Category Archives: educational newsletters

A Simple Indicator for Traders

First the Bad News: There are no “magic bullets” when it comes to trading.  There are people in this industry who have literally tested somewhere in the range of six bazillion “indicators” – give or take (“Hi. My name is Jay”).  Every trend following indicator looks like a gold mine when it latches onto a huge trend and rides it (but not so much when it starts getting whipsawed).  And every overbought/oversold indicator looks like a gift from heaven from time to time when it somehow manages to peak (or valley) and then reverses right at a high (or low).  And then the next time the thing gets oversold the security in question just keeps plunging and the previously “amazingly accurate” indicator just gets more and more oversold.

Bottom line: what I am about to discuss is likely no better or worse than a lot of other indicators.  And it is no holy grail.  Still, I kinda like it – or whatever that is worth.

EDITORS NOTE an AIQ EDS file for this indicator with the 3 step rules outlined can be downloaded from here you will need to copy or save this file into your wintes32/eds strategies folder. Alternatively the code is available at the end of this article for copying and pasting into a new EDS file.

UpDays20

I call this indicator UpDays20 and I stole, er, learned it originally from Tom McClellan of McLellan Financial Publications.  My calculation may be slightly different because I wanted an indicator that can go both positive and negative.  For a given security look at its trading gains and losses over the latest 20 trading days.

UPDays20 = (Total # of Up days over the last 20 trading days) – 10

So if 10 of the last 20 trading days showed a gain then UpDays20 would read exactly 0.

If only 6 of the last 20 trading days showed a gain then UpDays20 would read -4

You get the idea (and proving once again that it “doesn’t have to be rocket science”).  As a “trading method” it is always advised that this indicator – like most all other indicators – NOT be used as a standalone approach to trading.  That being said, the way I follow this indicator is as follows.

Step 1) UpDays20 drops to at least -2

Step 2) UpDays20 rises 2 points from a low

Step 3) The security in question then rises above its high for the previous 2 trading days

It is preferable to follow this setup hen the security in question is above its 200-day moving average, but that is up to the trader to decide (the danger to using this with a security below its 200-day moving average is that it might just be in the middle of a freefall.  The upside is that counter trend rallies can be fast and furious – even if sometimes short-lived).

Again, there is nothing magic about these particular steps.  They are simply designed to do the following:

1) Identify an oversold condition

2) Wait for some of the selling pressure to abate

3) Wait for the security to show some sign of reversing to the upside

Like just about every other indicator/method, sometimes it is uncannily accurate and sometimes it is embarrassingly wrong (hence the reason experienced traders understand that capital allocation and risk management are far more important than the actually method you use to enter trades).

In this previous article (in Figures 3 and 4) I wrote about using this indicator with ticker TLT.  Figure 1 and 2 display the “buy” signals generated using the rules above for tickers IYT and GLD.

1Figure 1 – UpDays20 “Buy” Alerts for ticker IYT (Courtesy AIQ TradingExpert)

2Figure 2 – UpDays20 “Buy” Alerts for ticker GLD (Courtesy AIQ TradingExpert)

Are these signals good or bad?  That is in the eye of the beholder and not for me to say.  One big unanswered question is “when do you exit”?  That is beyond the scope of this “idea” article – however, “sell some at the first good profit and then use a trailing stop” looks like a decent approach to consider) but would have a profound effect on any actual trading results.

Some of the signals displayed in Figures 1 and 2 are obviously great, others are maybe not so hot.  Interestingly, some of the signals in Figure 1 and 2 that don’t look to timely at first blush actually offered a profitable opportunity to a trader who was inclined to take a quick profit. Again, how you allocate capital and when you exit with a profit and when you exit with a loss would likely have as much impact on results as the raw “buy” signals themselves.

Summary

No one should go out and start trying to trade tomorrow based on UpDays20.  No claim is being made that the steps detailed herein will result in profits nor even that this is a good way to trade.

But, hey, it’s one way.

Jay Kaeppel Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro client.

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.

EDITORS NOTE an AIQ EDS file for this indicator with the 3 step rules outlined can be downloaded from here you will need to copy or save this file into your wintes32/eds strategies folder. Alternatively the code is available at the end of this article for copying and pasting into a new EDS file.

! UpDays20 – I call this indicator UpDays20. For a given security look at its trading gains and losses over the latest 20 trading days.

! UPDays20 = (Total # of Up days over the last 20 trading days) – 10

! So if 10 of the last 20 trading days showed a gain then UpDays20 would read exactly 0.

! If only 6 of the last 20 trading days showed a gain then UpDays20 would read -4

Upday if [close]>val([close],1).

totalupdayslast20days is CountOf(upday,20).

updayindicator is totalupdayslast20days – 10.

