Watch Bonds and Utilities

Here's two trade ideas for the new year. Keep an eye on both bonds and utilities. They tend to have an inverse relationship and both are interest rate plays. Longer term bonds (and short term as well) have been pretty bearish lately and are looking like they are heading for a steep decline in the near future. Here's the chart for Barclays 20+ year bond etf (TLT): If that support at the 87.70 gets taken out, expect a sharp move. What's moving bonds lower? Long term interest rates are moving higher after hitting record lows. Bond traders are anticipating higher long term rates, creating a steeper yield curve. As long as bond traders believe this, bonds will fall.

Utilities (XLU) look poised to pop right now, which acts as confirmation of the short bond trade. Utilities have been incredibly strong during the month of December and now, after a little consolidation, they look ready for a move higher. Here's the daily chart of XLU:The bond market is saying that the stock market is heading higher and utilities are confirming the bond trade. I'm currently short bonds (via TBT) and I might take a position in XLU if it drops down to the buy zone that I highlighted above.

One thing that I want to touch on real quick is the relationship between bonds and utilities. I stated that they tend to have an inverse relationship and that this is because they both are interest rate plays. Don't just take my word for it, lets take a look at it. Here's a 1 year chart showing the relationship of TLT and XLU:I'd say that the above chart shows a pretty close inverse correlation.

As always, we'll see how this theme plays out. I hope everyone has a Happy New Year!

TLT

Mike Leach v. Texas Tech: Here's the Motion for a Temporary Restraining Order and Injunction

I don't talk about law very often, but this is pretty interesting. Mike Leach has decided to play hard ball (good for him IMHO) against Texas Tech over his current problem...being suspended right before a bowl game. An attorney that I work with went to Tech for both undergrad and law school and needless to say, he lives and breathes Tech...he had insight about this whole scoop before it came out in the media.

Leach has hired a local Lubbock attorney and they have filed for a Temporary Restraining Order and Temporary Injunction and it is currently being heard in court this morning. After reading the motion and the attached exhibits (one of which is Leach's employment contract) it looks like Tech might be in some trouble. They have laid the grounds for a Breach of Contract suit that will no doubt follow soon. Here are the 4 pages of the motion, without the exhibits.Good luck Leach!

TLT

***Update***

While drafting this post, it was announced that Tech fired Leach...wow. The attorney I work with just announced that he is through with Tech because of this! I wonder how many other gung-ho alumns are pissed off about this?

Weekly Relative Strength Rankings

Although it was a short week, there was alpha to be made and here's where it was.What to take away from the above list? Strength in commodities, semi-conductors and tech and extreme weakness in bonds and gold. We'll see if these themes persist through this week.

Hope everyone is enjoying the holiday season!

TLT

Market Overview

It's nearly Christmas and the markets have taken a slight pause today (some are up a little and others are down or flat). I thought it would be a good time to look over the markets in general and see where we stand. There's a lot of chatter about the annual santa claus rally, lets see what the markets say.

To kick it off, lets look at the S&P via SPY. As you can see from the chart below, the S&P has been stuck in a trading range since early November. The top of the channel has been tested several times in December but we still have not seen a meaningful break. I want to see it break and hold before getting too bullish on the market.

The recent break out in tech (qqqq) is good news for the bulls. Tech is looking incredibly strong and it will help move all the markets higher if it remains strong. I will be looking to enter a long position in either the nasdaq etf or the semi conductors (smh) if the S&P breaks out. Here's the chart for the Q's, note the break out:Okay, S&P is range bound, Q's are breaking out, what else should we be following for an indication...the small caps (IWM). The small caps have been the laggards lately but now they seem to be playing catch up. The Russell 2000 (IWM) is sitting (barely) at fresh highs which is another good indication for bulls. Here' s the chart:We'll go ahead and file the small caps under bullish for now, but this will change if it falls back into its prior range. Next lets take a glance at the VIX. The VIX has just fallen to some fresh lows and it actually closed below the 20 level yesterday...something that it hasn't done for some time. What does this mean? It means that worries are easing, at least for now. This is also a bullish sign for the short term outlook of the stock market.

So far, we have a neutral S&P that might break out (neutral), a breaking Nasdaq (bullish), a breaking Russell (bullish) and a falling VIX (bullish). That's 1 neutral and 3 bullish signs. Where's the case for the bears? Here it is, the financials.

