All posts by admin

What to Watch in Energies

With crude oil hitting its highest level since November of 2014, the energy sector is suddenly drawing a lot of interest.  But there are few caveats that investors might want to keep in mind before getting too far ahead of themselves.

(BTW: If you enjoy reading JayOnTheMarkets.com – heck, even if you hate reading JayOnTheMarkets.com – please tell others and encourage them to stop by, “Like” an article, link an article, etc..  Thanks, The Management)

Energy Seasonality

Figure 1 (from www.Sentimentrader.com, which is quickly becoming one of my favorite sites) displays the annual seasonal calendar for ticker XLE – the SPDR Energy ETF. While it should be pointed out that it certainly is not like every year plays out like this chart, the primary point is that the “meat” part of year of from the end of January through the end of April is nearing the end of the line.0Figure 1 – XLE Seasonality (Courtesy: www.Sentimentrader.com)

XLE Overhead Resistance

XLE has had a terrific month of April, rallying over 14% since the low on 4/2.  And while it has been an impressive show of momentum, a look at the “bigger picture” points to some key levels of potential resistance just ahead.

Figure 2 is a monthly bar chart of XLE with two significant resistance levels drawn (at roughly $78.25 and $80.50). XLE has failed twice previously at roughly $78.40 – in December 2016 and again in January of 2018.1Figure 2 – XLE Monthly with overhead resistance (Courtesy ProfitSource by HUBB)

On the plus side, XLE is clearly trending higher at the moment and there is still another 6.4% and 9.4% of upside potential between the current price and the resistance levels drawn in Figure 2.  So short-term upside potential remains.

The only real “warning” I am raising is to pay attention to “what happens (if and) when we get there” (“there” being the $78.25-$80.50 range).

Jay’s Energy ETF Index

I created and follow an index of all manner of energy related ETFs (it combines traditional fossil fuel related ETFs with alternative energy source ETFs). A monthly chart with a significant resistance level drawn appears in Figure 3.2Figure 3 – Jay’s Energy ETF Index (Courtesy AIQ TradingExpert)

Figure 4 “zooms in” on Figure 3 using a daily bar chart of my Energy ETF Index.  As you can see, as nice as the latest rally has been, there is a “day of reckoning” looming out there somewhere if the energy sectors keeps going and retests this significant level.

2aFigure 4 – Jay’s Energy ETF Index; Daily (Courtesy AIQ TradingExpert)

For the record this index is comprised of:

GEX – Alternative Energy

KOL – Coal

LIT – Lithium

NLR – Nuclear

OIH – Oil Service

TAN – Solar

UGA – Gasoline

UHN – Heating Oil

UNG – Natural Gas

URA – Uranium

USO – Crude Oil

XLE – Energy Sector

Summary

Some might interpret this piece as a bearish to neutral word of warning related to the energy sector.  In reality I am pretty agnostic when it comes to energy and (sadly) can’t offer you a “prediction” that would do you any good.

But I will be watching closely to see what happens to XLE and my own index if and when the key resistance levels are tested – especially if that test occurs after the end of the most favorable February through April period.

Commodity related assets – such as energy, especially fossil fuels – appear “due” for a favorable move relative to stocks.  If and when these key resistance levels are pierced we could see an “off to the races” situation unfold.

Until then, be careful about  “bumping your head.”

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

Yes, the U.S. Dollar is at a Critical Juncture

If you have read any of my pieces lately you are already aware that as it relates to the financial markets a lot of things are presently at a critical juncture (including my sanity, but I digress).  Today let’s add the U.S. Dollar to that seemingly ever longer list of financial areas that appear to be at a crossroads.  And this one has some large implications simply because a lot of other markets are affected at least to some extent by what happens in the dollar.

Figure 1 displays the Spot U.S. Dollar on a monthly basis.

1

Figure 1 – U.S. Dollar Monthly (Courtesy ProfitSource by HUBB)

The reality is that there is no one definitive price at which to draw a “definitive” line in the sand.  So I arbitrarily picked two.  There is nothing “magical” about these two lines and a move above or below either does not technically “prove” anything.  Still, as far as this range goes, a lot of previous price moves have “gone here to die” so to speak.

Now this is the point in the article where a skilled analyst would explain in painstaking detail why the dollar is absolutely, positively destined to move higher (or lower) from here.  Sorry, folks I honestly don’t know. But there are two things I do know which might still prove useful:

1) For every prognosticator out there pounding the table that the dollar is sure to move higher there is another (equally slightly crazed) prognosticator averring that the dollar is destined to decline.  And the key thing to note is that they both can make a pretty compelling case.