! How to follow this indicator

! Step 1) UpDays20 drops to at least -2

! Step 2) UpDays20 rises 2 points from a low

! Step 3) The security in question then rises above its high for the previous 2 trading days

UpDays20rises2points if updayindicator>valresult(updayindicator,1) and valresult(updayindicator,1)>valresult(updayindicator,2).

updays20atminus2orlower if valresult(updayindicator,2)<=-2.

closesabovehighof2priordays if [close]>val([high],1) and [close]>val([high],2).

Upsignal if UpDays20rises2points and updays20atminus2orlower and closesabovehighof2priordays.

The Gathering Storm

First the Good News:
*The market averages are still in an up trend
*The Fed has yet to “remove the punch bowl”
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Figure 1 – Major Averages still in Up Trends (Courtesy AIQ TradingExpert)
Fed Balance Sheet
Figure 2 – Fed Quantitative Easing propels the stock market (Courtesy RealInvestmentAdvice.com)
Now the bad news
Market Bellwethers Flashing Warnings
In this article I wrote about four tickers I follow for signs of early warnings of trouble.  At the moment, all four are flashing warnings.
bellwether 4
Figure 3 – Bellwethers flashing potential warnings (Courtesy AIQ TradingExpert)
Stocks are Extremely Overvalued
Something important to note: valuation indicators are NOT good timing indicators.  The overall market can be over or undervalued for years. However, overvalued valuation readings are extremely reliable at telling us what will come next once the top is in (whenever that may be).  Figure 4 displays the Schiller CAPE model which measures adjusted P/E ratio.schiller cape w datesFigure 4 – Schiller Adjusted PE (Courtesy: Schiller Data Library)
1901: Dow -37% in 32 months
1929: Dow -89% in 3 years
1932: Dow -49% in 13 months
1965: Dow sideways to 40% lower for 17 years
2000: Nasdaq 100 -87%
2007: Dow -55% in 17 months
2017: ??
When will the exact top form?  Don’t know
What will likely follow?  Don’t Ask
The Decennial Pattern
As I wrote about here and as you can see in Figures 5 and 6, the Year 7 into Year 8 period has historically witnesses significant market weakness.  That does not mean that that is what will happen this time around.  But it is reason for caution.
decennial
Figure 5 – Stock Market Decennial Pattern (Courtesy: OptionStrategist.com)
Year 7 2
Figure 6 – Trouble in Late Year “7”  (Courtesy: OptionStrategist.com)
Figure 7 from Tom McLellan illustrates this phenomenon even more clearly.
Year 7 3
Figure 7 – Trouble in Late Year “7”  (Courtesy: www.mclellanoscillator.com)
September
What a crummy time for September to roll around.  Figure 8 displays the fact that the Dow has lost -80% during the month of September since 1897.sep
Figure 8 – Dow has lost -80% during September since 1897
Figure 9 displays the fact that since 1955 most of the “September Nasty” has occurred in that last 10 trading days of the month (after the close on 9/15 this year)
sep x
Figure 9 – Dow in September; 1st 3 days (blue); Last 10 days (green); in between (red); 1955-2016
Investor Complacency
Despite the fact that:
*We have experienced one of the longest bull markets in history
*Stock prices are extremely overvalued on an objective historical basis
*A number of warning signs are flashing
The investment world seems relatively untroubled (in the interest of full disclosure I have done only limited selling so far myself – more on this in a moment).
Figure 10 displays the AAII investor cash allocation reading from earlier this year.   Low cash levels tend to signal complacency (and impending market trouble) while high cash levels tend to occur near market bottoms.
AAII Cash
Figure 10 – AAII Investor Cash % is low (Courtesy: American Association of Individual Investors)
Figure 11 displays the amount of assets in the Rydex suite of “bearish” funds from earlier this year.  As you can see, investors were not too concerned about the prospects for a bear market – a potential contrarian signal.
rydex bear assets
Figure 11 – Rydex Bearish Funds Assets low (Courtesy: The Lyons Share)
Figure 12 shows the level of margin debt versus stock prices.  Historically when margin debt peaks and begins to decline the stock market suffers significantly.  There is no way to predict  when margin debt will top out and roll over but it did recently reach a new all-time high.  Could it go higher? Absolutely.  But if it rolls over – then look out below.
margin debt x
Figure 12 – If Margin Debt peaks trouble may follow (Courtesy: dshort.com)
Figure 13 displays the stock market versus the number of “Hindenburg Omens” (a measure of “churning” in the stock market) that have occurred in the most recent 6-month period.  Another warning sign is flashing.
Hindenburg Omen 6
Figure 13 – Hindenburg Omen flashing a warning (Courtesy: SentimentTrader.com)
Summary
Does any of the above guarantee that a significant stock market decline is imminent?  The correct answer is “No.”  The major market indexes all remain above their long-term moving averages. This can be considered the very definition of a bull market.
I personally have seen lots of warning signs flash along the way over the years.  And I have found that it is important to pay attention to these and to “prepare for the worst” – i.e., to plan an exit/hedging strategy “just in case.”  But trying to pick the exact top is an excellent way to end up looking stupid.  Trust me on this one.
So here is my summary:
*I do not possess the ability to “call the top” nor to “predict what will happen next” in the stock market
*I do possess a reasonably good ability to identify the trend “right now”
*I also possess the ability to recognize gathering storms clouds (and, yes, they are forming) and the ability to formulate an “emergency plan” as well as the wherewithal to follow the plan “should this be an actual (market) emergency.”
The current level of market valuation – and the history of the stock market following previous similar such readings – suggests that the next bear market will surprise many investors by its severity.
The clouds are gathering.  Please plan accordingly.
Jay Kaeppel Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro client. 
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.