Financials (XLF) have been a huge laggard and they will weigh down the S&P and the market in general if they don't perk up. Here' s the chart:There's the obstacle for bulls and fuel for bears. I don't know which way it will go and I'm certainly not smart enough to figure out how big of a mess the banks are (or are not) in. Furthermore, I can't even try to figure out the effects of the stimulus plan and whether that will provide enough cheap money to raise the market in general and make banks profitable, but there are lots of people out there that think the stimulus is merely going to provide profits to banks. I just watch the charts and try to determine which direction "order flow" is moving and then ride along.

One indication that can provide insight into whether banks will do well (and the economy in general) is the yield curve. The yield curve is currently steep, meaning short term rates are much lower than longer term rates. This is good for banks which in turn is good for the economy and markets in general. This is why the feds want the rates to remain low. Here are the current treasury rates and yield curve that are pulled straight off of Yahoo Finance's Bond Center. As you can see, longer term rates are much higher than short terms rates. This should help banks quite a bit and is indicative of good times ahead. However, there's always the concern that this time is different, especially considering that enormous stimulus plan and the worries of future inflation. We'll see how it plays out but for now I'm counting it as bullish.

So what else is there? The Dollar. The dollar has been in the headlines and has been talked about quite a bit lately. Most of the chatter has been about how bad the dollar is and that it's falling and going to lose half its value...blah, blah, blah. The dollar has actually been strong as of December and it appears that a reversal of some kind is under way. Here's the chart of UUP:Until recently, the dollar had shown an inverse correlation to the stock market, but that relationship seems to have changed as the dollar has been climbing with the market. I particularly like the long play in the dollar and I'm currently in it. One reason that I like it is that the dollar has been rising with stocks, but, the dollar also serves as a good flight to safety instrument that the world buys it when things start looking bad. Therefore, the dollar will likely keep rising in its current trend, and then if things get bad in the equities markets, the dollar will rally even harder. That's my current theory and like I said, I'm in this one.

Last but not least, Gold (gld). Gold has been on a bullish tear for quite some time, but now it seems to be falling back to earth. Why is gold a good short right now? Here's 3 reasons: 1) gold is likely in a bubble and bubbles break hard when they pop, 2) historically, gold has sharp climactic tops and long rounded bottoms and Dec. 3 sure looks like a climactic top to me, 3) the strong dollar will put pressure on gold prices. All of these things tell me that gold is a good (note not a sure thing) short right now and I'm currently in it. Here's the chart:Alright, here's a quick recap. The S&P is still range bound (neutral) and needs to break out, the Nasdaq is trending higher (bullish), the Russell is perking up and printing new highs (bullish), financials are lagging (bearish) but the yield curve is steep which makes it easier for banks to make money (bullish). The dollar is showing strength and gold is weak. These are neither bullish nor bearish (IMO) but they are very tradeable and I'm in both.

So what now? I'll be looking for a break out in the S&P with confirmation from small caps, financials and bonds (lower bonds). If this happens, I'll be looking to go long tech (QQQQ, XLK) and semi conductors (SMH) and short bonds (TBT). I'll also be adding to the long dollar position and the short gold position if they continue in my favor.

If the S&P doesn't break higher, watch out because we might see a substantial drop in the markets. For the bearish scenario, I'll be looking to short financials and emerging markets and look to go long utilities (xlu) and bonds (tlt). There's the game plan for the rest of the year and the beginning of 2010. We'll see how it plays out.

Have a merry Christmas and a happy new year!

TLT

Last Weeks Relative Strength Ratings

Here is last weeks Relative Strength ratings for the 30 ETFs (and an index) I track. Note that the current relative strength score incorporates the ETFs prior score into the ranking, thus you have Copper at the top of the list because it had superb strength the prior week. Also, I want to point out that all of these instruments are ranked against the performance of the SPY (S&P)...hence the "relative" in relative strength. Here's the list:
A couple of things worth noting about this week's rankings are the strong performance of both energy (xle) and oil (uso). Also, the weakness in gold (gld), silver(slv) and materials(xlb). Furthermore, the continued weakness in financials (xlf) is concerning for those that are expecting a rally. Personally, I can't imagine much of a sustained rally without the participation of the financials, but who knows, crazier things have occurred.