2) A lot rides on which way the dollar goes from here, because there is no shortage of markets that react – at least in part – to the movements of the U.S. dollar.  This means that alot of trading opportunities will be affected/created by the next big move from the dollar.

A few examples appear in Figure 2 below which displays the inverse nature of the correlation between the U.S. Dollar (using ticker UUP as a proxy) and the market in question (for the record, a figure of 1000 means the market moves exactly like the dollar and a figure of -1000 means the market moves exactly inversely to the dollar).

2

Figure 2 – Correlations to U.S. Dollar (Courtesy AIQ TradingExpert)

Now the fact that foreign currencies (ticker FXE – which tracks the Euro) move inversely to the U.S. Dollar is fairly obvious.  But note that on this list are:

*Foreign Bonds and U.S. Bonds (BWX and TLT)

*Precious Metals (GLD and SLV)

*Commodities (like coffee, soybeans and crude oil)

*Broad Commodity Indexes (DBC and GSG)

This encompasses a pretty darn wide swath of the trading world.  And every single one of them will be influenced to some extent by which way the dollar goes from here.

As you can see in Figures 3 through 6 (click to enlarge any of the charts), what happens to the U.S. Dollar can matter a lot to what happens in these markets.

3

Figure 3 – Dollar vs. Euro (Courtesy AIQ TradingExpert)

4

Figure 4 – Dollar vs. Bonds (Courtesy AIQ TradingExpert)

5

Figure 5 – Dollar vs. Metals (Courtesy AIQ TradingExpert)

6

Figure 6 – Dollar vs. Commodity Indexes (Courtesy AIQ TradingExpert)

Summary

So the bottom line is that I do not know which way the dollar goes from here.  But I do know that whichever way it goes a lot of “things” will likely go “the other way.”  And everything listed in Figure 2 represents a lot of trading opportunities.

This represents a good time to invoke:

Jay’s Trading Maxim #17: (with credit given to George and Tom at Optionetics back in the day): Investing success involves two “simple” steps. #1) Spot opportunity.  #2) Exploit opportunity.  Everything you do as a trader or investor falls into one of these two categories.

A bunch of opportunities may soon be spotted (assuming the dollar actually ever does get around to deciding which way it wants to go…).

So focus here, people, focus…

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

“Yes”, We are at a Critical Juncture

There are times when the market just moves along from day-to-day and us “junkies” might hang on every move but to the average investor what happens today or tomorrow is really not all that meaningful in the whole big spectrum of things.

And then there are times like now.  As you can see in Figure 1, the major market indexes are struggling and are testing their respective 200-day moving averages.  How this “dance” plays out may have important implications for virtually all stock market investors.

(click to enlarge)

1

Figure 1 – Major indexes “on the edge” (Courtesy AIQ TradingExpert)

First off let me say this: There is nothing “magic” about a 200-day moving average.  It was interesting that the other day when the S&P 500 Index closed below its 200-day average (it was the only major index to do so) roughly 22,367 articles appeared on the internet sounding the alarm.  Now I do pay a lot of attention to moving averages, but more to get a sense of trend than as automatic buy and sell triggers.  Which leads me to invoke:

Jay’s Trading Maxim #81: Contrary to popular belief, a price drop below a “key” moving average does NOT imply the onset of immediate and total Armageddon.

And

Jay’s Trading Maxim #81a: Um, but it could. So best to pay attention.

3 Possibilities

Actually there are a few others but the most likely outcomes – and the implications – are:

1. A reversal back to the upside – If the major averages hold here above their recent lows.  If this happens a strong rally to the upside is a strong possibility. Which is one reason it is too soon to “jump ship.”

2. A breakdown by all major indexes – If a majority of the major indexes break down below their recent lows investors are urged to take defensive measure.  Whether that involves selling shares/funds/ETFs/etc or hedging with options and/or inverse products is up to each investor.

3. A whipsaw – One other dreaded possibility involves both of the above – i.e., the average break down far enough briefly to trigger a defensive action only to quickly reverse back to the upside. This often leaves a lot of investors standing there dumbstruck and unable to pull the trigger to get back in.

Like I said, this is a critical juncture.  Whatever happens, investors need to pay attention and stand ready to, a) do nothing, or, b) take defensive action, or, c) take defensive action and then undo the defensive action and get bullish again (in the event of a whipsaw).

Steady, people, steady….

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

The Pause That $@%! Refreshes?

A glance at the history of the Presidential Election Cycle in the stock market suggests that we should:

*Not be surprised that the stock market is foundering a bit at the moment

*Not be terribly surprised if things get worse – particularly during the months of June through September of this year

*Anticipate that if the market does take a bigger hit in the months ahead that it may well set the stage for another significant advance into the middle of the mid-term election year.