One More Cry of ‘Wolf’

If I were the type to make bold proclamations I would probably consider “taking my shot” right here and shout “This is the Top” and/or “The Market May Crash.”  Unfortunately, on those occasions (well) in the past when I would make bold public predictions of what was about to happen in the financial markets I would almost invariably end up looking pretty stupid. So even if I did make a “bold proclamation” it wouldn’t necessarily mean that anyone should pay any attention.
Besides all that the last thing I want is for “the party to end”.  Even if you do think the market is about to tank it’s a pretty crummy thing to have to root for.  Even if you did manage to “call the top”, the ripple effect of the ramifications associated with a serious stock market decline can have pretty negative effect on just about everyone’s life.
So let’s put it this way: I am concerned – and prepared to act defensively if necessary – but still have money in the market and am still hoping for the best.
Reasons for Caution (Indexes)
Figure 1 displays four major indexes. The Dow keeps hitting new highs day after day while the others – at the moment – are failing to confirm.  That doesn’t mean that they won’t in the days ahead.  But the longer this trend persists the more negative the potential implications.
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Figure 1 – Dow at new highs, small-caps, Nasdaq and S&P 500 not quite (Courtesy AIQ TradingExpert)
Reasons for Caution (Bellwethers)
Figure 2 displays 4 “bellwethers” that I follow which may give some early warning signs.
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Figure 2 – Market Bellwethers possibly flashing some warning signs (Courtesy AIQ TradingExpert)
*SMH soared to a high in early June and has been floundering a bit since.
*Dow Transports tried to break out to the upside in July but failed miserably.
*XIV is comfortably in new high territory.
*BID tried to break out in July and then collapsed.  It is presently about 12% off of its high.
In a nutshell – 3 of the 4 are presently flashing warning signs.
Reasons for Caution (Market Churn)
In this article I wrote about an indicator that I follow that can be useful in identify market “churn” – which can often be a precursor to market declines.  Spikes above 100 by the blue line often signify impending market trouble
It should be noted that the indicators signals are often early and occasionally flat out wrong.  Still, a churning market with the Dow making new highs has often served as a “classic” warning sign.
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Figure 3 – JK HiLo Index (blue) versus Nasdaq Compsite / 20 (red); 12/31/2006-present
Summary
Again, and for the record, I do not possess the ability to “predict” the markets.  But I have seen a few “warning signs” flash bright red at times in the past.  As a general rule, it is best to at least pay attention – and maybe make a few “contingency plans” – you know,  just in case.
Here’s hoping my gut is wrong – again.
Jay Kaeppel Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client. 
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.

