A Method For My Madness

  • Posted by
  • on November 16th, 2013


“A good doctor looks at both, the pictures and the numbers.”  Benoit Mandelbrot


No matter your approach, it’s safe to say there are endless ways of pursuing investment profits. Yours is not mine, mine not hers. In our connected world, though, we get to see how others seek edge. Sometimes I can adopt a tiny piece of wisdom, and sometimes it’s just fun to watch a performer share their craft.

I generally believe there is consistent money to be made in three areas: balance sheets, behavior, and big ideas. Lacking expertise in the first, and often patience in the last, I’ve settled into behavior as my modus operandi. I study the footprints of my fellow profit-seekers and risk-avoiders, and try to be positioned in the direction of change.

The fit for my wiring is following the money by studying price. There are a ton of technical avenues I ignore; I don’t do fibonacci, Elliott wave, overbought/oversold, or a host of other popular techniques. They are too anticipatory for me, and I don’t like to presume what’s going to happen next. I just want to know what’s happening now, and analysis of market breadth is at worst a coincident indicator but sometimes a leading one.

Right now, it’s coincident. Primary indices such as $SPX are at all-time highs, and the underlying components are right there with them. I’ve been sharing my Breadth Dashboard of late, which tracks 4 basic measures of price across 200 key stocks on 3 different timeframes. Like the Paul Samuelson line about Wall St. indexes predicting nine out of the past 5 recessions, it will give more warnings than truly necessary; just a week ago it had me on alert for a potential change in trend.

But it has remarkable flexibility, more than I could likely muster on my own. It has robustness, inspecting the trend with a 200X magnifying glass to spot those times when a few big stocks give a misleading picture of market health. And its broad look across timeframes gives me a look at the forest when it’s so easy to get caught staring at a tree.  Take a look at the dashboard(handiwork of Jeff Carroll) as of Friday’s close:


 That’s enough green to worry the contrarian in me, but I only find it actionable when it recedes(for lack of a better term, green is good). Even now, anyone looking to go divergence shopping could go to the upper right and note that the long-term “% Above” seems to have stalled. Yes, it has…here’s the detail of the % of stocks above their 30 week moving average:


Here’s another “worry” often cited about the danger of this $SPY advance…that we’re not seeing enough 52 week highs to match those of the indices.


Agreed, but what about the complete lack of new lows in red? We have to account for both sides of the bull/bear equation, and highs still dominate even if they don’t match some idealized level from a dusty old book. We all have a favored metric or two, but there is no way I’m going to let one supersede my entire collection.

It’s easy to paint a bearish or bullish picture given a bias. But I don’t want to be bullish or bearish, I just want to be. As traders, we are constantly forced to make black and white decisions out of very gray information. The best way to maintain situational awareness(for me at least) is to lean on a consistent routine that constantly asks “more, or less?” as opposed to “in, or out?” A well-structured template is a wonderful way to slow things down and accept the information at hand.

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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