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

The Bartometer

August 18, 2019

Hello Everyone,

Over the last month the S&P 500 has fallen 4.1%, and 2.2% from my VERY CAUTIOUS SIGNAL of the 2954 break. Even though the markets are down for the month, they are still up nicely for the year. Bonds have rallied as well as commodities such as gold and silver.

Last month I stated that there was a Bearish pattern emerging called a Rising Wedge and I talked about the negative break of the pattern and once it closed below that pattern I went negative. You can clearly see the pattern on the chart below. Now that it has broken to the downside what happens
now?

We are not fortune tellers on what Trump will say or tweet, we don’t know what the Chinese will say or how they will react, but the technicals are not that bad and are starting to get a little more positive. My computer models are currently at a short term BUY signal, but things change daily like the tweets.

You have heard that because of the inverted yield curve, where typical money market is yielding 2% and the 10 year bond is yielding 1.6%. You can see that it is inverted. The 10 year bond should be yielding above the daily money market, not below it. Because of this and the inversion of most of the bonds, there might be a recession in about 1 to 1.5 years. I have been saying that over my last many Bartometers that I see a recession in about a year and a half, but not yet. What may be causing the inversion, may be foreign countries that have a negative yield actually buying our 2 to 30 year bonds and pushing the price up and the driving the yields down.

My fundamental economist Dr. Robert Genetski, from classicalPrinciples.com believes that while most observers believe that trade barriers are the main headwind facing stocks, like the Chinese tariffs, he is more concerned over a restrictive monetary policy. Signs of monetary restraint from interest rates and liquidity suggest that the odds of a recession have increased.

The S&P 500 is now 10% below his estimate of its value. As such, a positive announcement on trade or money can quickly send stocks soaring. For the moment the Fed will resist easing policy.

However, if stocks and interest rates continue to decline, constant pressure from the President to ease policy will lead to an abrupt, positive change. Such a change would quickly allow a resumption of the bull market in stocks.

On the Technical Side

My computer models went on a very short BUY signal last week, but there are three resistance and 2 support levels you may want to remember, 2944 is the first level where the S&P may stall and 2954.71 is the next major level that if broken and it I closes above that level many traders may come in and start buying possibly pushing the markets up and testing the old highs of 3025.

On the other hand, on the downside 2823 has buying support and 2799 is the 200 day moving average. That may hold too. It is now trading in a channel, 2944 on the top and 2823 on the bottom. A close of either one of those areas could mean the next major up or down trend direction.

Interest Outlook

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

Index Averages

Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until August 16th, 2019. These are passive indexes.

*Explanation of each on the last page

The S&P 500

Rising Wedge

Support

The S&P 500 is above. Last month I stated that there was a Rising Wedge Pattern that was technically bearish and that a break below the bottom of the pattern would make me Very Cautious. Now that it has broken below that pattern it is trading between 2823 and 2944. If the S&P closes above 2944 it could push it to 2954 where it could find heavier resistance. If it stays above 2954 for 2 to 3 days with heavy volume the market may have turned to a Bullish stance, but Volatility will remain. Even though we went to a SHORT TERM BUY signal, I am still a little Cautious.

The 2nd and third chart show the SK-SD Stochastics. At 32-40 where the arrow is pointing shows that the market is getting oversold and getting cheap and ready for a bounce. The third graph shows that the market momentum is still negative as the pink line is below the green line. A Short term Buy signal would be generated when the pink line crosses over the green line showing that momentum is again on the bullish side. As of right now the market technicals are getting better and a close above 2954.71 could change the trend to the positive side. Support levels on the S&P where
there may be buying support is 2823, 2727 the 200 moving average, and 2730 the test and the low of the June low. I like the USA markets more than the International markets.

Source: AIQ Systems on graphs

The rising wedge pattern is characterized by a chart pattern which forms when the market makes higher highs and higher lows with a contracting range. When this pattern is found in an uptrend, it is considered a reversal pattern, as the contraction of the range indicates that the uptrend is losing strength. When this pattern is found in a downtrend, it is considered a bearish pattern, as the market range becomes narrower into the correction, indicating that the correction is losing strength, and that the resumption of the downtrend is in the making.

