Saturday, April 20, 2013

IBM as Bellweather

The Little Kingdom That Could

The Little Kingdom

Once upon a time, there was a glorious little kingdom within a larger Empire. It ruled at a time when there was no opposition to its power, as nobody else could approach its singular determination to dominate its locale. Sure, there were minor challenges to its authority from time to time, but it brushed them off like so many fleas off of a dog's back. The rulers were young and vigorous, and in fact that was part of the kingdom's charm, for it allowed nobody to grow too old before sending them off to a happy retirement in the lush land's verdant valleys and golf courses.

The kingdom, however, was too successful for its own good. While at first loved and cheered, gradually a growing chorus of envious peons complained that the kingdom was simply getting too big and powerful within the Empire. The kingdom was not allowing other, competing kingdoms to survive, much less challenge its authority. While the kingdom argued, with complete justification, that this was in the best interests of the peasants and farmers, who benefited from its protection and devotion to improving their tools, the detractors responded that others had a right to help the people as well. They said that the Empire would be even stronger if the little kingdom were not quite so powerful.

Matters finally came to head when the Emperor in far-off Xanadu started noticing that the kingdom's popularity rivalled even his own. The people were writing songs and singing carols about the kingdom, while the Emperor, preoccupied with foreign wars and growing disaffection among the people, became hated and feared. Prodded on by his advisers, the Emperor finally instructed his Seneschal to "take care" of the kingdom and disrupt its growing influence.

The Seneschal was a wise man. He flattered the kingdom by telling it that it was so important to the Empire as a whole that it should be broken up into smaller kingdoms, making it into even more of a good thing for the people. At first the kingdom resisted, but the Seneschal was firm, and he camped his troops on the bluffs high above the kingdom's capital as a warning. The kingdom appealed to the wisest men in the Empire, but they finally agreed with the Seneschal. At last, in order to maintain its existence, the kingdom did as the Seneschal demanded. The king split his domain between his several sons and daughters, while maintaining only the prosperous capital for himself.

Everybody expected the kingdom to finally die, but a curious thing happened. Over time, the capital developed into its own little kingdom again, but instead of making tools for the farmers and peasants, it now set out only to advise the little kingdoms of the sons and daughters that had been split off from it. The capital still was so revered by the people, and had accumulated so much prestige and wisdom over the years, that everybody respected and followed its advice. In this way, the capital became even more powerful and influential than the original kingdom had been, but nobody in far-off Xanadu even noticed.

IBM logo


Now, given the title of this article, it no doubt is apparent that I am addressing in my own whimsical way the story of International Business Machines. While many think that IBM's glory days are long past, in fact IBM remains a preeminent corporation. Having remarkably transformed itself from a hardware company to a services one, it arguably is the most influential company in the world as of the date of this writing.

That's not just a rhetorical talking point. As of April 20, 2013, IBM has the highest percent weighting in the widely followed Dow Jones Industrial Index. It is the only stock that carries a weighting above 10% in that Index. In fact, it is the only stock that carries a weight above 9%, and above 8%, and above 7%. The closest weighted stock, in fact, is Chevron at all of 6.123%. IBM's weighting in the S&P 500 is much, much lower, at around 1/10 of 1%, but it remains widely followed and news about it has an out-sized effect upon the stock market. You may dismiss the Dow Jones Industrial Average as an outdated, biased, somewhat odd relic of the 20th Century. It still influences the average investor on the street, regardless of what we think. But, we don't have to look at the Dow Jones at all to see IBM's impact.

IBM vs. S&P 500 2000-2013

It is easy to dismiss IBM as a stock that stopped being a bellweather back during the Reagan years. The fact is, as the above chart of the S&P 500 over the past dozen years shows, there has been a very close correlation between IBM and the S&P 500 since 2000 as well. It is, in fact, remarkable. The area of greatest divergence began in 2009, when the market oversold based on near-panic conditions which IBM, serenely confident, shrugged off.

"Well, that correlation ended long ago," you probably are thinking to yourself. After all, nobody really talks about IBM much anymore, it's all about Apple and Facebook and that "old dinosaur tech firm" Microsoft. Intel and Cisco used to get that sort of press, too, but IBM has outlasted better companies than those.

