duCati Report Week 7

Life is pretty simple: You do some stuff. Most fails. Some works. You do more of what works. If it works big, others quickly copy it. Then you do something else. The trick is the doing something else.
Leonardo da Vinci

The COT index number is +23.2%. The commercials stepped into the market with volume. Last week we had a non-committal market that fell slightly. I was of the opinion that the commercials would not step into the market with the volume necessary to keep it moving higher. Well the volume is there, but we’ll have to wait and see if this is enough to break the market to new highs at a significant resistance point.

On the bull side +23% is on the high side. Usually, barring exceptional circumstances, the COT index declines from around this level. Any declines will likely coincide with a falling market. Bear readings can be higher, rising to the [-30%] levels.

M&A activity is on the increase. This is generally bullish. Also Hedge Funds on the sector-level, [the top 50 hedge funds] added the most exposure to the Energy sector, while Apollo Capital’s sale of LyondellBasell led to a significant decrease in exposure in the Materials sector. The funds added over half a billion dollars in exposure to each of four North American companies related to oil and gas, refining, or energy equipment and services: Whiting Petroleum, Valero Energy Corporation, Talisman Energy, and Cameron International. Of these names, Valero Energy is noteworthy for rising nearly 50% since the beginning of Q4. The most overweight sector continues to be Consumer Discretionary (+8.2 percentage points relative to the S&P 500).

Technical

Assuming a bull impulse on the 5day chart, there is support at $183.50, where, buying support would be expected to enter the market. This would be a place where a trade would offer a good risk/reward.

The trend is bullish on both the 5day and 3day which again is a positive for placing a trade in this area of support.

Trade

If the market trades at $183.5o’ish, then a bull call spread would make sense. So buy $183.oo and sell $183.5o for circa a $0.50 debit. Your risk is fixed at $0.50/contract and would start at $183.oo. Support being at $183.50 should provide that safety.

 

duCati Report Week 6

Life’s but a walking shadow, a poor player, that struts and frets his hour upon the stage, and then is heard no more; it is a tale told by an idiot, full of sound and fury, signifying nothing.
William Shakespeare

This week’s COT index number is +15.3%, which improves upon last week’s number and suggests that this rally is sustainable.

The thing to note with the COT number is that to show this particular level of expansion [+5%] the volume required in purchases to achieve this was +50%. To find a similar volume of contracts purchased we have to return to September 2013.

That volume was maintained for two weeks, and then the volume dropped off the edge of the cliff. This expansion/contraction in volume gave us a rally and decline in the market [the correlation being high] following the volume and COT index number expansion/contraction.

As we stand today, that volume expansion will need to be maintained at the current volume [or higher] or, we will see another contraction in the COT index number, which will find the double top region, or, false breakout chart pattern in the SPY index.

As we shall see from the short term technicals, there is nothing in particular to indicate one direction or another. However when you look at a 10yr chart, the SPY is hitting resistance. This rally from the lows represents in that time frame, the retest of that resistance. If it holds, the trend that has been in place since 2009 will suffer a far more serious reversal than we have seen to date.

As an indication, the VWAP average sits at $156.56. To fall to that level would have the pundits screaming bear market etc. In the rally from the lows of 2009, the market has returned to the VWAP on five occasions. The last was at the end of 2012.

Technical

This week in all the shorter time frames all are in up-trends. That however is about all the information that is really available. The support/resistance levels are all equidistant, so the price could trade either direction.

The 15day chart is the only chart that displays any support/resistance areas that might prove useful. Resistance is at $187.30’ish.

Based on those two observations, if long, remain long. If short, cover your shorts, and if out of the market, look for a long entry and avoid placing any short positions.

There seems to be bullish noises emanating from the big fund managers as to the state of the economy etc. I’m far from convinced on that point. It is however irrelevant to the point of view of trading unless you are taking a longer view into 2016 or beyond.

10 year bond yields are headed higher. In all likelihood they could hit 4% or slightly higher, depending on whether Yellen and the Fed keep curtailing QE purchases. Generally rising rates are a bad thing for equities. Rising yields from a suppressed point however will not necessarily have that [immediate] effect. But in a rising yield environment simply buying the market will not be as effective as buying individual stocks [that outperform on earnings growth] showing growth through revenues/profits rather than simply share re-purchases.

Summary

Taking everything into consideration, standing away from the market, or market neutral is the two safe options. Initiating short positions would be incredibly aggressive, although potentially lucrative given that markets tend to decline faster than they rise.