In a rising wedge, both boundary lines slant up from left to right. Although both lines point in the same direction, the lower line rises at a steeper angle than the upper one. Prices usually decline after breaking through the lower boundary line. As far as volumes are concerned, they keep on declining with each new price advance or wave up, indicating that the demand is weakening at the higher price level. A rising wedge is more reliable when found in a bearish market. In a bullish trend what seems to be a Rising Wedge may actually be a Flag or a Pennant (stepbrother of a wedge) requiring about 4 weeks to complete

Rising Wedges are not guaranteed so the 3019-3022 level and staying there for a couple of days could void this negative pattern. A break decisively on a close below 2979 could satisfy the Rising Wedge.

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 2844, 2803, and 2730. These might be BUY areas.

▪ Support levels on the NASDAQ are 7862, 7657, 7416, and 7291.

▪ On the Dow Jones support is at 25,376, 25,213, and 24,686. These may be safer areas to get into the equity markets on support levels slowly.

▪ RESISTANCE LEVEL ON THE S&P 500 IS 2944, 2954.71 and 302 . If there is a favorable tariff settlement, the market should rise short term.

THE BOTTOM LINE:

The S&P 500 is currently about 2.2% below my Very Cautious signal of 2954. The market should be volatile especially with seasonal patterns of August through the end of October being seasonally weak. With the inverted yield curve and hints of recession over the next 1.5 years investors should be somewhat cautious over the shorter term unless the S&P 500 closes above 2944 and more if it closes about 2954.71 and stays there for a couple of days with heavy volume. 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

Joe Bartosiewicz, CFP®

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

Investment Advisor Representative

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.

Backtesting A Mean-Reversion Strategy In Python

The importable AIQ EDS file based on Anthony Garner’s article in May 2019 Stocks & Commodities “Backtesting A Mean-Reversion Strategy In Python,” can be obtained on request via email to info@TradersEdgeSystems.com. The code is also shown below.

I backtested the author’s mean-reversion system (MeanRev.eds) using both the EDS module, which tests every trade on a one-share basis, and also via the Portfolio Manager, which performs a trading simulation.

The short side strategy showed a loss overall in the EDS test so I tested only the long side in the Portfolio Manager. I selected trades using the z-score, taking the lowest values.

For capitalization, I used max of three trades per day with a max total of 10 open trades at one time, 10% allocated to each position. I did not deduct slippage but did deduct commissions. I used a recent list of the NASDAQ 100 stocks to run the test. The equity curve and account statistics report are shown in Figure 7.

Sample Chart

FIGURE 7: AIQ. This shows the equity curve (blue line) from long-only trading the NASDAQ 100 list of stocks from 1999 to March 15, 2019. The red line is the NDX index.

!Backtesting a Mean-Reversion Strategy In Python !Author: Anthony Garner, TASC May 2019 !Coded by: Richard Denning 3/14/19 !www.TradersEdgeSystems.com 

!ABBREVIATIONS:
C is [close].

!INPUTS:
meanLen is 10.
longZmult is -1.
shortZmult is 1.
meanMult is 10.

!FORMULAS:

SMA is simpleavg(C,meanLen).
LMA is simpleavg(C,meanLen*meanMult).
STD is sqrt(variance(C,meanLen)).
zScore is (C - SMA) / STD.

!TRADING SIGNALS & EXITS:

buyLong if zScore < longZmult and SMA > LMA.
sellShort if zScore > shortZmult and SMA < LMA.
exitLong if valresult(zScore,1) < -0.5 and zScore > 0.5.
exitShort if valresult(zScore,1) > 0.5 and zScore < -0.5.

showValues if 1.

