Category Archives: educational newsletters

Bartometer November 11, 2019

Hello Everyone,

Market Recap:

On my last Bartometer I stated that we were #1 On Buy signal, #2 the Dow Jones and the stock market had Bullish Ascending triangles patterns, #3. Money flow and On Balance Volume were breaking out to NEW HIGHS when the stock market wasn’t. This shows demand for stocks over and above the price. These 3 indicators were telling me and I was telling you that I thought the market would breakout to new highs, AND IT DID. The stock market broke out of the bullish ascending triangle, (see index on the next page about ascending triangles)*. On the S&P I said that it had to breakout of 3030 and it did. It is now 3093. I said the Dow Jones had to breakout of the 27400, and it did. It is now 27681.

Where does is go from here and could we get a little pull back?

See chart below for an explanation.

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

Stocks benefited from encouraging news of a potential trade agreement between the US and China as well as some good news on the economy. Markets seldom move in only one direction. The S&P500 is now within 3% of its fundamental value. A pause or even a slight correction is overdue, particularly if there is any negative news. Even so, with stronger fundamentals and the Fed purchasing securities, any correction should be fairly mild. Stay bullish on stocks.

Adding to Bob’s his Comment:

Signs of strength in the economy combined with gains in stock prices led to a sharp jump in intermediate and longer-term interest rates. This week the interest rate on 10-year T-Notes moved 25 basis points higher. The latest moves turned the yield curve to a more normal shape. As with stocks, interest rates have spiked higher and are overdue for some correction. However, after more than a decade of interest rates declining and being well below their fundamental levels, rates remain 200 basis points below fundamental levels. While the Fed’s low target places a limit on how high interest rates will go, there is still a lot of upward potential for longer-term rates. Fixed-income portfolios should remain defensive.

On the Technical Side:

Over the last almost 22 months, the Dow Jones FINALLY broke out to new highs from the old highs set on Jan 31, 2018 at 26,714. That is a POSITIVE. Money Flow and On Balance Volume are still at a new high, but the markets are again becoming overbought. So, could the market comes down a little now? YES, the markets are now overbought and there could easily be a slight decline to 27191 to 27298, a decline of around 2%, and the S&P to decline to 3029 area, a decline of 2% or so, BUT no more than that, because if the markets GO BACK BELOW THE BREAKOUT it can cause traders to start selling in mass. So look for a possible test of the breakout, but IF the markets close below the breakout of 27300 to 27384 on the Dow Jones or 3030 on the S&P convincingly, then I will be getting Very Cautious. If that doesn’t happen then I am still moderately bullish. But I realize the market are now OVERBOUGHT and in my opinion, it is not a time to go out and invest a lot of money in the markets. Dollar cost averaging is fine. I stated in my January Bartometer that I thought the S&P could reach 3130 to 3180+ this year. At 3093 currently, that is about 1-3% from here.

Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until November 9th, 2019. These are passive indexes.
*Dow Jones +20%
S&P 500 +24%
NASDAQ Aggressive growth +31%
I Shares Russell 2000 ETF (IWM) Small cap +19%
International Index (MSCI – EAFE ex USA) +16%
Moderate Mutual Fund +14%
Investment Grade Bonds (AAA) +13%
High Yield Merrill Lynch High Yield Index +11%
Floating Rate Bond Index +4.0%
Short Term Bond +4.0%
Fixed Bond Yields (10 year) +1.75.% Yield


The average Moderate Fund is up 14% this year fully invested as a 60% in stocks and 40% in bonds and nothing in the money market.

S&P 500

Ascending Triangle is above, and is Bullish as long as it stays above the breakout of 3027-3030

The S&P 500 is above. The S&P 500 contains 500 of the largest companies in the US. The 2 top companies by market value are Microsoft and Apple. But there are 498 other stocks in it. If you can see above the ASCENDING TRIANGLE that is BOLDED. Notice the clear breakout to new highs. This is clearly BULLISH like I thought would happen last month. And it did. Now that it has risen 2% ABOVE the breakout, a BREAKDOWN below the 3030 convincingly would get me VERY Cautious. It is normal to come back down to test the breakout, but not to break down below it. So if you see the S&P close below 3030 convincingly on heavy volume, I will be getting Cautious to Very Cautious depending on the reason. But the market is now at fair value to me and there may be another 1-4% more for the year in my opinion, but not much more unless there is incredible news from the Political or Tariff front. It is not a great time to go out and buy a lot in the stock market in my opinion as well.

