Tim Bovee, Private Trader: Tuesday's Prospects: Round 2

Tuesday, July 22, 2014

Tuesday's Prospects: Round 2

If William Shakespeare were passing judgement on today's markets, he might well write:

... it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.

A stirring market analysis, to be sure. But most days in this summer of our discontent, it would be off the mark. Far from storm and fury, the markets more nearly resemble a stagnant, algae-covered pond, inhabited by dragon flies. Signifying nothing.

Monday's trading is a case in point. My first wave of analysis, as described in "Tuesday's Prospects", found 59 bull and bear signals out of the 4,009 symbols my apps analyzed overnight, but only one made it past the post and entered the second round.

Of the 59 signals, 46 failed because that didn't have greater than even odds of coming in with a profit in comparable signals during the past year. By comparable, I mean that if the present signal is bullish, then the odds are for past bull signals. If bearish, then for past bear signals.

That's a 78% failure rate, and rates that high are signs of a stagnant-pond market.

Of the 13 symbols with better-than-even success rates, 11 have earnings announcements within the next 30 days, and so are excluded from consideration under my rules. Earnings days produce a fair share of black swan, or at least sooty gray swan, events in the markets, and I don't like to buy in so close to that periodic uncertainty.

That's an 85% earnings announcement rate, a symptom of the fact that we are at the peak period of the present earnings season, which began two weeks ago.

That left a mere two symbols, a potential bull play, EBR, on the large-/mid-cap list, and a potential bear play, CMFN, on the small-cap list.

CMFN has no options and so can't be used to construct a bearish position. That's not an uncommon occurrence on the small-cap and over-the-counter lists. All bear trades in my memory have come from the large-cap list.

EBR gave a bull signal, but it has been in a downtrend since 2010 and is presently tracing out an Elliott wave pattern known as a flat, a bearish correction in this case.

Click on chart to enlarge.

EBR 10 years weekly bars

That left nothing on the stagnant pond, save for the algae and a few dead fish.

The point of this sad tale is that the earnings season is only a minor attribute of the lack of viable trades. The numbers from my first-round analysis points squarely at market stagnation as the proximate cause.

Only 1.5% of the symbols in my 4,009-symbol universe gave signals, and most of those are on symbols that lack conviction in their trends, that are prone to whipsaws.

The interesting question is what lies behind the stagnation. Traders waiting to see what the Federal Reserve does about monetary policy in a recovering economy? A top caused by the workings of the balance between optimism and pessimism in the broader society? A pause for earnings? Slow consumer spending? Tight lending policies? All or none of the above?

I've persuaded myself that the motives behind market movements are unknowable. Altogether, 1.8 billion shares of stock were traded on the New York Stock Exchange, American Stock Exchange and the NASDAQ.

If the average trade size is 500 shares, as it was in June on the IEX exchange, then that's arguably 3.6 million trading decisions. How can we presume to attribute those decisions to a single cause, or even to a handful of causes?

For myself, rather than worry about proximate causes, my practice is to sit beside the pond like a frog and watch the stagnant water that is today's markets. Occasionally, there will be a ripple on the surface, perhaps one of the few surviving fish, or perhaps a final crash of a dying dragonfly. In either case, it might present a trading opportunity, and I'l be ready to take pounce when it appears.

Patience.

-- Tim Bovee, Portland, Oregon, July 22, 2014

References

My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.
Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.