Berney; I went and clicked and the link has stopped working here
is a copy.
Crossed Swords
quicken.excite.com
<h4> Crossed Sword chart use back button to return </h4> </a>
CROSSED SWORDS
Remember above Chart of Mar-Apr 1999 It will go out of date as this
gets older right now (04-22) It's one of the best Crossed Swords
I've seen. The MDY is the MID CAP index, the SPY is the S&P 500.
What does it mean ?
Well it is going against the Nature of The Market, on the 14th
it signaled real trouble , I posted it on SI and by the 19th
the Market did a big dip.
In time the MDY will cross the Spy again but going the other way.
This is a Key to understanding what I call the MO MO market, as well
as my Head/Tail strategy.
Also remember index funds buy more of the big caps when they buy, so in time that tends to make big caps even bigger. Things can upset a few of them, and do from time to time but general rule #1 is big caps get bigger.
As for the MID cap vs the S&P500 rule #2 The mid cap index passes it's best runners to the S&P while the S&P can keep it's best runners so over time the S&P has a natural edge built in while the Mid Cap is handicapped
Going to sea I can buy the SPY long and Short the MDY equal money
and over a long period of time I do not have to worry. It's called
a hedge It won't make me rich but it will make money , and it's as
risk free as anything in the Market note the next 3 yr chart.
quicken.excite.com
3 Year MDY vs SPY Chart , use back button to return
The above hedge made 48% in 3 years with out any RISK !
What could you have done legging in and out of the MDY short ? or
legging out of the Spy long on down turns ? But just think not touching
it; it made 16% a year on your money, ( risk free is the theme here ).
Would it always do this good ? NO in a bear market it would not,
however it would still make some, because the MID cap can not do as
good as the S&P 500 so the short MDY makes more than the long
S&P losses in crashes. I'm not trying to recommend this hedge as I
know most traders would like to make more than 16% a year ,
I'm leading up to a point but for now just bear with me.
If you read Value Line you will see they point out that
in a crash historically Mid and Small caps crash much harder than Large
caps. In the big correction from July to Oct 98 the
MDY went much lower than the SPY. So Even if you were long the SPY ,
as long as you were short the MDY ( equal $ ) you made money even
during the crash. <br>
You may be tempted to say the MDY will come
back up to the SPY , but it won't. If you remember the first chart
you see the MDY crossing the SPY , but that's a short time frame. !
It can do that for short runs not long ones. It's when it does that
in a short time frame you get a signal the Market is going to
turn. Over any long term the SPY will stay ahead, it's built into
the way they are weighted and the SPY stealing the best stocks from
the MID cap index just about the time they are ready to really grow.
The smaller ones can and do run up faster at times , also down faster
and there is nothing unusual or alarming to see smaller caps out do the
larger ones.. BUT the crossed sword is unusual as they are running
up when the larger ones are going down That type of rotation don't
work, when small ones do go up fast if it's at the expense of the
BIG ones to the extent it drags them down then the mutual funds are
window dressing and it's a sign that new money is not available.
I hate to say it but it takes NEW money coming in to just keep the
market on an even keel, without new money the market sinks under it's
own overhead. In a way it's sort of like a Ponsi Scam but we can keep it
going for ever as long as we get new money from "profits , dividends
and interest and wages " so that we can buy more stocks.
Well all that said , how has the SPY long & MDY short done Year to
date. You can go back to the charts and while there check
different time frames.
It's only made 7% YTD , but I can show you a lot of funds that
haven't done tath good & I expect it will churn out it's 16% before
the year is up.
If you take the above and extrapolate it you can picture my head
tail market timing style. What happens with the MDY vs SPY also happens
inside the S&P DOW and NDX Now it takes work to break an index
apart and get out the BIG caps( head ) then the Small ones ( tail)
and watch them do much the same. The Top 50 BIG CAP stocks in the
S&P hold at this time 54% of that indexes market cap, the other 450
stocks only have 46% put together. The top 5 in the NDX have about
45% of her. Most cap weighted indexes are like that & If you look
inside and chart them separate you get what I call a head/tail signal.
That's my Kind of TA on an Index.
Foot notes
Normal TA on an index can be be miss-leading , it's not the fault
of the TA , but an index is not always what it looks like.
when it comes to indexes they do not measure the Money
very good ( market cap of the index ) and the tail can be
holding the index higher than it would be.
I see it as a "liquid level" & the index adjusting to that liquid
in a delayed fashion when the liquid level don't match the index.
IF BIG Caps are relatively down, when the index peaks then the TOP
is foam & not liquid, it's when the relative liquid of the index
goes south that we fairly soon get an Adjustment.
I like the word Adjustment better than correction because that's
really what the INDEX does, it adjusts to the liquid level.
So the liquidity of the index is important and I don't know how
to get at that without taking it apart.
I also call it the tail wagging the dog, this happens most in
the DOW 30 as they are not even weighted by market cap.
As I write this a 1 point move on GE represents a lot of money
moving ; as it has a 358B cap, BUT take UK with only 7B cap, GE
is like 50 times more liquid yet a 1pt move in either one Moves
the DOW the same amount as the other would. Hence UK can run
up the index trading a few dollars as fast as GE trading 50 times
as much or .GE falls $5 the liquid falls like crazy, yet UK can
support the index if it goes up $5 to where you see no change.
However a lot of money went off the table even if the index
didn't move. It's not as bad with cap weighted ones, as with the
Dow, but it's always good to look inside and at least check
the volume on the ones going down compared to the volume on
the ones coming up, as It's the money flow you want to watch
more than just how high or low the index is. On cap weighted
indexes keep an eye on the real big caps / comparing their
moves to the smaller ones and try to picture how the liquidity
inside of the index is changing. In short Follow the Money.
general rule #1 is big caps get bigger.
rule #2 The mid cap index passes it's best runners to the
S&P so over time the S&P has a natural edge built in
rule #3 Remember crossed swords can mean trouble
( note when the normal laggard goes up while the normal winner
goes down at the same time )
rule #4 Follow the Money
rule #5 go to rule #4
Good luck and if you go to sea and can't watch the market
just long the SPY and short the MDY, equal $
( & right now is a very good time, as the crossed sword will fix
itself in time & the MDY will come back under the SPY ) so the
hedge entered now has an additional edge.
Forget I said buy the SPY , use a no load S&P tracking fund
for the long side, as you can buy the exact dollar amount that
you short the MDY.
After thought
I've said too much for a lot of people to follow, and likely said it
poorly , but I need to add; - this is just a small part of what
I try to look at, it's not a cure all and end all , not if your
a trader, as there is that ever loving bond market to keep an
eye on too. Later I'll try to write about the Spiders and some
fast and dirty tricks that let you see Inside the S&P500
Good luck to you.
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