The Middle graph is called the SK-SD Stochastics model. It shows the markets as being overbought when the indicator is above 88 where it is above the 88 horizontal line. Notice every time the indicator was above 88 it seemed to peak out and sell off. This is not guaranteed but it is good indicator.

The 3rd indicator is MACD or Momentum this indicator is still bullish until the pink line breaks down below the blue line. As of right now, momentum is still higher, but the markets are over bought, so be careful.

An ascending triangle is a chart pattern used in technical analysis. It is created by price moves that allow for a horizontal line to be drawn along the swing highs, and a rising trend line to be drawn along the swing lows. The two lines form a triangle. Traders often watch for breakouts from triangle patterns.

See the pattern above? It’s an Ascending triangle. Ascending triangles are BULLISH as long as they don’t go back below the breakout. If this is a successful Ascending triangle the S&P can rise to 3130-3180 first and possibly higher IF the breakout isn’t broken convincingly on the downside or breaking and closing below 3030.

On-balance volume (OBV) is a technical analysis indicator intended to relate price and volume in the stock market. OBV is based on a cumulative total volume.

Money flow is calculated by averaging the high, low and closing prices, and multiplying by the daily volume. Comparing that result with the number for the previous day tells traders whether money flow was positive or negative for the current day. Positive money flow indicates that prices are likely to move higher, while negative money flow suggests prices are about to fall.

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 the 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 3027-3030, 3017, 2952, 2922, and 2812. These might be BUY areas.
  • Support levels on the NASDAQ are 8251, 8144, 8080 and 7771.
  • On the Dow Jones support is at 26,285, 25,763, and 25,458
  • These may be safer areas to get into the equity markets on support levels slowly.
  • RESISTANCE LEVEL ON THE S&P 500 IS 3130 and the Dow Jones breakout is 27,400. If there is a favorable tariff settlement, the market should rise short term.

THE BOTTOM LINE:

The Dow, the S&P 500 and the NASDAQ are at new highs after rallying over the last 3 weeks. Normally the markets after reaching new highs become overbought and may come back down towards the breakout areas to see if the breakouts area holds. lf breakout of 3030 are holds then the markets tend to drift back towards the old high to see if it can break out again. If it does then 3130 to 3180 could be the next target. If 3030 doesn’t hold on the S&P and starts to break down below 3030 then I will be getting cautious or very cautious.. I WILL CONTINUE TO ANALYZE THE TECHNICALS OF THE MARKET. The seasonal patterns of the markets are bullish towards the end of the year. Last year the markets fell in December. It looks like the market still wants to go up, but with tweets coming out hourly, market timing will be more difficult.

Best to all of you,

Joe Bartosiewicz, CFP®

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

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

Charts provided by AIQ Systems:

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

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

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

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

Figure 1 – Major Indexes (Courtesy AIQ TradingExpert)

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

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

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

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

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

The action here is much more mixed and muddled.

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

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

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

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

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

The Bottom Line

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

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

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

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

*How much capital you will allocate to each position?

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

*What will cause you to exit with a profit?

*What will cause you to exit with a loss?

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

*And so on and so forth

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

Jay Kaeppel

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

The Bartometer September, 2019

Hello Everyone,

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

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

On the Technical Side

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

Interest Outlook

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

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

These are passive indexes.

*Dow Jones +18%

S&P 500 +21%

NASDAQ Aggressive growth +25%

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

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

Moderate Mutual Fund +12%

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

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

Floating Rate Bond Index +5% +2.60%

Short Term Bond +3%

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

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

*Explanation of each below

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

Source: AIQ Systems on graphs

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

Source: Investopedia

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

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

THE BOTTOM LINE:

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

Best to all of you,

Joe Bartosiewicz, CFP®
Investment Advisor Representative

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Beating the Bond Market

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

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

But is it really the best play?