I’m increasingly bearish. With the [gradual] withdrawal of QE, which really as far as I am concerned was responsible for the one way market, the one way market could well be coming to an end. Technically we are there. It would require the Commercials to support the futures market with a tremendous volume of buying to keep the COT index number high…I don’t see it. Earnings etc in the SPY constituents as a group need to improve, and to date, they haven’t. EPS have been based on share buybacks. I don’t see that trend continuing. The unpopular view [especially as noted bears capitulated late last year] is that the bull is about to hit a major road bump in the dark.

The last clue is that spreads through the Options markets are tighter, expressing that the market makers have [no view] a lesser view of the market and are keeping it tight. There have been few new trades the last few weeks.

 

duCati Report in the post

This week’s duCati Report is in the post.

 

duCati Report Week 5

Think left and think right and think low and think high. Oh, the thinks you can think up if only you try!
Dr. Seuss

The COT index this week is +10.8%. This would [as it is improving] suggest strength in the market.

All week the blogosphere has been debating the long/short question. I myself was willing to consider the bear case at/around these current levels.

Technicals

The 15day is in a downtrend with resistance at circa $181.20. The 10day is also in a downtrend, although the channel is starting to flatten out, which suggests that the market may have [for this pullback] already bottomed. Resistance is at $181.40 which is slightly higher than the 15day. The 5day is uptrending. It has no significant levels currently.

Today, we are trading in a very tight range. Again we have a Fed release later this week which will be Yellen’s first as Fed Chair. Again most [think] that she will continue the QE reduction cutting another $10 billion from the monthly buy. The reason [and quite rightly] is that QE has done little to nothing for the real economy as far as employment. The money has simply been redirected into various financial markets, which is true.

Therefore [the bear] argument essentially states that without the artificial stimulus, the markets trade lower [at worst] or go nowhere [the correction through time argument] but that the bull is over for the moment at least.

Add into that earnings, which on lower expectations, are still managing to disappoint, and the market lacks any catalyst to push it higher.

Logically, the bear case reasons correctly. It is just that we all have been [due largely to QE] conditioned to buy the dips. Buying those dips has been rewarded. Today, the trade [although it will be a difficult trade] is short. However, as it would signal the [likely] end of the current bull, it will not be an easy or comfortable trade as the general economy is in ultra low growth mode. For these reasons only the most aggressive should look short. The rest of us will more sensibly stand aside or remain market neutral.

 

duCati Report Week 4

I’ve missed more than 9000 shots in my career. I’ve lost almost 300 games. 26 times, I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.

Michael Jordan

The COT index falls this week to +3.8%.

The market opened today weak. It looks to be heading towards that $170 level to test support. The same advice that was given last week is relevant this week: the market looks weak, short is the correct short term position, but, it looks as if today has traded to a support level on the 5day chart and a reactive bounce may be in order. All the longer term charts; 10day, 15day, are down sloping and not at any technical support levels. Therefore any bounce from the $174.20 area will likely run out of steam circa the $177.00 area.

Assuming for the moment that this is a trend change in the market all market neutral positions will automatically adjust to the new market conditions and nothing need be done at this point. It is likely that many will have already locked in small profits from bull moves and those positions will have eliminated any losses that accrue while the market adjusts.

With short term [weekly positions] there is again the necessity [as always] to get the timing right in order to extract any profit.

The test of the $170 support area will likely occur a little higher around the $172.30 level. We bounce early this week [if at all] and then sell-off hard into the close of the week.

The ‘bounce’, should it happen, is simply too risky to trade unless you are day trading and can close out very quickly any long positions. I would be more inclined to trade any bounce as a new short at/around the $177.oo area.

So what’s changed?

The Fed lopped another $10 Billion off of QE, and investors/traders have sold off stocks and run back to bonds. True corporate earnings have been lacklustre and I think this has a fair amount to do with the disenchantment with stocks since the start of January.

Less money flowing into financial markets means that the indiscriminate buying of stocks, irrespective of earnings, which are poor, has largely accounted for the run from stocks back to bonds.

Trade

Entered Trade

 

duCati Report Week 3

I’m selfish, impatient, and a little insecure. I make mistakes, I’m out of control, and at times hard to handle. But if you can’t handle me at my worst, then you sure as hell don’t deserve me at my best.

Marilyn Monroe

This week’s COT index remains positive at +8.3%, increasing slightly from last week.

Last week the initial dip was bought, but, continued weakness brought the SPY back down through that support area.

Technical

All short time-frames have now turned bearish from 3days to 15days. The support line in the SPY has also been broken. However in breaking through support, the break is now somewhat over extended [oversold] and we can expect potentially a bounce trade against the short term trend.

Another way of saying the same thing is: before going short, wait for the trade to develop and sell resistance. To the pessimistic, resistance will be found at $181 – $182. I think however that I would be looking at $184 to be safe[er] in this market.

So what has changed?

