January 2015 – Andrew Thrasher

Headed to San Diego For the TD Ameritrade Conference

Posted on January 26, 2015 by Andrew Thrasher, CMT

I won’t be posting this week as I’ll be leaving tomorrow bright and early (5:45 am flight) for San Diego to attend the TD Ameritrade National Conference. This will be my first year attending the TDA event but from what I’ve heard it’s well organized with has some great topics and discussions with regards to the asset management industry. I’ll be sure to tweet some of the interesting points I hear from the breakout sessions.

It’ll also be nice to feel warm temperatures again while getting a break from this Indianapolis winter!

If you’re also attending the conference be sure to hit me up on Twitter or StockTwits.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Will Germany Help Lead International Markets Higher?

Posted on January 22, 2015 by Andrew Thrasher, CMT

With the start of 2015 we have begun to see movement in international markets after the focus has been squarely on U.S. equities over the last two years. After the first few weeks of January, international markets have put in a stint of outperformance relative to U.S. indices. When this begins to happen I like to find some of the stronger markets among the international group. To do this we can use the Relative Rotation Graph (RRG) which measures the relative performance of a set of ticker symbols relative to the S&P 500 ($SPY) while also measuring the momentum of that relative performance.

Read the rest over at See It Market.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Why 2015 May Not Be A Lock For the Bulls

Posted on January 20, 2015 by Andrew Thrasher, CMT

With 2015 being a pre-election year many traders and market commentators have all assumed this year will be a lock for the bulls. Historically pre-election years have been very strong, having not experienced a down year according to the Stock Trader’s Almanac (STA) in the last 75 years. The reason for excessive bullishness is often rooted in the belief that the sitting president will do all he can to bolster economic growth and consumer sentiment going into the following election. Since 1931, January has historically been one of the strongest months in a pre-election year, and so far in 2015 January is down nearly 2%. Is this a bad sign for things to come if January doesn’t pick up its performance?

Last November I wrote a post “A Unique Seasonal Study to Forecast 2015 Returns.” In that post I highlighted the work done by Wayne Whaley who won the 2010 Charles Dow Award by the Market Technician Association. As we finish the period of time that Wayne designates as a good predictor of up and down years for the S&P 500, historical data doesn’t fare well for 2015.

Looking at the data by Whaley of years that have seen his specified time period go negative, which includes 13 years since 1950, only four were followed by positive returns for the S&P 500. Whaley also notes that ten of the twelve negative Nov-Jan periods saw at least a 12% drawdown during the year. However it’s important to note that none of these years were also pre-election years.

For 2015 we have a unique situation where the Nov 19^th-Jan. 19^th period was negative but the first five trading days of January resulted in a positive return. According to the STA, over the last 41 years, 85.4% of the time the market has been positive when the first five trading days also produced a positive return. When we look at pre-election years using STA’s data, 12 of the last 16 followed the pattern (positive or negative) of the first five days of January, with a recent exclusion of 2011.

If we were to look for years where Whaley’s time period of Nov-Jan was negative and the first five days of January were positive, since 1950 there have been just three such years. Of those three years two were negative, 1990 and 2002.

What about the decennial cycle, in which we look at the returns of years ending in 1, 2, 3, 5, 6 and so on? Year 5, wherein 2015 would be included, has been quite strong – up 83% of the time with an average return of 21.5%!

Going into 2015 we have only had two instances of six or more straight positive years going all the way back to 1835, the last occurrence being ’91 to ‘99 during the dot-com bubble. If the bulls are able to pull it out and keep ’15 in the green then this will only be the third 6+ year streak in 180 years.

Confused yet? There’s a decent amount of contradicting data for how 2015 will play out and I suppose that’s not a bad thing, as it prevents the breeding of overconfidence. Nothing has a perfect record and anything that does will eventually have its first incorrect forecast at some point sooner or later.

Where will 2015 end? I have no idea, but I find myself leaning more towards Whaley’s research and would not be surprised if we saw just a low single digit if not a negative return for the year. With the analysis that I do for the firm I work for, I allow price action to lead my bias. We’ll see what price action does over the coming 11 months and if another notch gets added for Whaley’s study or if the pre-election and start of January hold true as being historically bullish.

Weekly Technical Market Outlook 1/12/2015

Posted on January 12, 2015 by Andrew Thrasher, CMT

Well this has been an interesting start to the new year. Just about every major news source has spilled ink on the ‘January effect’ and the impact of a down start of a year has on the performance for the year as a whole. In November I wrote about the predictability the time period between November and January had for the following year and that history has shown it to be a better indicator than simply monitoring January or the first five days of January. While there’s still another week left for this method, it’s currently showing a negative performance which is not positive for 2015 as a whole. But this week’s price action could reverse that and it’s something I’ll be keeping an eye on.