Long-Term Treasuries vs. “Others”

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

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

For the record:

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

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

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

A Broader Approach

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

*Bloomberg Barclay’s Convertible Bond Index

*Bloomberg Barclays High Yield Very Liquid Index

*Bloomberg Barclays Treasury Long Index

*Bloomberg Barclay’s Intermediate Index

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

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

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

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

As you can see, the 4-index approach:

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

*Had a slightly lower maximum drawdown

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

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

Figure 5 – Long Treasuries vs. 4-Bond Index

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

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

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

Summary

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

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

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

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

Bonds versus Stocks

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

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

CWB – as a proxy for convertible bonds

HYG – As a proxy for high-yield corporates

TLT – As a proxy for long-term treasuries

IEI – As a proxy for short-term treasuries

SPX – As a proxy for the overall stock market

BND – As a proxy for the overall bond market

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

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

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

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

A Slight Detour

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

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

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

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

The Theory: Parts 1 and 2

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

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

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

Jay’s Seasonal Bond System

During the months of November through April we will hold:

*Bloomberg Barclay’s Convertible Bond Index

*Bloomberg Barclays High Yield Very Liquid Index

During the months of May through October we will hold:

*Bloomberg Barclays Treasury Long Index

*Bloomberg Barclay’s Intermediate Index

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

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

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

Figure 6 displays some comparative performance figures.

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

Figure 6 – Seasonal Strategy versus Buy/Hold/Rebalance

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

Summary

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

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

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

Answer: Well, it’s one way….

Jay Kaeppel

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

A Simple Alternative to Buy-and-Hold

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

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

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

The Monthly LBRMomentum Strategy

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

A Buy Signal occurs:

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

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

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

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

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

Figure 1 – LBRMomentum Buy Signals (courtesy AIQ TradingExpert)

Figure 2 – LBRMomentum Buy Signals (courtesy AIQ TradingExpert)

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

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

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

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

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

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

The things to notice about Figures 4 and 5 are:

a) the lack of significant drawdowns and,

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

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

Figure 6 displays some relevant comparative performance figures.

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

Figure 6 – Performance Figures

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

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

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

LBR Momentum

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

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

Jay Kaeppel

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

Intraday snapshot in action

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

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

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

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

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

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

How do traders use this powerful data?

  • For the Chart Pattern Recognition traders this is the Ferrari of analysis tools. It’s simple to scan hundreds of charts to see the patterns emerging the same day it’s happening.​
  • For traders who look for groups or sectors on the move, our intraday snapshot updates AIQ’s powerful groups and sectors too, so you can get ahead of a move in the market segments before the rest of the crowd.
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PLUS all the powerful features of AIQ TradingExpert Pro end of day including

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Where We Are

One of the best pieces of advice I ever got was this: “Don’t tell the market what it’s supposed to do, let the market tell you what you’re supposed to do.”

That is profound.  And it really makes me wish I could remember the name of the guy who said it.  Sorry dude.  Anyway, whoever and wherever you are, thank you Sir.

Think about it for a moment.  Consider all the “forecasts”, “predictions” and “guides” to “what is next for the stock market” that you have heard during the time that you’ve followed the financial markets.  Now consider how many of those actually turned out to be correct.  Chances are the percentage is fairly low.

So how do you “let the market tell you what to do?”  Well, like everything else, there are lots of different ways to do it.  Let’s consider a small sampling.

Basic Trend-Following

Figure 1 displays the Dow Industrials, the Nasdaq 100, the S&P 500 and the Russell 2000 clockwise form the upper left.  Each displays a 200-day moving average and an overhead resistance point.

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Figure 1 – Dow/NDX/SPX/RUT (Courtesy AIQ TradingExpert)

The goal is to move back above the resistance points and extend the bull market.  But the real key is for them to remain in an “uptrend”, i.e.,:

*Price above 200-day MA = GOOD

*Price below 200-day MA = BAD

Here is the tricky part.  As you can see, a simple cross of the 200-day moving average for any index may or may not be a harbinger of trouble.  That is, there is nothing “magic” about any moving average.  In a perfect world we would state that: “A warning sign occurs when the majority of indexes drop below their respective 200-day moving average.”

Yet in both October 2018 and May 2019 all four indexes dropped below their MA’s and still the world did not fall apart, and we did not plunge into a major bear market.  And as we sit, all four indexes are now back above their MA’s.  So, what’s the moral of the story?  Simple – two things:

  1. The fact remains that major bear markets (i.e., the 1 to 3 year -30% or more variety) unfold with all the major averages below their 200-day moving averages.  So, it is important to continue to pay attention.
  2. Whipsaws are a fact of life when it comes to moving averages.

The problem then is that #2 causes a lot of investors to forget or simply dismiss #1.