—Richard Denning
info@TradersEdgeSystems.com
for AIQ Systems

The Agony and Ecstasy of Trend-Following

Let’s face it, many investors have a problem with riding a trend.  When things are going well they fret and worry about every blip in interest rates, housing starts, earnings estimates and the price of tea in China, which often keeps them from maximizing their profitability.  Alternatively, when things really do fall apart they suddenly become “long-term investors” (in this case “long-term” is defined roughly as the time between the current time and the time they “puke” their portfolio – just before the bottom).

Which reminds me to invoke:

Jay’s Trading Maxim #6: Human nature is a detriment to investment success and should be avoided as much as, well, humanly possible.

So, it can help to have a few “go to” indicators, to help one objectively tilt to the bullish or bearish side.  And we are NOT talking about “pinpoint precision timing” types of things here. Just simple, objective clues.  Like this one.

Monthly MACD

1

Figure 1 displays the S&P 500 index monthly chart with the monthly MACD Indicator at the bottom.Figure 1 – Monthly S&P 500 Index with MACD (Courtesy AIQ TradingExpert)

The “trading rules” we will use are pretty simple:

*If the Monthly MACD closes a month above 0, then hold the S&P 500 Index the next month

*If the Monthly MACD closes a month below 0, then hold the Barclays Treasury Intermediate Index the next month

*We start our test on 11/30/1970.

*For the record, data for the Barclays Treasury Intermediate Index begins in January 1973 so prior to that we simply used an annual interest rate of 1% as a proxy.

Figure 2 displays the equity curves for:

*The strategy just explained (blue line)

*Buying and holding the S&P 500 Index (orange) line

2

Figure 2 – Growth of $1,000 using MACD System versus Buy-and-Hold

Figure 3 displays some “Facts and Figure” regarding relative performance.

3

Figures 3 – Comparative Results

For the record:

*$1,000 invested using the “System” grew to $143,739 by 6/30/2019

*$1,000 invested using buy-and-hold grew to $102,569 by 6/30/2019

*The “System” experienced a maximum drawdown (month-end) of -23.3% and the Worst 5-year % return was +7.3% (versus a maximum drawdown of -50.9% and a Worst 5-year % return of -29.1% for Buy-and-Hold)

So, from the chart in Figure 2 and the data in Figure 3 it is “obvious” that using MACD to decide when to be in or out of the market is clearly “better” than buy-and-hold.  Right?  Here is where it “gets interesting” for a couple of reasons.

First off, the MACD Method outperforms in the long run by virtue of missing a large part of severe bear markets every now and then.  It also gets “whipsawed” more often than it “saves your sorry assets” during a big bear market.  So, in reality it requires ALOT of discipline (and self-awareness) to actually follow over time.

Consider this: if you were actually using just this one method to decide when to be in or out of the market (which is NOT what I am recommending by the way) you would have gotten out at the end of October 2018 with the S&P 500 Index at 2,711.74.  Now nine months later you would be sitting here with the S&P 500 Index flirting with 3,000 going “what the heck was I thinking about!?!?!?”  In other words, while you would have missed the December 2018 meltdown, you also would have been sitting in treasuries throughout the entire 2019 rally to date.

Like I said, human nature, it’s a pain.

To fully appreciate what makes this strategy “tick”, consider Figures 4 and 5. Figure 4 displays the growth of equity when MACD is > 0 (during these times the S&P 500 Index is held).

4

Figure 4 – Growth of $1,000 invested in S&P 500 Index when MACD > 0.

Sort of the “When things are swell, things are great” scenario.

Figure 5 displays the growth of $1,000 for both intermediate-term treasuries AND the S&P 500 Index during those times when MACD > 0.

5

Figure 5 – Growth of $1,000 invested in Intermediate-term treasuries (blue) and the S&P 500 (orange) when MACD < 0.

Essentially a “Tortoise and the Hare” type of scenario.

Summary

Simple trend-following methods – whether they involve moving average using price, trend lines drawn on charts or the MACD type of approach detailed herein – can be very useful over time.

*They can help an investor to reduce that “Is this the top?” angst and sort of force them to just go with the flowing while the flowing is good.