One Good Reason NOT to Pick a Bottom in DIS

A better title for this article might be “How to Avoid Losing 98% in Disney.”
The recent dip in the price of Disney stock may ultimately prove to be a buying opportunity.  But for reasons detailed below I am going to let this one pass.
If you have read my stuff in the past you know that I look a lot at seasonal trends.  This is especially true for sectors and commodities – which in some cases can be tied to recurring fundamental factors.  I have occasionally looked at individual stocks (here and here and here), but tend to think that an individual company’s fundamentals can change so drastically over time that a persistent seasonal trend is less likely.
It appears that there are exceptions to every rule.
In Figure 1 below we see that after a strong run up from its 2009 low, Disney finally topped out in August of 2015. Since that time it’s been a string of large moves up and down – with the latest being down. This might prompt one to consider the latest dip as a buying opportunity.  And in fact, maybe it is. But I won’t be making that play myself based simply on a seasonal trend in DIS stock that was highlighted by Brooke Thackray in his book Thackray’s 2017 Investor’s Guide.
0Figure 1 – Is latest dip in DIS a buying opportunity?  Maybe, but history suggests we look elsewhere….(Courtesy AIQ TradingExpert)
When NOT to Own Disney Stock
In his book, Thackray highlights the period from June 5th through the end of September as an “unfavorable” period for DIS stock.  He also listed a specific “favorable” period that I’ll not mention here.  For purposes of this article I made the following changes:
*The “unfavorable” period begins at the close on the 5th trading day of June and ends at the close on the last trading day of September.
*The rest of the year – i.e., end of September until the close on the 5th trading day of June – is considered the “favorable” period.
Also, the test uses price data only.  No dividends are included nor is any interest assumed to be earned while out of DIS stock.
The results are fairly striking.  From the end of 1971 through the end of 2016:
*$1,000 invested in DIS on a buy-and-hold basis grew +8,042% to $81,422 (average annual +/- = +15.8%)
*$1,000 invested in DIS only during the “favorable” period grew +430,874% to $4,309,735 (average annual +/- = +25.0%)
*$1,000 invested in DIS only during the “unfavorable” period declined -98% to $18.89 (average annual +/- = (-6.9%))
It’s sort of hard to ignore the difference between +430,784% and -98%.
Figure 1 displays the cumulative performance during the unfavorable period from 1971 through 2016.
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Figure 1 – Growth of $1,000 invested in DIS only from close of June Trading Day #5 through the end of September (1971-2016)
Figure 2 displays the growth of $1,000 during the favorable period (blue line) versus a buy-and-hold approach (red line).
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Figure 2 – Growth of $1,000 invested in DIS only from the end of September through June Trading Day #5 (blue) versus Buy-and-Hold (red); 1971-2016
*The favorable period showed a net gain in 39 out of 45 years (87%)
*The unfavorable period showed a net gain in only 13 out of 45 years (29%)
*Buy-and-hold showed a net gain in 28 out of 45 years (62%)
Figure 3 displays year-by-year results.
Year Favorable Unfavorable Buy/Hold
1972 78.1 (3.5) 71.9
1973 (53.5) (12.0) (59.1)
1974 4.4 (56.4) (54.4)
1975 175.6 (12.4) 141.5
1976 5.2 (6.9) (2.0)
1977 (28.2) 19.1 (14.4)
1978 4.6 (3.3) 1.2
1979 1.2 10.5 11.9
1980 20.8 (5.8) 13.8
1981 42.8 (28.7) 1.9
1982 16.0 4.4 21.1
1983 (5.7) (11.6) (16.7)
1984 25.6 (9.6) 13.6
1985 94.4 (3.3) 88.0
1986 98.3 (23.0) 52.8
1987 14.6 20.1 37.6
1988 4.2 6.5 10.9
1989 32.7 28.3 70.3
1990 28.4 (29.4) (9.3)
1991 14.4 (1.5) 12.8
1992 51.3 (0.7) 50.2
1993 16.0 (14.5) (0.8)
1994 23.2 (12.4) 7.9
1995 27.7 0.3 28.0
1996 18.4 0.0 18.4
1997 43.3 (0.9) 41.9
1998 36.9 (33.6) (9.1)
1999 15.8 (15.8) (2.5)
2000 4.0 (4.8) (1.1)
2001 23.6 (42.1) (28.4)
2002 12.6 (30.1) (21.3)
2003 50.9 (5.2) 43.0
2004 28.9 (7.6) 19.2
2005 (2.5) (11.6) (13.8)
2006 41.8 0.8 43.0
2007 (6.2) 0.4 (5.8)
2008 (24.4) (7.0) (29.7)
2009 29.1 10.1 42.1
2010 16.1 0.2 16.3
2011 30.4 (23.4) (0.0)
2012 15.9 14.6 32.8
2013 54.3 (0.6) 53.4
2014 17.2 5.2 23.3
2015 20.4 (7.3) 11.6
2016 5.0 (5.6) (0.8)
2017 ? ? ?
# Years UP 39 13 28
# Years DOWN 6 32 17
Average % +/- 25.0 (6.9) 15.8
Figure 3 – Year-by-Year Results
Summary
Brooke Thackray found an extremely interesting and robust “unfavorable” seasonal trend in DIS stock.  Of course none of the data above guarantees that DIS stock is doomed to languish and/or decline in the months ahead.  But I for one do not intend to “buck the odds” and play the long side of DIS for a while.
Jay Kaeppel  Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro http://www.aiqsystems.com) client. 
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.

