ETF Prophet

Will the Market Crash?

Mr. Ice — Fri, 18 May 2012 02:45:09 +0000

The one way market continued today and having the “C” word in the title may appease the stock gods. The S&P 500 has gone down for five straight days and 11 of the last 13 days. The market is too stretched to the downside to support aggressive shorting, but it is showing no signs of a bounce and a we can see from last year deepest drops are often seen during extreme oversold readings. Facebook will start trading tomorrow; the market was unable to muster even a momentary bounce today. The sentiment will be even worse, if Facebook does not trade well tomorrow. The .382 Fibonacci retracement of the rally off the October lows comes in at 1289.60 and that could be the next area close to the 200 day if we fail to bounce again tomorrow.

05.17.12 – SPY Tags 200-EMA

Mrkt_Rwnd — Thu, 17 May 2012 16:56:38 +0000

It’s just another line in the sand on a chart, but it’s so widely followed it should start to get folks’ attention. The real question, is whether it will be used as a buy point, or a major risk-off signal for institutional money.

It seems news flow will drive the day. On one hand I’m asking myself what else is ‘out there’ in that regard as risk repricing continues; on the other, we have to look to last August to know what can happen when long-term support is broken in an increasingly technical/ quantitatively driven world.

Quantifiable Edges

Looking for a Catalyst

Mr. Ice — Thu, 17 May 2012 02:03:40 +0000

Although the indices weren’t down that much, it was another disappointing day for the bulls. Perhaps too many was anticipating today’s bounce. When the European Central Bank was rumored to be holding off from using further stimulus tools and more Greek bank problem surface, the sellers took over. In addition, the FOMC minutes did not show definitive signs of further easing. During the teeth of the decline, buyers are often worn out from the constant reversals. To get a better bounce we probably need a news catalyst as with previous declines. When we bottomed at the end of last year, it was a coordinated effort by world central banks that kicked off the rally.

Risk Spread Crosses Zero

BZB Trader — Wed, 16 May 2012 17:31:17 +0000

Yesterday I mentioned the Risk Spread chart of the RYDEX Mosaic and today’s we take a quick look at the status of the ETF Mosaic. A different portfolio with a different market neutral skew and the ETF model appears to be ahead of the RYDEX model in making the zero line turn. We still need to see both the TrendX and the Risk Spread indicators turn up before deploying new capital to the model but the indicator suggest we may be approaching that situation. Keep in mind that this BUY signal only applies to the market neutral blend unique to the ETF Mosaic model…this is not an signal for buying SPY or other market indices.

Quantifiable Edges

ETF_Rewind

Looking for Buyers

Mr. Ice — Wed, 16 May 2012 02:01:27 +0000

The pattern of early bounce attempt and weak closes continued today. We haven’t had a strong finish since late April, and that is just the opposite of what we saw in the first quarter when we went up daily. We were oversold and ripe for a bounce, but after two brief attempts, Greece and Europe news hit again. Closing at a new low with more European debt issues flaring up will discourage a lot of new buyers, but we are again presented with an opportunity for a bounce. Many had complaint about the nonstop bullish action to start the year, now we are finally getting that pullback. Will the buyers step up?

RYDEX Model Update

BZB Trader — Tue, 15 May 2012 18:05:29 +0000

Another week, another hit to the SPY but our RYDEX workhorse has so far weathered the storm. I’ve added a line to reflect relative gains over the past 5 days as well as the usual tracking metrics. Traditional risk management models used by many money managers hold 60% stocks & 40% bonds but using RYDEX funds and their inherent leverage skews allows nuancing such an approach to produce a better market neutral balance. I’ve also shown a chart of the “Risk Spread” and the TrendX momentum signal. The Risk Spread is looking at the attractiveness of a short term “risk on” vs. “risk off” position. And the reason this is useful information is in timing new allocations of capital into the model. Ideal risk off situations typically set up after a zero line cross to the upside of both indicators…a situation that is not imminent.

05.15.12 – Cross Correlations Rising

Mrkt_Rwnd — Tue, 15 May 2012 17:47:34 +0000

The market is looking for support to bounce, but is still struggling and range-bound on the day. My primary concern going into the p.m. session is the sudden rise in inter-security cross-correlations. Watch that ICJ index closely.

