The Big Canary in the Coal Mine…

Technology is what it’s all about these days.  Technology (primarily) runs on semiconductors.  If the semiconductor business is good, business is good.  OK, that’s about as large a degree of oversimplification as I can manage.  But while it may be overstated, there is definitely a certain amount of truth to it.

So, it can pay to keep an eye on the semiconductor sector.  The simplest way to do that is to follow ticker SMH.  Keeping with the mode of oversimplifying things, in a nutshell, if SMH is not acting terribly that’s typically a good thing.  So where do all things SMH stand now?  Let’s take a look.

Ticker SMH

As with all things market-related (among other things), beauty is in the eye of the beholder.  A quick glance at Figure 1 argues that SMH is inarguably in a strong uptrend, well above its 200-day moving average

Figure 1 – SMH in an uptrend (Courtesy AIQ TradingExpert)

A glance at Figure 2 suggests that SMH has just completed 5 waves up and may be due for a decline.

Figure 2 – SMH with potentially bearish Elliott Wave count (Courtesy ProfitSource by HUBB)

And Figure 3 highlights a very obvious bearish divergence between SMH weekly price action and the 3-period RSI indicator – i.e., SMH keeps moving incrementally higher while RSI3 reaches slightly lower highs each time.  Speaking anecdotally, this setup seems to presage at least a short-term decline maybe 70% of the time.  Of course, the degree of decline varies also.

Figure 3 – SMH with 3-period RSI bearish divergence (Courtesy AIQ TradingExpert)

So, what does it all mean?  First off, I am not going to make any predictions (if you knew my record on “predictions” you would thing that that is a good thing).  I am simply going to point out that one way or the other SMH may be about to give us some important information.

Scenario 1 – SMH breaks out to the upside and stays there: If SMH breaks through the upside and runs, the odds are very high that the overall stock market will run with it.

Course of action: Play for a bullish run by the overall market into the end of the year.

Scenario 2 -SMH breaks out briefly to the upside but then falls back below the recent highs: This would be at least a short-term bearish sign.  Failed breakouts are typically a bad sign and the security in question often behaves badly after disappointing bullish investors.  In this case, if it happens to SMH it could follow through to the overall market.

Course of action: If this happens, you might consider “playing some defense” (hedging, raising some cash, etc.) . Failed breakouts often make the market a little “cranky” (and cranky is one of my fields of expertise).

Scenario 3: SMH fails to breakout and suffers an intermediate-term decline.  If I were to fixate only on the bearish RSI3 divergence I showed earlier in Figure 3, this would seem like the most likely result. 

Course of action: If SMH sells off without breaking above recent resistance, keep an eye on SMH price via its 200-day moving average.  Simple interpretation goes like this: If SMH sells off but holds or regains it’s 200-day moving average then the bullish case can quickly be re-established; If SMH sells off and holds below its 200-day moving average, that should be considered a bearish sign for the overall market.

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.

Bartometer October 14, 2019

Hello Everyone,

Market Recap:
Over the last month, the market has gone down about 4%, then rebounded nearly 3% to a slight decline of 1% over the previous month. The continual news of the Impeachment, slower orders on manufacturing, and the Chinese tariff discussions have made the market more volatile. October is usually a bottoming month, and November and December are traditionally higher. Last year, this did not happen. The market bottomed on December 26, 2018, and surged from that date to July with a return of 21% from January to July 2019.

An excerpt from Fundamental Economist Dr. Robert Genetski: from Classical Principles.com:

“This week’s main positive event was Fed Chairman Powell’s indication that the Fed would resume purchasing securities. Assuming the Fed follows through, this represents a game-changer in terms of next year’s economy and conditions of the nearterm outlook for stocks. Another potential positive development is Trump’s view that talks regarding a trade agreement are going well. I continue to expect a limited deal as a first step in improving trade with China. The rise in stock futures last Friday indicates that investors expect an agreement”.

Adding to Bob’s his Comment:

With or without a trade agreement, the outlook for stocks has improved with Powell’s comments. Purchases of securities improve the odds the economy will do very well next year. If it does, there’s a better chance of avoiding a destructive move toward socialist policies. Stocks are still subject to a decline if there is a failure to reach a trade agreement. However, monetary policy is more important. Without sufficient money, the economy would decline even with a trade agreement. While the Fed’s purchases of securities won’t impact the economy until the spring, they should impact both stocks and interest rates almost immediately. The Fed’s decision to purchase securities provides a reason to move to a fully invested position in equity portfolios.

On the Technical Side:

Over the last almost two years, the markets haven’t done much at all. (See the Monthly Chart below). The markets have been volatile after the prior seven-year run. Earnings have been soft, but the markets seem to want to go higher. The stock market NEEDs to BREAKOUT of the old highs of the Dow Jones at 27400, S&P 500 at 3029, and the NASDAQ 8340. The markets are only about 1 to 2% from a Major Breakout. But it needs the volume and conviction of more certainty in the Chinese trade agreement and the economy that has been showing some signs of a slowing. Earnings have been slowing so we are at a critical point in the markets again. October can be a volatile month, so it is vital that if the markets don’t breakout soon it will cause sellers and traders to start the selling again. If the Dow closes below 25740, I will be getting Cautious, and 25335. I will be Getting Very Cautious.

Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until October 11th, 2019.