Let's look at another chart:

IBM vs. S&P 500 2008-2013

The connection over the past five years between IBM and the S&P 500 is still extremely tight. One could make the argument, especially given its heavy weighting in the indexes, that IBM has been instrumental in dragging the entire stock market up over this period, leading the way ever since the financial problems began in 2008. But look closely - when IBM dips, the broader market also tends to dip. When it surges, the broader market does likewise. Naturally, they do move at different rates. They very, very rarely diverge in direction.

You probably still are doubting this correlation, which you are sure ended long ago because now it is "just a coincidence" and "IBM's influence ended long ago." Let's look at one last chart.

IBM vs. S&P 500 2012-2013

If the correlation between IBM and broader market is just a coincidence, it is a remarkable one. I want to be clear that this has nothing to do with any outsized weighting of IBM in these charts: IBM has only its relative market cap to influence the S&P 500 charts at which we are looking.

The astonishing thing from looking at the charts of actual performance, and not simply relying upon our outdated notions, is that the correlation between IBM and the broader market has become tighter with time, not looser. A "bellweather" stock is one that either leads the market, or follows closely along with it in fairly tight lock-step manner. That definition fits IBM. That's right - today, in 2013, IBM is more of an actual market bellweather than ever! "As IBM goes, so goes the market" was a saying back in the 1970s. It remains even more apt in the 2010s.

This is simply to show how important IBM is to the market. IBM may not always lead the market - but it sure does a good imitation.

One last chart, comparing SPX and IBM:

IBM (purple) vs. SPX (candlesticks)  2013

This shows the extreme, uncharacteristic divergence between IBM and the broader market. Something is going to give - eventually they will return to harmony, because they always have in the past.

Warning Signs

Market Warning Signs

There are plenty of warning signs in the market right now. They exist out in the fundamental world - Fitch cutting the UK is a good example, but there have been a lot of ratings cuts with no effect, right? Here we don't have to argue about fundamentals, we look just at the charting side.

There has been a clear correlation between USD/JPY for some time. As the Yen falls, money is fleeing Japan to the US equity markets because there is nowhere to go and earn any kind of reasonable return in Japan. You can argue about the extent of the effect, but it seems pretty clear from the correlation that the Japanese money has had a positive impact on US equity markets. Notice that the peak of USD/JPY was within a day or two of the top in the S&P 500:

USD/JPY 2013

That chart reminds me of another chart, an old favorite, with which we all are familiar:

Well, history doesn't repeat exactly, and currencies are difference beasts than equities. However, blow-off tops have a nasty habit of acting the same way regardless of what is being charted.

Below is the daily chart of the SPY. It fell out of its channel last week. Some people see a head-and-shoulders topping pattern forming. That may indeed happen, which implies some sideways movement from this point. If one is coming, though, it hasn't formed yet.

SPY after April 19 2013

Again, we can argue about what it means. It probably isn't good.

The weekly SPY chart makes the point a little clearer:

SPY Weekly as of April 20 2013

The weekly chart on the SPY is showing a clear-cut reversal. This is another warning sign. Yes, the market could turn right around and head higher, but markets tend to be a bit like Battleships: once set in motion, they have a certain momentum to them. The momentum this past week, for the first time in a while, was to the downside. This downward bias includes the other major equities averages.

IWM Daily Chart on April 20 2013

The IWM has a reputation for leading the broader market. It is in the worst shape of all. Here, one arguably sees a head and shoulders topping pattern, with increased volume as a downtrend channel forms. This is clearer on the IWM weekly chart, which shows the downtrend is farther along than it might appear on the daily chart.

IWM Weekly chart as of April 20 2013

If equities are in trouble, where could the money fleeing a sinking market be going? Good question. The answer appears to be, among other places, bonds.

TLT Daily chart as of April 20 2013

There is another place for risk-averse money besides bonds. Many remember the "Nifty Fifty" from long ago, big, dividend-paying stocks that supposedly could not go down. Of course, down they went with the broader market, just a little later. Dividend stocks have a reputation for outperforming during Bear Markets, so they are one of the first places to which hot money flees when it becomes scared:

Dividend Stocks tend to Outperform during Down Markets

Unfortunately, tracking the relative popularity of high-dividend stocks in a Bullish environment is tough, because everything is going up. The thing we will be looking for more and more is the out-performance of those stocks should the market stumble. Watch also for market touts on channels like CNBC to start hyping them.