A Little Presidential Election Cycle History

For our purposes we will start the test on 12/31/1932 and define the cycle as containing the following four years:

*Post-Election

*Mid-Term

*Pre-Election

*Election

First the Bad News: Figure 1 displays the growth of $1,000 invested in the S&P 500 Index (using monthly closing price data) ONLY from the end of January of each Mid-Term Election Year through the end of September of each Mid-Term Election Year (i.e., the latest iteration began on 1/31/2018 and will extend through 9/30/2018).

1

Figure 1 – Growth of $1,000 invested in S&P 500 Index ONLY from Jan31 through Sep30 of each Mid-Term Election Year (1932-2018)

As you can see, the cumulative performance for the S&P 500 Index during the Mid-Term February through September period is a fairly painful -44.3% (for the record, the cumulative gain from buying and holding the S&P 500 from 12/31/1932 through 2/28/2018 was +39,288%, so yes, this qualifies as a period of some serious under performance).

That being said, it should be noted that this Mid-Term Feb through Sep period showed a gain 12 times and a loss only 9 times.  So a “rough patch” is no sure thing. The problem is that when this period is bad, it is “very bad”.  As you can see in Figure 3 later, this period experienced 6 losses in excess of -17.5% (FYI, a -17.5% decline from the 1/31/2018 close of 2823.81 would see the S&P 500 Index hit 2330).

Then the Good News: On the brighter side, Figure 2 displays the growth of $1,000 invested in the S&P 500 Index (using monthly closing price data) ONLY from the end of September of each Mid-Term Election Year through the end of July of each Pre-Election Year (i.e., the latest iteration begins on 9/30/2018 and will extend through 7/31/2019).

2

Figure 2 – Growth of $1,000 invested in S&P 500 Index ONLY from Sep30 of each Mid-Term Election Year through Jul31 of each Pre-Election Year (1932-2018)

Notice any difference between Figures 1 and 2?  This favorable period saw the S&P 500 register a gain during 20 of the past 21 completed election cycles (i.e., 95% of the time), with an average gain of +21.6%, and a cumulative gain of +3,730%.

Figure 3 displays the numerical results for each cycle.

Mid-Term Pre-Election Mid-Term Feb through Sep Mid-Term Oct thru Pre-Election July
1934 1935 (18.5) 21.8
1938 1939 14.5 (1.6)
1942 1943 0.5 32.0
1946 1947 (19.4) 5.3
1950 1951 14.1 15.2
1954 1955 23.9 34.7
1958 1959 20.0 20.9
1962 1963 (18.3) 22.9
1966 1967 (17.6) 23.8
1970 1971 (0.8) 13.4
1974 1975 (34.2) 39.7
1978 1979 14.9 1.2
1982 1983 0.0 35.0
1986 1987 9.2 37.8
1990 1991 (7.0) 26.7
1994 1995 (3.9) 21.5
1998 1999 3.7 30.6
2002 2003 (27.9) 21.5
2006 2007 4.4 8.9
2010 2011 6.3 13.2
2014 2015 10.6 6.7

Figure 3 – Unfavorable versus Favorable portions of Election Cycle

Summary

So what does it all mean?  Well, it means a few things. By my objective measurements the overall trend is still “bullish” and a number of “oversold” indicators are suggesting that a bounce of some significance may be at hand.  That being said, if the major market indexes do start to break down below their respective 200-day moving averages investors may be wise to take some defensive action.  If the market does experience a further break between now and the end of September, it may well be “one of the painful kind.”  So if you haven’t already, make your contingency plans now.

4

Figure 4 – Major Market Indexes with 200-day moving averages (Courtesy AIQ TradingExpert)

At the same time, as the end of September of 2018 nears – especially if the stock market has experienced or is experiencing at the time, a significant break – remember that history suggests that that will be a good time to “think bullish.”

Call me a cynic, but my guess is that alot of investors will do exactly the opposite on both counts (i.e., hang on if the market breaks down and then sell as the next bottom forms – Same it as ever was….)

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

Prepare to Bounce

2018 sure was a great year for the stock market.  For almost a month anyway.  Since then, not so much.  And on the heels of last week’s selloff a lot of pundits and prognosticators are suggesting more loudly that the Great Bull Run is dead. And maybe they are right.  But maybe not.

It is almost always a mistake to hang your hat on one indicator to guide your actions going forward.  But at the same time, sometimes one indicator generates a signal so clear it perhaps should grab your attention.  Let’s look at one that is on the verge of sending an important signal.