Dow Jones +17%
S&P 500 +20%
NASDAQ Aggressive growth +24%
I Shares Russell 2000 ETF (IWM) Small cap +13%
International Index (MSCI – EAFE ex USA) +13%
Moderate Mutual Fund +10%
Investment Grade Bonds (AAA) +11%

High Yield Merrill Lynch High Yield Index +9%

Floating Rate Bond Index +3-5%
Short Term Bond +3%
Fixed Bond Yields (10 year) +1.72.% Yield

The average Moderate Fund is up 10% this year fully invested as a 60% in stocks and 40% in bonds and nothing in the money market.

Interest Outlook
I see the Federal Reserve reducing interest rates ¼% in December.

The Dow Jones Index is above. As it contains 30 of the largest industrial and American stocks. I wanted to show you the 10 year performance and the LONG TERM of the Dow Jones. Notice that the Dow has done very well from 2010 until 1/31/2018. Since then the Dow Jones has gone up and down and is up about 1% in about 2 years. It is right near its old high of the last 1.9 years. There are three indicators above that are important. The first one is the MACD and or Momentum index. As you can see from the index is that it has lost momentum. See the index drifting lower. This shows that the market have lost the upside breakout push. It needs the volume push upward and it needs volume and good news from the government to push it higher and break out to push it above the 27400.

There are two indicators that look GOOD The Money Flow Indicator is at a new high as well as the On Balance Volume Indicator. These indicators are important to determine where the overall market is headed. When both of them are at new highs but the market is not at a new high it shows that there is DEMAND for stocks. It’s not guaranteed that the market will breakout but is a pretty good indicator that it will. With all of the Tweeting and volatility in the market this is not a greatest of indicators but it is more accurate without all of the volatile news. There is a somewhat of a Bullish patter above called an Ascending Triangle. It shows a rise of the trend line and that is bullish. See the vertical blue arrow pointing upward. This will many time breakout to the UPSIDE. But if the Dow Jones closes below 25740 I will be getting Cautious and if it breaks below 25335 on a close I will be getting Very Cautious.

Support levels on the S&P 500 area are 2916, 2823, 2746, and 2921. These might be BUY areas.


 Support levels on the NASDAQ are 7967, 7782, 7644, and 7407.
 On the Dow Jones support is at 26,285, 25,763, and 25,458
 These may be safer areas to get into the equity markets on support levels slowly.
 RESISTANCE LEVEL ON THE S&P 500 IS 30280 Dow Jones breakout is 27,400. If there is a favorable tariff settlement, the market should rise short term.

THE BOTTOM LINE:

The Dow, the S&P 500 and the NASDAQ are all near new highs after rallying over the last two weeks. Since then, the markets have rallied near their old highs. There are technical patterns that show the markets could breakout to new highs, but IF THE MARKETS DON’T BREAKOUT OUT SOON, THE MARKETS COULD TOP OUT. I WILL CONTINUE TO ANALYZE THE TECHNICALs OF THE MARKET.

There are seasonal patterns that are usually weak. October is NOT SEASONALLY strong. It’s often a bottoming month. It looks like the market wants to go up, but with tweets coming out hourly, market timing will be more difficult. If things come in as Trump expects, watch for a substantial rally possibly to the old highs. But there are headwinds currently short term.

Best to all of you,

Joe Bartosiewicz, CFP®
Investment Advisor Representative
Contact information:

5 Colby Way
Avon, CT 06001
860-940-7020 or 860-404-0408


SECURITIES AND ADVISORY SERVICES OFFERED THROUGH SAGE POINT FINANCIAL INC., MEMBER FINRA/SIPC, AND SEC-REGISTERED INVESTMENT ADVISOR.

Charts provided by AIQ Systems:

Technical Analysis is based on a study of historical price movements and past trend patterns. There is no assurance that these market changes or trends can or will be duplicated shortly. It logically follows that historical precedent does not guarantee future results. Conclusions expressed in the Technical Analysis section are personal opinions: and may not be construed as recommendations to buy or sell anything.

Disclaimer: The views expressed are not necessarily the view of Sage Point Financial, Inc. and should not be interpreted directly or indirectly as an offer to buy or sell any securities mentioned herein. Securities and Advisory services offered through Sage Point Financial Inc., Member FINRA/SIPC, an SEC-registered investment advisor. Past performance cannot guarantee future results. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Please note that individual situations can vary. Therefore, the information presented in this letter should only be relied upon when coordinated

10-9-19 Some Retail and some REITS our intraday snapsot revealed

The Dow was up a snap back from the prior fall into the close? We downloaded the snapshot 90 minutes into the trading day. This video shows what we found, and how you can use this to get ahead of the rest of the market.

The fastest way to browse hundreds of charts end of day is back with a vengeance. AIQ TradingExpert Pro has always been known for its ability to browse hundreds of daily price charts at blizzard speeds (one of the many unique features in the platform). 

The fastest way to browse hundreds of charts end of day is back with a vengeance. AIQ TradingExpert Pro has always been known for its ability to browse hundreds of daily price charts at blizzard speeds (one of the many unique features in the platform).  

Also includes historical data on US and Canadian stocks updated every night and Mutual Fund NAVs updated each night.

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Yes, the Stock Market is at a Critical Juncture (and What to Do About It)

As usual, you can pretty much see whatever you want to see in today’s stock market.  Consider the major indexes in Figure 1, displayed along with their respective 200-day moving averages.

Figure 1 – Major Indexes (Courtesy AIQ TradingExpert)

If you “want to” be bullish, you can focus on the fact that all 4 of these major indexes are presently above their respective 200-day moving averages.  This essentially defines an “uptrend”; hence you can make a bullish argument.

