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Betty L. - Equities Trader

Calling All Wall Street Veterans! Minimum Experience: 10 Yrs

So here we are, about to reach month end, and the S&P futures are up about 6.2% on the month.  That is the best December monthly return in at least a decade.  Looking at the return for any month, in fact, the last time we saw a return of or better was during the September rally (up 8.4%).  A strong month does not necessarily suggest that the strength will carry over into the next month.

Wall Street Veterans

A quick model I built just now (I won’t bore you with the details of the model this time) shows that the probability of the following month being up over 1% after a strong month (up at least 4%) only mildly favor the bullish side, around the 60% level.  To me, that figure is not high enough to suggest that one strong month will likely bring another up month.

They say history repeats itself so analysts should look to historical data to help gauge future market behavior.  However, the trouble I am facing here is that there just aren’t that many data points to work with anymore.  Again, a December month showing this much strength is uncommon.  Even my daily range tightening model is making me nervous because although the odds strongly point to a January pullback, those probability levels are skewed, in effect, because the action in the market that I am filtering for in the historical data does not occur often.  Today, Jeremy started the morning off with a chat emphasizing the value of experience in the market.  My studies are usually done for a look back period of 10 years and even a decade’s worth of data tell me that many types of market behavior do not occur frequently.  At first, 10 years of Wall Street experience sounds like a whole lot to me.  Yet the market has proven that even 10 years are not enough.  But perhaps that is part of the thrill of trading for the professionals in this business.

If You Are Trading Today, You Will Probably Contribute 1/10000 of Today’s Volume

Morning Notes

- Overseas mkts mixed in the overnight:
- Asian mkts closed down (-20 to -80bps)
- Meanwhile European mkts have seen mixed action thus far

City Around The Holidays

- Irish gov’t confirmed plans to take control of AIB, according to CNBC
- November Durable Goods Orders: -1.3% vs. -0.6%; prior revised up to -3.1% from -3.3%
- November Durable Goods Ex Trans: +2.4% vs. +1.9%; prior revised up to -1.9% from -2.9%
- Initial Jobless Claims: 420K vs. 420K; prior revised up to 423K from 420K
- Continuing Claims: 4.064M, down from 4.167M
- November Personal Income: +0.3% vs. +0.2%; prior revised down to +0.4% from +0.5%
- November Personal Spending: +0.4% vs. +0.5%; prior revised to up +0.7% from +0.4%
- November PCE Prices m/m: +0.1% vs. +0.1%
- We do have some additional economic data out today including UMich Sentiment @ 9:55a ET and New Home Sales @ 10a
- Expecting not much reaction (or action) in the mkt following economic numbers
- Bond mkts close @ 2p today
- S&P futures pulled in below S3 a little past 8a
- S&P futures are down 1.75 handles from FV

Finally, Some Economic Data to Spice Up the Market!

Morning Notes
- Overseas mkts mixed in the overnight
- Asian mkts were mixed w/ Shanghai down 90bps and the Hang Seng up 20bps
- European mkts are flattish

Spice Up the Market!

- There were reports out that China may buy Portuguese sov debt (Dean has been talking about how there have been some great deals on sov debt for a few months now)
- China’s debt purchase may help assuage debt issues in Portugal (Portuguese bond yields pushed higher nonetheless today)
- This week has been extremely quiet, volumes- and new-wise
- There are at least a few items on the economic calendar for today to help provide a little bit of action
- Q3 GDP (third estimate): +2.6% vs. +2.8%; first revision: +2.5% from +2.0%
- Q3 GDP Deflator: 2.1% vs. 2.3%; first revision: 2.3% from 2.2%
- S&P still flattish after an initial pull back after GDP release
- Dollar seeing a little bit of pressure following GDP release
- Existing Homes Sales @ 10a ET
- S&P futures are up half a handle from FV and trading b/w S3 and R3

Another Day of No Economic Data Releases and Light Volumes

Morning Notes
- Seeing pre market strength again today
- Strength comes amid lack of response by N.Korea to S.Korea’s military test yday
- Comments out of China: Chinese Vice Premier showed support of measures taken by EU and IMF and suggested China has taen steps to help EU with sov debt issues
- BOJ left rates unch’d, as expected; also kept its asset purchase plans unch’d
- In Europe, Moody’s warned that it may downgrade Portugal, which pulled back European stocks (which had initially pushed higher following Chinese Vice Premier’s positive comments)
- Seeing some choppy action in the pre around the euro, commodities
- S&P futures are up 5 handles from FV- no pivot signal generated, but respecting R3 and R4 in the pre
- Expecting to see continued light volumes, especially in light of no economic items on the calendar for today

Odds Update, As Given By The Daily Range Tightening Model

(For a background on this study, please see the Daily Range Tightening analysis.)

On Friday, Dec. 17, the S&P futures continued to trade in a narrow range,  marking the 11th trading day in a row in which we have seen the daily range being less than the 20d average daily range (ADR).  The below outlines market probabilities as the market remains stuck in a tight range for a longer period of time.  I began this study when the market had been trading in a tight range for five straight days.  I would focus on the evolving “Probability of Up >0% Over Next Time Period.”