The VixRSIRatio Indicator

This is an indicator that I developed a number of years ago by basically – I am going to use some highly technical terms here to describe the process I followed so please try to stay with me – mashing together several other indicators from other people.  If you are interested in the actual calculations they appear at the end of the article.  For now, just know that I refer to it as VixRSIRatio.  As I follow it, it gives meaningful signals very infrequently.  But that is OK as the signals it does give often prove to be useful.

For our purposes we will apply it to ticker SPY – an ETF that tracks the S&P 500 Index. The rule is simple:

*A “Bullish Alert” occurs when VixRSIRatio drops to -210 or below and then turns up.

That’s it. Now please note the use of the phrase “Bullish Alert” and the lack of the words “You”, “Can’t” and “Lose”, as well as the lack of the phrase “by putting all of your money in the market at the exact moment a signal occurs.”

This is key.  Also note that there is nothing “magic” about the value -210. Nothing scientific about it. It just seems like a useful cutoff.  Now let’s look at the “Bullish Alert” signals in recent years.  They appear in Figures 1 through 4.

1

Figure 1 – Jay’s VixRSIRatio; 2014-2018 (Courtesy AIQ TradingExpert)

2

Figure 2 – Jay’s VixRSIRatio; 2010-2013(Courtesy AIQ TradingExpert)

3

Figure 3 – Jay’s VixRSIRatio; 2006-2009 (Courtesy AIQ TradingExpert)

4

Figure 4 – Jay’s VixRSIRatio; 2001-2005 (Courtesy AIQ TradingExpert)

As you can see in Figures 1 through 4:

a) Readings below -210 tend to be followed by – at the least – decent trading opportunities.

b) Often these readings presage significant market advances

c) And alas, sometimes the signals come too soon and/or are not followed by much of an advance.

The Here and Now

As of 3/23/18 the VixRSIRatio for ticker SPY stood -354.  So clearly “Buy Alert” is at hand.  So the obvious question is “What comes next”?  Will it be a, b, or c above?

As always, time will tell.

Calculations

In a nutshell, VixRSIRatio combines Larry Williams’ Vixfix indicator with Welles Wilder’s 3-day and 14-day RSI indicators to create two more indicators – VixRSI3 and VixRSI14.  We then divide VixRSI3 by VixRSI14 and invert the whole thing (so that we get an indicator that gives negative readings when the market goes down).

Now you see why I put this at the end….

Below is the code for AIQ Expert Design Studio

############## Larry Williams Vixfix #################

xx is 15.

hivalclose is hival([close],22).

vixfix is (((hivalclose-[low])/hivalclose)*100)+50.

############ Welles Wilder RSI 3-day ##############

Define days3 5.

U3 is [close]-val([close],1).

D3 is val([close],1)-[close].

AvgU3 is ExpAvg(iff(U3>0,U3,0),days3).

AvgD3 is ExpAvg(iff(D3>=0,D3,0),days3).

RSI3 is 100-(100/(1+(AvgU3/AvgD3))).

############ Welles Wilder RSI 14-day ##############

Define days14 27.

U14 is [close]-val([close],1).

D14 is val([close],1)-[close].

AvgU14 is ExpAvg(iff(U14>0,U14,0),days14).

AvgD14 is ExpAvg(iff(D14>=0,D14,0),days14).

RSI14 is 100-(100/(1+(AvgU14/AvgD14))).

############Jay’s VixRSIRatio ##############

VixRSI3 is expavg(vixfix,3)/expavg(RSI3,3).

VixRSI14 is expavg(vixfix,3)/expavg(RSI14,3).

VixRSIRatio is -((((VixRSI3/VixRSI14)-1)*100)-50).

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

Biotech + Gold (Updated)