If you want to be “bearish”, you can focus on the “choppy” nature of the market’s performance and the fact that very little headway has been made since the highs in early 2018.  This “looks like” a classic “topping pattern” (i.e., a lot of “churning”), hence you can make a bearish argument.

To add more intrigue, consider the 4 “market bellwethers” displayed in Figure 2.

Figure 2 – Jay’s Market Bellwethers (Courtesy AIQ TradingExpert)

(NOTE: Previously I had Sotheby’s Holdings – ticker BID – as one my bellwethers.  As they are being bought out, I have replaced it with the Value Line Arithmetic Index, which has a history of topping and bottoming prior to the major indexes)

The action here is much more mixed and muddled.

*SMH – for any “early warning” sign keep a close eye on the semiconductors.  If they breakout to a new high they could lead the overall market higher. If they breakdown from a double top the market will likely be spooked.

*TRAN – The Dow Transports topped out over a year ago and have been flopping around aimlessly in a narrowing range.  Not exactly a bullish sign, but deemed OK as long as price holds above the 200-day moving average.

*ZIV – Inverse VIX is presently below it’s 200-day moving average, so this one qualifies as “bearish” at the moment.

*VAL-I – The Value Line Index is comprised of 1,675 stocks and gives each stock equal weight, so is a good measure of the “overall” market.  It presently sits right at its 200-day moving average, however – as you can see in Figure 3 – it is presently telling a different story than the S&P 500 Index.

Figure 3 – S&P 500 trending slightly higher, Value Line unweighted index trending lower (Courtesy AIQ TradingExpert)

The Bottom Line

OK, now here is where a skilled market analyst would launch into an argument regarding which side will actually “win”, accompanied by roughly 5 to 50 “compelling charts” that “clearly show” why the analysts’ said opinion was sure to work out correctly.  Alas, there is no one here like that. 

If the question is, “will the stock market break out to the upside and run to sharply higher new highs or will it break down without breaking out to new highs?”, I sadly must default to my standard answer of, “It beats me.”

Here is what I can tell you though.  Instead of relying on “somebody’s opinion or prediction” a much better bet is to formulate and follow an investment plan that spells out:

*What you will (and will not) invest in?

*How much capital you will allocate to each position?

*How much risk you are willing to take with each position?

*What will cause you to exit with a profit?

*What will cause you to exit with a loss?

*Will you have some overarching “trigger” to cause you to reduce overall exposure?

*And so on and so forth

If you have specific answers for the questions above (you DO have specific answers, don’t you?) then the correct thing to do is to go ahead and follow your plan and ignore the myriad prognostications that attempt to sway you one way or the other.

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 Bartometer September, 2019

Hello Everyone,

Over the last month the S&P 500 has risen 3% and is about 2/3rds of 1% below its high it reached in July. Last month on the Bartometer I stated that my computer models were on a Short term Buy signal and the S&P needed to break out of 2944- 2954 for me to be more bullish. I also said that if the S&P stayed above 2954 for 2 days it should head back to the old high of 3025 or there about and it did. Now that the markets are near their old high, where do I think the markets will go? Well, the answer isn’t so easy to answer. Technically the markets are overbought again but two of the technical indicators that show continuation on are On Balance Volume and Money Flow. Both of these indicators are currently at a New High, when the markets are not. These indicators while not always indicative of further advancement are still positive for a continuation to the upside. See the charts below.

My fundamental economist Dr. Robert Genetski, from ClassicalPrinciples.com said last week’s move by the European Central Bank (ECB) to ease policy is good news for the period immediately ahead. The ECB cut its target interest rate and will indefinitely purchase $20 billion of securities each month beginning in November. The move pressures the Fed and other central banks to also ease policy. Negotiations with China also appear to be moving in a positive direction. China is suffering much more than the US from Trump’s tariffs. China is anxious to reach a deal to avoid further problems. On Wednesday the Fed will follow the ECB and the Bank of Japan (BOJ) by cutting interest rates. Unlike the ECB and BOJ, the Fed will not resume purchases of securities. Hence, the Fed will not be easing policy. However, the perception of a period of global easing is likely to provide a short-term tailwind for boosting stocks and interest rates. Over the past 2 weeks there has been a 30 basis point increase in the yield on 10-year T-Notes. This has narrowed the inversion with 3-month Treasury bills from 50 basis points to 20. The spike in rates means financial markets reflect the view that monetary policy is less restrictive. This view is reinforced by the actions of the EC.

On the Technical Side

My computer models went on a very short term BUY signal 5 weeks ago when the S&P was 2844 and has not gone to a Sell signal, but there needs to now be a push through the 3027 level on the S&P and stay there or there could be a sell off here. Two of my favorite indicators Money Flow and On Balance Volume are at a new high while the index is not. This is a positive indication for continuation on the upside. But remember, we still need to watch all of the information that is coming out of the mouth of all political figures and the global markets, but currently I am still moderately bullish. I never put my guard down. See chart below

Interest Outlook

I see the Federal Reserve reducing interest rates ¼% in December.

Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until September 13th, 2019.

These are passive indexes.