The bottom line is that there are warning signs. Whether you believe them or want to face them, they are there. The market still could hit new all-time highs, as the cover of Barron's for April 22, 2013 predicts. Many traders with very good justification, however, take such covers as the supreme contrarian indicator. Draw your own conclusions.

Barron's Cover for April 22, 2013

Barrons Cover April 20 2013

Barrons cover
Barron's Cover, April 22 2013

The unmistakeable sign of a market about to roll over. This is absolutely classic. We are talking textbook stuff - yes, I have seen this in market texts. Thank you, Barron's, for calling the turn lower.

The poll results are eye-opening as well.

Barron's Big Money Poll - Are your clients bullish? Just 62%. Versus those polled (brokers) at 74% bullish.

Barron's Big Money Poll - 86% Bullish equities next 6-12 months. 14% bearish. Versus 11% bullish fixed income. 89% bearish.

Six months ago, just 46% of managers were bullish, down from 55% in the spring 2012 poll. ==> 74% bullish now. 

Barron's Big Money poll 74% bullish. Highest in 20 years of the poll. 

Barron's Big Money Poll - 70% think equities best asset next 12 months. $GLD just 11%. US markets 43% vs. $EEM 27%.

For those who want some verification as to how valid this contrarian indicator is, draw your own conclusions. Below is a cover from October 2012:


Friday, April 19, 2013

UA April 19 2013

Under Armour
UA April 19 2013

There are several things going on in this chart that are usually considered Bullish. What at first must have looked like an annoying decline turned into a nice cup pattern. It may be easy to miss because it started last August, but it's there when you look at the daily. The price is safely in the higher of the two long-term high value nodes. This may move sideways to form a handle, but at some point the patterns suggest a nice move higher.

SPY April 19 2013

SPY After April 19 2013

The SPY chart no longer is as easy to read as it had been since last year. The breakdown of this past week places it outside its long-standing uptrend channel. The greatest likelihood is that it either moves sideways or pulls back. A continued move higher now is the least likely outcome, though always possible.

LGF April 19 2013

Odds are You've Watched Lions Gate Films

Lions Gate
LGF March 21 2012

I want to return to a stock we were looking at exactly a year ago, Lions Gate Entertainment. We liked it then, and we like it now.

Above is my chart of LGF from last year - March 21, 2012. it was around 13, and looking good.

Below is the current chart. It is at 23, and still looking good.

Lions Gate April 19 2013
LGF April 19 2013

Lions Gate is a billion-dollar company. It owns the rights to the "Twilight" films (through Summit) and "The Hunger Games" franchise. It will fluctuate, as do all companies in the entertainment field, based on the success of its films.

We look for a break from the Bull Flag. There is a nice place for a stop, and no overhead resistance. Look for this on dips, and it might make you very happy.

Downtrend of Futures

Mid-day April 19 2013

There are many different ways to look at the futures, involving different time frames. If you look at the S&P 500 futures from the action since the recent all-time high, we are in a definite downtrend. Note that the 1550-1560 region is really the dividing line right now.

Thursday, April 18, 2013

SPY April 18 2013

SPY April 18 2013

Today was another down day, so naturally everyone went short. Just as naturally, futures then went up after hours and creamed those who went short. Same as it ever as.

The chart hasn't been speaking during this run, it has been yelling. We stopped our down day right at the low value node, as indicated on the chart. That's why we chart and use these studies, volume is very important. Since our stop was right below the low value node, it was not triggered.

A simple move outside of the uptrend channel does not mean we head straight down. The market could just as easily move back into the channel. It was foreseeable that we were headed for trouble at these heights because of the psychological nature of the "all time high." Never discount the effect of basic psychology and "bright lines." If you hear everyone talking about a particular level, the market will tend to notice. However, you still need to play the market and not the "obvious." Topping patterns can be very painful if you just make up your mind, cross your arms, and wait for the inevitable drop with an expectant look in your eyes.

Watch the key zones on the chart, if we drop through 1520, the 1400s are not far behind.

INFN April 18 2013

INFN April 18 2013

Infinera (INFN) has an interesting chart, with a lot of Bullish aspects. However, don't forget a stop somewhere right below the Flag, the markets are looking shaky and you don't want to be caught in a meltdown.