In this article I wrote about an index I follow that combines the biotech sector with the gold stock sector. I also wrote about “one way” to trade that index.  This article builds on that piece and adds a new “rule” to create more trading opportunities.
The BIOGOLD Index
Figure 1 displays the index that I created using AIQ TradingExpert.  It combines ticker FBIOX (Fidelity Select Biotech) with ticker FSAGX (Fidelity Select Gold).
1
Figure 1 – Jay’s BIOGOLD Index (Courtesy AIQ TradingExpert)
Also included in the lower clip is an indicator referred to as RSI32, which is the 2-day average of the standard 3-day RSI.
The Old System
In the original article I tested an approach that works as follows using monthly data:
*When the RSI32 drops to 32 or below, buy BOTH FBIOX and FSAGX
*After a buy signal, sell both funds when RSI32 rises to 64 or higher
For results, please see the original article.
The New System
The “new rules” are as follows:
A “buy signal” occurs when either:
*The RSI32 drops to 32 or below
*The RSI32 drops below 50 (but not as low as 32) and then reverses to the upside for one month
After either of the buy signals above occurs, buy BOTH FBIOX and FSAGX
*After a buy signal, sell both funds when RSI32 rises to 64 or higher
Figure 2 displays the BIOGOLD Index with various buy and sell signals marked.
2
Figure 2 – Jay’s BIOGOLD Index with RSI32 signals (Courtesy AIQ TradingExpert)
To test results we will:
*Assume that after a buy signal both FBIOX and FSAGX are bought in equal amounts
*We will assume that both funds are held until RSI32 reaches 64 or higher (i.e., there is no stop-loss provision in this test)
For testing purposes we will not assume any interest earned while out of the market, in order to highlight only the performance during active buy signals. Figure 3 displays the hypothetical growth of $1,000 (using monthly total return data) using the “system”.
3
Figure 3 – Hypothetical Growth of $1,000 using Jay’s BIOGOLD System (1986-present)
Summary
For the record, I am not “recommending” that anyone go out and initiate trading biotech and gold based on what I have written here.  Before trading using any approach it is essential for a trader to do their own homework and carefully consider all of the pro’s and con’s associated with any specific approach.  For example, while the trade-by-trade results for the above look reasonably good, it should be noted that there have been 4 separate drawdown’s in excess of -19% along the way, including a maximum drawdown of -37% in 2008.  In considering any approach to trading it is essential to first think long and hard about how well one would “weather the storms”, BEFORE focusing on potential profitability.
To put it more succinctly is the simple phrase “Don’t cross the river if you can’t swim the tide.”
Jay Kaeppel
Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

Trend Following in One Minute a Month

In the article linked below, investor and Forbes columnist Kenneth Fisher writes about what to look for at a market top (How to Tell a Bull Market from a Bear Market Blip). One piece of advice that I have heard him offer before is to wait at least 3 months after a top in price to worry about whether or not we are in a bear market.  That is good advice and provided the impetus for a simple trend-following model I follow based on that “wait 3 months” idea.

First, a few key points:

*Trend-following is NOT about picking tops and bottoms or timing the market with “uncanny accuracy”.  So don’t expect any trend-following system to do so.

*The primary edge in any trend-following method is simply missing as much of the major soul – and capital – crushing bear markets as possible, with the understanding that you will miss some of the upside during bull markets.

The Good News:

*Starting in November 1970 this system has beaten a buy and hold strategy

*This system requires no math. There are no moving averages, etc.  Anyone can look at a monthly S&P 500 bar chart and generate the signals.  And it literally takes less than 1 minute per month to update.

The Bad News:

*Every trend-following method known to man experiences whipsaws, i.e., a sell signal followed by a buy signal at a higher price.  This system is no exception.

*Due to said whipsaws this system has significantly underperformed the S&P 500 buy-and-hold since the low in early 2009.

For what it’s worth, my educated guess is that following the next prolonged bear market, that will change.  But there are no guarantees.

OK, all the caveats in place, here goes.

Jay’s Monthly SPX Bar Chart Trend-Following System

*This system uses a monthly price bar chart for the S&P 500 (SPX) to generate trading signals.

*For the purposes of this method, no action is taken until the end of the month, even if a trend change is signaled earlier in the month.

*A buy signal occurs when during the current month, SPX exceeds its highest price for the previous 6 calendar months.

A sell signal occurs as follows:

a) SPX registers a month where the high for the month if above the high of the previous month. We will call this the “swing high”.

b) SPX then goes 3 consecutive monthly bars without exceeding the “swing high.” When this happens, note the lowest low price registered during those 3 months. We will call this price the “sell trigger price.”

c) An actual sell trigger occurs at the end of a month when SPX register a low that is below the “sell trigger price”, HOWEVER,

d) If SPX makes a new monthly high above the previous “swing high” BEFORE it registers a low below the “sell trigger price” the sell signal alert is aborted

Sounds complicated right?  It’s not.  Let’s illustrate on some charts.

In the charts that follow:

*An Up green arrow marks a buy signal

*A Down red arrow marks a sell signal

*A horizontal red line marks a “sell trigger price”.

