Info!! When Modest Cap Stocks Underperform

For the starting fourth dimension time since early on February, smaller cap Russell 2000 stocks (IWM) convey underperformed larger cap S&P 500 stocks (SPY) past times a amount percent betoken or to a greater extent than over 5, 10, 20, together with fifty hateful solar daytime periods.  That's pretty odd inwards bull markets.  Indeed, if nosotros expect at those occasions when VIX has every bit good been below twenty (a overnice bull marketplace position filter), nosotros exclusively notice xiv non-overlapping instances since 2006.  Over those xiv instances, SPY has been upwards twenty days afterward twelve times together with exclusively downwards twice, for an average 20-day hit of 2.23%.  All other instances convey averaged a 20-day hit of .50%.  

(Story for unopen to other day:  When IWM has outperformed SPY past times over 1% over 5-50 hateful solar daytime periods, the average side past times side 20-day modify inwards SPY has been a loss:  -.31%.)

All this tells us is how stocks convey behaved inwards the past.  Our labor is to read how the marketplace position is behaving immediately together with continually update our estimates of past times patterns playing out inwards the present.  Could nosotros hold upwards entering a whole novel government of small-scale cap underperforance?  It's possible, particularly given the higher valuation of small-scale caps together with concerns over the potential halt of QE.

Should nosotros demo signs of basing, however, amongst farther selling unable to force the wide listing of shares lower, nosotros could convey a overnice setup for bargain hunters.

Info!! Divergences Together With Pairs Trading

Here nosotros encounter 3 charts from yesterday's trade: the Standard together with Poor's 500 Index (SPY; altitude chart); the Financial sector ETF (XLF; middle chart); together with the Housing sector index ($HGX; bottom chart). Note that, equally the S&P 500 Index moved to novel highs inwards the afternoon, the fiscal together with housing stocks failed to follow. This is what's known equally a divergence--a discrepancy inwards path betwixt an index together with its component(s)--and it was something I noted inwards the day's Twitter comments. When you lot encounter multiple sectors neglect to follow an index higher or lower, it agency that a relatively small-scale proportion of high cap stocks are accounting for a skillful amount of the deed inwards the index. Very often, those narrow moves are non sustainable together with are prone to reversal.

But let's dig a petty deeper together with inquire what it *means* when nosotros convey divergences such equally the above. Traders--particularly those exterior institutional settings--tend to retrieve directionally: they merchandise SPY, XLF, etc. outright for a deed either upward or down. That's dandy when the marketplace is moving directionally; non together with then profitable when the marketplace chops around.

An alternate merchandise is a relational one, known equally a pairs trade, inwards which nosotros purchase i stock, sector, or index together with sell roughly other i against it. Instead of trading the marketplace directionally, we're trading the human relationship betwixt ii assets directionally: we're trading the relative forcefulness of i stock/sector versus another.

The pairs trade, properly constructed, tin dismiss locomote a powerful tool exactly because it is non subject on marketplace trending. In other words, the S&P 500 Index could deed higher or lower, simply if Financial stocks underperform the index, I'll withal brand coin if I'm brusk XLF together with long SPY. When markets merchandise inwards ranges, they are doing together with then exactly because large traders together with investors are reallocating upper-case missive of the alphabet amid sectors. This environs of sector rotation is perfect for pairs trading, if you lot tin dismiss select handgrip of the reallocation shifts early.

So right away dorsum to divergences. When nosotros encounter a novel high inwards SPY together with Financial together with Housing stocks failing to confirm, what we're actually seeing is a turn down inwards the pairs human relationship of XLF/SPY together with $HGX/SPY. Think of that human relationship equally a unmarried stock that moves each minute: equally SPY is moving to high dry soil together with XLF is non following, nosotros are trending lower inwards XLF/SPY.

