Category Archives: ETFS

How to Succeed in Trading (by Really, Really Trying)

Sometimes it’s good to go back to the basics.  So here goes.

Trading success comes from a “reality based” approach.  It is NOT about “all the money I am going to make!”  It IS about “formulating a plan” (see the questions below) AND “doing the right thing over and over and over again” (no matter how uncomfortable or unsexy those “things” may be).

Steps to Trading Success

Trading success comes from:

A) Having answers to the questions below

B) Remembering the answers through all of the inevitable ups and downs

What vehicles will you trade?

Will it be stocks, ETFs, mutual funds, futures, options, or something else?  If you plan to trade futures or options understand that you will need a different account and/or approval from your brokerage firm.  Likewise, note that you will need to learn about the unique quirks of futures and options BEFORE you start trading.

How much money will you commit to your trading account?

Whatever that amount is be sure to put the entire amount into your account.  DO NOT make the mistake of saying “I only have x$’s but I am going to trade it as if it were y$’s.  One good drawdown and you will pull the plug.

How much money will you commit to a single trade/position?

We are NOT talking here about how much of a loss you are willing to endure.  We are simply talking about how much you will omit to the enter the trade.  If you put 10% of your capital into a given stock or ETF that doesn’t mean you are going to risk the entire amount.  This question has more to do with determining how diversified you will be.

How much money will you risk on a given trade/position?

Think in terms of percentages.  I will risk 1%, 2%, 5%, 10%, whatever.  There is no magic, or correct, number. But think of it this way – “if I experience 5 consecutive losing trades how much will my account be down?”  If you can’t handle that number then you need to reduce your risk per trade.

How many different positions will I hold at one time?  What is my maximum?

Buying and holding a portfolio stocks is different than actively trading. For active traders, holding a lot of positions at one time can be taxing – much more so than you might expect going in.  Don’t learn this lesson the hard way.

Do you understand the mechanics of entering trading orders?

The vast majority of trading orders are placed on-line.  Each brokerage firm has their own websites/platforms and each has their unique characteristics.  “Paper trading” an be a disaster if you come away thinking you “have the touch” when it comes to making money.  However, when it comes to learning the in’s and out’s of order placement BEFORE you actually start trading, it an be invaluable.

(Think of trading as sky diving and paper trading as watching virtual sky diving on your laptop.  You get the idea, but the actual experience is significantly different).

What will cause me to enter a trade?

There are roughly a bazillion and one ways to trigger a “buy signal”.  Some are great, some are awful, but the majority are somewhere sort of in the middle.  Too many traders spend too much time looking for “that one great method”: of triggering signals.  The truth is that if you allocate capital wisely, manage your risk (more to follow) the actual method you use to signal trades is just one more piece of the puzzle – NOT the be all, end all.

How will I enter a trade?

This sounds like the same question as the one above, but it is different.  For an active trader, a buy signal may occur but he or she may wait for “the right time” to actually enter the market.  For example, if an “oversold” indicator triggers a “buy” signal, a trader may wait until there is some sort of price confirmation (i.e., a high above the previous trading day, a close above a given moving average, etc.) rather than risking “trying to catch a falling safe.”

What will cause me to exit a trade with a loss?

The obvious one is a loss that reaches the maximum amount you are willing to risk per trade as established earlier.  But there can be other factors.  In some cases, if the criteria that caused you to enter the trade in the first place no longer is valid, it can make sense to “pull the plug” and move on to another opportunity.  A simple example: you buy because price moves above a given moving average.  Price then drops back below that moving average without reaching your “maximum loss” threshold.

What will cause you to exit a trade with a profit?

This one is easy to take for granted.  Too many traders think, “Oh, once I get a decent profit I’ll just go ahead and take it.”  But a lot depends on the type of methodology that you are using.  If you are using a short-term trading system that looks for short-term “pops” in the market, then it might male sense to think in terms of setting “profit targets” and getting out while the getting is good.  On the other hand, if you are using a trend-following method you will likely need to maintain the discipline to “let your profits run” in order to generate the big winning trades that virtually all trend-following methods need in order to offset all of the smaller loses that virtually all trend-following methods experience.

The problem comes when a short-term trader decides to “let it ride” or when a trend follower starts “cutting his or her profit short” by taking small profits.

