Wolf on Wall Street

Wednesday, March 7, 2012

Credit/Risk Assets and Sector Rotation

Commodities continue to lose ground vs the SPX today...

This is commodities vs the Euro (green), you can see they are more in line with the Euro, so the market essentially doesn't have the Euro supporting it.

Earlier today Yields were in line with the market, in line with a market bounce, since they have deteriorated consistently and the 12-1 p.m. area is where it really started. This would seem to indicate AAPL as the culprit, but I think there's more to it then that given the Euro's performance.

Euro vs SPX

High Yield Corporate Credit still hasn't budged in support of a bounce, which I didn't think it would being I expected the bounce to be a hollow shell and not a real risk move, more of a tactical set up for a market reversal. These Credit traders are generally better informed then equity traders, thus the saying "Credit leads, equities follow".

XLE was at least somewhat in line with the SPX earlier, it is losing ground as well, no doubt EUR/USD connected.

Financials remain in line with the SPX.

Tech continues to lose ground.

Earlier today the sector rotation was what we'd expect to see for a market bounce, the defensive sectors were on the decline, the risk sectors were advancing. Recently, since noon, that has started to reverse and the market is moving to a more defensive posture with Utilities, Healthcare & Staples seeing better relative performance. On the decline, Energy, Basic Materials, Industrials and Technology.

There seems to be a subtle, but definitive change in the character of the tone of the market.

AAPL Trade

I had thought AAPL had the potential to disappoint today, however we were also looking for a head fake trade, so we kind of got one, but not what was expected.

This date on the 15th looked to me to be a major change in AAPL, I've said I think we will look back at this date in the future and see that it was important, it is perhaps the day AAPL's back was broken. So could the last 7 days above the 15th be a sort of head fake? It would definitely be along the lines of the extent of a move I would expect that precedes a market reversal, but we'll need confirmation with a move BELOW the $526.30 level. If that occurs and we see a sharp downside move from there, then that is our answer.

As far as the head fake move written about last Friday and Sunday, the Bollinger bands suggested it was imminent, we got a very small, but a head fake move the very next morning, virtually on the open taking AAPL down -2.2% on a closing basis, even more on an intraday basis.

Today's trade since the 1 p.m. unveiling has been erratic to say the least.

I'm going to keep looking around

VXX and Treasuries

As of last night, I expected both to drop on a market bounce and be accumulated in to the pullback, but I expected a bigger pullback and a bigger market bounce first. There are some recent changes in both.

Here's the TLT negative divergence yesterday, since it trades opposite the market, this made perfect sense as did the drop in price today, however I expected this to move lower before seeing a positive divergence.

It looks like 1 pm was when things started to change, here we see a positive divergence bleeding through on the 5 min chart in treasuries.

The VXX 2 min is leading positive, I expected to see this, but at lower price levels.

Now it's bleeding through the 5 min as well.

I need all eyes and ears I can get here, especially on any developments in the EU. The Euro has not been very supportive of the market today.

Market Update-Something is up

The signals are changing very fast and I'm trying to make heads or tails of this, lets start with a market update and then we'll look around from there. Although I want to be quick, I also want to be accurate.

DIA 1 min

The 2 min is falling apart.

The 5 min looked like it was prepped to move higher, perhaps a breakout move with AAPL which doesn't look like it's coming, it is now showing signs of deterioration, it's almost as if something has happened that has changed the outlook-There's a lot going on, not just AAPL, but the EU.

The 15 min chart even looked good for a solid bounce and it is starting to see at least a relative negative divergence

IWM 1 min is falling apart.

The 2 min showed good strength yesterday and early today, it is seeing that weakness from the 1 min bleed in.

The 5 min chart which looked good for a decent bounce is starting to see the 2 min chart bleed in.

This is the best looking 15 min chart, suggesting a decent bounce, we'll have to see if the 5 min bleeds in to this.

QQQ 1 min falling apart a bit

2 min falling apart.

5 min falling apart

15 min was only in line, we'll see if it starts deteriorating too.

SPY 1 min positive from yesterday and a negative now

2 min is gaining downside momentum

5 min is still in line

!5 min is still positive.

It looks like the market was prepped for a good bounce, which is essentially what we were looking for via AAPL, now it looks like something has changed pretty quick.

AAPL Trade a bit volatile, market not so much...

AAPL, the event began at 1 pm, they did introduce Apple TV on sale March 16th, I believe there are still content provider problems there, but they didn't mention that as I skip back and forth between the live web blog and the charts.

QQQ

SPY

DIA is even flatter.

Not quite sure what to make of this yet...

