Ugly week over, more downside to come

Recap

Last night I called the market down today and it sure was, with the Dow ending the day with a dismal 253 point loss following equally dismal jobs news.  Will a bull-bear ratio of 2:13 last night, it wasn't exactly a surprise.

Unfortunately, next week's not looking much better right now.  And I'm increasingly pessimistic about the outlook for September as a whole.  More details on that over the weekend.

Trades

I exited my SDS trade from yesterday's close at 23.90 today for a nice 84 cent profit.  I also covered my now two day long ES Fantasy Trader short at1180.25 for a 22.25 point profit.  I took some heat on this one the first day but patience paid off in the end.

With 10 contracts that comes to $11,125.  Portfolio total now $133,625 after 8 trades (6 wins and 2 losses) since inception.  Here's the trade:

SLD    10    ES    false    SEP11 Futures     1202.50    USD    GLOBEX    AUG 30 19:54:35

BOT    10    ES    false    SEP11 Futures     1180.25    USD    GLOBEX    11:05:33

The next ESFT trade will be Monday evening.

Weekly wrap-up

The Good, The Bad and the Ugly

Clint Eastwood, the Good

Well, I for one am glad to see this week end.  Tonight we  turn once again to Clint Eastwood for inspiration.  The Good was clearly my call for today, "we have still lower to go on Friday" which was right on the money with the Dow shedding another 173 points to close at 10,818. I also suggested we were going to retest the Dow's 200 week MA at 10,730

That's still on the table, and we're certainly headed that direction. The Bad was my thinking last Sunday that the week would end higher. It finally proved to be just another bad week on Wall St.  And this steenkin' market of course lately is just plain Ugly.

We're at an interesting juncture right now.  While today's drop was discouraging, the fact that we did not break under the 200 week MA was positive.  The Dow weekly chart is showing definite signs of being oversold now.  However, the last two big red daily candles in and of themselves show no sign of a turnaround on Monday.  I do want to see how the futures act on Sunday night before making any forecasts though.  I'll do a more in-depth analysis then.

Ticker Sense

I am pleased to announce that the Night Owl is now part of the Ticker Sense Blogger Sentiment Poll over at the Ticker Sense web site (now in my blog list in the sidebar). The poll, taken each week, answers the question of where you think the SPX will be in 30 days, either up, down, or neutral.

The latest poll was split pretty evenly in a 3-way tie, reflecting the indecision we've been getting in the charts lately as seen in the frantic yo-yo action of the past two weeks.  It will be interesting to see, given the ugly week we just had, how the numbers shake out when the new poll comes out next week.

The poll is worth watching of course because of the common perception that in the markets, the majority is usually wrong, making it something of a contrarian indicator.  If you look at the historical graph on the site, you can see that this is to a large extent the case - though not always.  In any event, the URL's of the participants are given along with the results and they make for some fascinating reading themselves.

There's lots of great information on Ticker Sense, including graphs, charts, links, and commentary - I highly recommend it and I'm putting it on my daily reading list.  Disclaimer - I have no association with Ticker Sense other than as a poll participant.

Weekly Review

Hey, when you're right, you're right. Yesterday I wrote:

"tomorrow I'm looking for at least a gain comparable to today's, maybe more."

So yesterday we gained 21 points and today we gained 30. In fact, we had quite a week, with the Dow posting its biggest gain in 10 weeks, as you can see in this weekly Dow chart.

The Dow ended the week up 2.2% and is now up 3.61% year to date. Also, the famous First Five Days of January closed higher as did the entire month. And now we have the first week of February, which is historically not as strong as January, also closing higher and by a good amount. So far, it appears that 2011 is living up to the pre-presidential year historical effect mentioned in The Stock Traders Almanac: the year before an election, the market is up an average of 10.5%, almost as much as the other three years in the four year election cycle put together.

And therein lies the immediate question. With the rally having gone on so long now, I have to wonder if it isn't about time for the correction everyone is calling for to finally kick in. Although I'm pretty confident the year will end higher, it's pretty obvious that it won't move up in a straight line. We'll address that in my next post.

Performance

Although the Dow was up 0.25% today, I somehow managed to lose 0.29%. Oh well - that happens sometimes. In any case, I ended the week up 2.38% thanks to strong performance earlier this week. I am now up 4.77% year to date which puts me easily on track to match my 32% return of last year. My Sharpe ratio stands at 0.33.

Trades

Today I closed out my position in SPIL at 7.00 for a 1 3/4 point gain and removed it from my low price/high yield portfolio. SPIL has had a nice run and its current yield of 5.77% puts it at the bottom of the list anyway. I will be looking for another tech name to replace it with and put that money back to work.