*Dow Jones +18%

S&P 500 +21%

NASDAQ Aggressive growth +25%

I Shares Russell 2000 ETF (IWM) Small cap +18%

International Index (MSCI – EAFE ex USA) +13%

Moderate Mutual Fund +12%

Investment Grade Bonds (AAA) +11% +2.64%

High Yield Merrill Lynch High Yield Index +9% +4.26%

Floating Rate Bond Index +5% +2.60%

Short Term Bond +3%

Fixed Bond Yields (10 year) +1.82.% +2.63%

The average Moderate Fund is up 12% this year fully invested as a 60% in stocks and 40% in bonds. And nothing in the money market

*Explanation of each below

The Dow Jones Index is above. As it contains 30 of the largest industrial and American stocks. You will notice that the Dow above and to the right is approaching its old high achieved in July. It has rallied 5% since the Buy signal my computer models gave last month. But now it has to break out to new highs or it puts in a double top. There are 3 indicators above that are important. The first one is SK-SD Stochastics and it is back to the 88 level and that shows the market is overbought. The 2nd and third are Money Flow and On Balance Volume. Both of those indicators are very important for me to determine confirmation and continuation of the rally. Notice that both of them are at a new high while the Dow Jones is not. This is a positive divergence and hopefully the markets will continue its upward movement. I like the USA markets more than the International markets. The Dow Jones looks better than the S&P and the NASDAQ technically at this time. Remember, volatility will still be present so I would still be somewhat cautious.

Source: AIQ Systems on graphs

*On-balance volume (OBV) is a technical analysis indicator intended to relate price and volume in the stock market.
OBV is based on a cumulative total volume.[1]
*Money flow is calculated by averaging the high, low and closing prices, and multiplying by the daily volume. Comparing that result with the number for the previous day tells traders whether money flow was positive or negative for the current day. Positive money flow indicates that prices are likely to move higher, while negative money flow suggests prices are about to fall.

Source: Investopedia

*A Support or support level is the level at which buyers tend to purchase or into a stock or index. It refers to the stock share price that a company or index should hold and start to rise. When a price of the stock falls towards its support level, the support level holds and is confirmed, or the stock continues to decline, and the support level must change.

  • Support levels on the S&P 500 area are 2954.71, 2950, 2944, and 2931. These might be BUY areas.
  • Support levels on the NASDAQ are 8024, 7969, and 7777 (200 Day Moving Average.
  • On the Dow Jones support is at 26,766, 26,595, and 26,368
  • These may be safer areas to get into the equity markets on support levels slowly.
  • RESISTANCE LEVEL ON THE S&P 500 IS 3028. If there is a favorable tariff settlement, the market should rise short term.

THE BOTTOM LINE:

The Dow, the S&P 500 and the NASDAQ are all near new highs. 5 weeks ago on the Bartometer my computer models went to a Buy signal. Since then, the markets have rallied near their old highs. There are technical patterns that show the markets could breakout to new highs but IF THE MARKETS DON’T BREAKOUT OUT SOON, THE MARKETS COULD TOP OUT. I WILL CONTINUE TO ANALYZE THE TECHNICALs OF THE MARKET. There are seasonal patterns that are usually week. September and October ARE NOT SEASONALLY GOOD MONTHS. It looks like the market wants to goes up but with tweets coming out hourly, market timing will be more difficult. If things come in as Trump expects, watch for a solid rally possibly to the old highs. But there are headwinds currently short term.

Best to all of you,

Joe Bartosiewicz, CFP®
Investment Advisor Representative

5 Colby Way
Avon, CT 06001
860-940-7020 or 860-404-0408

SECURITIES AND ADVISORY SERVICES OFFERED THROUGH SAGE POINT FINANCIAL INC., MEMBER FINRA/SIPC, AND SEC-REGISTERED INVESTMENT ADVISOR.
Charts provided by AIQ Systems:
Technical Analysis is based on a study of historical price movements and past trend patterns. There is no assurance that these market changes or trends can or will be duplicated shortly. It logically follows that historical precedent does not guarantee future results. Conclusions expressed in the Technical Analysis section are personal opinions: and may not be construed as recommendations to buy or sell anything.

Disclaimer: The views expressed are not necessarily the view of Sage Point Financial, Inc. and should not be interpreted directly or indirectly as an offer to buy or sell any securities mentioned herein. Securities and Advisory services offered through Sage Point Financial Inc., Member FINRA/SIPC, and SEC-registered investment advisor.

Past performance cannot guarantee future results. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Please note that individual situations can vary. Therefore, the information presented in this letter should only be relied upon when coordinated with individual professional advice. *There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values. It is our goal to help investors by identifying changing market conditions. However, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the market.
The price of commodities is subject to substantial price fluctuations of short periods and may be affected by unpredictable international monetary and political policies. The market for commodities is widely unregulated, and concentrated investing may lead to Sector investing may involve a greater degree of risk than investments with broader diversification.
Indexes cannot be invested indirectly, are unmanaged, and do not incur management fees, costs, and expenses.

Dow Jones Industrial Average: A weighted price average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.

S&P 500: The S&P 500 is an unmanaged indexed comprised of 500 widely held securities considered to be representative of the stock market in general.

NASDAQ: the NASDAQ Composite Index is an unmanaged, market-weighted index of all over the counter common stocks traded on the National Association of Securities Dealers Automated Quotation System

(IWM) I Shares Russell 2000 ETF: Which tracks the Russell 2000 index: which measures the performance of the small capitalization sector of the U.S. equity market.

A Moderate Mutual Fund risk mutual has approximately 50-70% of its portfolio in different equities, from growth, income stocks, international and emerging markets stocks to 30- 50% of its portfolio indifferent categories of bonds and cash. It seeks capital appreciation with a low to moderate level of current income.

