Bonds vs equity

Here's an interesting piece of intermarket relationship. When the ratio of a treasury bond fund like IEF over a broad market index-based fund like SPY is trending up, it's better to be in treasury bonds.  When IEF:SPY is trending down, it's better to be in equities.

To use it as a proper buy-sell signal, it would have to be investigate further and for a longer period, but based on the last 3 years, it looks promising.

Here I am using crosses above and below the 40-week moving average as buy-sell signals. I am considering a cross of the ratio above its moving average as a sell signal for SPY, and a time-confirmed (1 or 2 weeks) cross as a buy signal for IEF.

The green boxes and lines are for IEF, and the blue boxes and lines are for SPY. You can see how the green and blue lines have a more favorable slope than the red lines, which correspond to periods that would be avoided.

Put/Call ratio signals shift towards bear territory

Another one of my bear market indicators is confirming that we're in a bear market. The 50-day MA of the CBOE Put/Call ratio is now above 1.  This means, in broad terms, that the market psychology is shifting towards a wide expectation of lower prices.  Market participants are buying more puts than calls - most are bracing for the worst, or at least trying to be prepared for it. To me, it means a diffused readiness to sell - which should lead to lower prices.

Status on 11/22/11

CORN: at 39.41, it's just a hair above support, the neckline of a probable head and shoulders, or megaphone top. A break below 39, if confirmed, could lead to a massive decline to 29 (10 is the distance between the recent top at 50 and the neckline). Outlook: uncertain.

IEF: at 105.01, consolidating after a recent gap up.  In uptrend. High volume day today, and closed at the high. Outlook: bullish.

KO: at 65.97, at neckline of probable head and shoulder top. I think it will break below and fall. The rounded shape of the last October-November hump doesn't look like some consolidation in an uptrend. Outlook: bearish.

UUP: at 22.04, consolidating. Outlook: bullish.

XLP: I'm dropping it because it's too much like KO.

Status on 11/17/11

CORN. Close at 40.49. Bullish flag has failed, small consolidation near lower edge of trading range has broken to the downside.  Outlook: bearish.

IEF. Close at 104.79. In 3-week consolidation between 103.50 and 105. Larger range between 101 and 106. Outlook: bullish.

KO. Close at 66.62. Bullish triangle failure started today. Outlook: bearish.

UUP. Close at 22.07. Bullish island reversal one month ago. Two failed faded bullish gaps (double-negative means positive) in last three weeks. Outlook: bullish.

XLP. Close at 30.97. Same comments as KO.

Long KO at 66.98, sold at 66.34

Reasons for entry:
- possible double bottom around 63
- price near lower edge of bullish triangle
- price near support (low risk)

Target:
- 3-month high resistance is around 71.50
- measured move from relative low to relative high is 4.50. This implies target at 71.50.

Sold at 66.34 the next day.

Reason for exit: stopped-out.

One more time, my support line was pierced intraday and I got stopped out of my trade. It's probably true that this trade would not have worked out, but the automatic stop worked against me. If I had waited until the end of the day, I would have probably gotten out anyway, but at a better price.  It's true that during catastrophic falls waiting until market close can hurt, but getting stopped out is pattern in my trading.

In any case, the bullish triangle is failing.  In a day or two we'll know if the failure is confirmed, and in that case my outlook on KO (and the rest of the market) will turn negative.



Which markets to follow

I think I am trying to follow too many markets and cannot focus on anything in particular. This behavior may derive from the "fear of missing out", which I suppose is what you feel when you are practically 100% cash. There has to be a right range of markets that the human mind can follow without getting lost in the data. I notice that often when I am looking at tons of charts, one after the other, I lose focus, then I realize I should have been looking at some other indicator, instead of the one I am actually looking at, then some other thought comes up, like for example I could use a certain tool to compare this and that, and I'm lost.

I have been trying to find a few markets with no correlation between them, but I always end up looking at commodities and they are far too volatile for my taste at this time.

I have tried with a shortish list of US market sector ETFs, and I can see the difference in volatility among them, and that some have a more of a tendency to follow the equity market trend, but they all still pretty much move in unison with the S&P 500.

I have tried looking at all 30 of the stocks in the DJIA, and they are too many. I would have to reduce this list to only 10 maybe.  I haven't done so yet because of the "fear of missing out", but I am starting to think that it's the best thing to do.
Maybe a good approach is to have circles of attention.  One smaller circle with just a few securities, possibly all different and with as little correlation between them as possible. One larger circle with more securities, to be looked at every once in a while.

So, I made a list of a semi-random sample of ETFs and some large cap equity stocks, their price, their standard deviation for the last 21 days, and the ratio of standard deviation to price, sorted by percentage standard deviation, in descending order.  The idea is to pick a currency, a commodity, a bond fund, a stock index and an equity stock, and those would be the markets in the smaller circle. I am using percentage standard deviation as a proxy for volatility, because I am interested in choosing instruments with low volatility, to reduce risk.

TICKER	PRICE	STDEV(21)
IEI	121.58	0.53	0.4%
IEF	104.21	0.9	0.9%
FXC	97.84	0.87	0.9%
KO	67.95	0.65	1.0%
uup	21.85	0.21	1.0%
xlp	31.19	0.3	1.0%
T	29.07	0.3	1.0%
fxe	135.75	1.5	1.1%
splv	25.06	0.32	1.3%
xlu	34.99	0.45	1.3%
bab	28.53	0.37	1.3%
corn	41.64	0.57	1.4%
dbc	27.93	0.4	1.4%
xlk	25.96	0.38	1.5%
hyg	87.32	1.29	1.5%
MSFT	26.68	0.41	1.5%
PG	62.98	0.98	1.6%
fxf	108.93	1.71	1.6%
fxa	102.01	1.62	1.6%
GOOG	613.86	10.26	1.7%
ewm	13.48	0.23	1.7%
spy	125.25	2.3	1.8%
MCD	93.99	1.76	1.9%
tlt	116.97	2.22	1.9%
INTC	24.5	0.52	2.1%
bal	59.87	1.35	2.3%
AAPL	379.35	9.87	2.6%
jo	59.16	1.62	2.7%
ews	11.82	0.33	2.8%
pin	18.79	0.54	2.9%
ijr	66.87	1.93	2.9%
ewl	22.37	0.65	2.9%
CSCO	18.9	0.56	3.0%
ung	7.94	0.25	3.1%
sgg	86.97	3.02	3.5%
uso	37.98	1.49	3.9%
amzn	219	11.77	5.4%

The ones I should be looking at are in bold.  I have excluded a few at the top because of personal preference.  It's interesting to see that some of my favorite ones are pretty low in this list, and probably I should stay away from them, with the exception of UNG, maybe.  That's because UNG seems to be in a downtrend, while pretty much everything else is in a trading range. Am I already breaking my own rules? Probably.

Anyway, that's the general idea now, to follow IEF, KO, UUP, XLP, and CORN.
KO is generally positively correlated with XLP and the equity market at large, and with CORN, and inversely correlated with UUP, but some of these relationships are not constant and can reverse for weeks at a time. However, KO represents about 7% of XLP, since Coca-Cola is a consumer staple, so the correlation between them is unlikely to reverse entirely for long stretches of time.

So, these are my markets now, and although I expect the list to change over time, I should really make an effort to keep the number at five, to be able to really focus and learn.