Four Things to Watch for Warning Signs

First things first: I am primarily a trend-follower (this is based on, a) the relative long-term benefits of following trends and b) my lack of ability to actually “predict” anything – but I digress).
As a trend-follower I love the fact that the stock market has been trending higher and the fact that there is so much “angst” regarding the “inevitable top.”  Still, like a lot of investors I try to spot “early warning signs” whenever possible.  Here are the four “things” I am following now for signs of trouble.
Fidelity Select Electronics
In Figure 1 you see, a) the blow-off top of 1999-2000 and b) today.  Are the two the same?  I guess only time will tell.  But the point is, I can’t help but think that if and when the bloom comes off of the electronics boom, overall trouble will follow.  Here is hoping that I am not as correct here as I was here.
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Figure 1 – Ticker FSELX (Courtesy AIQ TradingExpert)
Just asking.
Transportation Index
As you can see in Figure 2, the Dow Transports has a history of making double tops which is followed by trouble in the broader market.  Are we in the process of building another double top?  And will trouble follow if we are?  Dunno, hence the reason it is on my “Watch List” rather than on my “OH MY GOD SELL EVERYTHING NOW!!!!! List”.
2
Figure 2 – Dow Transportation Index (Courtesy AIQ TradingExpert)
I guess we’ll just have to wait and see.
Ticker XIV
Ticker XIV is an ETF that is designed to track inverse the VIX Index. As a refresher, the VIX Index tends to “spike” higher when stocks fall sharply and to decline when stocks are rising and/or relatively quiet.  To put it in simpler terms, in a bull market ticker XIV will rise.  As you can see in Figure 3 one might argue that XIV has gone “parabolic”.  This is a potential warning sign (assuming you agree that the move is parabolic) as a parabolic price move for just about anything is almost invariably followed by, well, let’s just say, “not so pretty”.
3
Figure 3 – Ticker XIV (Courtesy AIQ TradingExpert)
Let’s hope not.  Because if it does qualify as  parabolic that’s a very bad sign.
Ticker BID
This one may or may not be relevant but for what it is worth, Sotheby’s (ticker BID) has on several occasions served as something of a “leading indicator” at stock market tops (for the record it has also given some false signals, so this one is more for perspective purposes rather than actual trading purposes). Still, if this one tops out in conjunction with any or all of the above, it would likely serve as a useful warning sign.
4
Figure 4 – Ticker BID (Courtesy AIQ TradingExpert)
Summary
There is no “urgent action” to be taken based on any of this.  Bottom line: Nothing in this article should trigger you to run for the exits.
Still, it might be wise to at least take a look around and “locate the exit nearest you.”
You know, just in case.
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (Courtesy AIQ TradingExpert) client. http://jayonthemarkets.com/
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 MACD ‘Tell’ Strikes Goldman Sachs

There are many ways to use the MACD indicator developed long ago by Gerald Apel.  This is one of them.  Maybe.  Nothing more, nothing less.
First the caveat: what follows is NOT a “trading system” or even something that you should consider on a standalone basis.
MACD
The MACD indicator uses exponential moving averages to identify the underlying trend for a given security and is also used by many traders to identify divergences which may signal an impending change of trend.
Figure 1 displays the daily MACD for ticker SPY.
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Figure 1 – Ticker SPY with MACD Indicator (Courtesy AIQ TradingExpert)
The MACD ‘Tell’
While this is NOT intended to be a mechanical signal, I am going to put specific rules on it just to give it some structure.  The rules:
1) If the daily MACD (12,26,9) has declined for at least 7 consecutive trading days AND
2) The 2-day RSI is at 64 or above
Then an “alert” signal is flashed.  The key thing to note is that if the MACD ticks higher on the day that the 2-day RSI rises above 64, the signal is negated.
Before proceeding please note that the 12,26,9 parameter selection is simply the “standard” for MACD.  Also, there is nothing magic about 7 consecutive days – so one might experiment with different values there.  Finally, using the 2-day RSI and a “trigger” value of 64 are also both arbitrary.  There may be better values and/or different overbought/oversold indicators to use.
Ticker GS
A “classic” example of the MACD Tell appears in Figure 2 using ticker GS.
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Figure 2 – Ticker GS with the MACD Tell (Courtesy AIQ TradingExpert)
The MACD Tell is typically best used as a short-term indicator.  In this case a short-term trader might have considered playing the short side of GS – or even better – using option strategies such as buying puts or selling bear call spreads.
Summary
No one should rush out and start trading put options based on this indicator (or any other indicator for that matter) without spending some time doing some homework and testing out the viability for producing profits.
In reality, this is the type of indicator that should typically be combined with “something else” and/or used as a confirmation rather than as a standalone approach.
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.

March and April (and the Train Rolls On)

The stock market is off to a flying start in 2017.  We have a buy signal from the January Barometer, the 40-Week Cycle just turned bullish  and most of the major U.S. indexes soaring to new all-time highs.  See Figure 1.

1a

Figure 1 – Major U.S. Average hitting new highs (charts courtesy AIQ TradingExpert Pro)

With the turn of the month near, what lies ahead for March and April?  Well, it’s the stock market, so of course no one really knows for sure.  Still, if history is an accurate guide (and unfortunately it isn’t always – and I hate that part), the odds for a continuation of the advance in the months just ahead may be pretty good.