The Merrill Lynch High Yield Master Index: A broad-based measure of the performance of non-investment grade US Bonds

MSCI EAFE: the MSCI EAFE Index (Morgan Stanley Capital International Europe, Australia, and Far East Index) is a widely recognized benchmark of non-US markets. It is an unmanaged index composed of a sample of companies’ representative of the market structure of 20 European and Pacific Basin countries and includes reinvestment of all dividends.

Investment grade bond index: The S&P 500 Investment-grade corporate bond index, a sub-index of the S&P 500 Bond Index, seeks to measure the performance of the US corporate debt issued by constituents in the S&P 500 with an investment grade rating.

The S&P 500 Bond index is designed to be a corporate-bond counterpart to the S&P 500, which is widely regarded as the best single gauge of large cap US equities.

Floating Rate Bond Index is a rule-based, market-value weighted index engineered to measure the performance and characteristics of floating rate coupon U.S. Treasuries which have a maturity greater than 12 months.

Beating the Bond Market

Suddenly everyone is once again singing the praises of long-term treasuries.  And on the face of it, why not?  With interest rates seemingly headed to negative whatever, a pure play on interest rates (with “no credit risk” – which I still find ironic since t-bonds are issued by essentially the most heavily indebted entity in history – the U.S. government) stands to perform pretty darn well. 

EDITORS NOTE: We combined Jay's 2 articles on Beating the Bond Market into one article. Later in the article Jay uses AIQ TradingExpert Matchmaker tool to reveal that convertible bonds and high yield corporates have a much higher correlation to the stock market than they do to the long-term treasury. 

But is it really the best play?

Long-Term Treasuries vs. “Others”

Because a later test will use the Bloomberg Barclays Convertible Bond Index, and because that index starts in 1986 and because I want to compare “apples” to “apples”, Figure 1 displays the growth of $1,000 since 1986 using monthly total return data for the Bloomberg Barclays Treasury Long Index.

Figure 1 – Growth of $1,000 in Long-Term Treasuries (1987-2019)

For the record:

Ave. 12 mo %+8.2%
Std. Deviation+9.0%
Max Drawdown(-15.9%)
$1,000 becomes$12,583

Figure 2 – Bloomberg Barclays Treasury Long Index (Jan 1987-Jul 2019)

Not bad, apparently – if your focus is return and you don’t mind some volatility and you have no fear of interest rates ever rising again.

A Broader Approach

Now let’s consider an approach that puts 25% into the four bond indexes below and rebalances every Jan. 1:

*Bloomberg Barclay’s Convertible Bond Index

*Bloomberg Barclays High Yield Very Liquid Index

*Bloomberg Barclays Treasury Long Index

*Bloomberg Barclay’s Intermediate Index

Figure 3 displays the growth of this “index” versus buying and holding long-term treasuries.

Figure 3 – Growth of $1,000 invested in 4-Bond Indexes and rebalanced annually; 1987-2019

Ave. 12 mo %+8.0%
Std. Deviation+6.8%
Max Drawdown(-14.8%)
$1,000 becomes$11,774

Figure 4 – 4-Bond Index Results; 1987-2019

As you can see, the 4-index approach:

*Is less volatile in nature (6.8% standard deviation versus 9.0% for long bonds)

*Had a slightly lower maximum drawdown

*And has generated almost as much gain as long-term treasuries alone (it actually had a slight lead over long-term treasuries prior to the rare +10% spurt in long treasuries in August 2019)

To get a better sense of the comparison, Figure 5 overlays Figures 1 and 3.

Figure 5 – Long Treasuries vs. 4-Bond Index

As you can see in Figure 5, in light of a long-term bull market for bonds, at times long-term treasuries have led and at other times they have trailed our 4-Bond Index.  After the huge August 2019 spike for long-term treasuries, they are back in the lead.  But for now, the point is that the 4-Bond Index performs roughly as well with a great deal less volatility.

To emphasize this (in a possibly slightly confusing kind of way), Figure 6 shows the drawdowns for long treasuries in blue and drawdowns for the 4-Bond Index in orange.  While the orange line did have one severe “spike” down (during the financial panic of 2008), clearly when trouble hits the bond market, long-term treasuries tend to decline more than the 4-Bond Index.

Figure 6 – % Drawdowns for Long-term treasuries (blue) versus 4-Bond Index (orange); 1987-2019

Summary

Long-term treasuries are the “purest interest rate play” available.  If rates fall then long-term treasuries will typically outperform most other types of bonds.  On the flip side, if interest rates rise long-term treasuries will typically underperform most other types of bonds.

Is this 4-index approach the “be all, end all” of bond investing?  Is it even superior to the simpler approach of just holding long-term bonds?

Not necessarily.  But there appears to be a better way to use these four indexes – which I will get to below

So, all-in-all the 4-bond index seems like a “nice alternative” to holding long-term treasuries.  But the title of these articles says “Beating the Bond Market” and not “Interesting Alternatives that do Just about as Well as Long-Term Treasuries” (which – let’s face it – would NOT be a very compelling title).  So, let’s dig a little deeper.  In order to dig a little deeper, we must first “go off on a little tangent.”

Bonds versus Stocks

In a nutshell, individual convertible bonds and high yield corporate bonds are tied to the fortunes of the companies that issue them.  This also means that as an asset class, their performance is tied to the economy and the business environment in general.  If times are tough for corporations it only makes sense that convertible bonds and high yield bonds will also have a tougher time of it.  As such it is important to note that convertible bonds and high yield corporates have a much higher correlation to the stock market than they do to the long-term treasury.

