.

This particular sentiment indicator is based off of information from the Rydex family of Mutual Funds. Because of the highly leveraged nature of some of their funds, these vehicles have become quite popular among market timers. The public data, published each night, shows us whether investors are choosing to move their money into low beta or higher beta funds. From a contrarian perspective, we can use this information to conclude whether market participants are “beta chasing” and looking for higher prices, or are nervous and fear has set in.

From Sentiment Trader:

“When the Index reaches a high extreme of around 2.8 or higher, it means that speculation is beginning to exceed its normal trading range, and that usually spells trouble for the market (especially in the context of a downtrend). Conversely, we normally see an index reading somewhere around 1.0 when prices have fallen and the Rydex timers are more concerned with falling prices than catching the next wave higher. Not surprisingly, higher prices are often the result.”

Monday’s readings for the Rydex Beta Chase Index came in just a touch above 1.0, a level where fear and uncertainty have often peaked over the last 18 months.



Daily Sentiment Report Monday 10.22.12 (SentimentTrader)

California, Here We Come

Flying out to LAX on Wednesday morning for some meetings. But from what I understand, we’ll be getting together with a good crew at one of LA’s premier hotel bars Wednesday evening. If you’re in the area and would like to join us for a few cocktails and market discussions, feel free to reach out to me.

Thursday morning we’re taking the train down to San Diego for the Stocktoberfest festivities in Coronado. I’m really looking forward to the event and have a nice presentation planned for Friday.

Ping me if you’re around @allstarcharts

Polarity In The Dow Monday

Monday’s action was really interesting to us chart watchers. Former Resistance becoming Support before our very eyes. I think this is the most important concept for us.

I tweeted what the chart looked like on Stocktwits Monday asking if this former resistance would indeed become support?

15 minutes later the Dow Jones Industrial Average started a 100 point rally. Although the meat and potatoes of the move came at the end of the day, the point is that the buyers showed up at a level where there used to be sellers. That’s what should happen. When it doesn’t is when you really need to look out.

I think based on this action, we have a terrific reference point for US Stocks short term. Above Monday’s lows and we like them long. A rollover below the potential “hammer” candlestick would be worrisome and evidence that further repair is needed.

It’s days like today that really help us manage risk the best.

Here are the candles on a 10 min time frame:

On top of the obvious risk/reward, consider a few other bullish factors: Momentum turned much higher on this new low in prices. That’s exactly what we look for. The recent low also could not hold getting back above that prior support very quickly. This puts a potential false breakdown on the table too. And for you Elliotticians, I put my wave count up there but I think it’s pretty clear.

To me all these things add up to an easy point of reference that helps us manage risk.

This is the reason why I do this.


Tags: $INDU $DIA

Forget The News, Look At Price

It’s a beautiful day today in New York City. So I wanted to start the week out on a positive note.

This is just a friendly reminder to worry less about the news headlines and focus more on price action. Remember when Greece was all the rage? You couldn’t turn the tv on or pick up a paper without something negative about Greece: “Greece Is Beyond Repair: Harvard Professor” – CNBC June 8, “History Offers An Ugly Precedent For Greek Euro Exit” Bloomberg June 1, “Greek Elections Poses The Next Major Threat” – WSJ June 11, “Greeks Dread Future As Their World NY Times June 13, “Greek Elections: Vote Is Plunge Into Instability”BBC News May 7, “Greece To Leave Euro Zone on June 18th”CNBC May 28. I can go on and on, but I think you get the point. And guess who’s stock market is up over 85% since June? And guess who’s stock & bond market barely gets a mention anymore?

The Athens Stock Exchange General Index has been one of the biggest winners since the summer, and no one seems to care. Why? Because I guess it isn’t sexy enough anymore. Apparently only riots out there make the headlines. Good news? No one wants to hear that. So I’ll be that guy:

Is this chart not a thing of beauty? Leave the sexy headlines to those who need to sell advertising for a living. And not that there is any wrong with that. If that’s how you make money, that’s great. This is America – go for it. But as readers and watchers, let’s remember the objectives behind what is being shown/printed. If your goal is to make money in the stock market, studying price is probably a better idea.

Just a thought…



Athens Stock Exchange General Index (Bloomberg)

The Crude to Natural Gas Ratio Lives On

We’ve been talking about this all year. Natural Gas – and more specifically Natural Gas relative to Crude Oil. It’s easily been my favorite trade of the 2012.

Here is a video about this ratio that I did for Yahoo Finance earlier this week. Then check out the links down below.



Related Posts:

About That Crash In Natural Gas Prices (2.28.12)

Is This Natural Gas Rollover a Potential Entry Point? (3.1.12)

The Natural Gas Crash Revisited (4.12.12)

The Bubble That Popped In The Oil To Natural Gas Ratio (5.16.12)

How’s That Natural Gas Rally Coming Along (7.23.12)



Big Move Coming In The Industrials

You guys have to see this. I mentioned it briefly in my yahoo segment with Matt Nesto the other day, but I think this is something serious.

The Industrials are setting up for a big move. And I don’t mean the Dow Industrials, I mean the Industrials Select Sector Index. You know the one with $MMM $HON $GE $UTX $CAT.

Take a look at this chart. It’s a weekly closing line chart of the $XLI, but specifically the last 6 years. Notice the downtrend since the 2007 peak being touched on 4 separate occasions. Then bring in the uptrend from the 2009 lows up to today’s levels. There is a move coming, and it’s not going to be a boring one. (click chart to embiggen)

Those 2011 were a fairly precise 38.2% Fibonacci Retracement off the 2009 rip-your-face-off rally. That’s standard stuff. But more importantly, it’s decision time for the Industrial space. We’ve reached the apex and we’re expecting a big move. Which direction is still to be seen. But we have to give the benefit of the doubt to the bulls here. Four touches of the trendline tells me the fifth should be the one. To be on the safe side, we want to see weekly closes above 38, and if you want to be on the ultra-safe side 39.

But this is set up for a potentially monster move. No one likes the Industrials. No one’s even talking about them. And for good reason, they’ve been one of the worst performing sectors within an otherwise great year for US Stocks. But look out. If these guys get going, get out of the way!


Also See:

Talking S&P500 Levels: Yahoo Breakout (10-16-12)