Figure 2 displays the growth of $1,000 invested in the Dow Jones Industrials Average ONLY during the months of March and April starting in 1946.

2a

Figure 2 – Growth of $1,000 invested in the Dow Jones Industrials Average ONLY during the months of March and April (1946-2016)

For the record, the months of March and April combined:

*Showed a gain 53 times (75% of the time)

*Showed a loss 18 times (25% of the time)

*The average UP year showed a gain of +5.2%

*The average DOWN year showed a loss of (-3.3%)

*The largest Mar/Apr gain was +15.9% (1999)

*The largest Mar/Apr loss was (-6.0%) (1962)

Summary

So is the stock market train sure to “roll on” during the March/April timeframe?  Not at all.  But with “all systems Go” at the moment and with a historically favorable period approaching – and despite a lot of overly bullish sentiment beginning to bubble up – I feel compelled to stay on board at least until the next stop..

Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client. http://jayonthemarkets.com/

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.

With Retailers, it’s ‘When’ Not ‘What’

I’ve been seeing a number of panicked missives lately regarding the retailing sector.  They typically go something like this:
“Despite new highs for most of the major market indexes, the retailing sector has been struggling – and in some cases hit hard – therefore it is clearly (paraphrasing here) THE END OF THE WORLD AS WE KNOW IT, AHHHHHHHHHHHHH……………………..”
Or something along those lines.  And the truth is that they may be right.  But as it turns out, with the retailing sector it is typically more a question of “when” and not “what” (or even WTF
Recent Results
The concerns alluded to above are understandable given recent results in certain segments of the retailing sector. Figure 1 displays the stock price action for four major retailers.  It isn’t pretty.
(click to enlarge)
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Figure 1 – Major retailers taking a hit (Chart courtesy AIQ TradingExpert)
So if major retailers are performing poorly one can certainly see why someone might extrapolate this to conclude that the economy is not firing on all cylinders and that the recent rally to new highs by the major averages is just a mirage.  And again, that opinion may ultimately prove to be correct this time around.
But before swearing off of retailing stocks, consider the following.
Retailers – When not What
For our test we will use monthly total return data for the Fidelity Select Retailing sector fund (ticker FSRPX).  Figure 2 displays the growth of $1,000 invested in FSRPX only during the months of:
*February, March, April, May, November, December
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Figure 2 – Growth of $1,000 invested in ticker FSRPX only during the “favorable” months since 1986
For the record:
*An initial $1,000 grew to $50,274, or +4,927% (this test does not include any interest earned during the months out of FSRPX).
*# of years showing a net gain = 27
*# of years showing a net loss = 4
*Average UP year = +17.0%
*Average DOWN year = (-3.4%)
*Maximum UP Year = +50.0% (1990)
*Maximum DOWN Year = (-5.9%) (1994)
The Year-by-Year Results appear in Figure 3
Year % +(-)
1986 26.2
1987 15.8
1988 12.2
1989 16.9
1990 50.0
1991 45.5
1992 8.0
1993 4.6
1994 (5.9)
1995 3.0
1996 26.1
1997 18.1
1998 45.7
1999 4.0
2000 1.8
2001 12.5
2002 (0.1)
2003 18.5
2004 11.3
2005 10.3
2006 0.1
2007 (2.8)
2008 (4.7)
2009 44.9
2010 24.5
2011 4.6
2012 10.8
2013 16.6
2014 11.5
2015 6.1
2016 9.2
Figure 3 – Year-by-Year Results for  “Favorable” Months since 1986
The Rest of the Year
If for some reason you had decided to skip the months above and hold FSRPX only during all of the other months of the year, your results appear in Figure 4.4
Figure 4 – Growth of $1,000 invested in ticker FSRPX only during the “unfavorable” months since 1986
For the record:
*An initial $1,000 grew to $1,037, or +3.7% (this test does not include any interest earned during the months out of FSRPX).
Summary
Is the retailing sector guaranteed to generate a gain during our “favorable” months in 2017?  Not at all.  Still, given that retailing is presently beaten down a bit and the fact that the worst full year loss during the favorable months was -5.9%, it may be time to think about taking a look (although – as always, and for the record – I am not “recommending” retailing stocks, only pointing out the historical trends).
Still, as the old saying goes, the results below are what we “quantitative types” refer to as “statistically significant”.
*Favorable months since 1986 = +4,927%
*Unfavorable months since 1986 = +3.7%
 Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client. http://jayonthemarkets.com/
 

MatchMaking a seasonal Energy play

If you follow jay Kaeppel’s posts in this blog, you’ll know that he’s the master of research on all things seasonal. This past week he posted a seasonal article on energy using FSESX – Fidelity Select Energy Services. Previously he had noted the bullish tendency for ticker FSESX during the months of February, March and April.  In his follow up piece, he added one more “favorable” month and then also looked at a 6-month “unfavorable” period. The article is included at the end of this post so you can see the results.