Here is my advice: Don’t be one of those people.  While a drop below a specific moving average by most or all the indexes may not mean “SELL EVERYTHING” now, it will ultimately mean “SEEK SHELTER” eventually as the next major bear market unfolds.  That is not a “prediction”, that is simply math.

The Bellwethers

I have written in the past about several tickers that I like to track for “clues” about the overall market.  Once again, nothing “magic” about these tickers, but they do have a history of topping out before the major averages prior to bear markets.  So, what are they saying?  See Figure 2.

2

Figure 2 – SMH/Dow Transports/ZIV/BID (Courtesy AIQ TradingExpert)

The bellwethers don’t look great overall.

SMH (semiconductor ETF): Experienced a false breakout to new highs in April, then plunged.  Typically, not a good sign, but it has stabilized for now and is now back above its 200-day MA.

Dow Transports: On a “classic” technical analysis basis, this is an “ugly chart.” Major overhead resistance, not even an attempt to test that resistance since the top last September and price currently below the 200-day MA.

ZIV (inverse VIX ETF): Well below it’s all-time high (albeit well above its key support level), slightly above it’s 200-day MA and sort of seems to be trapped in a range.  Doesn’t necessarily scream “SELL”, but the point is it is not suggesting bullish things for the market at the moment.

BID (Sotheby’s – which holds high-end auctions): Just ugly until a buyout offer just appeared.  Looks like this bellwether will be going away.

No one should take any action based solely on the action of these bellwethers.  But the main thing to note is that these “key” (at least in my market-addled mind) things is that they are intended to be a “look behind the curtain”:

*If the bellwethers are exuding strength overall = GOOD

*If the bellwethers are not exuding strength overall = BAD (or at least not “GOOD”)

A Longer-Term Trend-Following Method

In this article I detailed a longer-term trend-following method that was inspired by an article written by famed investor and Forbes columnist Ken Fisher.  The gist is that a top is not formed until the S&P 500 Index goes three calendar months without making a new high.  It made a new high in May, so the earliest this method could trigger an “alert” would be the end of August (assuming the S&P 500 Index does NOT trade above it’s May high in the interim.

Jay Kaeppel

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

The Bartometer June 9, 2019

Hello Everyone,


The major stock indexes fell about 5% in May and rebounded most of the loss in June so far in one week. Source: CNBC.com

CURRENT EVENTS INFLUENCING MARKET MOVEMENT:

Stocks fell because of the Chinese and the 5% Mexican tariff announcement. There will probably be a positive announcement on the Mexican tariff front as tariffs will hurt our economy and the auto industry. In a positive development, Fed officials said they would be open to reducing interest rates if the tariffs weaken the economy. The current interest rate on the ten-year bond has dropped from 3.2% on the ten-year bond to about 2.10% now just in roughly six months. The affordability of buying a new house has gotten much better.

Trump will do what he can to shore up the economy, and if the markets fall, he is keenly aware of stemming any significant decline in the stock market as he wants to be reelected. The jobs report was a little weaker than was expected; that is why the Fed may reduce interest rates to keep the economy on an upward trajectory consistent with a 2-3% per year growth in the GDP. Overall, I am still positive on the economy unless full tariffs are enacted on the Mexican and the Chinese economies.

If they are expanded to the 25% fully enacted, I will be getting more cautious on the economy and the stock markets.

INTEREST RATE SCENARIO

The Federal funds rate is about 50 basis points or half of 1% higher than the two and five year Treasury Notes and has historically indicated that a recession is looming. The next few months will indicate whether the economy will soften. At this point, I don’t think it will decline as much as to go into recession, but there are still risks. Trump will determine what will happen to the economy. If the tariff situation is resolved, then I think the economy will still be in a growth phase, but if the tariffs are not resolved and get worse, the risks of a recession will increase dramatically.

MARKET RECAP:

Last month on my May 5th Bartometer I said that if the S&P 500 closes below 2,886 I will get VERY CAUTIOUS and It did. After that, it proceeded to 2,740 a drop OF 5%, AND my computer models gave a BUY signal ON 6/5/19, the big up day at 2,800, and it rallied to an intraday high of 2,885.85 and closed at 2875. Even though we are on the BUY-HOLD signal, I would like the S&P 500 to break out of 2886, preferably the 2,893 level and stay there for 2 to 3 days for me to believe the rally can approach the old highs of 2,954. See the charts for an explanation.