No Live link

Apparently AAPL isn't providing live video coverage of the event, there are some blogs that will be posting live updates,

Here are two
MacRumors

EnGadget

Credit and Risk Assets

We're closing in on the 1 pm AAPL event, I need to find a live link to it. Here's what other asset classes are doing thus far...

Commodities are underperforming the SPX by a little, they are more in line with the EUR/USD below...

Commods vs Eur/Usd

Yields are in line with the SPX

The Euro is lagging it a bit

A wider view of the Euro/SPX

Interestingly, High Yield Corporate Credit isn't participating in any equities risk move.

Energy is slightly underperforming...

Financials are slightly outperforming-

Tech was outperforming earlier, now it's lagging.

Sector rotation looks as you'd expect for a bounce, all of the risk groups are up and defensive plays are down.

$USD correlated Assets Gain on EUR/USD move

The EUR/USD pair (5 min)

Copper (all compare to the Euro in red)

GLD

USO

And of course, the market...

Why?

Jon Hilsenrath of the WSJ, floated a rumor the F_E_D is considering 'Sterilized QE", for what reason, I have no idea. If QE was truly sterilized, it would add zero liquidity to the market.

3C Quick Start

Many of the charts you see here at WOWS are my proprietary indicator 3C which reveals underlying institutional money movements and often contradicts price. To understand the annotations made on charts, you must first understand that 3C has no numerical value, it is a pure divergence indicator. Positive divergences represent accumulation by smart money, negative divergences represent distribution by smart money and when 3C trades with price, that is trend confirmation.

The chart annotation system is simple; white arrows represent relative positive divergences, red arrows represent relative negative divergences and green arrows represent trend confirmation. When 3C is in a white or red box, that represents a leading positive or negative divergence, leading divergences are the most powerful.

We analyse 3C in multiple timeframes, the longer the timeframe the stronger the accumulation. 1-2 min timeframes represent intraday moves, a 5 min timeframe can represent a day or two and 15 min timeframes average trends of a swing trade nature. 30 and 60 min charts can move the market for a month or more and daily charts can be over a year.

You'll get use to seeing the charts and understanding how the multiple timeframe analysis works and works well.

Welcome to Wolf on Wall Street.

The trades featured here are meant to maximize returns with the least risk and highest probabilities. Unless otherwise mentioned, all trades are meant to be executed at market. I prefer long-term trending trades which perform well in rising markets, but really stand out in declining markets. However, we get occasional one day gifts 30,40,60% 1-day gains. I'd urge you to consider taking some or all off the table in such cases, the markets don't give gifts like that often or for very long. Most of the returns that make the system outperform so well come in short-entry trades. If you are opposed to short trades, this is not the system for you, unless you are ok with buying an inverse ETF. If you would like more information about the truth about shorting stocks, just email me.

Risk management. I recommend a specific and consistent risk management approach to all positions. In most cases we try for 2% risk money (2% of portfolio) unless such a position size exceeds 15-20% of overall portfolio in actual position size. Each trader is different and each has a different allowance of open trades. I like to keep the overall money in the trade around 10-15% of portfolio per position in case of gaps against you. Stops are generally executed at the end of day and I personally never place a stop order, all my stops are mental; remember, the middle man gets to see everyone's cards. When you are not in tune with the market or opportunities just aren't that spectacular, I take my risk per position down to 1% or even half a percent of portfolio value.

Each trader is different and must determine their own level of comfort with risk. I do have a channel stop which I provide to TeleChart/StockFinder users for automated stops, I appreciate you using my links to sign up if you do. The Trend Channel catches trends and works well as it automatically adjusts for each stock's volatility. Arbitrary exits based on nervousness about the markets WILL decrease the portfolio performance dramatically. This system will not ever get you in at market bottoms or tops. The recent 1 year performance against the Russell 2k buy and hold had the system beating it by 3:1. Ultimately it is up to you as to how you proceed, but I'm always available to help you determine what might work best for you.

I do use other scans and systems when market conditions warrant their use and may change strategy with market conditions.

The MOST IMPORTANT tool you have to bring you long term success is RISK MANAGEMENT. There are plenty of articles linked at Trade-Guild.net on Risk Management. We can be wrong 75% of the time and still outperform the market with solid, consistent risk management.

Position Sizing

The position sizes noted in the positions @ 2% risk of portfolio are based on a $20,000 portfolio-adjust as needed. Due to tight stops, there is the possibility, even probability that one position could take up the entire portfolio. You need to decide how many positions you want to trade and reduce the position size according to that. For instance, if you want to trade 5 positions in a $20,000 portfolio, no one position should be valued at more than $4,000-not risk money or 2% rule, but share price entry x shares.