Action Items for Next Week

  • Posted by
  • on November 25th, 2011

“If you’re going to panic, panic first”  Some non-bankrupt trader

No grand strategy breakthrough here, but I always help myself by writing out the issues at hand.  My anecdotal history says booming markets follow orderly market reactions to downturns, and my frustration of recent months doesn’t stem from an “orderly” market.  Other than the fall of 1998, it’s the rare beast that forces U.S. investors to be driven by what happens overseas…we’re clearly seeing that rare beast unfold week by week.

The macro concerns are obvious, but the new info being introduced is U.S. data falling short of expectations.  The rare shining light in recent quarters, we’re seeing issues raised about both the outlook for corporate earnings and economic growth as evidenced by the recent GDP shortfall.  While next Friday’s November payroll number may be stellar(unlikely) or useless(very likely), it is going to be anticipated with angst as next week unfolds regardless of whether Europe gets “solved”.

Since I’m not a macro specialist, I turn as always to price analysis.  I love how Erik Swarts described why he studies price.  I’ll go one further in saying that fundamental analysis requires deep consideration of how both investors and global consumers & bankers might respond; we TA folks simply decide we can’t effectively pull that off so we stick to analyzing only how our fellow investors may respond.

By now, the macro and momentum concerns are obvious to everyone so let’s just call them troubling and non-discriminating in reach.  They are to be respected without ignoring the possibility that anything can happen, even market rallies.  Extreme breadth surges can mean the beginning or end of a trend; the condition of recent months has been more thermostat than lit match, but this selloff is the first since then to share characteristics of a breakaway move like the one in late July/early August.

I remember a line from Brian Shannon’s book “Anyone can identify a trend; the idea is to find low-risk spots to buy and sell for a profit.”  So are there any data points that tell us not to sell short with $SPX at 1165?  Some big ones, actually…the following may not turn around the deteriorating trend but they could dictate the path we take to lower prices:

1) Time of the month- the old Fosback “turn of the month” strategy tells us it’s generally better to sell after the 1st few days of the month; MarketSci ran a good update of this strategy last year

2) Month of the year- Frank at Trading the Odds shared a great study of 9 prior years back to 1930 in which the market went negative YTD in November, with December never suffering a 1% further loss

3) Extreme breadth- in that same post, Frank followed a study from Market Tells showing strongly positive historic responses to the type of breadth thrust we’ve just witnessed

I don’t always have an opinion, but always have a plan.  Sometimes that plan says to wait until B and C confirms A, sometimes(like now) it says not to interpret anything until A appears.  Right now, “A” means evidence that the overpowering short-term plunge is at least slowing down.  That case can only be made after we go stop sliding longer than the 11/17-11/18 and 11/21-11/22 episodes in which $SPY went sideways for a day & a half before resuming lower.  A plan is not a plan until I’ve at least considered if “value” is capable of putting up a battle against the power of momentum.  For now, it looks able but not quite willing.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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