T2108 Update (April 5, 2013) – Churn Continues. Positive Bias Remains.

(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are highly likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)

T2108 Status: 48.0%
VIX Status: 13.9
General (Short-term) Trading Call: Hold

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar)

Commentary
As luck would have it, the SSO put I bought on Thursday to play the T2108 Model tripled in value when I sold it in the wake of Friday’s opening sell-off. The S&P 500 trembled as U.S. unemployment numbers were much worse than expected. However, after the index tagged its lower-Bollinger Band, I realized the action set up a fresh buying opportunity. I am now long SSO calls. (You can follow my real-time commentary on twitter. The trades are tagged with the #120trade hashtag.). Those calls increased in value over 30% by the close as the S&P 500, almost predictably, bounced off the lower-BB. After it is all said and done, the S&P 500 has still gone nowhere for a month.

The opening excitement drove the VIX right to its 200DMA and just above the all-important resistance/support level of 15.3. Again, almost predictably, the VIX soon faded from these resistance levels and closed right where it closed the previous day. This action sets up a likely positive day on Monday where I will most likely sell my SSO calls.

T2108 dropped just slightly to 48.0%. It first dropped below 50% two days ago. The S&P 500’s performance since then is exactly 0%. This is important because my T2108 model suggests the S&P 500 will have a positive bias until this “under period” lasts about 30 days. The chart below shows historical performance of the S&P 500 from the first day T2108 closes below 50% to the first day it rises above 50%. The blue dots show actual performance. The red dots show the predicted performance (using Support Vector Machines {SVM} with a radial projection for you data mining/machine learning types). The x-axis measures how long (the duration) T2108 remains below the 50% threshold.

What this chart does not show is the range of expected performance WHILE T2108 makes it way above the 50% threshold again. Making the drawdown risks explicit is one of the many to-dos ahead of me before I fully publish my results of the T2108 overhaul. Note well that being able to examine S&P 500 behavior above and below ANY threshold is one of the several improvements I have made. This rethink is part of what makes the concepts of overbought and oversold a lot more squishy and a little less relevant to the overall analytic framework. Stay tuned for more.

Daily T2108 vs the S&P 500

Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)

Weekly T2108

*All charts created using freestockcharts.com unless otherwise stated

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: long VXX shares and puts; long SSO calls