I have wanted to start a journal here in ET for a while now and I guess now is a good time as any. Also, I hope to stop polluting others' threads and keep my thoughts about the market here. If you are going to contribute to the thread I would only ask that you keep it very, very relevant. Other than that you are most welcome to make me eat crow (please serve with a side of fries). The journal will be a bit different from others in a few ways. I'm mainly interested in the general tone of the market, rather than say a specific subsector or a specific security. As Jesse Livermore says, most stocks follow the major indices. So I will be looking for big swings and try to profit from them by entering at inflection points when I identify them. I may use options, stocks, SSF, futures, etc. depending on the level of conviction and time window I see. Another way that this journal will probably be different is that I may not be updating it frequently (daily or intra-day) since the nature of my strategy is to go for longer swings and ignore hourly or daily swings. But you are welcome to post if you have something to add or think I am wrong or whatever. I just ask that you keep it relevant. My main tools for doing this analysis are the usual suspects. Technical analysis, market internals, sentiment, fund flows, and some pixie dust. To be honest, I prefer the more esoteric tools, although the tried and tested oldies are not ignored. So lets take a look at right now and go down the list of why I think we are in a topping stage (as expressed repeatedly in other threads): Sentiment AAII -- most recent is 63% bullish (nuff said) II -- bullish but not extremely so Hulbert's newsletter metrics -- extremely bullish JJC if onboard -- generally a good guy to fade According to Richard Bernstein Wall Street 'strategist' recommend a 65.7% stock allocation (not a typo) Very low cash levels for mutual funds Technicals Dow has not confirmed Transports by surpassing recent high Sideways and listless trading Gold in secular bull & again entered a cyclical bull (mid March) (for more on gold do a search for "Babak" and "gold") The VIX and its cousin VXN are screaming overbought ATR of major indices is very low -- a sign of a top Internals Nasdaq/NYSE high/low metrics are screaming overbought Nasdaq/NYSE stocks over long term MA -- ditto McClellan Summation for both -- ditto Nasdaq/NYSE adv/dec -- ditto Fund Flows TrimTabs/AMG report significant pick up in mutual fund inflows VERDICT: SELL So how do I suggest one play it? There are many ways. A simple one is to short ETFs like SMH, QQQ, DIA or SPY and just hold for the ride. Another that I'm fond of is to search out specific stocks which look toppy, that is they are close to previous resistance thereby offering a low risk short entry. Another is to look for a whole sector which is getting toppy (hint: transports) I've been making my list this past week and will be going through it with a fine tooth comb to finalize it. Well...that's it. For now.
forget about the Mutual Fund cash levels. This measure is a good sentiment of much longer term potential than for daily type swing trading. A better measure would be the put/call ratio on a ma basis. The II sentiment by the latest measures is neutral at best with some 35% of Advisors bearish and only 43% bullish. This gauge has very good swings with the market. In addition I would add the cycle measures in the market. The dominant daily cycle is in a top area with a bottom due in the first week of May, however the weekly is strong up and means higher prices henceforth. So, I would probably cover, but NOT short this market. Wait for the pullback to BUY! And the A-D line for the NYSE supports this view.
All of Babak's points are in support of a short position now. The question is whether a trend change will be upon us or is this just a pullback. Bullish Advisors reflect high % bulls VIX at 10 month lows and VXN at all time low McClellan Oscillators are at an overbought, and have been overbought for a week SUmmation Index is high, but has yet to cross down Other indicators like % of stocks 1 and 2 s.d. above 200 dma and 1 and 2 s.d.above 40 dma are at levels associated with tops in the last year. Bullish percent indicies are relatively high but only close to the Dec high, which was a lower high than 2001 The put/call ratio is ambiguous. The 21 dma for the PC ratio is not at absolute topping levels (reflecting high call buying), but the 50 is close to the topping level trendline, i.e. the pc ratio has been evolving upward for 3 years. I am putting on short positions, some mild and for the long term, some aggressive for very short term.
Nice journal. I agree with you, that the market would go down. I don't think it's time to sell/short yet, though. I think the market could go up a little bit more from here, perhaps to DJI 8800 to 8900. I don't think DJI can break 9k. Then, I think that the summer will bring a lack of volume, and sideways trading for a couple of months. Then, come September/October, DJI 6k, and S&P maybe 700 or lower. THen I think we'll have another bear market rally, come december and christmas time. Then the process repeats itself, until DJI 4k. DJI 4k, then we can probably find a bottom there. But then again, who knows. My reasons for thinking as above? I dunno, it's gut feeling, and the economy doesn't seem to be improving, falling value of the dollar, whole lotta other things, etc. Who knows, maybe DJI will break above 9k and complete a head and shoulders bottom. Maybe go up to 10k? Damnit, I would love to trade in a bull market. Jake
Just to clarify a few things due to comments above. The call to sell/short was not a day-trade thing. Sure the market tanked today. But it spiked higher just a few days ago. That doesn't mean anything because my time horizon is longer than a day. The real test of the thesis is a month or two down the road. So lets hold on the back patting. Regarding cash levels, I only use them to make sure that the bear is still here (primary trend). When the cash level goes up significantly it will be one sign that managers are being bludgeoned enough to feel the pain. So its just a peek to make sure it is still low, nothing else. Yes, the BP% is relatively low and that does bother me a bit. But it isn't that low either. Its sort of midway. A bit puzzling but all other indicators are screaming so I console myself with that and ignore the mumbling BP% indices.
A little bit more on sentiment. This from a usually marginal source of such data -- UBS/Gallup: http://www.gallup.com/poll/releases/pr030428.asp The UBS/Gallup Index of Investor Optimism had it biggest jump since its inception (Oct 1996) in April 2003. As you might expect this is not terribly bullish. I'm still watching the March 21st (2003) Dow high as it is the 'line in the sand'. If the Dow can not close above that level, then rallies like today are basically the last throes of a dying bear rally. And for a good example of a specific stock that is now pushing into resistance (pull up a 1 year chart) and offers a low risk short check out VRSN.
April 24, 2003 All of these inputs have dragged the broad-based Composite model into strong negative territory for only the third time since 2000. The first was August 2000 and the second was March 2002. Honestly, I've been surprised that the model has dropped so far so fast, particularly with the positives from the Commitments of Traders data and Specialist Short Ratio. But the historic levels of overbought breadth (advance/decline, up volume and cumulative TICKS) combined with the sustained low relative VIX have weighed heavily on the model and are the largest reason it's now giving such a negative indication. From www.sentimentrader.com a website devoted to the intricacies of sentiment in all its glorious detail.
Not really an update for the journal (we are still overbought and treading water until the market rolls over) but instead I found something which I thought you may find interesting. It is the latest remarks from TraderMike (Mike Swanson) from TimingWallStreet.com. I've heard he now runs a hedge fund as well as his web site. I have a lot of respect for this guy ever since I began to read him in 2000. His macro vision has been spot on and his analysis refreshing. You can make up your own mind: http://timingwallstreet.com/timing042703.pdf