Once again, these ratings are just that and they are not trade signals of any kind. I just use this spread sheet to keep track of the macro picture of order flow.

Have a great day!

TLT

Weekly Wisdom Quote

"Most of the time, we deal with ... obstacles by persevering. Sometimes we get discouraged and turn to inspirational writing, like stuff from Vince Lombardi: 'Quitters never win and winners never quit.' Bad advice. Winners quit all the time. They just quit the right stuff at the right time."

Seth Godin
the dip

Crazy for Coach

Sunday my wife and I went to a Coach (COH) outlet store at the Allen outlet mall in Allen, Texas. She had received a 20% off coupon in the mail and wanted to get a couple of wallets. We thought we would just stroll in and grab what she wanted...boy were we in for a surprise! I'm sure part of the craziness was due to it being so close to Christmas, however, the Coach store was noticeably busier than any of the other stores at the outlet mall. First, we had to stand in a line outside the front door and wait to get in, like a high-end night club. Once the line got sufficiently long, it was at least 100 ft., and enough people cleared out of the store, presumably to avoid violating the fire code capacity limit, the door man let us and a lot of others in the store.

Once in the actual store, we noticed that it was still very crowded. Unfortunately for my wife, the wallets that she wanted must have been popular because they were sold out in the black and brown colors that she wanted. So instead of the wallets she picked out a purse, she had to get something since we went through all the trouble of just getting in the store. While she shopped, I noticed a line that wrapped around the store...the line to check out. I went ahead and got in line and then she met up with me once I finally got close to the check out counter.

I'm not posting about this experience to recommend buying Coach stock, I just think that the crazy demand for the purses is interesting and certainly worth keeping an eye on. Eventually, every woman who wants one will have their own Coach purse, whether it's an expensive one from the regular store a cheaper one from an outlet mall...what matters seems to be that its a purse that bears the distinct "C" pattern cloth. It will be interesting to see what happens to this company when the purses saturate the market to that level...could be an excellent short. For now though, the trend is certainly up and you'd be stepping in front of a freight train if you attempt to short this right now.

Here's the daily and weekly chart for COH, notice the strong uptrend:
Have a great day!

TLT

Where's the Alpha?

Here's a screen shot of half of a relative strength spread sheet that I keep up with:This spread sheet follows 30 different etfs and index funds that range from various market indexes (qqqq, iwm, oex, etc.), sectors (xlp, xlk, xli, etc.) and other asset classes (bonds, gold, copper, foreign stocks). It automatically updates itself every day and it helps me keep up with where the alpha's at.

The relative strength rating is a basic formula that tracks the daily return and compares it to the return of the S&P to generate a basic relative strength rating. I take this relative strength rating from the current day and then combine it with the prior day's reading and weight the current days relative strength higher in the computation...thus putting more weight on today's price action but still taking into account yesterdays, which in turn takes into account the prior days rating. This method of calculating smooths out the relative strength ratings but yet still provides quick enough signals to help see where the order flow is heading on a macro level in the short run.

On a different note, sadly, I lost my trial today. It's one of those things that happens but it always stings. There's always one side that has to lose in a trial and today was our turn. Enough of that though. I'll be back tomorrow.

TLT

Weekly Wisdom Quote

"If rule governance and conscientiousness in following rules is associated with market success, then traders want to use emotions to trigger greater attentiveness to plans and rules. This means creating associative cues between emotional arousal and the behaviors responsible for trading success."

Brett N. Steenbarger
The Psychology of Trading

The Market Continues to Chop

The chop fest continued this week as the major indexes, in particular the S&P 500, has failed make a meaningful move. We tested the highs of the range last week and briefly broke out but to no avail as the rally quickly sold off and the S&P retested the lows of the channel. Here's an hourly chart, note the choppy action of the wide volatility stops:Maybe we'll see a break one way or another next week...until then there's not much to do but to maybe fire off a few quick day trades and book profits pretty quickly. The swing trade in UTX got stopped out, barely, but out none the less. The only position that I'm currently holding is a trade in JNJ that I'm trailing a stop on. JNJ has had quite a run lately but who knows how much move is left...I'll let the market get me out.