*They can also help an investor avoid riding a major bear market all the way to the bottom – which is a good thing both financially and emotionally.

But everything comes with a cost.  Trend-following methods will never get you in at the bottom nor out at the top, and you WILL experience whipsaws – i.e., times when you sell at one price and then are later forced to buy back at a higher price.

Consider it a “cost of doing business.”

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 July 14, 2019

Hello Everyone,

I apologize for getting my newsletter out a week later than usual, my family had a needed short vacation.

Now for the good news, last month I stated that I was bullish on the markets and said I thought the markets would break out of the old 2886 level on the S&P and go to the 2954 level and possibly go to new highs. See last month’s Bartometer. The good news is the S&P is now at new highs and up another 6% since last month. The not so good news is that the small to midcap stocks are NOT at a new high and this divergence is showing me that we have a select narrow rally. The Small Cap index is 10% below its old top hit on 09/28/21018.

The Midcap Index is down 4.7% from last September as well. What does this mean? It means that there is a divergence in the stock market, and most of the participation is in the very large stocks like Microsoft, Netflix, etc. Even though this divergence is happening, my computer models are still somewhat bullish. Is it changing? You’ll see the answer in the chart below

Source: CNBC.com

Interest Outlook

As the major indexes reached all new highs, the Fed Chairman confirmed that the Fed would accept the lead from financial markets and cut their target interest rate by ¼%. Even though the Fed may reduce interest rates, there are many problems with Powell’s statements. His comments do not bode well for future moves. Especially if the economy goes into a recession over the next year or more. At this time long term rates should continue to be stabilized.

CURRENT EVENTS INFLUENCING MARKET MOVEMENT:

The Chinese tariff situation has calmed down somewhat allowing the markets to continue to rise as earnings from U.S. companies continue to grow. Overall the economy is doing relatively well. With a potential slowing of earnings ahead, the stock markets are now somewhat overbought. If interest rates stay at this very low level, then the stock market is still a decent value, but if interest rates start to head higher, the stock market ascent will then be over for a while. Overall, things look okay.

Index Averages

Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until July 12, 2019. These are passive indexes.

*Dow Jones +18%
S&P 500 +21%
NASDAQ Aggressive growth +25%
I Shares Russell 2000 ETF (IWM) Small cap +17%
International Index (MSCI – EAFE ex USA) +11%
Moderate Mutual Fund +11%
Investment Grade Bonds (AAA) + 7% +2.64%
High Yield Merrill Lynch High Yield Index +9% +4.26%
Floating Rate Bond Index +5% +2.60%
Fixed Bond Yields (10 year) +2.% Yield 2.63%
The average Moderate Fund is up 11.6% this year fully invested as a 60% in
stocks and 40% in bonds. And nothing in the money market
*Explanation of each on the last page

The S&P 500

Source: AIQ Systems on graphs



The S&P 500 has broken out to a new high last month on the Bartometer I was Bullish and stated that my computer models went to a Buy signal on June 4th at 2800 on the S&P 500. Now it is 3014. My computer models are still on the BUY-HOLD but the market is now getting very OVERBOUGHT and if I were in the market now I would start to take some money off the table and rebalance if you are in retirement.

The S&P 500 could go to 3130 to 3180 this year, but that would be a stretch and I don’t think the market has that much growth now for the rest of the year. Maybe 3-7% if that.

Notice the two trend-lines above at the top right of the top chart. There are two rising trend-lines, the blue arrow is pointing to it. This is call a RISING WEDGE. A Rising Wedge is a NEGATIVE pattern IF the trend-line is broken on the down side. This is a pattern that can be VOIDED if the S&P 500 closes above 3019 -3022 for 2-3 days with heavy volume. On the other hand, it the S&P 500 breaks below 2979, I will be getting Cautious. If it closes below 2979 then 2954 better hold or I will be getting VERY
CAUTIOUS. But remember if the market closes above 3019-3022 for 2 to 3 days with good volume then the pattern is voided.