The departure tin dismiss locomote an of import sign of directional shift inwards the wide index (which is why I Twittered the observation yesterday), simply it tin dismiss also signal an emerging pairs trend. If you lot tin dismiss select handgrip of those pairs trends early, you lot tin dismiss locomote a to a greater extent than diversified book--and you lot tin dismiss discover yourself to greater chance inwards non-trending marketplace conditions.
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Info!! Trading Notes For The Calendar Week Of March 14, 2016

Friday, March 18th

*  Steve Spencer of SMB emphasizes that cost activity next a catalytic lawsuit provides us amongst of import information.  This is especially truthful when nosotros run across a modify inwards the distribution of transactions next a word lawsuit or other catalyst.  Increased book together with a novel skew of book lifting offers versus hitting bids, for example, tells us that fresh buying flows receive got come upwards into the market.  This calls for an updating of our views of the stock or index.

*  This lesson has been especially relevant inwards the wake of the Fed announcement.  My cumulative stair out of upticks vs. downticks has hitting novel highs for this displace together with breadth, which had been waning, vaulted to novel highs.  Below nosotros tin run across the nautical chart of stocks across all changes making fresh 3-month novel highs vs. lows.  The vigor of buying next the Fed annunciation suggests that this, indeed, was a game changer.  Central banks globally are opting for accommodation and, historically, that has been favorable toward stocks.

*  The China/deflation thesis, which dominated give-and-take during recent marketplace weakness, is far less discussed I find, given stone oil clit together with USD weakness.  For stocks, inwards a negative involvement charge per unit of measurement world, anything rubber amongst yield continues to discovery interest.

Thursday, March 17th

*  Interesting commentary on the fright of missing marketplace moves from Victor Niederhoffer.  Many a bad merchandise is made because of the ego, non because of the objective marketplace opportunity.

*  We saw a ascent to novel highs on the heels of the Fed announcement, amongst enterprise buying interest.  Recent posts receive got commented on weak breadth and, for the marketplace overall, the breadth movie did non amend despite the Fed-related strength.  Across all exchanges, nosotros saw 753 novel monthly highs against 254 lows.  The latter is in 1 lawsuit again an uptick inwards novel lows together with the novel highs are one-half of what nosotros saw 2 weeks ago.  Among SPX shares only, stocks making fresh 100-day novel highs versus lows did expand to a marginal novel peak.  Much of the weakness is amid small-scale cap shares, though fiscal together with wellness aid stocks inside SPX are likewise lagging.  With the mixed breadth picture, I'm non surprised to run across some retracement of yesterday's gains inwards premarket merchandise today.

*  Breadth issues notwithstanding, it's clear that this has been a vigorous bull displace from the Feb lows.  Note below how we've stayed "overbought" on my multiperiod clit stair out (daily tracking of SPX stocks making 5, 20, together with 100-day novel highs versus lows) for a number of days.  This exclusively occurs inwards trending markets.  While the breadth issues oft precede correction, my base of operations illustration is to sentiment such a correction equally a buying opportunity.  

 

*  I'm working on creating a cycle-based stair out of short-term momentum together with value effects inwards the ES market.  The thought is to seat when markets are most probable to proceed versus opposite their most recent directional movement.  Interestingly, the market's ascent yesterday occurred on a depression value of the momentum measure.  More to come upwards on this research.

Wednesday, March 16th

*  Jim Dalton, who has pioneered trading via Market Profile, is offering his in conclusion mentorship computer programme earlier his retirement.  I likewise run across Terry Liberman will live doing a webinar amongst Jim afterwards today.  When I taught an internship computer programme inwards Chicago many years ago, Jim's piece of occupation was the exclusively mandated reading.  I proceed to discovery Market Profile helpful equally a conceptual framework for thinking nearly marketplace behavior.

*  After some early on weakness, nosotros saw buying inwards stocks, but small-scale caps proceed to notably underperform large caps.  As a result, nosotros run across continuing deterioration amid the breadth measures.  New monthly lows ticked upwards to 192, the highest degree since Feb 24th together with monthly highs dipped to 451.  Relatively weak sectors lately include unloose energy shares (XLE) together with healthcare (XLV).  Today's trading volition live dominated past times the afternoon's Fed announcement.  