Nothing really except that the market has decided to pay attention to the various bearish aspects of markets around the world. China is slowing, but has been slowing for some time. Earnings have been particularly lacklustre and weaker than many expected. With an already lowered bar, missing now has far deeper implications for valuations going forward. Thus a moderately priced market starts looking like an expensive market.

But really, most of this is old news, or has been ignored in the past. The Federal Reserve is expected to further reduce bond purchases next month – yet, the yield on the 10yr fell last week, which, should have made stocks more attractive, except that the money flowing to bonds came from stocks.

So, returning to the market, Everyone is looking at $170 as the line in the sand as far as the uptrend is concerned. In an algo driven market, all liquidity points are virtually guaranteed to be hit, so $170 more magnet than line in the sand. The goal is to test a significant level and free up liquidity to trade around. After all the stops have been triggered the idea they’ll figure out if there are still more sellers than buyers. If so, expect the next area to be tested. If buyers push back hard, then we have a false breakdown. One or the other (or some combination) will occur, but we won’t know much until we get there and watch it play out.

Internals

Breadth is still intact within market internals. This suggests that the bull market is not yet over and again a bounce and re-test [or continuation higher] is a reasonable expectation.

Technicals [again]

The 3mth chart has the market sitting directly on support. Thus the opening price action on Monday will be important. If the level holds – and I do expect it to hold intra-day and towards the close, then I think we get the bounce for the week. If it fails badly, then I would stay away as the market could trade hard towards that $170 area.

Trade

Entered Trade

 

Trade as signalled in newsletter

The trade was signalled in last week’s newsletter. The entry has worked out, now the exit [with some profit] needs to materialise.

 

duCati Report Week 2

Sometimes when you innovate, you make mistakes. It is best to admit them quickly, and get on with improving your other innovations.

Steve Jobs

This week’s COT index number is +7.8%. Improving strength. In the current market we are at a point of indecision. It could move either way. So with a stronger COT number, my bias is to the upside. Are there confirmatory signals elsewhere in the market?

Technical

We are in a short-term uptrend in 15day, 10day, 5day time-frames. Only in the 3day time-frame are we in a downtrend. Support sits at circa $183.oo, which is a buying point long should the market trade that price. I would expect that price to be hit near the early part of the trading week, with the market trading higher into the close of the week.

Technical Trade.

Enter a Bull Spread in SPY [Buy $182.oo, Sell $183.00 @ or around the support level at $183.oo] dependent on pricing, as the trend and COT index number support the thesis of a long position out of the support area.

10yr

The 10yr has pulled back to the moving average. If it finds support and trades higher – what if anything does this mean for the market? At the moment stocks and rates are not tightly correlated, so there is nothing that really has any evidence one way or t’other. For the moment ignore. Bond rates are returning below the inflation rate and are therefore as an asset class, not particularly attractive.

Earnings

Have been pitched so low that most should clear the hurdles set. Currently stocks are more about inflationary pressures. Until the Fed stops creating credit, and the T-Bills etc trade higher, stocks will continue you trade higher as rising capitalisation values provide the return against inflation. This can only continue until it doesn’t. Therefore, unless you are trading individual names, the aggregate of earnings should be positive for the over-all market.

Healthcare

Looks, compared to the over-all market, ready to revert to the mean, thus a trade could potentially be structured for this.

Entered Trade

 

duCati Report Week 1

Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.

Abraham Lincoln

The Christmas period is now over for another year and the markets will return to their business.

The last three weeks COT index number are: 55%, 69%, and this week’s 64%. Thus, this week, looking at the price action of the market, I would expect a weaker market in that the COT number as it strengthened at 69%, the market only moved marginally, and did not make new highs. This week, the index number weakens, and therefore I would be looking at a weaker market potentially.

Technical

The 10day and 15day charts correlate best with the current price action. There is support marginally above the $182.oo level on the 15day chart and the same on the 10day chart.

The area that causes concern is that on the 10day chart we have a downtrend channel, while on the 15day it remains an uptrend channel. There is no real way to predict which short-term trend will dominate, however adding the COT index number to the mix and I would be leaning to the bear case [for this week].

Starting next week, I’ll be [via the newsletter] be adding an overnight end-of-week-trade. I’ll be testing it live this week, and if all goes as it should, I’ll be adding an extra e-mail with the trade on Thursday prior to the close, to run to the close [or thereabouts] on Friday, so a very short-term trade. It is a refinement of the original “Weekly Trade” that I ran for the first half of last year.

Trade

Entered Trade

 

Taking some profits

I have just entered some ‘sell’ orders in the portfolios to take some profits. EWP, EGPT & EWI all have some sell orders. GLW in the pure common stock positions.