When the daily range is less than the 20d ADR for five consecutive sessions:

5 Days of Daily Range Tightening

When the daily range is less than the 20d ADR for eight consecutive sessions:

8 Days of Daily Range Tightening

When the daily range is less than the 20d ADR for nine consecutive sessions:

9 Days of Daily Range Tightening

And finally, when the daily range is less than the 20d ADR for 11 consecutive sessions:

11 Days of Daily Range Tightening

The odds of the market going higher in the subsequent 10 days went from 57.4% to 28.6%.  The odds of the market going higher in the subsequent 20 days went from 51.7% to 25.0%.  The conclusion I am drawing from this analysis is that the longer the market stays constrained in a narrow range, the more likely it is that the market will pullback in the following 10 and 20 days.  (Note the odds pertaining to the next 5d time period.  These probabilities still paint a fairly neutral picture in that the probability of the market being up over >0% is still close to the 50% level.)  Despite today’s breakout to the upside, I am sticking by my thesis of an impending pullback in the next 2 weeks and month (10d and 20d).  A glance back at the S&P daily shows that it is not uncommon to see market pullbacks right after a slight fakeout breakout.

Expecting a Quiet Friday, Even in Light of Options Expiration

Morning Notes

It's Friday

- Very quiet in the overnight, with overseas mkts trading in a tight range
- Congress passed extension of Bush Tax Cuts last night
- Ireland was downgraded by Moody’s- no real impact on the mkt, was not a surprise
- German IFO (business confidence) came in better than expected
- EU created a permanent bailout structure, effective 2013
- PBOC was out saying it would take prudent approach to raising rates
- S&P futures down about 1.25 handles from FV
- Treasuries up
- Only item on economic calendar for today is Leading Indicators @ 10a
- Note: today is options expiration (quadruple witching: index futures, index options, stock options, stock futures)
- Would typically expect volume and volatility on an options expiration day, but today does not feel like it will be one of those days (again, very quiet in the pre)

Daily Range Breakout or Breakdown?

This is now my third time writing about the tightening in the daily range of the S&P.   The market has been stuck in tight range for a couple weeks now.  Just the other day I had written a blog stating that it had been the 8th consecutive trading day of tightening in the daily range.  I define tightening as days when the range ends up being less than the 20 day average daily range (ADR).  Yesterday the S&P futures traded in a 10.75 handle range, another narrow range day, marking now the 9th session in a row of daily range tightening.

I re-ran my model, again using S&P futures data from January 2000, to look for all instances when we have seen nine consecutive sessions of narrow range trading (i.e., the actual range is less than the 20d ADR).  I want to present a side by side comparison of the model results (what happens on the subsequent 5, 10, and 20 days) when I run it for eight consecutive sessions vs. nine consecutive sessions:

8 Days of Daily Range Tightening

9 Days of Daily Range Tightening

The main item here that I want to point out is that the probability of the market moving higher for all time periods drops when the analysis is run for nine consecutive days (as opposed to eight).  Particularly, we see that following eight consecutive days of tightening the probability of the 10d change being positive was 43.1% and for the 20d change was 41.7%.  Compare these figures to the 10d and 20d change following nine consecutive days of tightening: 38.5% and 36.5%, respectively.  The decline in the odds of the market going higher seems to be part of a larger trend- the longer we stay stuck in a tight range, the higher the probability of a pullback.  The first time I ran this study was when the S&P had been trading in a narrow range for just five days in a row.  Take a look at what the odds results were previously:

5 Days of Daily Range Tightening

The probability trading higher in the subsequent 10d and 20d was 57.4% and 51.7%, respectively.  Again, note that the odds of the market being up go lower the longer we remain (over consecutive days) in a tight range.  The average (and median) changes help confirm this trend as those numbers point lower as well.  In particular, the 20d average change and median both lie around -3.3%, a noticeable drop.  Initially, the 50/50 odds generated after five consecutive sessions gave me no conviction to either side.  But now after nine days of tightening in the daily range, with the odds favoring the market being down in the next 10 and 20 days, I will say I believe this slow down in the market will result in a pullback and not a resumption of the uptrend.

*If today ends up being yet another day of daily range tightening, and it appears that it will as we have been trading in a 11.75 handle range (the 20d ADR will be approximately 16 handles and change), I will re-run the model to accommodate for 10 consecutive days.

