The Magic of Weighting

If Jesse Livermore only heard that title, he's be in total agreement, assuming you know why you are waiting, but that's not what I'm referring to. It's a shame people don't understand the weighting system each of the averages uses, then they might be able to better understand why 86% of NYSE stocks were above their 40 day moving average in January of 2013 and only 54% are above the same moving average now, this means the trend among the majority of stocks has been to fall, not rise as the averages would imply, once you understand that, you can also understand why stock picking (if you aren't just using a broad ETF like SPY) can be so important as you could be in that group of 30% of stocks that have fallen below their 40-day instead of rising with the market.

In any case, the Dow was one I mentioned today and its top components. Intraday the Dow hit +.47%, but closed red, down -0.08%.

The stocks I mentioned to keep an eye on because they were the top 5 weighted stocks were at gains earlier when mentioned (the first number) and at the close at lower levels:

IBM +.76% to +.35%
VISA +.33% to -.26%
GS +1.19%!!! to +0.43%
BA +.30% to -.37%
MMM +.33% to -.07%

If you looked at the same chart as posted earlier..."The Usual Suspects"  in which I show the Dow with its top 5 weighted components and the NASDAQ 1000 with its top 5, you get a feel for what is moving the market.

On the close, you see what the Dow's top 5 weighted stocks did and it took the Dow from a nearly 1/2 percent gain to a loss.

 The Dow is the candlesticks, the other stocks are labelled at the top.

It looks like the top weighted stock did a lot of the lifting today, IBM, but ultimately couldn't hold the Dow green.

Only 1/3rd of Dow stocks closed with a gain, only 1 (MSFT) was >1% at +1.41%, the second place was GS at .43m then a couple in the .30 area, a couple in .20, 1 in the teens and 1 at .01%.

In this case, if I used equal weight for all 30 stocks, the Dow would close down -.09, not far from the -.07%.

In any case, this hasn't been used for a while, I think QE2 we saw a lot of this kind of trading, volume was low enough the last 2 trading days that it worked, but that begs the questions, why did everything else stop working?

I'll have a closer look at the internals, but one thing I noticed right away is our spot VIX Bollinger Band squeeze that leads to highly directional moves is very close to breaking out in the direction assumed.

VIX BB Squeeze about to break out.

The new trading portfolio is doing well, it just got started this week and it has been a quiet week so I've had the time to keep up with it, hopefully I can keep that up. All positions were entered either Wednesday or Today and thus far of the 6, 4 are green and NUGT is the leader with a +7.84% gain, the only two down are PCLN, -1.13 and the 3x leveraged IWM short, SRTY, down 1.62%, everything else is up near 4%.