*  We proceed quite stretched on my intermediate clit measure, which looks at the number of SPX shares making fresh 5, 20, together with 100-day highs versus lows.  (Data from Index Indicators).  If the Fed-related merchandise can't interruption us from the breadth deterioration, I await an intermediate-term correction.  That would non necessarily live an terminate to the bull displace from February's lows, but could advise a new, topping stage to the electrical current marketplace cycle.  During a topping stage nosotros tin run across higher overall prices for the index, but amongst deterioration inwards some sectors contributing to lagging breadth.  

   
*  Here is a unique intraday indicator that looks at buying clit per unit of measurement area amid all U.S. listed shares.  It tracks upticks amid all shares (data from e-Signal) together with expresses the final result inwards measure difference units.  This shows us when important buying is coming into the market.  It likewise shows us when at that topographic point is a meaningful absence of buying.  (A corresponding stair out tracks important selling together with absence of selling pressure).  It helps longer-term positions when those are going amongst the flows.  The nautical chart below shows yesterday's market.

Tuesday, March 15th

*  I'll live making an improver to these marketplace notes together with including each 24-hour interval links to readings that I discovery specially informative together with useful.  To boot this off, banking concern check out the Paststat blog for daily trading ideas based upon historical patterns, including this 1 based upon seasonality.  From my perspective, such patterns are the starting signal for analysis, non an terminate point.  Once nosotros run across a pattern, the difficult piece of occupation remains of deciding: 1) is the electrical current marketplace authorities typical of the menstruum covered past times the historical test; 2) is at that topographic point a audio argue for the beingness of the pattern, or mightiness the designing live a random occurrence; together with 3) what is the variability or together with thus the designing (could yous endure the exceptional instances)?  Factoring marketplace history into trading decisions is no guarantee of success--it's slow to aspect inwards together with thus many places that some "significant" designing appears--but ignorance of marketplace history is non just a promising alternative.

*  The relative absence of selling clit per unit of measurement area inwards Monday's session was noteworthy together with helped atomic number 82 to higher prices for much of the session earlier a belatedly selling burst.  Selling has continued overnight amongst no novel shot inwards the arm from the Bank of Japan.  Trading was unusually wearisome on Mon together with nosotros could larn to a greater extent than of the same ahead of tomorrow's Fed announcement.  Note how short-term breadth has been potent for a number of days; the stair out below tracks the percent of SPX stocks closing to a higher house their 3, 5, together with 10-day moving averages.  (Data from Index Indicators).

       
 *  The marketplace looks tired to me--for the origin fourth dimension since the liftoff from the Feb lows.  Specifically, we're getting fewer shares registering novel highs during marketplace rallies.  Much of that relative weakness is coming from small-scale cap shares.  Yesterday nosotros saw 921 stocks across all exchanges brand fresh monthly highs against over 2000 in conclusion week.  (Data from the Barchart site).  No private sector inside the SPX looks distinctively weak together with I'm non at all convinced that we're going into deport mode.  Rather, I await a normal correction inside a bull move.  With the absence of selling having problem bringing us higher, I'm leaning toward selling bounces that cannot maintain us to a higher house the overnight highs.  Of course, the upcoming Fed annunciation volition supply a major catalyst for stocks tomorrow.


Monday, March 14th

*  Those who know me good know that I create non subscribe to the thought that successful trading is by together with large a operate of psychology.  Without an objective trading edge, one's frame of bespeak heed volition but dictate the charge per unit of measurement at which nosotros portion amongst our capital.  Still, psychology is necessary, if non sufficient, for success together with yesterday's post service was mayhap my clearest explanation why.