Trading Example: April 18 2013

A Typical Trading Example

I primarily trade the futures, so that's where I get my examples. The analysis, though works for any equity or other tradable instrument.

Focusing on price and volume is my thing, as I have said more than once on these pages. My indicators are a 30-period moving average, candlesticks and volume bars. I fool around with other studies - Ichimoku charts are really cool-looking - but those simple tools are my bread and butter.

So, everybody in the room where I typically trade was absolutely certain today that Hell was upon us and that the S&P 500 was destined for 1420. Well, not everyone thought the next stop was 1420, that was one of the more optimistic predictions. Anyway, I know I'm giving the game away before it starts, but look to the left side of the chart below. What it doesn't show is a seemingly endless drop in the futures since the day before. People were shouting that "this had to hold" and "we've broken all support" and the like - you know the score.

Spoos April 18 2013
Futures April 18 2013 the turning point

To be a good trader, you have to keep your wits about you. Everybody knows that, and everybody thinks they do that. But if you don't recognize the emotions playing inside you and prefer to dismiss them, you'll never be a good trader. A huge spike down is bound to raise the fur on any cat's back.

So, we get that big spike down to the lows of the last couple of weeks and everybody was busy loading up shorts. At least, that was what everyone was saying. It's more the expressions of glee and delight that tell you what traders really are doing.

Anyway, I was paying attention to the developing chart and not busy counting my short profits like some others. So, I casually mentioned:

TheSlayer Apr. 18 at 1:06 PM
Everybody is bearish, with reason, but if this thing turns up, there will be a lot of short covering in a hurry. $ES_F

And so it went. I wasn't sure if people were getting the message, though, so a few minutes later I elaborated a little bit:

TheSlayer Apr. 18 at 1:10 PM
There was a volume surge at that low, possible it was a short-term blow-off bottom. $ES_F

Things continued for a bit, and the shorts were starting to get a little quiet. So, one more comment, to be clear:

TheSlayer Apr. 18 at 1:16 PM
Shorts are hurrying to lock in profits, very nice surge here. $ES_F

Now, you probably think I'm just busy patting myself on the back, but I don't have to waste time posting here to do that - I'm real capable of doing that otherwise! But the whole idea of this blog is to educate and maybe help you - the person looking at this - just a little bit. You can learn from my adventures, even if I am a self-touting bastard.

Below is the reason I felt confident that the bottom was in for the day:

E-minis chart
Futures April 18 showing volume surge

I realize it's not totally obvious from this chart, but this was the biggest volume spike in the entire run down, and it came on a sharp dive that quickly reversed. They may not ring a gong at the bottom, but this is the next best thing. After that, the futures followed my 30-period moving average just like an obedient puppy.

Anyway, I hope this helps someone out there. I remember when I was starting out, I found simple stuff like this helpful.

TheSlayer Apr. 18 at 1:31 PM
Closing strong would be Bullish for overnight and tomorrow. $ES_F

Tuesday, April 16, 2013

DRYS April 16 2013

DRYS chart
DRYS April 16 2013

DRYS has consolidated down to its 61.8 Fib line - again - and is in a nice, decisive spot for either another collapse or a another rebound. With this stock, you never know where it might go next, but it's usually lower. The entire sector is out of favor, and that often gives opportunity, so DRYS may be worth a look here.

Interesting Comments: TD Ameritrade

TD Ameritrade said some interesting things on its earnings call today, April 16, 2013. In the main, it sounded as if they were trying to calm any jittery nerves about the market. Thus, they said things like this:
The reality is that while those investors who are engaged in the markets are increasingly bullish and our RIAs continue — are currently fully invested with record low levels of client cash as a percentage of client assets, many retail investors remain cautious.
Well, fine, though I don' t particularly like the "fully invested" part - where is additional cash going to come from? The people on the sidelines? If they aren't in yet, what makes you think a higher market will draw them in?