Weekly Review

With the first week of 2011 now in the books, it's time to review what happened and look ahead a bit. Here, submitted for your perusal, is a chart of six months worth of the Dow in weekly candles. I've drawn in two different ascending regression trend channels. The first starts at the lows of 2010 at the end of June. The second, narrower, channel starts only at the first week of December, when Santa Claus was still just loading up his sleigh with profits for all the good little traders. Note that the Dow at its current level of 11,675 is right in the center of both channels.

Lately I've been reading a lot of contrarian-style chatter to the effect that the market is "due for a pullback" because "everyone is optimistic" and "the technicals are overbought". I don't know how true any of those are, but looking at the RTC channels, I don't see this big downturn coming in the next few days. Which is not to say it won't happen at some point. I just don't think that point is at hand yet. The RTC is good at verifying the end of a trend. It does not call the top ahead of time.

In fact, the daily Dow is not looking as good as the weekly chart. Although with two consecutive days of losses in the Dow we're still three days from a bearish setup if we get sideways action, a one day drop of just 16 points could do the same. In fact, Friday's action took us below the lower RTC line intra-day. And as of this writing (8:30 PM EST), all three futures are down slightly. Also, note that Monday's are typically not very good in recent times. So given this divergence, while I'm not all that confident about tomorrow, I have to leave the green swing trend arrow in place and take a wild guess that the week will end higher.

Also of interest is this quote from The Stock Traders Almanac:

The last 37 up First Five Days (of the S&P in January) were followed by full year gains 32 times, for an 86.5% accuracy ratio and a 14% average gain in all 37 years.

That's pretty impressive. And in 2011 the S&P closed at 1271.50 with a gain of 14 points, s gain of 1.1%. That's good enough for me. Add to the fact that 2011 is a pre-presidential election year (which historically outperforms) and I'd say we're looking for some more gains by the time Santa Claus comes back to town.

Performance

At the start of every year, the numbers are all a bit askew because we're just getting going, but for what it's worth I finished the first week of 2011 up 0.52%. That would be an equivalent annual run rate of 27.2%, which is in the ballpark of what I've gotten the last two years (a bit over 30%).

Weekend Buffet

Quote of the Week

"Germans are not going to retire at 67 so Greeks can retire at 58."

- Angela Merkel, Chancellor of Germany

Reading
Since the mess being made in Europe by the PIGS has been in the news again so much this past week, I think it's worth taking a special look at it. I came across the following article in the Washington Times and I can highly recommend it. If you want to know more about what Ms. Merkel is talking about, check this out:

www.washingtontimes.com

It's not a pretty picture. Bottom line, the Europeans in general hate each other and always have, no doubt to the chagrin of the "one worlder" types. The coming unraveling of the Euro (and I am certain that it is inevitable now) is simply the end result of that.

Chart of the Week
And if the unrest in Europe wasn't enough to bum you out, with the new unemployment numbers out this past week, check out this chart I found over at Wells Fargo, courtesy of the US Dept. of Labor:It is often all to easy to forget, when you live in a nice upper middle class neighborhood populated by college professors, scientists and other professionals, that the rest of the world is not like that. The message is clear: if you have a college education, the unemployment rate in the country for you personally is not 9.6% or 9.8% or anywhere near there. It's about 5%. And over there on the left end of the chart, not to belabor the obvious, you drop out of school at your own peril. Your unemployment rate then is almost 16%. And the recession induced hit was far larger than for those with more education.

What's the answer? I won't even pretend to know that one. What I do know is that throwing more money at the school system is definitely not the answer. New York, for instance has the third highest per capita spending rate on public education in the nation and yet ranked 32 out of 50 in 2001 (the last chart I was able to find - I wouldn't be surprised if it's even lower today).

Weekly review: Uptrend established

I was a bit concerned yesterday that after two such big up days, we'd give it all back today and fall back into the 11,000 - 11,200 trading range. But apparently, all the day traders decided not to bail out for the weekend leaving us with a modest 19.7 point gain in the Dow to end the week at 11,382. And as you can see from the daily chart here, this keeps us right in the middle of the new ascending RTC channel I started from 11/30. I'm sure glad I had my long hat on.

And since it's the end of the week, now let's take a look at the weekly Dow chart, going back to the start of the September rally.Technically, there's not much to dislike here either. This week formed a big bullish engulfing pattern and the weekly volume on this green candle was about double last week's red one. Dr. Brett Steenbarger was always pointing out how important volume was to judge the significance of a particular price movement. By that measure, this week was significant indeed. Finally, we can see a nice bullish crossover in the stochastic. This all points towards an assault on last month's high of 11,451 before the end of the month. The uptrend is established; my long hat remains on.