In Figures 1 and 2 we use the following ETF tickers:

CWB – as a proxy for convertible bonds

HYG – As a proxy for high-yield corporates

TLT – As a proxy for long-term treasuries

IEI – As a proxy for short-term treasuries

SPX – As a proxy for the overall stock market

BND – As a proxy for the overall bond market

As you can see in Figure 1, convertible bonds (CWB) and high-yield corporates (HYG) have a much higher correlation to the stock market (SPX) than to the bond market (BND).

Figure 1 – 4-Bond Index Components correlation to the S&P 500 Index (Courtesy AIQ TradingExpert)

As you can see in Figure 2, long-term treasuries (TLT) and intermediate-term treasuries (IEI) have a much higher correlation to the bond market (BND) than to the stock market (SPX).

Figure 2 – 4-Bond Index Components correlation to Vanguard Total Bond Market ETF (Courtesy AIQ TradingExpert)

A Slight Detour

Figure 3 displays the cumulative price change for the S&P 500 Index during the months of November through April starting in 1949 (+8,881%)

Figure 3 – Cumulative % price gain for S&P 500 Index during November through April (+8,881%); 1949-2019

Figure 4 displays the cumulative price change for the S&P 500 Index during the months of June through October starting in 1949 (+91%)

Figure 4 – Cumulative % price gain for S&P 500 Index during June through October (+91%); 1949-2019

The Theory: Parts 1 and 2

Part 1: The stock market performs better during November through April than during May through October

Part 2: Convertible bonds and high-grade corporate bonds are more highly correlated to stocks than long and intermediate-term treasuries

Therefore, we can hypothesize that over time convertible and high-yield bonds will perform better during November through April and that long and intermediate-term treasuries will perform better during May through October. 

Jay’s Seasonal Bond System

During the months of November through April we will hold:

*Bloomberg Barclay’s Convertible Bond Index

*Bloomberg Barclays High Yield Very Liquid Index

During the months of May through October we will hold:

*Bloomberg Barclays Treasury Long Index

*Bloomberg Barclay’s Intermediate Index

(NOTE: While this article constitutes a “hypothetical test” and not a trading recommendation, just to cover the bases, an investor could emulate this strategy by holding tickers CWB and HYG (or ticker JNK) November through April and tickers TLT and IEI May through October.)

Figure 5 displays the growth of $1,000 invested using this Seasonal System (blue line) versus simply splitting money 25% into each index and then rebalancing on January 1st of each year (orange line).

Figure 5 – Growth of $1,000 invested using Jay’s Seasonal System versus Buying-and-Holding and rebalancing (1986-2019)

Figure 6 displays some comparative performance figures.

MeasureSeasonal System4 Indexes
Buy/Hold/Rebalance
Average 12 month % +(-)+11.9%+8.0%
Std. Deviation %8.7%6.8%
Ave/StdDev1.371.18
Max Drawdown%(-9.2%)(-14.8%)
$1,000 becomes$38,289$11,774

Figure 6 – Seasonal Strategy versus Buy/Hold/Rebalance

From 12/31/1986 through 8/31/2019 the Seasonal System gained +3,729% versus +1,077% (3.46 times as much) as the buy/hold and rebalance method.

Summary

The Seasonal Bond System has certain unique risks.  Most notably if the stock market tanks between November 1 and April 30, this system has no “standard” bond positions to potentially offset some of the stock market related decline that convertible and high yield bonds would likely experience. Likewise, if interest rates rise between April 30 and October 31st, this strategy is almost certain to lose value during that period as it holds only interest-rate sensitive treasuries during that time.

The caveats above aside, the fact remains that over the past 3+ decades this hypothetical portfolio gained almost 3.5 times that of a buy-and-hold approach.

Question: Is this any way to trade the bond market?

Answer: Well, it’s one way….

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.

A Simple Alternative to Buy-and-Hold

The Good News regarding the stock market is that in the long run it goes “Up”.  The Bad News is that along the way there are harrowing declines (think -40% or more) as well as long stretches of 0% returns (From Dec-2000 through Sep 2011 the S&P 500 Index registered a total return of -4%. The stock market also went sideways from 1927 to 1949 and from 1965 to 1982). 

Large declines and long flat periods can shatter investors financial goals and/or affect an investor’s thinking for years to come.  Given the rip-roaring bull market we have seen in the last 10 years it may be wise to reiterate that “trees don’t grow to the sky.”  Don’t misunderstood, I am not attempting to “call the top” (as if I could), it’s just that I have been in this business a while and – paraphrasing here – I’ve seen some “stuff.”

What follows is NOT intended to be the “be all, end all” of trading systems.  In fact, since 1971 this “system” has beaten the S&P 500 Index by just a fraction.  So, one might argue in the end that it is not worth the trouble.  But here is the thing to consider: If you would like to earn market returns WITHOUT riding out all of the harrowing declines and the long sideways stretches – it is at least food for thought.

The Monthly LBRMomentum Strategy

There are two indicators involved: a 21-month moving average of the closing price of the S&P 500 Index and a momentum indicator that I call LBRMomentum.  The calculations for LBRMomentum appear at the end of the article.  LBR is an acronym for Linda Bradford Raschke as it uses a calculation that I first learned about from something written by, well – who else – Linda Bradford Raschke (If you want to learn what the life of a professional trader is all about, I highly recommend you read her book, Trading Sardines). 