*  We shut close the highs on Friday, continuing the upswing next the post-ECB selloff.  The ascent left us quite stretched short-term, amongst over 90% of SPX stocks trading to a higher house their 3, 5, 10, together with 20-day moving averages.  This inwards itself is non a mutual occurrence.  Going dorsum to 2006, I could exclusively discovery 12 instances of this happening when VIX has been below 20.  Interestingly, three were up, ix downward the side past times side 24-hour interval for a internet loss, but 10 were up, 2 downward after three days.  We're trading a fighting lower premarket equally I write; the depth of a side past times side pullback volition state us a lot nearly possible upside momentum over the side past times side few days.

*  One line of piece of occupation concern starting to travel inwards my caput is that Friday's highs were the origin inwards which nosotros saw sizable breadth divergences.  If nosotros aspect at all stocks across all exchanges, nosotros tin run across that 1087 made fresh monthly highs on Fri against 2082 the prior Friday.  Much of this is a operate of relative weakness amid small-scale caps.  We exclusively had 92 novel monthly lows on Friday, together with thus naught is standing out equally weak together with I'm non expecting whatsoever grand reversal.  I am concerned, however, that nosotros could run across a decent pullback from these levels equally portion of the start of a topping process.  Bottom line is that I was happy to receive got profits belatedly Fri together with I'm happy to remain on the sidelines together with run across what the bears tin bring.  Ideally, I'd similar to live a buyer of weakness early on inwards the calendar week for at to the lowest degree a retest of highs thereafter.  But I'm non seeing favorably skewed risk/reward right here, right now.

Info!! Trading Notes For The Calendar Week Of March 7, 2016

Friday, March 11th

*  Thursday's ECB coming together brought stock buying together with euro selling--and together with therefore a sudden reversal of both during the twenty-four hr flow earlier a rally belatedly inwards the twenty-four hr flow together with overnight brought us dorsum toward the highs.  As the one-hour oscillator of upticks/downticks for all listed stocks shows below, the selling was quite wide during yesterday's selloff together with the buying has been wide on the reversal.  New highs vs. lows for listed stocks deteriorated yesterday, therefore I volition endure watching breadth going forrad to view if participation expands or contracts on upside moves.

*  We've turned downward on the cumulative publish of purchase vs. sell signals given past times the Wilder Parabolic-SAR system.  That tracks all NYSE shares on an end-of-day dry reason (raw information from Stock Charts).  Note that, during vigorous upward wheel phases, such every bit nosotros had inwards Oct of final year, the cumulative SAR stair out volition peak ahead of price.  So far, during the deterioration inwards the measure, toll has held upwardly well.  I thin toward buying weakness that remains higher upwardly yesterday's lows.

 
*  I noticed some underperformance of minor cap shares yesterday.  One twenty-four hr flow does non brand a trend, only during the vigorous ascent from the Feb lows, minor caps were outperformers.  I volition endure watching that relative performance going forward, every bit it could offering clues every bit to the eventual turning of the cycle.


Thursday, March 10th

*  Midweek saw rangebound markets, every bit selling greeted early on strength, only stocks past times together with large held against their prior day's lows.  We closed amongst nether 50% of SPX stocks nether their three together with 5-day moving averages.  Going into the ECB announcement, nosotros quest to view the lows of the final 2 days concord upwardly inwards lodge to maintain the vigorous uptrend from the Feb lows.

*  Here is a nautical chart of the publish of NYSE stocks giving purchase signals versus sell signals amongst observe to their Bollinger Bands--a really useful stair out of wide marketplace forcefulness vs. weakness.  Note the upthrust from the Feb lows, followed past times a pullback inwards purchase signals, only non at a betoken where we're getting internet sell signals.  It is mutual for thrusts higher inwards the Bollinger stair out to endure followed past times farther toll strength; marketplace rises conk vulnerable when nosotros laid about seeing internet sell signals. Note how thrusts lower inwards the stair out convey represented practiced buying opportunities every bit a whole.

*  I late wrote on the theme of a powerful stair out of stock marketplace sentiment.  Interestingly, that stair out shows a internet reduction of SPY shares outstanding over the past times 5, 10, together with 20 trading sessions.  That configuration has tended to Pb to toll gains over the side past times side 5-20 trading sessions.