Index Averages

Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until June 7, 2019.

*Dow Jones +12.50%
S&P 500 +15.60%
NASDAQ Aggressive growth +17.50%
I Shares Russell 2000 ETF (IWM) Small cap +12.97%
International Index (MSCI – EAFE ex USA) +9.97%
Moderate Mutual Fund +8.20%
Investment Grade Bonds (AAA) +7.03% +2.64%
High Yield Merrill Lynch High Yield Index +7.39% +4.26%
Floating Rate Bond Index +4.90% +2.60%
Fixed Bond Yields (10 year) +2.10% Yield 2.63%

The average Moderate Fund is up 8.2% this year fully invested as a 60% in stocks and 40% in bonds.

If interest rates are peaking and look to be flattening or declining over the next year then investment grade or multisector bonds technically might be better than floating rate bonds. But diversification is important.

The S&P 500

Source: AIQ Systems

The S&P is above. Last month AIQ gave a SELL signal on April 18th but I went to a VERY CAUTIOUS the close below 2,886. The S&P dropped 5% after it closed below 2,886.

My models went to a BUY signal at 2,800 on 6/05/2019 the S&P now we are right back up to 2,875. Where do we go from here? If the 2,893 level can be broken on the Upside which I think it can and stay there for 2-3 days , then the S&P should approach its old high of 2,954 it hit on May 1, 2019. Notice the graph below the S&P. This chart is the SK-SD stochastics, it is breaking out on the upside and it shows the market is oversold and could continue to rally.

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 2865, 2811, 2740, and 2683 areas. These might be BUY areas.
  • Support levels on the NASDAQ are 7704, 7414, 7291, and 7171.
  • On the Dow Jones support is at 25,943, 25739, 25,538 and 25,376. These may be safer areas to get into the equity markets on support levels slowly.
  • RESISTANCE LEVEL ON THE S&P 500 IS 2885. If there is a favorable tariff settlement, the market should rise short term.


THE BOTTOM LINE:


The S&P 500 is right at the point where it needs to break out of 2,893. I am still Moderately Bullish on the market and think it will break out. My computer technical models are on a short term buy signal, so do I think the S&P will breakout above 2,954, the old high it hit on May 1, 2019? We will see, but if it approaches that level, it will be imperative to watch the 2,954 level to see if it turns down. I will be watching that level to see if it is a breakout. If it cannot, then I would become Cautious again.


Best to all of you,

Joe Bartosiewicz, CFP®
Investment Advisor Representative

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


Contact information:
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Charts provided by AIQ Systems:

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


Disclaimer: The views expressed are not necessarily the view of Sage Point Financial, Inc. and should not be interpreted directly or indirectly as an offer to buy or sell any securities mentioned herein. Securities and Advisory services offered through Sage Point Financial Inc., Member FINRA/SIPC, and SEC-registered investment advisor.
Past performance cannot guarantee future results. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Please note that individual situations can vary. Therefore, the information presented in this letter should only be relied upon when coordinated with individual professional advice. *There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values.
It is our goal to help investors by identifying changing market conditions. However, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the market.
The price of commodities is subject to substantial price fluctuations of short periods and may be affected by unpredictable international monetary and political policies. The market for commodities is widely unregulated, and concentrated investing may lead to Sector investing may involve a greater degree of risk than investments with broader diversification.
Indexes cannot be invested indirectly, are unmanaged, and do not incur management fees, costs, and expenses.
Dow Jones Industrial Average: A weighted price average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.
S&P 500: The S&P 500 is an unmanaged indexed comprised of 500 widely held securities considered to be representative of the stock market in general.
NASDAQ: the NASDAQ Composite Index is an unmanaged, market-weighted index of all over the counter common stocks traded on the National Association of Securities Dealers Automated Quotation System
(IWM) I Shares Russell 2000 ETF: Which tracks the Russell 2000 index: which measures the performance of the small capitalization sector of the U.S. equity market.
A Moderate Mutual Fund risk mutual has approximately 50-70% of its portfolio in different equities, from growth, income stocks, international and emerging markets stocks to 30-50% of its portfolio indifferent categories of bonds and cash. It seeks capital appreciation with a low to moderate level of current income.
The Merrill Lynch High Yield Master Index: A broad-based measure of the performance of non-investment grade US Bonds
MSCI EAFE: the MSCI EAFE Index (Morgan Stanley Capital International Europe, Australia, and Far East Index) is a widely recognized benchmark of non-US markets. It is an unmanaged index composed of a sample of companies’ representative of the market structure of 20 European and Pacific Basin countries and includes reinvestment of all dividends.
Investment grade bond index: The S&P 500 Investment-grade corporate bond index, a sub-index of the S&P 500 Bond Index, seeks to measure the performance of the US corporate debt issued by constituents in the S&P 500 with an investment grade rating. The S&P 500 Bond index is designed to be a corporate-bond counterpart to the S&P 500, which is widely regarded as the best single gauge of large cap US equities.
Floating Rate Bond Index is a rule-based, market-value weighted index engineered to measure the performance and characteristics of floating rate coupon U.S. Treasuries which have a maturity greater than 12 months.