Different Types of Trading Require a Different Mindset

Putting money into a mutual fund or a portfolio of stocks is far different than trading futures or even options.  While you can be “hands on” with funds or stocks it is not necessarily a requirement (I still hold a mutual fund that I bought during the Reagan administration).  With futures or options, you MUST be – and must be prepared to be – hands on.

Also, big percentage swings in equity are more a way of life in futures and options.  I like options because they give you the ability to risk relatively small amounts of capital on any variety of opportunities – bullish, bearish, neutral, hedging and so forth.

I also like futures, but it does require a different level of emotional and financial commitment than most other forms of trading.  Many years ago, I wrote about the following “Litmus Test for Futures Traders”.  It goes like this:

To tell if you are prepared emotionally and financially to trade futures doe the following.

1. Got to your bank on a windy day.

2.  Withdraw a minimum of $10,000 in cash

3. Go outside and start throwing your money up into the air until it all blows away

4. Go home and get back to your routine like nothing ever happened.

If you can pass this test then you are fully prepared to trade futures.  If you cannot pass this test it simply means that you need to go into it with your eyes wide open regarding the potential risks (with the knowledge that something similar to what was just described can happen at any time).

Summary

In a perfect world a trader will have well thought out and detailed answers to all of the questions posed above BEFORE they risk their first dollar.

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,

Too Soon to Get Sweet on Sugar

One of my (admittedly, potentially foolish) beliefs is that commodities will outperform stocks again someday.  Possibly someday starting soon (roughly defined as anywhere from today to a year from today) and that the shift will be dramatic and last for a period of 3 to 8 years.

And no, I don’t think I could be any more vague.  But I haven’t really “taken the plunge” (i.e., shifted money from the stock market into commodities in any meaningful way) yet.  But I am keeping a close eye on things.  Rather than rattled off another 1,000 words to explain, I will simply refer you to Figure 1 that tracks the ratio of the S&P Commodity Index to the S&P 500 Index.

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Figure 1 – Commodities versus Stocks (Source: www.DailyReckoning.com)

History suggests that “the worm will (eventually) turn.”

Sugar

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Let’s focus on one commodity for now.  Sadly, it’s one of my favorites (ranks right up there with coffee).  Sugar.  As you can see in Figures 2 and 3, sugar has a history of contracting in price over a period of time and then alternately – and please excuse my use of the following overly technical terms – “swooping” or “soaring”.Figure 2 – Sugar 1970-1998 (Courtesy ProfitSource by HUBB)

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Figure 3 – Sugar 1998-2019 (Courtesy ProfitSource by HUBB)

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Sugar can be traded either in the futures market (each full one-point movement in price equates to $1,120 in contract value).  An alternative for “normal people” is ticker CANE which is the Teucrium Sugar ETF which trades like shares of stock.  See Figure 4.Figure 4 – ETF Ticker CANE (Courtesy AIQ TradingExpert)

As you can see, sugar has been “contracting” in price of late.  Does this mean it is reading to “swoop” or “soar”?  Possibly.  But for those who want to play the bullish side, it is probably a bit too soon to dive in.

Seasonality in Sugar

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Figure 5 displays the annual seasonal trend in sugar.  It should be noted that you should NOT expect every year to follow this trend.  It is a display of previous historical tendencies and NOT a roadmap.Figure 5 – Sugar Annual Seasonal Trend (Courtesy Sentimentrader.com)

Still, the primary point is captured nicely in:

Jay’s Trading Maxim #92: One of the keys to long term success is committing capital where the probabilities are (or a least appear to be) in your favor.

February through April is NOT that time for anyone looking to play the long side of sugar.

Figure 6 displays the cumulative results achieved by holding long one sugar futures contract ONLY during the months of February through April every year starting in 1970.

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Figure 6 – Cumulative $+(-) holding long sugar futures Feb, Mar, Apr every year since 1970

Some things to note regarding sugar Feb through Apr:

*UP 18 times

*DOWN 31 times

*Average gain = +$2,201

*Average loss = (-$3,377)

*Largest gain = +$6,630 (1974)

*Largest loss = (-$18,424) (1975)

Summary

The point IS NOT to argue that sugar is doomed to plunge between now and the end of April, nor even to argue that it cannot rally strongly between now and then – because it can.

The point IS to merely point out that the odds do not presently favor the bulls, which means – well, see Trading Maxim #92 above.

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.

