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I find it interesting and also pretty great that while markets continue mostly higher, small caps are pulling back. Perhaps IWM will fill it's recent gap that will allow for a nice entry on the next Small Cap Power Period buy in day which is Thursday, November 20. Read about the small cap power period here.
Meanwhile, I have been SHOR'd by the drama over Mitel's bid for the company being pulled after multiple rejections. I am waiting until the end of the day to see if it can SHOR up a bit, but today's candle is definitely a sell signal with multiple dojis followed by today's gap down.
Here are the IWM and SPY charts.
There is a lot of drama going on in the trading blog-sphere today. Ted Turner once coined the phrase, "we love drama" and how true it is. For those who delve in the drama of interblog politics, readers are rapt with attention.
Poppycock is all I have to say. I have no interest in attracting trolls and haters. I am happy to just share my work and coach serious traders. But all that drama did inspire me to write about something that you all may find of interest.
One thing I often discuss is how most strategies work with discipline but the discipline is virtually impossible until we learn to cut the emotions from our work. While our emotions protect us in life and allow us to stay safe, they have the opposite affect in trading. Those emotions often cause traders to abandon their strategy in the name of fear and are more likely to lead to high risk trading. They bring out the gambler in us.
Cowboys and gunslingers bragging on the nets about how to make that big score are preying on the naivete of nubile traders looking to get rich quick. This lack of risk averse strategy that allows the trader to keep emotions at bay usually leads to bigger losses.
The key to being profitable as a trader is to take small losses and bigger winnings. Don't be a gunslinger. Keeping risk ratios in check keeps the odds in one's favor. Accepting that every big win comes with a small loss, will help to keep your emotions in check.
Indices are not moving much today as bond markets are closed and most bankers are off for the Veteran's Day holiday. As such we are drifting slightly lower which is healthy action in charts that have rallied without much of a break over the past few weeks. I will continue to hold my long positions as long as they remain above the 8 ema.
Here is the SPY chart.
I have been mentioning throughout this latest rally in the markets how challenging it has been to find set-ups. The main reason is the fast moves in both directions that create "V" shaped patterns and make a mess of Moving Averages. As markets slow down their pace, I expect to start to see more inviting set-ups. Meanwhile, IWM is coming in a bit and getting ready for the next Small Cap Power sub-Period. Here are the SPY and IWM charts.
Markets are continuing their mild healthy pullback.
I closed my TNA today for the end of the first sub-small cap power period. A quick shout out today to Raoul who pointed out to me that since 2000, the second sub period, the last 6 days of November, have not had a losing year.
Here is an hourly, 4 day chart of the IWM that shows the move we enjoyed in Small Caps.
I am unfazed by this little pullback in the markets and find it a healthy consolidation of the recent move. Indices are a little extended and this gives respective 8 ema's a chance to catch up.
Volatility has not yet collapsed as markets try to find some even ground. The best thing that could happen is several days of sideways action. These fast moves down then fast moves up only keep volatility's hand in the mix. The continued drop in oil is not helpful either. But I continue to be confident that volatility will collapse eventually.
Tomorrow is the last day of the first sub-small cap power period. I will close my TNA sometime tomorrow as I stick to the seasonal dates for the best odds. The next sub period takes place during the last 6 trading days of November.
Markets are continuing beautifully with small caps taking the lead on this second day for the first sub-Small Cap Power Period of 2014. My portfolio is working nicely although volatility is still keeping its hands in the cookie jar. This move higher has been as fast and furious as was the move the lower, once it stables out for a couple of days, I expect that volatility will collapse further. I am happy with my current positions and I will take some partial profits in ESI since it is up over 10%. Here is the IWM chart.
For a several years I have written about this seasonal phenomenon that is used by several hedge funds to gain an edge. Tomorrow (Thursday) is the first buy day of the first of three 2014 "sub-periods that occur in the fourth quarter; (we call them 'power periods') which are especially potent and consistently positive. They are:
Power Period #1: The last two trading days of October and first two trading days of November
Power Period #2: The last six trading days of November and first three trading days of December
Power Period #3: The last seven trading days of December"
I first read about this some years ago as it is described by AlphaIM for their Alpha Bonds Strategy. They use index funds that give them a beta of 1.5. Quotes/italics in this post is the work of Alpha Investment Management. There are plenty of ETF's out there that track the small cap index fund - The Russel 2000 or the RUT. The directly correlated index fund that can be traded is $IWM. I have previously used $TNA successfully which gives a beta of 3x. This strategy can also be played by finding bullish patterns of small cap stocks that are likely to have a stronger edge during this period. In my experience, it is best played with all three sub-periods.
"These three periods exploit other lesser known "sasonal factors" in addition to small cap dominance at year end. For example, it is well established that the market does better during the month-end and month beginning period than other times. Also, the market tends to produce above-average returns around holiday periods (Thanksgiving and Christmas).
AlphaIM has been tracking these statistics since 1979. Over the past 35 years, "the 1.5 Beta Statistics shows that the two historical losses have been minor while the average trade has generated gains of 3.2%. Overall, the three power periods have produced an average gain of 9.6% per quarter while exposing assets to market risk just 8% of the time each year.
We know of no other market-based factors which come close to delivering this kind of return with such unerring consistency.
Disclosure: Past performance is not a guarantee of future performance. The Russell 2000 is an index and cannot be used in actual investing. Index funds which replicate the index may not produce returns exactly matching the index. The data presented does not take into consideration fees, expenses or trading costs. Hypothetical or model portfolios also cannot reflect management decisions which may deviate from the methodology presented."
Markets are hanging in there finding some sideways action to let the 8 ema catch up. Crude oil is still low but seems to have found support in the $80 area as it bases out. I don't expect it to move higher very quickly, but as long as it doesn't go much lower, I think we are in good shape.
The action in the indices will set up some nice entries and was the action I have been looking for. I notice stocks are starting to set up better for entries. SPY is consolidating it's move higher and crunching the 8 ema below with the 50 sma above.
Meanwhile, I am holding what I have and setting hard stops today as I spend the day with my family as we have taken a couple of days off together. I will set hard stops for today and will update them tomorrow. I have posted the stops on my front page portfolio which are 17.83 for TOUR which is continuing to set up nicely, and 34.23 in TRN. TRN took a dip this morning but has recovered nicely thus far. The stop is below the morning's low.
Here is the SPY chart.