A Buy Signal occurs:

*When LBRMomentum drops to negative territory then turns higher for one month, AND

*SPX currently or subsequently closes above its own 21-month moving average (in other words, if LBRMomentum rise from below to above 0 while SPX is below it’s 21-month MA, then the buy signal does not occur until SPX closes above its 21-month MA)

*A Buy signal remains in effect for 18 months (if a new buy signal occurs during those 18 months then the 18-month bullish period is extended from the time of the new buy signal)

*After 18-months with no new buy signal sell stocks and move to intermediate-term treasuries until the next buy signal

See Figures 1 and 2 for charts with “Buy Signals” displayed

Figure 1 – LBRMomentum Buy Signals (courtesy AIQ TradingExpert)

Figure 2 – LBRMomentum Buy Signals (courtesy AIQ TradingExpert)

Figure 3 displays the cumulative total return for both the “System” and buying-and-holding SPX.  As I mentioned earlier, following the huge bull market of the past 10 years the next results are roughly the same (Strategy = +11,769, buy-and-hold = +11,578%).

Figure 3 – Growth of $1,000 invested using LBRMomentum System (blue line) versus S&P 500 Index buy-and-hold; 1971-2019

But to get a sense of the potential “Let’s Get Some Sleep at Night” benefits of the System, Figure 4 displays the growth of $1,000 invested in the S&P 500 ONLY when the System is bullish. 

Figure 4 – Growth of $1,000 invested in SPX ONLY while LBRMometnum System is Bullish

Figure 5 displays the growth of $1,000 invested in the Bloomberg Barclays Treasury Intermediate Index ONLY when the LBRMomentum System is NOT bullish.

Figure 5 – Growth of $1,000 invested in SPX ONLY while LBRMometnum System is NOT Bullish

The things to notice about Figures 4 and 5 are:

a) the lack of significant drawdowns and,

b) the lack of long periods with no net gain. 

In other words, this approach represents the Tortoise and not the Hare. The intent is not so much to “Beaten the Market” but rather to avoid being “Beaten Up by the Market.”

Figure 6 displays some relevant comparative performance figures.

MeasureSystemBuy/Hold
CAGR %10.06%10.03%
Std. Deviation%10.2%16.7%
CAGR/StdDev0.980.60
Worst 12 mo. %(-15.5%)(-43.3%)
Maximum Drawdown %(-17.6%)(-50.9%)
% 12-month periods UP93%80%
% 5-Yr. periods UP100%89%

Figure 6 – Performance Figures

Note that the Compounded Annual Growth Rate is virtually the same.  However, the System clearly experienced a great deal less volatility along the way with a significantly lower standard deviation as well as far lower drawdowns (-17.6% for the System versus -50.9% for buy-and-hold).  Note also that the System showed a 12-month gain 93% of the time versus 80% of the time for buy-and-hold. The System also showed a gain 100% of the time over 5-year periods (versus 89% of the time for buy-and-hold).

The last “Buy Signal” occurred on 3/31/2019 and will remain in effect until 9/30/2020.

For the record, this “System” has significantly underperformed buy-and-hold over the past 10 years.  Still, if earning a market return over the long-term – without worrying as much about massive declines and long, flat stretches is appealing – it is food for thought.

LBR Momentum

LBRMomentum simply subtracts the 10-period moving average from the 3-month moving average as shown in the code below

LBRMomentum is simpleavg([close], 3) – simpleavg([close], 10).

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.

Intraday snapshot in action

Tuesday our intraday snapshot revealed groups were strong still, but the Expert System showed weakness in stocks – we can profit while markets are still open.

We downloaded the snapshot midway through the trading day, ran our reports and right off noticed the AI Expert Rating system on stocks showed far more down ratings than up. The groups were still strongly up.

This video shows what we saw mid morning 9-10-19

The fastest way to browse hundreds of charts end of day is back with a vengeance. AIQ TradingExpert Pro has always been known for its ability to browse hundreds of daily price charts at blizzard speeds (one of the many unique features in the platform). 

The fastest way to browse hundreds of charts end of day is back with a vengeance. AIQ TradingExpert Pro has always been known for its ability to browse hundreds of daily price charts at blizzard speeds (one of the many unique features in the platform).  

Also includes historical data on US and Canadian stocks updated every night and Mutual Fund NAVs updated each night.

How do traders use this powerful data?

  • For the Chart Pattern Recognition traders this is the Ferrari of analysis tools. It’s simple to scan hundreds of charts to see the patterns emerging the same day it’s happening.​
  • For traders who look for groups or sectors on the move, our intraday snapshot updates AIQ’s powerful groups and sectors too, so you can get ahead of a move in the market segments before the rest of the crowd.
  • For traders who want to place trades in the last hour of the trading day,  downloading a snapshot in the last hour of trading day has almost the entire days action for your stocks, you can do your end of day analyze and place tomorrows trades today.