Utilities at the Crossroads

A lot of eyes are firmly fixed on Utilities at the moment.  And for good reason.  As you can see in Figure 1, the Dow Jones Utilities Average is presently facing a key resistance level.  If it breaks out above the likelihood of a good seasonal rally (more in a moment) increases significantly.

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Figure 1 – Utilities and resistance (Courtesy AIQ TradingExpert)

One concern may be the fact that a 5-wave Elliott Wave advance appears to possibly have about run its course (according to the algorithmically drawn wave count from ProfitSource by HUBB which I use).  See Figure 2.

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Figure 2 – Utilities and Elliott Wave (Courtesy ProfitSource by HUBB)

For what it is worth, the March through July timeframe is “typically” favorable for utilities.  Figure 3 displays the growth of $1,000 invested in the Fidelity Select Sector Utilities fund (ticker FSUTX) ONLY during the months of March through July each year starting in 1982.

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Figure 3 – Growth of $1,000 invested in ticker FSUTX Mar-Jul every year (1982-2018)

For the record:

*# times UP = 29 (78%)

*# times DOWN = 8 (22%)

*Average UP = +9.3%

*Average DOWN = (-5.8%)

*Largest UP = +21.1% (1989)

*Largest DOWN = (-25.8%) (2002)

*Solid performance but obviously by no means nowhere close to “a sure thing”.

*It should be noted that several of the “Down” years occurred when the S&P 500 was already in a pretty clearly established downtrend (2001, 2002 and 2008), i.e., below its 10-month moving average.  See Figure 4.

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Figure 4 – S&P Index w/10-month moving average (Courtesy AIQ TradingExpert)

Summary

Utilities are flirting with new all-time highs and March through July is a “seasonally bullish” period for utilities.  Does that mean “happy days are here again, and we should all be piling into utilities?  Yeah, isn’t that always the thing about the markets?  There is rarely a 100% clear indication for anything.

As always, my “prediction” about what will happen next in utilities is irrelevant and I am NOT pounding the table urging you to pile in.  But I can tell you what I am watching closely at the moment:

*The S&P 500 Index is flirting right around its 10-month moving average (roughly 2,752 on the S&P 500 Index).  If it starts to break down from there then perhaps 2019 may not pan out so well for utilities.

*The Dow Jones Utility Average is facing a serious test of resistance and may run out of steam (according to Elliott Wave).

*But a breakout to the upside could well clear the decks for utilities to be a market leader for the next several months

Focus people, focus.

Jay Kaeppel

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

It Really Was the Most Platinum Time of the Year; What Time is it Now?

In this article I highlighted the fact that platinum tends to be a consistent performer during the months of January and February combined.  2019 held serve as platinum futures registered their 23rd Jan-Feb gain in the last 24 years.  The Platinum ETF (ticker PPLT) registered a two month gain of +9.6%.  See Figure 1.

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Figure 1 – Ticker PPLT (Courtesy AIQ TradingExpert)

Figure 2 displays the updated hypothetical growth of equity achieved by holding long 1 platinum futures contract during January and February every year starting in 1979.

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Figure 2 – Platinum futures $ +(-) during Jan-Feb; 1979-2019

Since most investors will never trade platinum futures, Figure 3 displays the growth of $1,000 invested in ticker PPLT only during Jan and Feb since 2011.

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Figure 3 – Cumulative % growth of $1,000 invested in ticker PPLT ONLY during Jan. and Feb.; 2011-2019

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Figure 4 – Yearly % +(-) for PPLT during Jan-Feb

Going Forward

So platinum was great, but what have you done for me lately?  For what it is worth, historically two sectors that “should” be doing well in the March-April period are energies and grains (please remember that seasonal trends DO NOT always work every year).   As you can see in Figure 5, energies have been rallying since late December (though lots of consternation regarding crude oil remains a constant).

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Figure 5 – Ticker DBE (Energies) – so far so good; (Courtesy ProfitSource by HUBB)

Grains have been a bust so far (their “favorable seasonal period” typically begins in late January-early February – no dice this time around).  Where too from here?  One of two scenarios: either this is just going to be an off year for grains, or right now will be looked back upon as a buying opportunity.  Only time will tell.

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Figure 6 – Ticker DBA (Agricultural) – so far NOT so good; (Courtesy ProfitSource by HUBB)

And of course, don’t forget that the stock market tends to do pretty well March through May….

