Diary of a Financier

Bottom & the bounce

In Capital Markets on Thu 13 Jun 2013 at 23:08

What a relief! After the Bruins lost the Stanley Cup finals opener in 3 OTs, after US equity futures were bleeding down 60bps, and after Japanese markets crashed down 6%, I could not sleep last night. Then, a +1.48% SPX rally cured all ills today.

Amid the carnage last night, all I had to ease my mind was the 2007 analogue. That gave me a little reassurance: I could see the commensurate Head & Shoulders bottom having already materialized this week, which meant that the futures’ overnight lows (and the low open) matched the doji hammer also seen in 2007.

On Wednesday, I had added to my equity growth theme by accumulating a bigger stake in the Mid Cap Growth ETF ($IWP) and a small 2% position in Large Cap Growth ($IWF). I don’t expect to add to the latter, but I will grow the IWP allocation to maybe as high as 8% from the 4% current. After all, I’ve been very open about my expectation for growth, especially mid cap, to be a material outperformer (vs. value) in the coming months.

Once I committed Wednesday’s capital to the long side, you have no idea how hard it is—emotionally and psychologically—to watch a bloodbath like that all night. I’m obviously glad I stuck to my guns though, repeatedly pointing out the oversold conditions of intraday fractals and bullish pattern setups, all of which are etched into the intraday charts for posterity’s sake. These developments will serve as a good launch pad for the next leg higher:

SPY 1-min & 15-min

SPY 1-min & 15-min- H&S bottom with bull divergence

I started today with only 2% cash, so I chose not to use my dry powder to buy the ugly open. Frankly, I didn’t have the guts to wade even deeper, having already felt like I was swimming against a strong current. But, as the market started to reverse higher mid-morning, I bought a new 4% position in the Russell 3000 All Market ETF ($IWV). At that point, the portfolio was effectively dipping into margin for cash, so I waited until the close to liquidate the rest of my $TIVO stake (at a disappointing 5% gain) and $BPL (+33%), which more than covered the debit balance.

With all this activity, the portfolio’s allocation has reached 66/31/3% (stocks/bonds/cash). Beta is back up to 0.92 vs 0.76 benchmark, from a low of ~0.81, and sigma 1.42 vs 0.82 benchmark. I really like my positioning here, overweight the 60/40 benchmark and only getting heavier on the risk.

A quick look at SPY’s daily chart shows the 50-day SMA having served as a solid support, allowing the pricetrend to setup a launch from this bull flag:

SPY daily

SPY daily

~~~~

Thus, I’m pretty bullish on the coming weeks. To supplement traditional quantitative, fundamental, and technical analysis, the fourth quadrant of my multi-disciplined approach is my comparative work using historical analogues, which have proven quite the precise, reliable guides to the market’s short/medium term fluctuations. While I have a confident appraisal of the first three inputs, I need to reassess my 2007 analogue. As I said earlier this week:

“If this were the bottom, the shallowness and the brevity (compared to 2007) would force a terminal departure in the analogue’s weekly comparison–despite the concurrence with its daily precedent. Void of an unexpected recoupling, that means I’ll have to reassess the roadmap going forward.”

2013’s rally has been uniquely short, steep, and straight–not unlike 2007’s. Yet, the shallowness of this recent correction (-5.20% vs -11.25% in 2007) will alter the contour and trajectory of our wormhole higher. Recall the market’s sensitivity to initial conditions, in that slight alterations to sentiment and psychology have a profound resonance. The 2007 analogue suggested that SPY would rally +13% in just under 4 months from today’s trough before the next garden-variety drawdown. Thinking even further ahead, it warns of a major top to this cyclical bull around 5 months or +14% above today’s print. These can be my base case expectations for the time being. Indeed it is too soon to abandon 2007’s precedent just because of divergent stochastics, but as the analogue works on recoupling across all fractals, I’ll waste no time in searching for a successor–lest I succumb some cognitive bias.

–Romeo

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  1. […] by [the market's reaction to] Ben Bernanke’s post-FOMC meeting press conference. I had voiced concerns that the 2013 priceaction had irritatingly diverged from its 2007 […]

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