Sometimes a sell trigger price is hit and is marked by a down red arrow as a sell signal.  Other times a sell trigger price is aborted by SPX making a new high and negating the potential sell signal.

spx trendf 1

Figure 1 – SPX signals 1970-1979 (Courtesy AIQ TradingExpert)

SPX trendf 2

Figure 2 – SPX signals 1980-1989 (Courtesy AIQ TradingExpert)

SPX trendf 3

Figure 3 – SPX signals 1990-1999 (Courtesy AIQ TradingExpert)

SPX trendf 4

Figure 4 – SPX signals 2000-2009 (Courtesy AIQ TradingExpert)

SPX trendf 5

Figure 5 – SPX signals 2010-present (Courtesy AIQ TradingExpert)

To demonstrate results we will use monthly close price data for SPX.  If the system is bullish then the system will hold SPX for that month.  If the system is bearish we will assume interest is earned at an annual rate of 1% per year.

Figure 6 displays the results of the System versus Buy and Hold starting with $1,000 starting November 1970 through 1994 (roughly 24 years).

6

Figure 6 – Growth of $1,000 invested using System versus Buy-and-Hold; Nov-1970 through Dec-1994

Figure 7 displays the results of the System versus Buy and Hold starting with $1,000 starting at the end of 1994 through the most recent close.

7

Figure 7 – Growth of $1,000 invested using System versus Buy-and-Hold; Dec-1994 through Feb-2018

Figure 8 displays the growth of $1,000 generated by holding the S&P 500 Index ONLY when the trend-following system is bearish.  In Figure 8 you will see exactly what I mentioned at the outset – that the key is simply to miss some of the more severe effects of bear markets along the way.

8

Figure 8 – Growth of $1,000 invested ONLY when trend-following model is Bearish; 1970-2018

Finally, Figure 9 displays trade-by-trade results (using month-end price data).

9

Figure 9 – Trade-by-trade results; Month end price data

Summary

So is this “The World Beater, Best Thing Since Sliced Bread” system?  Not at all.  If you had started using this system in real time in March of 2009 chances are by now you would have abandoned it and moved on to something else, as the whip saw signals in 2011-2012 and 2016 has the System performing worse than buy and hold over a 9 year period.

But here is the thing to remember.  Chances are prolonged bear markets have not been eradicated, never to occur again.  100+ years of market history demonstrates that bear markets of 12 to 36 months in duration are simply “part of the game”.  And it is riding these bear markets to the depths that try investors souls – and wipe out a lot of their net worth in the process.

Chances are when the next 12 to 36 month bear market rolls around – and it will – a trend-following method similar to the one detailed here may help you to “save your sorry assets” (so to speak).

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

World Met Resistance

In this article titled “World, Meet Resistance” – dated 12/21/2017 – I noted the fact that many single country ETFs and regional indexes were closing in on a serious level of potential resistance.  I also laid out three potential scenarios.  So what happened?  A fourth scenario not among the three I wrote about (Which really pisses me off.  But never mind about that right now).

As we will see in a moment what happened was:

*(Pretty much) Everything broke out above significant resistance

*Everything then reversed back below significant resistance.

World Markets in Motion

Figure 1 displays the index I follow which includes 33 single-country ETFs. As you can see, in January it broke out sharply above multi-year resistance. Just when it looked like the index was going to challenge the all-time high the markets reversed and then plunged back below the recently pierced resistance level.

(click to enlarge)1

Figure 1 – Jay’s World Index broke out in January, fell back  below resistance in February (Courtesy AIQ TradingExpert)

The same scenario holds true for the four regional indexes I follow – The Americas, Europe, Asia/Pacific and the Middle East – as seen in Figure 2.

(click to enlarge)2

Figure 2 – Jay’s Regional Index all broke above resistance, then failed (Courtesy  AIQ TradingExpert)

So where to from here?  Well I could lay out a list of potential scenarios. Of course if history is a guide what will follow will be a scenario I did not include (Which really pisses me off.  But never mind about that right now).

So I will simply make a subjective observation based on many years of observation.  The world markets may turn the tide again and propel themselves back to the upside.  But historically, when a stock, commodity or index tries to pierce a significant resistance level and then fails to follow through, it typically takes some time to rebuild a base before another retest of that resistance level unfolds.

Here’s hoping I’m wrong

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

Is a Reprieve for Bonds in the Offing?