On This Day in History

1929 - US President Herbert Hoover announces to the U.S. Congress that the worst effects of the recent stock market crash are behind the nation and the American people have regained faith in the economy.

Performance

The Dow gained an impressive 2.6% this week. By comparison, I was up 2.55%. It would have been more but for the 1% loss I took on Tuesday. But you can't really be disappointed with a 2.5+% gain on any week. And for today at least, I handily outperformed the Dow, gaining 1.38% vs. to Dow's 0.17%. This now gives me a year to date gain of 26.5%, compared to the Dow with 9.15%.

And my low price/high yield portfolio is doing very nicely indeed. It's giving me a yield of more than 10% and I also now have a capital appreciation of 10%, just since last July.

Weekend Buffet

Reading

Time for some selected weekend musings. Here's a link I just can't emphasize enough. It's to Dr. Brett Steenbarger's Trader Feed blog. Until its end earlier this year, I was an avid daily reader of this. I credit Dr. Brett in large measure for my trading turning profitable, and he was the inspiration for my starting this blog. To his credit, the blog is still up and searchable, though no longer updated since he went private.

If you've never read Trader Feed, you owe it to yourself. It is an impressive collection of psychological insight into the art and science of trading. You will be a better trader (and a better person) for reading it: traderfeed.blogspot.com/

Dr. Steenbarger has also written several books. I've read The Psychology of Trading: Tools and Techniques for Minding the Markets and it was great. Here's an Amazon link to all of them. This is definitely worth taking a look at too: www.amazon.com

Chart of the Week

There's been a lot of interest in gold lately, what with it setting new record highs. While wandering the web, I found this chart over on Wikipedia. I find it both fascinating and depressing. It plots the value of the US dollar against gold from 1954 to 2003. This chart is worth discussing in more detail later on, but for now, here it is:I'm not quite old enough to remember the very left edge of this chart, but I do remember the days when gas was 26 cents a gallon and a postage stamp was 4 cents. Today both gas and stamps are about an order of magnitude more expensive. But does a gallon of gas get my car ten times further than it did back in the 50's? Does a letter get delivered 10 times faster? No and no.

Gas and mail (and cars and college educations and everything else) are the same today as they were back then. What has changed is that the value of our currency has shriveled to near worthlessness. We're not quite to the stage of Weimar Republic wheelbarrows of cash to buy a loaf of bread - just yet anyway. But looking at this chart makes me sad.

Weekend Reading

Here's something that's apparently a long-running tradition, but I only just discovered it recently, and it's great. If you don't already have a copy of The Stock Trader's Almanac, run don't walk to your nearest book-selling website (I got mine from Amazon) and buy one today.

Published annually, the STA is like the Old Farmer's Almanac, only for the stock market. It's just brimming with useful nuggets of historical data, statistics, trends, tables, and charts all in a wire-bound daily calendar format that lies open flat on your desk. Market holidays, options expiration days, everything is in there. And though it's also available as an e-book, treat yourself to the real deal. It deserves a prominent place on your office desk. There is something interesting on every page.

The Stock Traders Almanac is like a cell phone or a microwave oven. I never knew I needed one before they existed; now I don't know how I ever got along without them.

Chart of the Week

And here's a chart I found on a site by the name of www.financialarmageddon.com. It shows the correlation between the S&P and the Consumer Confidence Index, going back 20 years. Note how during most of that time, there is a high degree of correlation between the two. It makes intuitive sense: when the market goes up, people feel good; when it goes down they feel bad.
But look what happened after the 2008 financial collapse: since then the market has rebounded nicely, but consumer confidence remains in the toilet. I interpret this as being bullish for the market. The two major tops in this chart (in 2000 and 2007) were both marked by consumer confidence readings that were not only much higher than now, but much closer to the level of the S&P (going by the way this chart was set up) at the time.

You have to admit, this is a most interesting chart.

Weekly summary

Well, it appears that rather than falling out the bottom of the daily RTC, the Dow actually moved up right back almost into the center of the channel as we see on this daily chart.

This means that the uptrend remains unbroken and makes it appear less likely that we've got a significant decline coming on Monday, or indeed in the next few days. We also managed to cross the 11K mark, just barely, this past week as well as the 200 week moving average (10,988), both bullish signs. There is no RTC sell signal here.

So I'm still not ready to go short. I'm holding onto my longs and in fact bought 100 shares of NLY (Annaly Mortgage) on Friday as part of my new strategy to add more high yielders to my stock mix. I was also gratified to see that VZ, which I sold Thursday, was down on Friday. Usually when I sell a stock, it goes up the next day :-)