As Mutual funds are not for everyone, we went in search of alternative tickers that could closely match FSESX in performance characteristics. Using AIQ Matchmaker we compared the price action of FSESX against our universe of stocks and ETFs looking for a match.

Matchmaker uses Spearman Rank Correlation analysis to identify a close match to FSESX. The closer the result to 1000, the higher the correlation. Anything over 950 is a very close match. Here’s the results.
Figure 1. MatchMaker correlation for last 4 years – FSESX vs stocks and ETFs
The ETF IEZ – iShares Oil and Equipment & Services showed a very high correlation over the 4 years we tested. OIH – Oil Service Holders, another ETF, also showed high correlation.
Here’s an AIQ overlay chart of recent daily price action comparing FSESX vs IEZ.
 
Figure 2. Recent daily price action comparing FSESX vs IEZ.
IEZ appears to be a good surrogate for FSESX at least over the last 4 years.
We also wanted a visual of the seasonal pattern in action. Fortunately we have a tool still in development at AIQ that’s just right for this. Basically it provides a price comparison of ‘x’ numbers of years of the same ticker overlaid on each other.
Here’s 3 of the last 4 years on IEZ, the average of the years displayed is in black. We highlighted the Feb, Mar, Apr and Dec in yellow. We could have included more years but for illustration purposes it was easier to show the 3 years (the chart gets busy with too many lines on it!)
 
Figure 3 – IEZ seasonal chart (beta) for 3 years with average.
The Feb, Mar, Apr period has a definite bullish tendency, the Dec period does Ok too. You’ll notice the tendency for IEZ to fall sharply in January. Conclusion? IEZ is a reasonable surrogate for FSESX if you’re contemplating this seasonal move.
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The article this follow up is based upon is by Jay Kaeppel and is included below. Jay is Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro client. http://jayonthemarkets.com/

When to Feel ‘Energetic’ (or NOT)

If you are looking for a market sector with some serious seasonal trends, look no further than the energy sector. Previously I had noted the bullish tendency for ticker FSESX during the months of February, March and April.  In this piece, we will add one more “favorable” month and then also look at a 6-month “unfavorable” period.
For the record, the information that follows is not being recommended as a standalone strategy.  It is presented simply to make you aware of certain long-term trends that have been very persistently bullish (or bearish as the case may be) in the energy sector.
4 Favorable Months
*The four “favorable” months for our test are February, March, April and December
Figure 1 displays the growth of $1,000 invested in ticker FSESX only during these four months every year since 1986 versus simply buying-and-holding ticker FSESX.
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Figure 1 – Growth of $1,000 invested in FSESX only during Feb, Mar, Apr, Dec every year since 1986
Starting in 1986, an initial $1,000 investment grew to $76,019 (or +7,500%) versus $10,237 (or 923%) using a buy-and-hold strategy.
6 Unfavorable Months
The six “Unfavorable” months are June, July, August, September, October and November.
First the “positive” news:
*This 6-month period has managed to show a gain 14 times in 31 years – so by no means should you consider this period a “sure thing” loser
*During 4 separate years – 1997, 2003, 2004 and 2010 – the “unfavorable” months registered a cumulative gain in excess of +30%.
Doesn’t sound all that “unfavorable” so far does it?  But here’s the catch: Despite the occasional 30%or more gain, it is fair to refer to this 6-month period as “unfavorable” as the cumulative long-term results of buying and holding FSESX during these months has been nothing short of devastating.
Figure 2 displays the growth of $1,000 invested in ticker FSESX only between the end of May and the end of November every year starting in 1986.
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Figure 2 – Growth of $1,000 invested in FSESX only during June through November every year since 1986
Starting in 1986, an initial $1,000 investment declined to just $82, or a cumulative loss of -91.8%
Figure 3 displays some comparative data between favorable and unfavorable periods as well as using a Buy-and-Hold strategy.
Measure Buy-and-Hold 4 Favorable Months 6 Unfavorable Months
Average Annual % +(-) 12.8 16.5 (-4.2)
Median Annual % +(-) 8.7 15.5 (-1.8)
Standard Deviation 33.4 20.1 24.6
# Years UP 18 26 14
# Years DOWN 13 5 17
Worst Year (-55.4) 2008 (-7.6) 1994 (-62.8) 2008
$1,000 becomes $10,237 $76,019 $82
Cumulative % +(-) +923% +7,500% (-92%)
Figure 3 – Comparative Results
Figure 4 displays the year-to-year results for a Buy-and-Hold approach versus holding only during the 4 “favorable” months or the “Unfavorable” 6 months.
Year All 12 months % +(-) 4 Favorable % +(-) 6 Unfavorable % +(-)
1986 (8.9) (5.2) (9.2)
1987 (20.7) 22.9 (40.1)
1988 (4.2) 22.8 (16.3)
1989 50.3 27.1 16.2
1990 8.7 4.9 (11.2)
1991 (19.9) 4.1 (25.0)
1992 4.9 (1.6) (1.3)
1993 16.4 24.5 (10.7)
1994 (0.5) (7.6) 3.1
1995 40.0 33.7 2.0
1996 45.9 22.5 20.8
1997 43.9 (4.9) 32.9
1998 (41.4) 26.5 (50.5)
1999 80.9 74.1 7.5
2000 51.7 77.6 (21.1)
2001 (22.4) 20.8 (32.4)
2002 2.2 26.2 (18.0)
2003 13.1 15.5 (16.0)
2004 26.2 1.2 30.2
2005 47.4 4.8 34.0
2006 (9.1) (4.1) (1.8)
2007 58.3 25.6 16.7
2008 (55.4) 10.5 (62.8)
2009 60.4 24.5 9.6
2010 31.7 21.6 33.7
2011 (18.5) 3.1 (16.8)
2012 (3.9) 0.7 9.6
2013 14.1 0.3 11.5
2014 (19.5) 7.2 (26.7)
2015 (19.7) 2.9 (17.9)
2016 44.2 28.4 20.1
Figure 4 – Yearly % +(-) for Buy-and-Hold versus 4 Favorable Months versus 6 Unfavorable Months
Summary
There is no guarantee from year-to-year results of buying and holding ticker FSESX during the “Favorable 4” months will show a gain and/or outperform the “Unfavorable 6” months. And there is by no means any guarantee that the “Unfavorable 6” will show a loss during any given year (note that 2016 saw the Unfavorable 6 generate a cumulative gain of +20.1%!).  So just remember that we are talking about some very long-term  trends here.
Still, most investors can discern the difference between:
*Favorable 4 months gain = +7,500%
*Unfavorable 6 months loss = (-92%)
This type of difference is what we “quantitative types” refer to as “statistically significant.”