The question on many investors’ minds is “are we in a bond bear market?”  Given that long-term treasuries have lost roughly 17% since July of 2016 it is a fair question.
The main model that I use is still bearish on bonds (more on this topic below).  Still, there are a few potential “lights at the end of the bond tunnel” – at least potentially in the near-term.
Long-Term Rates
My mega long-term “fail-safe” bond trend indicator appears in Figure 1.  It is the yield on 30 year treasuries (ticker TYX – which is multiplied by 10 for some unknown reason) with a 120-month exponential moving average.
0Figure 1 – 30-Yr. Treasury yields (Ticker TYX) with 120-month average (Courtesy AIQ TradingExpert)
When the day comes that TYX breaks out above the 120-month moving average I for one will officially designate the great bond bull market as “over.”  And that day is coming.  But for what it’s worth – it’s not quite here yet.
Metals Positive for Bonds
In this article I wrote about a bond timing model that uses the relationship between gold and copper.  Like a lot of timing models of all stripes it does a good job of differentiating good times for bonds from bad times for bonds, but is very far from perfect.
It goes like this:
A = Gold / Copper
B = 30-day moving average of A
C = 80-day moving average of A
D = B – C
If D > 0 = Bullish for bonds*
If D < 0 = Bearish for bonds*
*- with a 1-day lag
This indicator flipped to bullish at the close on 2/7/18 after being bearish since 7/10/2017.
Figure 2 displays the action of ticker TLT since the last “sell” signal in July 2017.  As you can see, in the end it ended up being “correct” as TLT was lower on 2/7/18 than it was on 7/10/17.  But that was not the case until the last week or so.  So for most of the time during this bearish period TLT traded higher.
1Figure 2 – Ticker TLT with recent Jay’s Metal Model signals (Courtesy AIQ TradingExpert)
What is most important however is to focus on the long-term results. In Figure 2 the blue line depicts the growth of equity achieved by holding long 1 t-bond futures contract ONLY when the model is bullish while the red line depicts the growth of equity achieved by holding long 1 t-bonds futures contract ONLY when the model is bearish (red line).
2aFigure 2 – T-bond futures $ gain/loss when Jay’s Metal Model is bullish (blue line) versus when model is bearish (red line)
The long-term difference in performance is fairly obvious.  That being said it should also be noted that the blue line is by no means a series of straight line advances, i.e., there is no guarantee that this latest bullish signal will prove fortuitous, especially given that we may be transitioning from a long-term bond bull market to a long-term bond near market.
One More Possible Piece of Good News
In this article I applied an indicator I originally learned from Tom McClellan at http://www.mcoscillator.com to weekly TLT.  This indicator looks at the number of times TLT has been up minus the number of times down over the past 20 weeks. Very often a drop to -2 or below followed by an upside reversal of 2 points (i.e., it drops to -2 then subsequently rises to 0, or drops to -3 then rises to -1 and so on) has presaged a favorable up move in bonds. This indicator applied to TLT recently fell to -2 and may flash a favorable signal soon (please note that it HAS NOT given a buy signal yet and that it  could take several weeks before it does).
3Figure 3 – Weekly TLT with UpDays20 Indicator (Courtesy AIQ TradingExpert)
One Piece of “Still Bad News”
In this article I wrote about one of the main bond models I use that uses the trend in Japanese stocks to trade bonds inversely, i.e., if Japanese stocks are bearish it is bullish for bonds and vice versa. I use a 5-week and 30-week moving average to quantify Japanese stocks as “bullish” or “bearish”.
In Figure 4 when the blue line in the top clip is above the red line this is considered bearish for bonds and when the blue line is below the red line it is considered bullish for bonds. For now the blue 5-week average line is still well above the red 30-week average, so this indicator still  designates the trend for bonds as “bearish”.
4aFigure 4 – Ticker TLT tends to trade inversely to ticker EWJ (Courtesy AIQ TradingExpert)
Summary
So are bonds due to rally?  Well, it seems like at least a short-term bounce could be in the offing.  That being said, with bonds breaking down sharply at the moment, 1) this “idea” is geared for “traders” who are not afraid of (and are unacquainted with) taking risks, 2) it might make sense to wait for the UpDays20 indicator discussed above to tick higher by two points – which could take up to several weeks to play out – before “taking the plunge.”
As always I am not “recommending” anything, just highlighting what I see.  For longer-term investors the “Boring Bond Index” bond strategy I wrote about here remains a viable  long-term approach to bond investing.
Jay Kaeppel
Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