PLUS all the powerful features of AIQ TradingExpert Pro end of day including

  • AI-based Signals Uncover Hidden Trades – Award winning AI-based expert system screens for trading candidates that may have been missed by other systems, giving you an edge.
  • Time Saving Analysis with Chart Barometer – Our Indicator Barometer gives you an instant evaluation of the status of all indicators for each chart. Saving you time and allowing an easy to read analysis of any ticker. 
  • Every Chart your way with Custom Layouts – Whether you prefer price bar, candlestick, or point and figure charts, we’ve got them. Plus, TradingExpert Pro delivers all the trendline and drawing tools that you expect in a top end package, including Fibonacci Studies, Gann Fans, and Regression Lines.
  • Time Saving Power! 200 Screening Reports – TradingExpert Pro automatically performs millions of computations and delivers instant access to one and two-page reports highlighting trading candidates for stocks, indexes, mutual funds, groups and sectors and more. Want to find tickers in a trend? We got it. Relative strength? Upside and downside at your fingertips. Volume Spikes, Persistence of Money Flow, Price Gap, Point and Figure Breakouts and many many more……All generated each day automatically…
  • Building a Trading System just got a Whole lot Easier – TradingExpert Pro provides an amazing way to design, test, and automate virtually any trading idea. It’s called the Expert Design Studio and is considered by traders to be the best tool of its kind. That’s because it combines a point-and-click interactive trading library with state-of-the-art back testing and gives you the ability to produce custom screening reports. PLUS our Pre-built strategies have been fine-tuned by our analysts to produce outstanding results. They include Growth, Divergence, Short Selling,  Day Trading, and Bottom Fishing models, to name just a few.
  • Complete Array of Analysis Tools – TradingExpert Pro’s Proven Market Timing “too good to ignore.” Introduced in 1986, AIQ’s market timing system called the Crash of ‘87 and has called all major market moves since. Its multi-indicator, rule-based approach for determining market direction is time proven.  

AND TradingExpert Pro also includes:

  • Professional Level Portfolio Management
  • Matchmaking Correlation tools
  • Automate Your Winning Systems with Portfolio Simulation Tools

Also includes historical data on US and Canadian stocks updated every night and Mutual Fund NAVs updated each night.

AND ALL AT OUR LOWEST PRICE FOR YEARS

LEARN MORE

August 22 was a day when Intraday Snapshot gave us insight into this market again before the market closed.

The Dow was up modestly, the internals not so hot. We download the snapshot 30 minutes before the trading day closed 8-22-19. This video shows what we found, and how you can use this to get ahead of the rest of the market.

The fastest way to browse hundreds of charts end of day is back with a vengeance. AIQ TradingExpert Pro has always been known for its ability to browse hundreds of daily price charts at blizzard speeds (one of the many unique features in the platform). 

The fastest way to browse hundreds of charts end of day is back with a vengeance. AIQ TradingExpert Pro has always been known for its ability to browse hundreds of daily price charts at blizzard speeds (one of the many unique features in the platform).  

Also includes historical data on US and Canadian stocks updated every night and Mutual Fund NAVs updated each night.

How do traders use this powerful data?

  • For the Chart Pattern Recognition traders this is the Ferrari of analysis tools. It’s simple to scan hundreds of charts to see the patterns emerging the same day it’s happening.​
  • For traders who look for groups or sectors on the move, our intraday snapshot updates AIQ’s powerful groups and sectors too, so you can get ahead of a move in the market segments before the rest of the crowd.
  • For traders who want to place trades in the last hour of the trading day,  downloading a snapshot in the last hour of trading day has almost the entire days action for your stocks, you can do your end of day analyze and place tomorrows trades today.

PLUS all the powerful features of AIQ TradingExpert Pro end of day including

  • AI-based Signals Uncover Hidden Trades – Award winning AI-based expert system screens for trading candidates that may have been missed by other systems, giving you an edge.
  • Time Saving Analysis with Chart Barometer – Our Indicator Barometer gives you an instant evaluation of the status of all indicators for each chart. Saving you time and allowing an easy to read analysis of any ticker. 
  • Every Chart your way with Custom Layouts – Whether you prefer price bar, candlestick, or point and figure charts, we’ve got them. Plus, TradingExpert Pro delivers all the trendline and drawing tools that you expect in a top end package, including Fibonacci Studies, Gann Fans, and Regression Lines.
  • Time Saving Power! 200 Screening Reports – TradingExpert Pro automatically performs millions of computations and delivers instant access to one and two-page reports highlighting trading candidates for stocks, indexes, mutual funds, groups and sectors and more. Want to find tickers in a trend? We got it. Relative strength? Upside and downside at your fingertips. Volume Spikes, Persistence of Money Flow, Price Gap, Point and Figure Breakouts and many many more……All generated each day automatically…
  • Building a Trading System just got a Whole lot EasierTradingExpert Pro provides an amazing way to design, test, and automate virtually any trading idea. It’s called the Expert Design Studio and is considered by traders to be the best tool of its kind. That’s because it combines a point-and-click interactive trading library with state-of-the-art back testing and gives you the ability to produce custom screening reports. PLUS our Pre-built strategies have been fine-tuned by our analysts to produce outstanding results. They include Growth, Divergence, Short Selling,  Day Trading, and Bottom Fishing models, to name just a few.
  • Complete Array of Analysis Tools – TradingExpert Pro’s Proven Market Timing “too good to ignore.” Introduced in 1986, AIQ’s market timing system called the Crash of ‘87 and has called all major market moves since. Its multi-indicator, rule-based approach for determining market direction is time proven.  

AND TradingExpert Pro also includes:

  • Professional Level Portfolio Management
  • Matchmaking Correlation tools
  • Automate Your Winning Systems with Portfolio Simulation Tools

Also includes historical data on US and Canadian stocks updated every night and Mutual Fund NAVs updated each night.

LEARN MORE