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.

Can Corn?

It’s January.  It’s cold.  And the ground in the Midwest is frozen (and getting more frozen by the moment I might #$%^ add).  So of course, it is time to thinking about planting corn!

Wait, what!?

Well, yes as it turns out just about everyone involved in the agricultural industry has questions (doubts?) about corn planting in the spring and the eventual crop harvested in fall.  And the big questions are, “How will planting go?” and “how much corn will be produced?”  As it relates to corm the whole supply/demand thing you learned about way back when hinges on the ultimate answers to those two questions.

In a nutshell, there is “doubt.”  No surprise really as there is absolutely not a single corn seed planted anywhere in the Midwest at this moment.  So, who knows for sure?

One thing we do know for sure is that a lot of people are aware of this phenomenon in corn and feel compelled to “hedge their bets”, typically on an annual basis.  Figure 1 displays an annual seasonal chart for corn futures from www.sentimentrader.com.1Figure 1 – Annual Seasonal trend for Corn (Courtesy Sentimentrader.com)

As you can see, price strength is typical in the first 4 to 5 months of the year.  This should not be surprising because – as I described above – doubt about supply causes buying pressure (typically).

So for traders the real question is “should I be buying corn in anticipation of buying pressure?”  The answer is “definitely, maybe!”  Let’s take a closer look.

Figure 2 displays spot corn prices since 2001.

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Figure 2 – Spot Corn prices (Courtesy ProfitSource by HUBB)

We can notice two things:

*Corn is presently in a fairly prolonged consolidation/compression range

*Previous consolidation/compression ranges have been followed by some significant advances

Despite this, one should not necessarily assume that corn is about to burst higher in price.  So let’s look at things from a more technical/tactical trading point of view.

How to Play Corn

*The “purest’ play is corn futures.  However, corn futures are not for most people.  In Figure 2, corn is trading at “350”, which equates to $3.50 a bushel in corn futures parlance.  Here is what you need to know:

If one were to buy a corn futures contract at $3.50 a bushel, a move to $4.50 a bushel would generate a gain of +$5,000 and a move to $2.50 a bushel would generate a loss of -$5,000.

In sum, a great way to make a lot of money if you are right and a great way to lose a lot of money if you are wrong.  There is an alternative for the “average” investor.

*Ticker CORN is the Teucrium Corn ETF which allows investors to trade corn like they would trade shares of stock.  Figure 3 displays a daily chart for ticker CORN.

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Figure 3 – Ticker CORN with a significant resistance level around $16.53 (Courtesy AIQ TradingExpert)

Note that I have drawn a horizontal line $16.53, which connect the January 2018 low and the December 2018 high.  As with any line that one might arbitrarily draw on a bar chart, there is nothing “magic” about this price level.  But it does represent a potential line in the sand that be utilized in the following “highly complex” manner:

*CORN above $16.53 = (Possibly) Good

*CORN below $16.53 = Bad

The Choices

So what’s an investor to do?  As always, there are choices.

Choice #1 is flush this idea and forget all about corn.

Choice #2 is to buy now in hopes of an upside breakout, possibly with a stop-loss under the September 2018 low of $15.39.

Choice #3 is to wait for an upside breakout above $16.53 as confirmation that an actual bullish trend is forming.

Summary

I don’t make “recommendations” here at JOTM, so whether you prefer #1, #2 or #3 above is entirely up to you.  The key points though are:

It appears that there may be an opportunity forming (higher seasonal corn prices based on perceptions of problematic weather for planting and a long consolidation/compression in price).

A trader considering this idea needs to make decisions regarding what to trade (futures or CORN ETF), when to actually get in (before the breakout or after) and where to place a stop-loss.

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 Long and Short-Term Bond Market Perspective, Part I

Meanwhile, back in the bond market.  Yes, the stock market has been the place for “action” recently.  First a massive decline in short order followed immediately by a stunning advance.  But many investors also look to the bond market in order to achieve their long-term goals.  So, let’s try to put things in perspective a bit.

The Main Points

*Point ARates will likely work their way higher over time

There has historically been a roughly 60-year cycle in interest rates (See Figure 1).  If this holds to form, odds are the next 30 years will not look anything like the last 30 years in the bond market, i.e., rates will likely work their way higher over time.