Waiting for a Bounce

Mr. Ice — Tue, 15 May 2012 02:34:04 +0000

For the fifth time in the last six days, we gapped lower, bounced back mid morning and then closed weak. The dip-buyers lost interest quickly after upside momentum stalled and we ended up closing near the lows of the day for the first time in a week. Breadth was poor and Greece continues to plague the market. We are getting close to a bounce, but if we go lower, many are eyeing the low 1300 area for a bounce.

05.14.12 – Another Stairstep Gap

Mrkt_Rwnd — Mon, 14 May 2012 16:47:44 +0000

SPY Price held its first test where we’d hope it would near $134 and is trying to recover for a challenge of S1 from below. That will be an important level this p.m. Internals are still awful, of course, but volatility appears to be leveling.

This Level Is Very Important Technically

Mrkt_Rwnd — Mon, 14 May 2012 15:31:28 +0000

Quantifiable Edges

ETF Rewind – On the Edge | Week 19 | 05.11.12

Mrkt_Rwnd — Sun, 13 May 2012 23:15:05 +0000

Equities tried and failed to hold support last week, but neither has a capitulative event occurred. It still ‘feels’ like price is on the edge — at once oversold, yet not broadly so and more negative news flow could easily hurtle us towards those as yet rising 200-day moving averages.

For the week, the S&P 500 fell another -1% and the VIX is beginning to reach a bullish stretch from its intermediate-term moving average. With European news in flux, retail reports tomorrow, and Fed minutes due Wednesday, it should be a most instructive week and I have further derisking on my mind.

[Week 20 Calendars: Economic | Reporting]

Source: Mrkt_Commentary** subscription service; prior weekly posts.

NEVER INVESTMENT ADVICE

Skew & Risk

CSS Analytics — Sun, 13 May 2012 18:24:45 +0000

The environment for trading contains numerous sources of potential risk, from sovereign defaults to bank failure to war in the Middle East. The ability to follow broad and protracted trends across global markets and commodities has never been more difficult. This explains the recent popularity of volatility index trading and also asset allocation methods that employ volatility management. The subject of managing tail risk by looking at “skew” is rarely discussed but remains an important complement to volatility.

I often find that the conventional definitions for skew are confusing, while the calculations cited are often based on normal distributions which are not ideal for this type of measurement. Skew is simply the degree to which the average of the distribution is tilted from its midpoint (or median). When measuring skew it is best to look at returns versus prices.

Skew= Average – Median

If the daily skew is positive, then the average of daily returns is greater than the median of daily returns. This implies that there are probably positive outliers in the data–the “good” tail (95th percentile for example) is often larger than the “bad” tail (the 5th percentile) . In the case that the skew is negative, the opposite is true: there are probably negative outliers in the data, and the “bad” tail is larger than the “good” tail. Essentially, skew is a measure of the possibility of favorable or unfavorable surprises.

This concept is different than just looking at a simple moving average of prices or the average of daily returns, because the skew can have a different sign than the measure of central tendency. The average can be positive, while the skew can be negative and vice versa. That is why the skew can carry vital information for traders– it can be an early warning, and sometimes even a better indicator of future returns than just a simple average.

At the very least, tail risk can be mitigated by observing skew directly and in today’s environment that is especially critical. The combination of volatility-sizing with skew can be a powerful method for risk management. In a subsequent post, I will demonstrate some practical applications of these concepts.

Facebook

Mr. Ice — Sat, 12 May 2012 03:01:02 +0000

The market worked very hard to shake off a steady dose of negative news, but there was just too much of it. It was impressive that the market consistently bounced back from weak opens, but there is no upside momentum and the market is barely holding above support. Next week is the much-anticipated Facebook IPO, which has the potential to improve the mood during option expiration week, if it gets off to a good start.

05.11.12 – Shrugging Off the Negatives

Mrkt_Rwnd — Fri, 11 May 2012 17:41:29 +0000

This is always a good sign — not easy to shake off the blues in the Financials, so it will be important to see how the SPY acts here at its daily VWAP. I have been traveling this week and it’s good to be back gang!