What the Hal?

Some industries are cyclical in nature.  And there is not a darned thing you – or they – can do about it.  Within those industries there are individual companies that are “leaders”, i.e., well run companies that tend to out earn other companies in that given industry and whose stock tends to outperform other companies in that industry.

Unfortunately for them, even they cannot avoid the cyclical nature of the business they are in.  Take Halliburton (ticker HAL) for example.  Halliburton is one of the world’s largest providers of products and services to the energy industry.  And they do a good job of it. Which is nice.  It does not however, release them from the binds of being a leader in a cyclical industry.

A Turning Point at Hand?

1

A quick glance at Figure 1 clearly illustrates the boom/bust nature of the performance of HAL stock.Figure 1 – Halliburton (HAL) (Courtesy AIQ TradingExpert)

Which raises an interesting question: is there a way to time any of these massive swings?  Well here is where things get a little murky.  If you are talking about “picking timing tops and bottoms with uncanny accuracy”, well, while there are plenty of ads out there claiming to be able to do just that, in reality that is not really “a thing”.  Still, there may be a way to highlight a point in time where:

*Things are really over done to the downside, and

*For a person who is not going to get crazy and “bet the ranch”, and who understands how a stop-loss order works and is willing to use one…

..there is at least one interesting possibility.

It’s involves a little-known indicator that is based on a more well-known another indicator that was developed by legendary trader Larry Williams roughly 15 or more years ago.  William’s indicator is referred to as “VixFix” and attempts to replicate a VIX-like indicator for any market.  The formula is pretty simple, as follows  (the code is from AIQ Expert Design Studio):

*hivalclose is hival([close],22).

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

In English, it is the highest close in the last 22-periods minus the current period low, which is then divided by the highest close in the last 22-periods. The result then gets multiplied by 100 and 50 is added.

Figure 2 displays a monthly chart of HAL with William’s VixFix in the lower clip.  In a nutshell, when price declines VixFix rises and vice versa.

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Figure 2 – HAL Monthly with William’s VixFix (Courtesy AIQ TradingExpert)

Now let’s go one more step as follows by creating an exponentially smoothed version as follows (the code is from AIQ Expert Design Studio):

*hivalclose is hival([close],22).

*vixfix is (((hivalclose-[low])/hivalclose)*100)+50. <<<Vixfix from above

*vixfixaverage is Expavg(vixfix,3).  <<<3-period exponential MA of Vixfix

*Vixfixaverageave is Expavg(vixfixaverage,7). <<<7-period exp. MA

I refer to this as Vixfixaverageave (Note to myself: get a better name) because it essentially takes an average of an average.  In English (OK, sort of), first Vixfix is calculated, then a 3-period exponential average of Vixfix is calculated (vixfixaverage) and then a 7-period exponential average of vixfixaverage is calculated to arrive at Vixfixaverageave (got that?)

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Anyway, this indicator appears on the monthly chart for HAL that appears in Figure 3.Figure 3 – HAL with Vixaverageave (Courtesy AIQ TradingExpert)

So here is the idea:

*When Vixfixaverageave for HAL exceeds 96 it is time to start looking for a buying opportunity.

OK, that last sentence is not nearly as satisfying as one that reads “the instant the indicator reaches 96 it is an automatic buy signal and you can’t lose”.  But it is more accurate.  Previous instances of a 96+ reading for Vixfixaverageave for HAL appear in Figure 4.