What to Worry About – and When – in the Bond Market

There is a lot of hand-wringing going on these days regarding the bond market.  And rightly so given that interest rates have been (were?) in a downtrend for 35+ years.  Given that, given the long-term cyclical nature of interest rates and given that rates are at a generational low level, “concern” is understandable.
However, needless hand-wringing over events that have yet to occur is not.
rates long-term
Figure 1 – Long-term treasury yields through the years (Courtesy: ObservationsanNotes.blogspot.com)
(The chart in Figure 1 is updated only through about 2012.  Nevertheless, it effectively highlight the long-term cyclical nature of interest rates.)
The problem is the “well, interest rates are destined to rise therefore I should immediately [fill in your defensive action here].”
Many analysts and investors are following and attempting to interpret every tick in bond yields.  In fact, some very well known bond “people” have proclaimed a “bond bear market”.  And they may be right.  But still…
What I Follow in the Bond Market
What follows are a few random thoughts on some of the things I look at when tracking the bond market.
#1. 30-Year Yield versus 120-month Exponential Moving Average
Figure 2 displays ticker TYX, an index which tracks the yields on 30-year bonds (for some reason it multiplies by 10 – so a yield of 3% appears on the chart as 30.00).
2
Figure 2 – 30-year treasury yields versus 120-month exponential moving average (Courtesy AIQ TradingExpert)
Using the data from Figure 1 I have found that a 120-month (i.e., 10-year) average does a pretty good job of riding the major trends in interest rates.  As you can clearly see in Figure 2, TYX is still noticeably below its 120-month EMA.  This could obviously change quickly but  for the moment by this objective measure the long-term trend in interest rates right at this very moment is still “down.”
Please note that I am not saying that interest rates will not rise and move above this MA.  I am saying two things:
1. Until the crossover occurs try not to focus too much attention on dire predictions.
2. Once the crossover does occur the bond market environment that most of us have known throughout all or most of our investment lives will change dramatically (more on this topic when the time is right).
#2.  The Yield Curve(s)
Figure 3 displays the yield curves for 30-year yields minus 10-year yields and 10-year yields minus 2-year yields. The narrowing trend is obvious. This is causing great consternation because historically when the yield curve “inverts” (i.e., when shorter-term rates are higher than longer-term rates) it is a very bad sign for the economy and the financial markets.
3
Figure 3 – 10-yr yield minus 2-year yield (blue) and 30-year yield minus 10-year yield (orange); (Courtesy: YCharts)
The problem here is that there is still an important difference between “narrowing” and actual “inverting”.  Many people seems to look at Figure 3 and assume that an inverted yield curve (i.e., if and when these lines go into negative territory) is “inevitable” and that things are therefore doomed to get worse for the economy and the markets.
Repeating now: There is still an important difference between a “narrowing” yield curve and an actual “inverted” yield curve.  Until the yield curve actually does invert try not to focus too much attention on dire predictions.
#3. The Current Trend in Bonds
One trend following indicator that I follow (and have written about in the past) is the inverse relationship between long-term t-bonds and Japanese stocks.  Figure 4 display ticker EWJ (an ETF that tracks an index of Japanese stocks) versus ticker TLT (an ETF that tracks the long-term treasury bond).
4
Figure 4 – Ticker EWJ versus Ticker TLT (Courtesy AIQ TradingExpert)
Figure 5 displays two equity curves.  The blue line represents the $ gain achieved by holding long 1 treasury bond futures contract ONLY when the EWJ 5-week moving average is below the EWJ 30-wek moving average and the red line represents the $ loss achieved by holding long 1 treasury bond futures contract ONLY when the EWJ 5-week moving average is above the EWJ 30-week moving average.
5
Figure 5 – Holding long t-bond futures when EWJ is in a downtrend (blue line) versus holding long t-bond futures when EWJ is in an uptrend (red line); December 2003-present
Notice anything different about  the blue line versus the red line?  With EWJ trending strongly higher, caution remains in order or the long-term treasury bond. If the trend in EWJ reverses things may look better for long-term bonds.
#4. Short and Intermediate Term Bonds remain a Viable Alternative
As I wrote about here an index of short and intermediate treasury and high grade corporate remains a viable long-term approach for income investors. Figure 6 displays the growth of $1,000 invested using the “Boring Bond Index” I wrote about in the aforementioned article.  This index has gained in 38 of the past 42 years.6
Figure 6 – Growth of $1,000 invested using “Boring Bond Index” Method; 12/31/1975-11/30/2017
Summary
There are good reasons to be wary of interest rates and bonds. At the same time overreacting to dire headlines also remains a very poor approach to investing.
So in sum:
*The very long-term trend in interest rate is still technically “down”
*The yield curve is narrowing but still has a ways to go before it inverts
*The current trend in long-term bonds is bearish
*Short and intermediate term bonds experience much less volatility than long-term bonds (and reinvest more frequently, which may come in handy if rates do begin to  rise in earnest).
*If and when TYX pierces its long-term average and/or when the yield curve inverts, the time will arrive for investors to make some wholesale changes in how they approach their bond market investments.
*If and when EWJ starts to fall, things may improve for the current plight of the long-term treasury.
*And through it all, a boring approach to bonds may still prove very useful.
Jay Kaeppel
Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.