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Figure 1 – 60-year cycle in rates suggest higher yields in years ahead (Source: mcoscillator.com)

*Point BInvestors should be wary of buying and holding long-term bonds

Figure 1 does not mean that rates will rise in a straight-line advance.  But again, odds are that rates will rise over time, so as a result, investors should be wary of buying and holding long-term bonds (as they stand to get hurt the most if rates rise).  That being said, in the short-term anything can happen, and long-term bonds may still be useful to shorter-term traders, BUT…

…Short to intermediate term bond funds are better now for investors than long-term bonds (if rates rise over time investors in short/intermediate term bonds can reinvest more quickly at higher rates, while long-term bond holders just lose principal).

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Figure 2 – Affect of rising rates on bonds of various maturities (Source: AAII.com)

*Point CIt appears to be too soon to declare a confirmed “Bond Bear Market!!!”

Bond yields looked in 2018 like they were staging a major upside breakout – and then reversed back to the downside.  So – Point A above not withstanding – it appears to be too soon to declare confirmed “Bond Bear Market!!!”

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Figure 3 – 10-year treasury yield “breakout fake out” (Source: AIQ TradingExpert)

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Figure 4 – 30-year treasury yield tested 120-month moving average, then failed  (Source: AIQ TradingExpert)

*Point DCorporate bonds as a whole carry more risk than in years past

The risk associated with corporate bonds as an asset class are higher than in the past due to A) a higher rate of debt, and B) a large segment of the corporate bond market is now in the BBB or BBB- rating category.  If they drop one grade they are no longer considered “investment grade” and many institutional holders will have no choice but to sell those bonds en masse.  Which raises the age-old question, “too whom?”

For more on this topic see herehere and here.5Figure 5 – Rising corporate debt (Source: Real Investment Advice)

*Point E:

On the brighter side, two bond market models that I follow are presently bullish.  More about these in Part II.

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.

When to Buy Energy Stocks

Crude oil and pretty much the entire energy sector has been crushed in recent months. This type of action sometimes causes investors to wonder if a buying opportunity may be forming.

The answer may well be, “Yes, but not just yet.”

Seasonality and Energy

Historically the energy sector shows strength during the February into May period.  This is especially true if the November through January period is negative.  Let’s take a closer look.

The Test

If Fidelity Select Energy (ticker FSENX) shows a loss during November through January then we will buy and hold FSENX from the end of January through the end of May.  The cumulative growth of $1,000 appears in Figure 1 and the yearly results in Figure 2.

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Figure 1 – Growth of $1,000 invested in FSENX ONLY during Feb-May ONLY IF Nov-Jan shows a loss

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Figure 2 – % + (-) from holding FSENX during Feb-May ONLY IF Nov-Jan shows a loss

Figure 3 displays ticker XLE (an energy ETF that tracks loosely with FSENX).  As you can see, at the moment the Nov-Jan return is down roughly -15%.

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Figure 3 – Ticker XLE (Courtesy AIQ TradingExpert)

All of this suggests remaining patient and not trying to pick a bottom in the fickle energy sector. If, however, the energy sector shows a 3-month loss at the end of January, history suggests a buying opportunity may then be at end.

Summary

Paraphrasing here – “Patience, ah, people, patience”.

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.

Focus on “Investing” (not “the Market”)

I don’t offer “investment advice” here at JOTM so I have not commented much on the recent action of the market lest someone thinks I am “predicting” what will happen next.  Like most people, predicting the future is not one of my strengths.  I do have some thoughts though (which my doctor says is a good thing).

The Big Picture

Instead of talking about “the markets”, let’s talk first about “investing”, since that is really the heart of the matter.  “The markets” are simply a means to an end (i.e., accumulating wealth) which is accomplished by “investing”.  So, let me just run this one past you and you can think about it for a moment and see if it makes sense.

Macro Suggestion

*30% invested on a buy-and-hold basis

*30% invested using trend-following methods

*30% invested using tactical strategies

*10% whatever

30% Buy-and-Hold: Avoid the mistake that I made way back when – of thinking that you should always be 100% in or 100% out of the market.  No one gets timing right all the time.  And being 100% on the wrong side is pretty awful.  Put some portion of money into the market and leave it there.  You know, for all those times the market goes up when you think it shouldn’t.