Out With The Old (Part 1)

Before moving on to 2017 I want to revisit a couple of “old” ideas I wrote about recently.
One 9/23/16 I wrote this article detailing a very aggressive bond trading strategy.  The model detailed essentially combined two other models that I have used for a number of years – one a “timing” model, the other  a “seasonal” model.  If either model is bullish then ticker TMF (a triple leveraged long-term treasury bond fund) is held.
As shown in Figure 1, the first model turns:
*Bullish for Bonds when the 5-week moving average for ticker EWJ drops below the 30-week moving average for ticker EWJ
*Bearish for Bonds when the 5-week moving average for ticker EWJ rises above the 30-week moving average for ticker EWJ
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Figure 1 – Bond Bull and Bear signals using ticker EWJ (Courtesy AIQ TradingExpert)
The second model simply holds bonds during the last 5 trading days of each month
The rules for Jay’s Very Risky Bond Model (JVRBM) are as follows:
Bullish for TMF if:
*Ticker EWJ 5-week MA < Ticker EWJ 30-week MA, OR
*Today is one of the last 5 trading days of the month
Bearish for TMF if:
*EWJ 5-week MA > EWJ 30-week MA AND today IS NOT one of the last 5 trading days of the month
Figure 2 displays the growth of $1,000 invested in TMF if the bullish conditions above apply since 4/16/2009 (when TMF started trading).
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Figure 2 – Growth  of $1,000 invested in ticker TMF when JVRBM is Bullish (4/16/2009-12/30/2016)
Figure 3 displays the growth of $1,000 invested in TMF is the bearish conditions above apply since 4/16/2009 (when TMF started trading).
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Figure 3 – Growth  of $1,000 invested in ticker TMF when JVRBM is Bearish (4/16/2009-12/30/2016)
For the record:
*During the Bullish periods in 2016 ticker TMF gained +72%
*During the Bearish periods in 2016 ticker TMF lost -43%
Figure 4 displays the growth of  $1,000 invested in ticker TMF during the Bullish versus Bearish periods in 2016.
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Figure 4 – Growth of $1,000 invested in TMF during Bullish versus Bearish periods (12/31/2015-12/31/2016)
All in all not a bad year (Just don’t forget high degree of risk).
Summary
Make no mistake, this is a trading method that entails a great deal of risk.  One can reasonably ask if a long position in a triple leveraged fund of any kind is really a good idea.
But, hey, the phrase “high risk, high reward” exists for a reason.
Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client. http://jayonthemarkets.com/