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Figure 4 – HAL with previous “buy zone” readings from Vixfixaverageave (Courtesy  AIQ TradingExpert)

Note that in previous instances, the actual bottom in price action occurred somewhere between the time the indicator first broke above 96 and the time the indicator topped out.  So, to reiterate, Vixfixaverageave is NOT a “precision timing tool”, per se.  But it may be useful in highlighting extremes.

This is potentially relevant because with one week left in May, the monthly Vixfixaverageave value is presently above 96.  This is NOT a “call to action”.  If price rallies in the next week Vixfixaverageave may still drop back below 96 by month-end.  Likewise, even if it is above 96 at the end of May – as discussed above and as highlighted in Figure 4, when the actual bottom might occur is impossible to know.

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Let me be clear: this article is NOT purporting to say that now is the time to buy HAL.  Figure 5 displays the largest gain, the largest drawdown and the 12-month gain or loss following months when Vixfixaverageave for HAL first topped 96.  As you can see there is alot of variation and volatility.  

Figure 5 – Previous 1st reading above 96 for HAL Vixfixaverageave

So HAL may be months and/or many % points away from an actual bottom.  But the main point is that the current action of Vixfixaverageave suggests that now is the time to start paying attention.

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 Useful Interest Rate Indicator

2018 witnessed something of a “fake out” in the bond market.  After bottoming out in mid-2016 interest rates finally started to “breakout” to new multi-year highs in mid to late 2018. Then just as suddenly, rates dropped back down.

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Figure 1 displays the tendency of interest rates to move in 60-year waves – 30 years up, 30 years down.  The history in this chart suggests that the next major move in interest rates should be higher.Figure 1 – 60-year wave in interest rates (Courtesy: www.mcoscillator.com)

A Way to Track the Long-Term Trend in Rates

Ticker TNX is an index that tracks the yield on 10-year treasury notes (x10).  Figure 2 displays this index with a 120-month exponential moving average overlaid.  Think of it essentially as a smoothed 10-year average.

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Figure 2 – Ticker TNX with 120-month EMA (Courtesy AIQ TradingExpert)

Interpretation is pretty darn simple.  If the month-end value for TNX is:

*Above the 120mo EMA then the trend in rates is UP (i.e., bearish for bonds)

*Below the 120mo EMA then the trend in rates is DOWN (i.e., bullish for bonds)

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Figure 3 displays 10-year yields since 1900 with the 120mo EMA overlaid.  As you can see, rates tend to move in long-term waves.

Figure 3 – 10-year yield since 1900 with 120-month exponential moving average

Two key things to note:

*This simple measure does a good job of identifying the major trend in interest rates

*It will NEVER pick the top or bottom in rates AND it WILL get whipsawed from time to time (ala 2018).

*Rates were in a continuous uptrend from 1950 to mid-1985 and were in a downtrend form 1985 until the 2018 whipsaw.

*As you can see in Figure 2, it would not take much of a rise in rates to flip the indicator back to an “uptrend”.

With those thoughts in mind, Figure 4 displays the cumulative up or down movement in 10-year yields when, a) rates are in an uptrend (blue) versus when rates are in a downtrend (orange).

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Figure 4 – Cumulative move in 10-year yields if interest rate trend is UP (blue) or DOWN (orange)

You can see the large rise in rates from the 1950’s into the 1980’s in the blue line as well as the long-term decline in rates since that time in the orange line.  You can also see the recent whipsaw at the far right of the blue line.

Summary

Where do rates go from here?  It beats me.  As long as the 10-year yield holds below its long-term average I for one will give the bond bull the benefit of the doubt.  But when the day comes that 10-year yields move decisively above their long-term average it will be essential for bond investors to alter their thinking from the mindset of the past 30+ years, as in that environment, long-term bonds will be a difficult place to be.

And that won’t be easy, as old habits die hard.

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Figure 5 is from this article from BetterBuyandHold.com and displays the project returns for short, intermediate and long term bonds if rates were to reverse the decline in rates since 1982.Figure 5 – Projected total return for short, intermediate and long-term treasuries if rates reverse decline in rate of past 30+ years (Courtesy: BetterBuyandHold.com)

When rates finally do establish a new rising trend, short-tern and intermediate term bonds will be the place to be.  When that day will come is anyone’s guess.  But the 10-year yield/120mo EMA method at least we have an objective way to identify the trend shortly after the fact.

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.