30% using trend-following methods:  Let me just put this thought out there – one of the biggest keys to achieving long-term investment success in the stock market is avoiding some portion of those grueling 30% to 89% (1929-1932) declines that rip your investment soul from you body and make you never want to invest again.  Adopt some sort of trend-following method (or methods) so that when it all hits the fan you have some portion of your money “not getting killed”.

30% invested using (several) tactical strategies: For some examples of tactical strategies see hereherehere and here.  Not recommending these per se, but they do serve as decent examples.

10% whatever:  Got a hankering to buy a speculative stock?  Go ahead.  Want to trade options?  OK.  Want to buy commodity ETFs or closed-end funds or day-trade QQQ?  No problem.  Just make sure you don’t devote more than 10% of your capital to your “wild side.”

When the market is soaring you will likely have at a minimum 60% to 90% of your capital invested in the market.  And when it all goes south you will have at least 30% and probably more out of the market ready to reinvest when the worm turns.

Think about it.

The Current State of Affairs  

What follows are strictly (highly conflicted) opinions.  Overall sentiment seems to me to be very bearish – typically a bullish contrarian sign.  However, a lot of people whose opinions I respect are among those that are bearish.  So, it is not so easy to just “go the other way.”  But here is how I see the current “conflict”.

From a “technical” standpoint, things look awful.  Figures 1 and 2 show 4 major market averages and my 4 “bellwethers”.  They all look terrible.  Price breaking down below moving averages, moving average rolling over, and so on and so forth.  From a trend-following perspective this is bearish, so it makes sense to be “playing defense” with a portion of your capital as discussed above.

(click any Figure to enlarge)

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Figure 1 – Major market averages with 50-day and 200-day moving averages (Courtesy AIQ TradingExpert)

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Figure 2 – Jay’s Market Bellwethers with 50-day and 200-day moving averages (Courtesy AIQ TradingExpert)

On the flip side, the market is getting extremely oversold by some measure and we are on the cusp of a pre-election year – which has been by far the best historical performing year within the election cycle.

Figure 3 displays a post by the esteemed Walter Murphy regarding an old Marty Zweig indicator.  It looks at the 60-day average of the ratio of NYSE new highs to New Lows.  Low readings typically have marked good buying opportunities.

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Figure 3 – Marty Zweig Oversold Indicator (Source: Walter Murphy on Twitter)

Figure 4 displays the growth of $1,000 invested in the S&P 500 Index ONLY during pre-election years starting in 1927.  Make no mistake, pre-election year gains are no “sure thing.”  But the long-term track record is pretty good.

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Figure 4 – Growth of $1,00 invested in S&P 500 Index ONLY during pre-election years (1927-present)

There is no guarantee that an oversold market won’t continue to decline.  And seasonal trends are not guaranteed to work “the next time.”  But when you get an oversold market heading into a favorable seasonal period, don’t close your eyes to the bullish potential.

Summary

Too many investors seem to think in absolute terms – i.e., I must be fully invested OR I must be out.  This is (in my opinion) a mistake.   It makes perfect sense to be playing some defense given the current price action.  But try not to buy into the “doomsday” scenarios you might read about.  And don’t be surprised (and remember to get back in) if the market surprises in 2019.

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,

The Two Most Important Bond Market Charts

A funny thing happened on the way that bond bear market.  But first the promised charts:
*Figure 1 strongly suggests that the next major move in bond yields is higher (as yields tend to move in roughly 30-year up and 30-year down waves).
1Figure 1 – 60-year bond yield cycle (Courtesy: www.mcoscillator.com)

*Figure 2 displays the 10-year treasury note yield – with a long, long downtrend followed by an advance to a potential “fake out breakout” to the upside.  More to follow.
2Figure 2 – 10-year treasury yields (x10); ticker TNX (Courtesy AIQ TradingExpert)