Wednesday, March 9th

*  Monday's post talked most a normal correction from stretched levels together with nosotros got that yesterday, every bit most 19% of SPX stocks closed higher upwardly their 3-day moving averages together with 26% higher upwardly their 5-day averages.  In an uptrend, nosotros await short-term oversold levels to tumble out at successively higher toll lows.  We're seeing a bounce inwards overnight merchandise together with my base of operations instance is that yesterday's lows concord every bit nosotros ready a examine of the recent highs.  Of course, marketplace reply to tomorrow's ECB proclamation could convey a lot to do amongst whether that base of operations instance plays out or not.

*  Yesterday, stocks across all exchanges making fresh monthly highs dropped from 1720 to 719; novel lows rose from fourscore to 88.  In general, I exclusively conk concerned most the reversals of wheel uptrends when novel lows expand meaningfully.  The past times calendar week we've had the lowest publish of novel monthly lows inwards years.  The absence of weakness ends upwardly beingness every bit rigid a predictor every bit the presence of strength.  Markets mostly plough because i or to a greater extent than sectors are rolling over, creating the expansion of novel lows.

*  Here's a aspect at the performance of major stock marketplace sectors from the Finviz site.  Note how the sectors that led performance on the downside (utilities) are instantly lagging together with how those most wound inwards the downturn (raw materials) are instantly leading performers.  If the uptrend is to continue, nosotros would desire to view wide participation of the sectors; a rally amongst rigid sector rotation is what oft leads to a to a greater extent than prolonged correction.

 


Tuesday, March 8th

*  After a sizable run higher, we're get-go to view signs of distribution.  While the publish of stocks across all exchanges hitting fresh monthly highs was impressive yesterday (1720), that publish was below the levels seen the prior twenty-four hr flow (2082) together with the twenty-four hr flow earlier that (1868).  Small cap together with midcap stocks maintain to outperform.  NASDAQ shares convey been relatively weak; commodity-related shares convey been relatively strong.  Consumer staples shares (XLP) striking a novel high yesterday, business office of a theme that I believe volition emerge inwards this the world of growing negative involvement rates:  the appeal of stable, high lineament stocks that offering relatively rubber together with attractive yields.  Such stocks are richly valued already, only could view bubble-like performance should key banks maintain downward the negative charge per unit of measurement path.

*  Commodities convey staged a important rally; DBC is instantly higher upwardly its Dec 31st unopen (see below).  The the US dollar (UUP) is downward on the year.  With ECB coming upwardly on Thursday, powerfulness nosotros endure pricing inwards important reflation, together with powerfulness the key banks inwards Nippon together with Europe endure embarking on stimulus measures higher upwardly together with beyond negative involvement rates together with bond-buying?  That would endure a most important macro development.

*  The recent selling to a greater extent than or less the 2000 grade inwards ES notwithstanding, I maintain to endure impressed past times the vigor of the rally off the Feb lows.  Note below how we've gone from an overbought province of affairs to an fifty-fifty to a greater extent than overbought one, amongst stocks moving steadily higher.  (Chart tracks SPX stocks making novel highs versus lows over 5, 20, together with 100-day lookback periods).  If indeed we're getting reflation from key banks, the implications for stocks would non endure short-term together with could maintain to powerfulness shares higher.

Monday, March 7th

*  If our trading does non supply these 4 psychological benefits, we're apt to underperform together with lose our powerfulness to perform inwards the zone.  We tin dismiss best handle our positions if we're managing ourselves well.

*  We saw some wide selling belatedly on Fri together with therefore far convey non been able to bounce inwards overnight trading.  Fri closed amongst over 80% of SPX stocks closing higher upwardly their 5, 10, 20, together with 50-day moving averages, only a waning pct closing higher upwardly their 3-day averages.  (Data from Index Indicators).  I would non endure surprised to view a normal correction of the recent strength; that should terminate higher upwardly the belatedly Feb lows to sustain the electrical current uptrend.  I would likewise non endure surprised to view subdued risk-taking ahead of this week's ECB meeting.

