Listen To The Database

Random Thoughts

On Tuesday the Ps (S&P500) were down, so guess what? No, not chicken butt. On Wednesday, the market was up. This brings the change in direction count (up/down or down/up) to 8 out of the last 11 days. So, today the Ps will end down. Well, it’s not that easy but the information is still useful. It tells us that this market lacks direction. I suppose this isn’t rocket science. If you go back a couple of months you’ll see that the Ps were trading around 1878. Connect the dots to yesterday’s close and they are right around 1878.

If you want to know what’s really going on within a market, take a look at 1,500-2,000 of the most liquid stocks. This gives you a really good feel for what’s happening beneath the surface. Most appear to be headed lower. For those who don’t have time to do this, I quantified it for you. Taking all stocks with an average volume of over 250,000 shares daily, over half are in downtrends based on the Bowtie moving averages being in downtrend proper order (10SMA<20EMA<30EMA, see Education and recent Webcasts). Since we trade more volatile stocks, let’s look at all stocks who have a 50-day historical volatility (HV) reading of 20 or higher (the Ps are at 11 right now for reference, so these stocks are roughly twice as volatile as the market based on this measure). So, within the more tradable stocks, 57% are in downtrends. When you go a little further up the pike to stocks that we will mostly likely trade, HV>30, the number in downtrends grows to over 60%. So, when you factor in volatility, those stocks that  we are more likely to trade are in downtrends. This is a fancy way of saying that the momentum issues have lost momentum.

It is important to listen to the database.

If you don’t have time to look at a bunch of charts, the Rusty (IWM) is often a good proxy to what’s really going on. Although it tailed off its worst levels to close slightly in the plus column yesterday, it remains in a downtrend.

Although it is a little choppier, the Quack (Nasdaq) also remains in a downtrend.

Just in case you forget, I still remain concerned about the fact that the Ps continued to be propped up by mostly Defensive issues. And, all of these areas banged out new highs on Wednesday. When, not if, these issues correct, it could have a material impact on the Ps—unless of course, a bunch of other sectors decide to rally at the same time. I dunno, it looks a little scary from where I sit. One day at a time I suppose.

Most stocks are in downtrends so shorting seems like the logical play. Unfortunately, overall, things also remain choppy. This makes staying onboard difficult. Stocks rally enough to knock you out and then resume their downtrends.

So what do we do? Whenever you can draw a straight sideways line in the Ps for a couple of months you really need to consider if it is a market you want to be trading. This is especially true when you consider that the Quack is essential unchanged for 1-month. Yes, most stocks remain in downtrends but the market remains choppy (have I said that yet?). Although I seem to always preach being selective, now is the time to really be selective. Make sure you really like a setup before going after it. On the upside, the Defensive issues could provide opportunities—although this does scare me since it is the only game in town (see recent columns). On the short side, look for issues that are on the cusp of breaking down from trend transitional patterns. My thinking is the bigger they are, the harder they will fall. Again though, be super selective. For the most part, this is a market where you might just want to be patient and let things shake out. Knowing when to stay out is just as important as knowing when to be in.

Best of luck with your trading today!

Dave

P.S. Chart show today! If you’re not busy saving lives, building buildings, repairing automatic transmissions, or doing other great things, then come to the show.