Trading Notes: Calendar Week Of 8/10/2015

Friday, August 14th

*  For me, the standout observation for today’s merchandise is that the yuan stabilized at the overnight fix, nosotros got a little popular inwards stocks, in addition to and thus at that spot has been no follow through and, every bit I write, that little popular has been alone reversed.  Meanwhile crude oil in addition to copper dice along to languish close their recent lows.  The take away for devaluation inwards mainland People’s Republic of China is a reply to economical weakness in addition to perchance the best real-time guess of that weakness is inwards commodities pricing.  I take away maintain problem seeing whatever sustained bull displace inwards stocks until the deflationary pressures reflected past times commodities weakness abate.

*  My diverse breadth measures take away maintain been peaking and, recently, bounces inwards stock marketplace seat breadth take away maintain non been sufficient to elevator the index to novel highs (see nautical chart of Intermediate Strength above).  I’m content, given the dynamics above, to take away maintain a little swing seat for a displace to oversold levels. The models are neutral, in addition to it would non take away maintain a huge amount of weakness to plow them bullish, thus at this juncture I’m non anticipating a full-on behave marketplace seat move.  Too, every bit the higher upwardly nautical chart shows, we’ve seen a drying upwardly of the set out of stocks making fresh lows.  Should nosotros larn near-term cost weakness in addition to fewer stocks making novel lows, I volition run that every bit a tactical chance to take away maintain profits.  If the weakness hypothesis is correct, nosotros should non take away maintain out the overnight highs inwards today’s trading session.  With models non lined up, I’m happy to take away maintain a relatively brusque leash for seat trades.

*  The breadth volatility stair out referenced yesterday is at the lowest levels seen since belatedly February/early March.  Such depression levels take away maintain been associated alongside weak returns over a side past times side five-day basis.  Pure volatility has too moved below median levels, too associated alongside weak forrard returns over a swing basis. 

Thursday, August 13th

*  Yesterday’s Federal Reserve annotation nigh caution chasing oversold levels when pure volatility is high turned out to last to a greater extent than right than I expected, every bit nosotros reversed the recent weakness in addition to rallied strongly inwards SPX.  We dropped all the way below 2050 inwards the ES futures early on inwards the day, a two-week low.  Interestingly, nosotros only saw 1058 stocks across all exchanges brand fresh monthly lows vs. 1078 on 8/6 in addition to 1862 on 7/27.  Note a set out of sectors that held upwardly alongside relative strength, including the yield-sensitive utilities in addition to consumer staples shares.  The commodity-related stocks take away maintain too held up.  This told us that the early on driblet was to a greater extent than nigh sector rotation than full-on risk-off–a valuable tell.  Market breadth has non been weakening alongside the recent mainland People’s Republic of China related selloff.

*  Pure volatility remains unusually elevated fifty-fifty alongside yesterday’s rebound; when this occurs, at that spot is unremarkably to a greater extent than upside left inwards the move, every bit the combination of volatility in addition to line leads to near-term momentum.

*  The 3-5 24-hour interval models are mixed:  1 is neutral, the other mildly bearish.  The side past times side 24-hour interval model is neutral.  These are the kinds of signals you lot arrive the middle of trading ranges.  I could last persuaded to purchase intraday weakness that holds higher upwardly the overnight lows for a short-term merchandise higher based on the potent pure volatility, but otherwise don’t perceive a potent edge.

*  My breadth volatility stair out is hitting multi-week lows.  That’s a stair out of the volatility of 24-hour interval to 24-hour interval breadth in addition to it’s been a helpful measure.  When breadth volatility has been inwards the lowest one-half of its distribution since 2014, the side past times side 5 days inwards SPY take away maintain averaged a loss of -.01%.  When inwards the highest one-half of its distribution, the side past times side 5 days inwards SPY take away maintain averaged a gain of +.34%.  If nosotros were to larn other volatility readings dropping, the models would probable plow bearish.

Wednesday, August 12th

*  mainland People’s Republic of China devaluation continues every bit major driver of stocks globally.  While developed marketplace seat equities take away maintain traded inwards a arrive at over the past times several months, emerging marketplace seat stocks take away maintain been inwards a consistent downtrend (see EEM nautical chart above).  This suggests that a major engine of recent global economical increase is no longer a contributing factor.  It is this weakness in addition to non the stimulus value of the weaker Asian currencies that is driving stock in addition to commodity markets lower in addition to stimulating a flying to the security of character yield.

*  The 3-5 24-hour interval models for SPX are neutral; the side past times side 24-hour interval model ended Tuesday rattling modestly bullish.  The models cannot constituent inwards idiosyncratic marketplace seat factors such every bit the devaluation, thus I am non relying upon them for signals at this time.  Sometimes this fourth dimension actually is different.

*  My stair out of “pure volatility”–the average cost displace per unit of measurement of trading volume–has dice elevated, which agency that nosotros could run across outsized moves (including countertrend ones) every bit book picks up.  This has of import implications for the setting of stops in addition to targets on trades in addition to makes it peculiarly unsafe to chase overbought or oversold cost levels.

*  General game excogitation is to dice along to sell bounces inwards SPX that terminate at lower highs.  If the devaluation genuinely is contributing to an ongoing risk-off trade, nosotros should non merchandise higher upwardly the levels seen only prior to the most recent yuan fix.  I dice along to harbor doubts nigh whatever sort of sustained Fed hiking inwards the confront of what is increasingly looking similar a currency state of war of competitive devaluations.  

Tuesday, August 11th

*  mainland People’s Republic of China devaluation fundamental slice of overnight news; USD rises vs. Asia; stocks laissez passer on dorsum a chunk of Monday’s gains.  mainland People’s Republic of China devaluation affirms authorities line of piece of job concern over economical weakness.  Difficult to run across much inwards the way of Fed hiking alongside Asian goods becoming cheaper inwards U.S. in addition to dampening inflation.  Also hard to run across Fed hiking inwards whatever sustained way inwards the confront of what is increasingly looking similar a currency war.  All inwards all, this is consistent alongside the macro themes lately outlined in addition to should last supportive of U.S. stocks offering yield.  Economic benefits of lower inflation/lower prices are tempered past times headwinds from higher USD.

*  My 3-5 24-hour interval models for SPX turned modestly bearish at halt of 24-hour interval on Monday, but reaction to the mainland People’s Republic of China tidings swamps model effects.  Next 24-hour interval model for SPX turned from modestly bullish to neutral.  

*  General game excogitation is to sell bounces inwards SPX that neglect to take away maintain out Mon highs.  Commodity markets take away maintain been a skilful proxy for the Asia weakness theme, in addition to it is hard to run across stocks sustaining a rally if that subject is dominant.

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