They also said this:
[We are in] an increasing market with a few corrections along the way for increased volatility. That’s a perfect market environment for us

All well and good, you need to keep traders honest with an occasional spanking. Then, they said this, which just leapt out at me for some reason:
Retail investor sentiment improved over the quarter…Our Investor Movement Index continues to demonstrate increased bullishness, showing upward movement in 8 of the last 9 months and is currently at its highest level since June of 2011. But while settlement has improved, engagement remains toughened as many investors hesitate to reenter the markets. 
Now, obviously, they were trying to say that the markets were completely healthy and so on and so forth. But I remember June 2011. Just to refresh your recollection, here is a chart of the S&P 500 for that summer of 2011:

SPX May June July 2011
SPX June 2011

June 2011 was a volatile month for the market, with quite a correction in progress at the start of the month. It did end well, so at least that part worked out well for "retail investor sentiment." But that's an odd month to bring up if you are trying to say that skies are nothing but sunny. Interpretations may vary on that.

So, anyway, they had some interesting things to say on the call. Always good to check in with what the brokers are saying, they know all.

SPY April 16 2013

This is Why We Use Charts

SPY April 16 2013

Last night, after a moderate sell-off, some were crying that the big bull run was over and that the end was near. Happens every time.

Those of us who look at charts objectively noticed that technically, all was fine. The SPY did exactly what it was supposed to do - kiss the bottom trendline and provide a buying opportunity. I didn't change the channel lines on this chart - it's the same as it has been. The prices moved within the up-trending channel, like magic.

You have to trust your charts. It's the only objective information you get.

Trading Example

A Simple Trading Set-Up

I know that people of all sorts of experience and aptitude visit a site like this. Those who are experienced have their own methods that (hopefully) work for them. Here, I wish to show a simple trading example. It is one of an infinite range of possibilities, which range from pure guesswork/gambling to using sophisticated algorithms to make your decisions for you. This is a simple chart method that may give you some ideas for your own trading.

I did not cherry-pick these charts. I simply decided on the fly that this might be an easily understood example, without knowing how it would turn out. I was talking about this at the time online where I trade. I'm sure you may have better methods and be ten times the trader I am, but this is one way to trade.

The futures cross over

The chart is a five-minute chart of the S&P 500 futures, which we call $ES_F. You have three indicators on here: volume bars, candlesticks and a thirty-period trend line. There's nothing magical about any of these, they just happen to be what I was using today. I use them because they help me visualize what is happening. What helps you may be completely different. If you are experienced, you really don't need much more than this.

When the futures behave on a typical day, the trend line is what you want to focus on. It was a trending day, making the trend line particularly useful, without a lot of misleading crossovers. Crossovers are what we look for, because they suggest waxing/waning buying enthusiasm. The longer you trade, the more you will realize that the market moves in pulses of enthusiasm about owning equities.

So, we are watching the trend line. Notice how the candlesticks remain on the left side on the way up (disregard the bottom left for this example, though it works the same way). We stay long while the candlesticks stay to the left of the trend line.

Surge to the downside

Notice the crossover. The idea is to sell when the move below the trend line is confirmed. If you are quick on the trigger, you enter short early and incur more risk and more potential profit. Exactly where you pull the trigger depends on your own disposition, how the market has been acting that day, and so forth. It was helpful that the volume spikes began to show to the downside, so pulling the trigger and selling/going short was easy to decide early on. I don't like to be piggish, and am willing to give up occasional potential huge gains for many more smaller gains, though I've tried both ways and both strategies have terrific arguments in their favor. Anyway, that big volume spike on the big, ugly red candle is a tip that you have a blowoff bottom.

We do get a false mini-crossover right before the big down move. This is where judgment comes into play. You want some kind of confirmation that the down move is over, not just a statistical artifact. Nobody said this was easy, there is judgment involved, always. Let me emphasize: every trading method requires judgment calls, is far from fool-proof, will give you occasional losses, and will put you on the wrong side of a move a certain percentage of the time. Anybody who tells you differently is fooling you.

The longer you stay in a trade, the higher your event risk, so you pay for that time you are holding, even though you don't realize it. Anyway, once you see the crossover, that's when you start thinking about ending the old (long) trade and entering the new (short) trade. End it either on the next crossover to the upside, or as early as makes you comfortable. You won't go broke taking a quick profit.

The bottom and the next cross-over

We get the hoped-for downside surge, and nice potential profit on a short. If you want to stick in the trade, you again exchange greater risk for greater potential reward. Most would cover on that big, ugly red candlestick, walk away with nice profits, and prepare for the next setup, given that this generally has been an up market. In an up trending market, it makes less sense to hold short than to hold long, so you close your shorts out quicker than longs, on average.