This market is extended, so even though I am relatively still positive, I’ll let the market tell me what to do. So if the S&P Closes below 2979 I am getting Cautious, and a close below 2954 decisively, then I am getting Very Cautious. That means a trimming of your assets, or a partial sell and to transfer to more of a conservative account. Right now I am still BULLISH.

The second chart below is the MACD, a cross down could correspond with the breaking of 2954 DECISIVELY on a close. Notice in June it crossed above, see blue arrow, this was a great place to BUY. Now that it is much higher and with the extension of the market I gave you the information as to where the market could reverse and what to look for.


Chart Source: Forexop.com

The rising wedge pattern is characterized by a chart pattern which forms when the market makes higher highs and higher lows with a contracting range. When this pattern is found in an uptrend, it is considered a reversal pattern, as the contraction of the range indicates that the uptrend is losing strength.

When this pattern is found in a downtrend, it is considered a bearish pattern, as the market range becomes narrower into the correction, indicating that the correction is losing strength and that the resumption of the downtrend is in the making.

In a rising wedge, both boundary lines slant up from left to right. Although both lines point in the same direction, the lower line rises at a steeper angle than the upper one. Prices usually decline after breaking through the lower boundary line.

As far as volumes are concerned, they keep on declining with each new price advance or wave up, indicating that the demand is weakening at the higher price level. A rising wedge is more reliable when found in a bearish market. In a bullish trend what seems to be a Rising Wedge may be a Flag or a Pennant (stepbrother of a wedge) requiring about four weeks to complete.

Rising Wedges are not guaranteed, so the 3019-3022 level and staying there for a couple of days could void this negative pattern. A break decisively on a close below 2979 could satisfy the Rising Wedge.

Source: Wikipedia

*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 2986, 2954, 2910, and 2780 areas. These might be BUY areas.
  • Support levels on the NASDAQ are 8175, 7884, 7771, and 7657.
  • On the Dow Jones support is at 26918, 26708, 25,538 and 26318.

These may be safer areas to get into the equity markets on support levels slowly. RESISTANCE LEVEL ON THE S&P 500 IS 3019 but rising as market goes up. If there is a favorable tariff settlement, the market should rise short term.


Source: Investopedia

THE BOTTOM LINE:

The S&P 500 has reached a new high, and as long as 2954 does not break down decisively with a lot a volume I am still relatively positive. We are positively OVERBOUGHT here short, so THIS IS NOT A TIME TO BUY a lot of Indexes here in my opinion I am still relatively Bullish.

The S&P needs to close above 3019-3022 and stay there two days to form another base from which to rise more, but if the S&P breaks below 2979, and daily this trend-line is rising, I will be getting Cautious, and a convincing close below 2954 will get me Very Cautious.

Best to all of you,
Joe
Joe Bartosiewicz, CFP®
Investment Advisor Representative

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 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.
Joe Bartosiewicz, CFP®
5 Colby Way
Avon, CT 06001
860-940-7020 or 860-404-0408

The World Leader in Intelligent Trading software – how it called the up move on June 4, 2019

When AIQ released StockExpert in 1987, the Expert Ratings were the foundation of the system. This release represented the first software product developed for personal computers that used Artificial Intelligence to signal equity movement. AIQ’s founder and knowledge engineer, Dr. J.D. Smith, chose to use expert system technology that was developed at Stanford University in the late 60’s. An expert system uses a knowledge based rule driven structure. 

Dr. Smith tested hundreds of technical rules that had been published by respected analysts.Those rules that tested well were placed into a knowledge base of rules. Rules were weighted based on their effectiveness. When a series of bullish rules was triggered, an Expert Rating buy signal was generated. A series of bearish rules generated an Expert Rating sell signal. 

In this video Steve Hill explains the internal rules of the
Expert System that generated the signal

The sell signal that the AI system issued on April 18, 2019 presaged a 2000 point move down. Things have now changed. On June 4, 2019 the AI system issued a buy signal.