Trend
The trend of the S&P 500 ($SPX) remains positive as the recent short drop was ended with a higher low in price as the 100-day Moving Average acted as a low point. We’ll see if price is able to take out the prior January high and keep the up trend intact.

Breadth
While at the prior January high we saw the Common Stock-Only Advance-Decline Line break above its prior high, it has now gone back under the peak. However, like price it made a higher low on the recent drop. The Percentage of Stocks Above Their 200-day Moving Average remains in a clear down trend.

Hedge Funds Become More Gloomy
While hedge funds have struggled to shine like the bright star they believe themselves to be; according to a survey of 200 funds by Aksia as reported by the WSJ, they don’t have high hopes for equities in 2015. Over 70% of those surveyed do not expect returns to exceed 10%, potentially ending the streak of double-digit gains for the S&P 500.

Yield Curve
As the yield curve has continued to seek out lower lows in 2015, following the pattern of 2014, this could have implications for the financial sector ($XLF). We typically see financials outpace the S&P 500 in a rising yield curve environment. The sector broke this trend after the relative performance bottomed in November and began to outperform the major index while the yield curve itself headed lower. However, this breakaway has since reversed recently with $XLF taking some punches over the last week while the S&P rallied.

Momentum
In the last Technical Market Outlook I noted the negative divergence that had been taking place between the S&P and momentum. Price began to drift lower after that point and while the equity index has yet to regain its prior high, neither has momentum.

Gold
While the focus has been on oil over the last several months, Gold ($GC_F) has been consolidating on the weekly chart. After temporarily breaking below the 2013 lows, gold has risen back above and trying to hold $1,200. Momentum, specifically the Relative Price Index (RSI) and MACD indicators, have created positive divergences with the test of the prior lows. I’m watching to see if gold can get back above $1,250 and momentum continue to gain ground as buyers step back in.

Corn
I last wrote about corn in October, “Are Corn Prices Poised To Rise?” showing the break of the declining trend line, the commodity entering a bullish period of seasonality, and the low-level of sentiment. Since then we’ve seen corn prices continue to rise, with the Corn ETF ($CORN) testing $28. The Relative Strength Index (RSI) is now in a channel as price begins to weaken. I’m watching to see if momentum can break above or below its channel lines and if price can hold above its short-term low just above $26.

Year-to-Date Sector Performance
As 2015 gets started the relative performance of the nine S&P sectors already looks like a repeat of ’14. Health Care ($XLV). Consumer Staples ($XLP), and Utilities ($XLU) have led for the first eight days of the year. While Energy ($XLE) and Financials ($XLF) are the worst performers so far this year.

Let’s Make A Deal: Trader’s Edition

Posted on January 6, 2015 by Andrew Thrasher, CMT

Learning to control your emotions can be one of the hardest challenges for many traders. These tests are often brought on by downturns in the market and/or drops in positions. Trading with full emotion is like driving with your eyes closed. You may make it a short distance but the chances of you safely getting to your destination unharmed are extremely unlikely.

A couple of weeks ago I was watching the movie 21, in which there’s a discussion of the Monty Hall Problem. It’s based on the game show Let’s Make a Deal, hosted by Monty Hall in the 1960’s in which there are three doors with a prize behind just one of the doors. You are the game show contestant and are given the choice of one of the three doors. After making your selection the host opens one of the doors and then gives you the choice of changing your selection. This is where emotion begins to leak into our thought process. No one wants to be wrong and the less action taken is often believed to minimize the ability of a wrong choice. So you stick with your first pick and two-thirds of the time you go home with nothing but a gift basket.

As traders each week, each day, each tick of the bid-ask spread we are presented with the choice of buy or sell. Each decision offers a zero-sum outcome. You either made money or not. Not making money does not equate to failure and many new traders have a hard time coming to that realization. Without a game plan when a position begins to go against you emotion can start to seep into your thought process.

This is what happens to contestants on Let’s Make a Deal. They are presented with the option to change their choice of doors after one door as been opened and reveal the prize is not there. This slight change in the variables, going from three doors to choose from two doors has a significant impact to the odds of you winning the prize. Since Monty Hall knows which door the prize is behind he knows which set of doors to choose from to open. The odds increase to two-thirds if you change your selection while they remain just one-third if you keep your original pick. The math and the odds are in favor of changing doors but many contestants let their emotion take over and they chose to keep their first choice. It’s as if they are frozen of fear of being wrong that their brain doesn’t allow them to act rationally.

As traders we perform our duties and we execute our trades not for entertainment but to follow a plan that should led to a profit. Allowing emotion to leak into that process can keep us from thinking clearly and choosing the wrong door. And unlike a game show, the market doesn’t give you a consolation gift basket.

So which door would you chose?