As you can see, I haven't posted much in the past week or so. Mostly because there's not much to post but also because I've been incredibly busy with the law work. I'll be in court for a civil trial Monday and then will probably start posting more regularly after that. Hope everyone's had a good week.

TLT

Weekly Wisdom Quote

"The defining characteristic that separates the consistent winners from everyone else is this: The winners have attained a mindset--a unique set of attitudes--that allows them to remain disciplined, focused, and, above all, confident in spite of the adverse conditions."

--Mark Douglas
Trading In The Zone

Swing Trade Idea: Long UTX

Here's an idea for a swing trade for tomorrow. Long UTX at 68.25, which is the high of the last hourly candle of today's trading. Why not just jump in at the closing price of 68.15? Because you want to see it open strong and hold yesterday's lows...trading up to 68.25 will be an indication strength. The profit target is $75 and a stop should be placed at 66.80. This gives the trade roughly a 4.5:1 risk to reward ratio. Here's the chart:This trade offers a very tight stop which is important for this type of trading environment. If you're wrong on a trade, you want to pull the plug quickly. Furthermore, there is quite a bit of potential for this trade if it breaks higher...this stock's sector(XLI) is particularly strong as well. If the price rises, I'll be trailing my stop with the volatility stop (using 4.5 multiple and 20 period settings) on the 1 hour chart. Note that the trade plan has a profit target set for $75, however I will continue to trail my stop past this point, unless XLI is not still in a buy mode...if that's the case, I'll take half profits at 75 and trail the other half.

The important thing to take away is the stop...a hard stop. The market has been rather shaky lately, and all it would take is a small rally in the dollar, more Dubai-like bad news, or a nasty jobs report this coming Friday and this market could tank. As always, we'll see how this one turns out. Remember, it's just a probability, never a certainty.

TLT

Strong Market Today, Let's Take a Look At It

It's not too surprising that stocks are strong today as there were quite a few buy programs that hit the market in the last hour of trading yesterday. As of this writing, the SPY is up approximately 1.25% and IWM (small caps) is up 1.5%...which is significant because there has been a divergence between large cap and small caps lately. One notable divergence that is still in place today is with the financials (XLF) as it is down a little and not participating in the rally, making todays rally a little suspect. Here's a screen shot of my intra-day stock monitoring screen with the SPY and some annotations:As you can see, the SPY gapped up and is currnelty holding onto gains. It's currently in an uptrend on the 15 minute time frame, but there's some overhead resistance at the $111.75 level. We'll need to see that level taken out and for it to hold in order for the SPY to see higher highs...otherwise it will just continue to chop around in that 111.75-109 range that it's currently stuck in.

At the beginning of this post I mentioned buy programs...some might wonder what this means. I (along with most other traders) monitor the NYSE tick index or the TICK for short. Various people state that certain levels are important, such as 800, 1000 or 1250 and the corresponding negatives of these values. Others monitor an average of the values and watch that to see if there's more buying or selling. Personally, I just keep track of the number of readings above 1000 and below -1000 and I note if there are several readings that are close but not quite at these levels. I also keep an eye on the 20 and 50 period moving averages on the 5 min chart to look for consistent buying or sellling.

For example, lets look at today's 5 minute tick chart:There have been 6 readings of 1000 or more on the tick and there has not been a single reading at or below -1000, although there were a few close readings around -900. In fact, the majority of this morning's tick reading were positive as indicated by positive 20 and 50 period moving average readings. What does this mean? It means that buy programs have been hitting the market and the significance of this is that the big boys are trading to the upside, at least for now. This tells me to only trade to the upside and to let profits run because the trend is likely to continue...as opposed to a choppier day evidenced by extreme tick readings in both the positive and the negative that would warrant taking profits quickly.

This is how I follow and look at the TICK chart. Note that there are several interpretations on how to use and read the tick chart. Furthermore, this post has not gone into very much depth about the tick and it assumes that you are at least familiar with it. The tick index is merely the number of stocks on the NYSE that are trading on an up tick vs. the stocks trading on a downtick. If you're not familiar with the tick index and want to learn more, a good place to start for learning about the TICK index is Investopedia with this and then read some of the links as well.

Have a profitable trading day!

TLT