Now for the recap:
*The 10-year treasury yield (TNX) topped out in the early 1980’s and declined to a low in July 2012.
*TNX then moved higher for about a year, then drifted lower to its ultimate low around 1.35 three years later in 2016.
*From there rates rose to roughly 3.25% by October 2018.  Along the way it took out its 120-month moving average, a horizontal resistance line at about 3.04% and finally a downward sloping trend line in October 2018.
*With “final resistance” pierced many bond market prognosticators assumed that yields were off to the races.
*And then that “funny thing” happened.  10-year yields fell from 3.25% in October to a recent level of roughly 2.90%.
At this point “predicting” where TNX is headed in the short run from here is pure conjecture.  There is a chance that rates will not rally anytime soon and that they may even continue to drift back lower.  Take your pick.  Flip a coin.  Whatever.  The bottom line is that what you see in Figure 2 is entirely in “the eye of the beholder.”
So let’s circle back to Figure 1.  The bottom line is this:
*The odds appear very good that the next 30 years in in bond yield will look a lot different than the last 30 years, when high grade bond yield fell from 15% to roughly 3% (which is OK, because if rates ever go negative and I have to pay the government just to hold my money I am going to be really pissed….but I digress).
*Short-term “traders” can trade long-term bonds to their hearts content.  However, “investors” may be wise to avoid long-term bonds.  Consider ticker TLT, the iShares 20+ year treasury bond ETF.  It presently has a 30-day SEC yield of 3.06% and an “average duration” of 17.42 years.  Here is how to understand that:
Regarding yield, if price remained completely unchanged, and investor would theoretically earn roughly 3.06% in interest over the next 12 months
Regarding duration, if interest rates rose one full percentage point, ticker TLT would theoretically lose -17.42% in value
Long-term bonds may rally from time to time.  However, for long-term investors holding bonds, this is NOT a favorable reward-to-risk tradeoff.
Summary
In the “big picture” we probably are in a long-term bear market for bonds.  But it may not look like it for a while.  So trade in and out as much as you’d like.  But for bond investment purposes I am keeping duration short.
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.

‘Dogs’ ‘Due’ for ‘Days’

While I am by and large an avowed “trend-follower” I also recognize that sometimes things get beaten down so much that they ultimately offer great potential long-term value.  Or, as they say, “every dog has it’s day.”  So, let’s consider some “dogs”.

For the record, and as always, I am not “recommending” these assets – I am simply highlighting what look like potential opportunities.

Dog #1: Soybeans (ticker SOYB)

As I wrote about in this article, soybeans are very cyclical in nature.  According to that article there are two “bullish seasonal periods” for beans and one “bearish”:

*Long beans from close on the last trading day of January through the close on 2nd trading day of May

*Short beans from the close on 14th trading day of June through the close on 2nd trading day of October

*Long beans from the close on 2nd trading day of October through the close on 5th trading day of November

In Figure 1 (ticker SOYB – an ETF that tracks the price of soybean futures) has been beaten down quite a bit.  This doesn’t mean price can’t go lower.  However, given the cyclical nature of bean prices they probably won’t go down forever.

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Figure 1 – Weekly SOYB; prices beaten down (Courtesy AIQ TradingExpert)

Figure 2 is a daily chart of SOYB and displays the recent “bearish” seasonal period and the latest “bullish” period so far.

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Figure 2 – Daily SOYB (Courtesy AIQ TradingExpert)

Dog #2: Uranium (ticker URA)

In this article and this article, I wrote about the prospects for uranium and ticker URA – an ETF that tracks the price of uranium.  Since that time URA has basically continued to go nowhere.  As you can see in Figure 3, it has been doing just that for some time.  While there is no guarantee that the breakout out of the range indicated in Figure 2 will be to the upside, historically, elongated bases such as this often lead to just that.  A trader can buy it at current levels and put a stop loss somewhere below the low for the base and take a reasonable amount of risk if they are willing to bet on an eventual upside breakout.

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Figure 3 – Ticker URA with a long (really long) base (Courtesy AIQ TradingExpert)

Dog #3: Base Metals (Ticker DBB)

Under the category of – I called this one way, way too soon – in this article I wrote about the potential for ticker DBB to be an outperformer in the years ahead.  As you can see in Figure 4, so far, not so good.

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Figure 4 – Base Metals via ticker DBB (Courtesy AIQ TradingExpert)

Still, the argument for base metals is this:

*In Figure 3 is this article you can see that commodities as an asset class are due for a good move relative to stocks in the years ahead.

*In addition, the Fed is raising interest rates.

As discussed historically base metals have been the best performing commodity sector when interest rates are rising.  Ticker DBB offers investors a play on a basket of base metals.

Summary

Will any of these “dog” ideas pan out?  As always, only time will tell.  But given the cyclical nature of commodities and the price and fundamental factors that may impact these going forward, they might at least be worth a look.

In the meantime, “Woof” (which – as far as I can tell – means “Have a nice day”).

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.