The next set-up, in fact, came quickly, with the crossover to the upside in the middle of all those lovely green candles. You buy at the crossover (closing any shorts if you haven't already, obviously) and enjoy the ride higher. You then could either sell on one of the pops with a nice profit, or hold. That is where the day ended.

It doesn't always end this nicely. You can get whipsawed doing this, too. You have to judge the market conditions every day to decide if this market strategy will work.

This isn't an attempt to prove anything. I just want to give a typical example of how things work in real trading. Exactly where you buy and sell is completely discretionary, and you won't necessarily make a profit even with these kinds of set-ups. The cross-overs, though, give you your signals, how you follow them is up to you. The above should show that you don't need fancy charting studies or much guess-work to help you make your trading decisions. Simple trend lines and volume bars will do.

Monday, April 15, 2013


Bitcoin Explained

I thought some traders who have heard about this "currency" might be interested in learning more about it in this video.

And, what happened to it:

Bitcoin exchange halts trading, to return funds

April 18, 2013, 3:24 pmYahoo!7

The company’s founder Roman Shtylman, says that "due to circumstances outside [BitFloor’s] control" it "must cease all trading operations indefinitely."

Virtual currency Bitcoin's trading exchange is closing its doors, halting trading and announcing that it will return everyone’s funds.

In an announcement on its main site, the company’s founder, Roman Shtylman, says that "due to circumstances outside [BitFloor’s] control" it "must cease all trading operations indefinitely."

BitFloor is Bitcoin’s New York-based exchange, specialising in trades of the digital peer-to-peer currency.

The price of Bitcoin has been fluctuating wildly over the last few weeks and the decision comes after weeks of denial of service attacks and technical problems that led to severe price fluctuations.

BitFloor has said that because its US bank account is closing it won’t be able to provide the same level of dollar deposits and withdrawals that it has been up to this point.

"Unfortunately, our US bank account is scheduled to be closed and we can no longer provide the same level of USD deposits and withdrawals as we have in the past," wrote BitFloor founder Roman Shtylman. "As such, I have made the decision to halt operations and return all funds.

"Over the next days we will be working with all clients to ensure that everyone receives their funds. Please be patient as we process your request."

The shutting down of BitFloor comes after it temporarily suspended operations last September after the theft of 24,000 BTC. At the time, Bitcoin was trading for $10.40.

Bitcoin was originally developed in 2008 by a computer developer using the pseudonym "Satoshi Nakamoto", who published a paper describing how it could work.

The goal of creating Bitcoin was to have an alternative currency that could not be devalued by governments or central banks.

Obtaining Bitcoins is similar to opening an account through a bank. “All a user has to do is visit Bitinstant and convert a local currency into the virtual money. The currency is traded just like any other, with the most popular exchange being Mt.Gox,” reports the Motley Fool.

MCD April 15 2013

MCD was one of many big names down with the market on April 15 2013. It was bruised a bit, but hardly battered. Since it is now down in the middle of its uptrend channel, if you want in, it's time to start looking at it a little closer.

HD April 15 2013

HD April 15 2013

HD pulled back all the way to the middle of its uptrend channel. A little more selling bringing it to the bottom of the channel would make it a better buy, of course, but right where it is makes it start to look tempting.

SPY April 15 2013

SPY chart April 15 2013
SPY April 15 2013

After a hard down day in the markets, we look at the SPY chart - and see that it kissed the bottom trend line and 30 day EMA. Believe it or not, the uptrend remains intact for now. Nothing is confirmed in terms of a S&P 500 market break or anything like that - yet.

Sunday, April 14, 2013

KMI April 14 2013

KMI chart
KMI Daily

KMI is an oil services company that operates a large network of natural gas and refined petroleum products pipelines. As oil companies expand their shale oil operations, they are going to need pipelines like the much-debated Keystone pipeline.

DNR April 14 2013

DNR chart

Denbury Resources (DNR) is an oil extraction company with potential. Its products could become much more valued as more and more domestic oil wells mature.

SLB April 14 2013

SLB chart
SLB Daily

Oilfield services has great potential, and the charts aren't bad, either. SLB is an industry leader.