Light Volumes + No Pivot Signal Generated = Indecision

Morning Notes
- Light volumes in the overnight
- Hang Seng down the most, closed -1.3%, on concerns over monetary policy measures (Shanghai Comp down 50bps)

Indecision in the Market

- China and Hong Kong upgraded (Asian mkts were closed already when the announcement was made)
- German and Eurozone Manufacturing PMI came in better than expected
- UK raised 2011 inflation forecast, as expected
- Commodities have been fairly quiet this morning
- FDX reported an earnings miss this morning, pulling in the futures as well
- S&P futures traded right up against R3 just before FDX earnings
- S&P futures not on a pivot signal this morning, trading between S3/R3
- Initial Jobless Claims: 420K vs. 425K; prior revised up to 423K from 421K
- Continuing Claims: 4.135M from 4.113M
- November Building Permits: 530K vs. 560K; m/m chg: -4.0%
- November Housing Starts: 555K vs. 545K; m/m chg: +3.9%
- Futures not reacting to data releases
- Philly Fed number out at 10a ET

Futures Hovering Over S4 Pivot For First Time In A Few Weeks

Spain Potential Downgrade

Morning Notes
- Overseas markets are all lower this morning following news that Moody’s may downgrade Spain
- Adding further weakness in the markets is the Tankan Survey results in Japan, which showed that business confidence in the country has fallen for the first time in two years
- JPY weakness has added little support to Nikkei, which closed down just 10bps
- Also, UK unemployment rate came in higher than expected
- Dollar up small
- Gold and oil are down
- NY Empire Manufacturing Survey: 10.57 vs. 3.00; prior was -11.14
- November Core CPI: +0.1% vs. +0.1%
- November CPI m/m: +0.1% vs. +0.2%; prior was +0.2%

- Futures not really reacting to data release
- Other economic items on the calendar for today: Industrial Production and Capacity Utilization at 9:15a ET; NAHB Housing Idx at 10a; Crude Inventories at 10:30a
- S&P futures are down about 4 handles from FV
- Tight pivots in the Spooz today- we are on the S3 buy signal , although that could change quickly given that we are hovering right above S4 and we had been on the S4 sell signal earlier in the pre

January Pullback Imminent

Well, I’m pissed at the market and pissed that I ignored the odds for the lower low that the Close Near the Lows model called for.  At the same time, I can’t be too pissed because the market does not always follow the odds.  The S&P futures traded between R3 and R4 for most of the day and when the market did not show signs of clear weakness off the open (which we actually have been seeing in recent days), I thought testing yesterday’s low was nearly out of the question.  Of course, anything can happen in the market (clearly, today was an example), but at that point in time in the morning, I dismissed the possibility of making a lower low as the odds did not seem like they would play out today.  The model uses the SPYs data so looking at the SPYs, today they actually traded above R4 for most of the day.  Again, since I did not see the usual weakness off the open in the market today, I did not feel that the 124.52 level, which is yesterday’s low, was in the picture.  But sure enough the low print in the SPYs was 124.29.  I was short in the morning believing that we would make a lower low soon off the open, but when that did not work, I flipped to being long.  That worked okay until the late afternoon sell off.  Anyway, that was my vent.  So on that note, I will be returning back to my odds analysis blogs.

Doji Candles

I recently wrote about a tightening in the daily range of the S&P futures.  We still have been stuck in a tight range in the market.  If you did not catch my first blog on this topic, I defined tightening in the daily range as days when the range ended up being less than the 20 day average daily range (ADR).  Using this definition, today was the 8th consecutive trading day that we have seen a tightening in the range.  This study covers data from January 2000 and since then there have only been 72 instances when the daily range tightened eight sessions in a row.  In other words, this type of daily range tightening does not happen that often (roughly 2.6% of the time since 2000).

What I focus on in this analysis is what occurs in the 5, 10, and 20 days following this type of move in the market.  Below are the results:

Daily Range Tightening

I won’t go into all of the specifics, but rather I’ll give a general summary of what I garner from this data.  The probability of being up over 0%, or moving higher, in the next five days is 55.6%.  I actually want to focus more on the average and median change numbers this time around.  The average 5d chg is flattish (down 5 bps) and the median 5d chg is 58bps.  Given the roughly 50/50 odds of going higher and the flattish average change, I don’t think we see the narrow range in the market resolve itself to either side in the five day term.  The next five days, in my opinion, will remain relatively calm, perhaps a widening in the range, but no huge rally or sell off.

Then I extended the analysis to observe the 10d change.  Now the probability of the market going higher in the next ten days drops a bit down to 43.1%, so a little skewed to the bearish side.  The average 10d chg is down 96bps while the median is down 45bps.  These data points to me suggests downside pressure in the 10 day (or two calendar week) term.  Finally, I included the 20d change as well as I noticed that moves could occur as late as one month afterwards.  I’ll actually pause here to note that of the limited times we have seen eight consecutive days of tightening in the daily range, Dec. 2010, Dec. 2009, Dec. 2008, and Dec. 2007 all saw this type of move.  A quick look back at the S&P chart shows that the following month of January tended have noticeable pullbacks.  January 2011 will be a bearish month for me (although I seem to be bearish all the time).  Going back to the data, the average 20d chg is -1.8% and the median 20d chg is -1.65%.  These bearish figures are confirmed by the lower probability of 41.7% that the market will move higher (above 0%) in the next 20 days.

Of course, my interpretation of this data is just one of several others.  However, I read this data as suggesting that the next five days will probably remain calm, a continuation of the uptrend we have been in perhaps.  Then the subsequent five days (i.e., in the next ten days from here), we will start seeing some pressure to the downside.  And then January will bring a pullback in the market (note the term “pullback” and not “sell off”) as the 20d average chg is -1.8% and the odds favor (though only very slightly) moving lower (a less than 0% return) in the market.