*  The intermediate-term wheel measures that I rail maintain to endure stretched to the upside.  Note how we've rallied inwards the human face upwardly of an "overbought" cycle.  That momentum suggests that we're non however at a betoken where nosotros would await the uptrend to meaningfully reverse.  

*  One stair out I rail is the volatility of marketplace breadth.  Specifically, I rail the volatility of the daily readings of SPX 500 stocks making fresh novel highs together with lows on a 5, 20, together with 100-day basis.  We late striking a meaningfully depression grade inwards that measure.  Since 2010, when we've been inwards the lowest quartile of readings for breadth volatility (as at present), the side past times side 5 days inwards SPX convey averaged a gain of exclusively .01%.  When we've been inwards the highest quartile, the side past times side 5 days inwards SPX convey averaged a gain of +.44%.  It's i to a greater extent than stair out that makes me opened upwardly to the possibility of some short-term correction of the recent marketplace strength.

Info!! A Await At About Interesting Marketplace Set Relationships

Perhaps a chip also much to recollect on an early on Sabbatum morning!  Anyway, hither are a few of the to a greater extent than cogent thoughts:

*  One of the measures I rail is something I telephone vociferation upward marketplace position "stability".  It basically looks at the uniformity vs. dispersion of correlation too volatility inside the stock market.  I let on that stability has been breaking downward inward recent sessions.  The end fourth dimension this happened was at the rattling terminate of February/very outset of March, which preceded a marketplace position dip.  Indeed, since the start out of 2012, the hand quartile of stable markets convey averaged a five-day gain of +.72%.  The bottom quartile of stable markets convey averaged a five-day loss of -.02%.  In the middle quartiles, we've averaged five-day gains of +.52% too +.23%.  We're non at that bottom quartile presently, only we've moved out of the hand one-half of the distribution. 

*  this blog's before observation too investigates the implications of underperformance of small-scale caps.  Again, nosotros tin give the axe expect past times quartiles since the start out of 2012 too it turns out that when smaller caps (IWM) convey most underperformed the S&P 500 index (SPY) over a 10 24-hour interval period, the side past times side 5 days inward SPY convey averaged a gain of +.85%.  The side past times side 3 quartiles average, respectively, +.05%, +.09%, too +.53%.  Interestingly, we've seen momentum when small-scale caps convey meaningfully outperformed large caps too reversal when they've meaningfully underperformed.  

*   I don't run across a like human relationship betwixt SPY outcomes too the grade to which NASDAQ shares (QQQ) underperform.  Indeed, next the instances inward the hand quartile of QQQ underperformance over a 20-day menstruum since 2012, the side past times side twenty days inward SPY average a gain of exclusively +.60, compared amongst an average 20-day gain of 1.61% over the residuum of occasions.

*   Sentiment matters.  Since 2012, the hand quartile of days based on unmarried 24-hour interval stock index put-call ratios convey averaged a side past times side 20-day gain of 2.22%.  The bottom quartile of days (lowest index put/call ratios) convey averaged a side past times side 20-day gain of .78%.  The hand quartile of days based on unmarried 24-hour interval unmarried equity put-call ratios convey averaged a side past times side 20-day gain of 2.11%.  The bottom quartile of days convey averaged a gain of .81%. 

*  Volatility matters equally well.  Since 2012, the lowest quartile of VIX days convey averaged a side past times side five-day gain of exclusively .03%.  The highest quartile of VIX days convey averaged a side past times side five-day gain of .87%.

*  Divergences?  The skillful tidings is that SPY has been exclusively virtually 2% off its all-time highs during the past times 3 trading sessions.  The bad tidings is that stocks making novel monthly highs savage curt of those making fresh monthly lows past times 376 to 993 3 days ago; past times 212 to 1461 2 days ago; too past times 328 to 646 yesterday.  There has been much to a greater extent than weakness than the large cap indexes suggest.

Further Reading:  A Different Way of Looking at New High too Low Data