Category Archives: indexes

The Gathering Storm

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

A Focus on the Trends in Stocks, Bonds and Gold

In the end it is not so much about “predicting” what will happen next in the financial markets, but rather recognizing – and being prepared for – the potential risks, that makes the most difference in the long run.  So let’s start by looking at current trends.
Stocks
Let’s start with a most simple trend-following model that works like this:
-A sell signal occurs when the S&P 500 Index (SPX) registers two consecutive monthly closes below its 21-month moving average
-After a sell signal, a buy signal occurs when SPX register a single monthly close above its 10-month moving average.
Figure 1 displays recent activity.
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Figure 1 – SPX Trend-Following signals (Courtesy AIQ TradingExpert)
The good news is that this model does a good job of being out of stocks during long bear markets (1973-74, 2000-2002, 2008-2009).  The bad news is that – like any trend-following model – it gets “whipsawed” from time to time.  In fact the two most recent signals resulted in missing out on the October 2015 and March 2016 rallies.
But note the use of the phrase “simple trend-following model” and the lack of phrases such as “precision market timing” and “you can’t lose trading the stock market”, etc.
For now the trend is up.  A few things to keep an eye on appear in Figures 2 and 3.  Figure 2 displays four major averages.  Keep an eye to see if these averages break out to the upside (see here) or if they move sideways to lower.
2Figure 2 – Four Major Market Averages (Courtesy AIQ TradingExpert)
In addition, I suggest following the 4 tickers in Figure 3 for potential “early warnings” – i.e., if the major averages hit new highs that are not confirmed by the majority of the tickers in Figure 3.3
Figure 3 – Four potential “Early Warning” tickers  (Courtesy AIQ TradingExpert)
Bonds
My main “simple bond trend-following model” remains bearish.  As you can see in Figure 4, a buy signal for bonds occurs when the 5-week moving average for ticker EWJ (Japanese stocks) drops below its 30-week moving average and vice versa.
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Figure 4 – Ticker EWJ 5-week and 30-week moving average versus ticker TLT (Courtesy AIQ TradingExpert)
A 2nd model using metals to trade bonds has been bullish of late but is close to dropping back into bearish territory.  Figure 5 displays the P/L from holding a long position of 1 t-bond futures contract ONLY when both the EWJ AND Metals models are bearish (red line) versus when EITHER model is bullish (blue line)
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Figure 5 – T-bond futures $ gain/loss when EWJ OR Metals Models are Bullish (blue line) versus when EWJ AND Metals Models are both Bearish (red line); August 1990-present
Gold
My most basic gold trend-following model is still bearish.  This model uses my “Anti-Gold Index” (comprised of tickers GLL, SPX, UUP and YCS).  It is bullish for gold when a Front-Weighted Moving Average (detailed here) is below the 55-week exponential moving average and vice versa.
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Figure 6 – Jay’s “Anti-Gold Index” versus ticker GLD (Courtesy AIQ TradingExpert)
Summary
So at the moment the stock model is bullish and the bond and gold models are bearish.  Are these trends certain to persist ad infinitum into the future?  Definitely not.  Will the models detailed here provide timely signals regarding when to get in or out the next time around?  Sorry, but it doesn’t always work that way with trend-following.
But as for me I prefer “riding the trend” to “predicting the future.”
Some painful lessons just stick with you I guess.
Jay Kaeppel  Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client. 
Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

Four Things to Watch for Warning Signs

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

AIQ Market Timing signals a sell

The AIQ TradingExpert Pro Market Timing Expert System uses over 400 rules based on numerous technical indicator conditions to determine if a change in the current trend is imminent. The signals can be quite early and confirmation from other indicators not used in the AI system, like Phase are recommended. Quick disclaimer, we are not advisors and do not give recommendations.

Here’s the signal from last week. The number of stocks with new highs vs new lows is clearly showing a persistent down trend, while the market has been flat.

By clicking the ER button in Charts we can see some of the major rules that have fired to generate the signal

The AIQ market Log in Reports  provides additional information that gives us some broader information on the market. here we can see how a broad range of indicators on the market are fairing and also the percentage of buy vs sell signals on stocks in the S & P 500 (Unconfirmed signals 43-57, confirmed signals 33-67) .
The market action from Tuesday generated a second down signal of 2-98, following the 200 point fall in the Dow. The major rules that fired this time are below.
While never perfect, we always take heed when this many rules are firing

It’s all relative you see

The markets have been shall we say been less than inspiring recently. Brexit came and went with a brief hiccup in the action and only in the last week or so has the volatility picked up. The Dow as you can see in this weekly chart is back the same level as December 2014

 

 

The VXX shows clearly the decline in volatility since the high back in 2011

 

The summer doldrums may be over, but during periods when the market is range bound, segments within the market are often performing very well or very poorly. One AIQ Report that can show the strength within segments is the Relative Strength Strong – Short Term. This report shows stocks in 3 month trend up and is a great report for those who trade with ‘the trend is your friend’. Here is Friday 9-16-2016 report. The report is ranked by the stocks with the best trend.

 

 

I highlighted 6 stocks in the top of this report. All have good trends in place, and all in the Oil and Exploration S&P 500 group. The group has performed quite well recently. The top 2 OILEXPO stocks CHK and DVN have both had a small pullback to their uptrend line. We’ll see how they do this week.

 

Inverse Head and Shoulders on the market?

There was an interesting Inverse Head and Shoulders pattern completed last night on SPY. As SPY is the proxy ETF for the S&P500 index, it caught my attention. A closer look at the Chart attached shows this pattern usually breaks out to the upside.
Analysis of the supplementary information clearly shows that the uniformity of this inverse head and shoulders is good, however the overall quality of the pattern is only average. The biggest issue is the lack of volume and lack of power of the breakout. The volume is particularly low. More volume is needed before this pattern is confirmed, particularly on a strong up day.

Learn more about Chart Pattern Recognition for TradingExpert Pro  http://aiqsystems.com/chartpatterns.htm

Soybeans, Crude Oil and Gold, Oh My

Well I have not been writing a lot lately.  The truth is I am a little “out of sync” with the markets these days.  And I prefer to write when I feel like I have at least some idea of what the heck is going on.  Which is a good thing I think.
So for today let’s just review and update some relevant things that I have written about in the past.
Soybeans
In this article I suggested a bullish position in May soybean futures.  Under the category of “One for the Good Guys”, beans have rallied nicely as shown in Figure 1.  
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Figure 1 – May Soybeans (Courtesy: www.Barchart.com)
At this point a trailing stop – or selling half into strength and using a trailing stop on the remaining position – sounds like a good idea to me.  It should also be noted that “First Notice Day” for May soybeans is 4/29.  Bottom line, unless you want someone to dump 5,000 bushels of soybeans in your front yard (OK, it doesn’t really work like that but it is fun envision that it does), then you need to exit any and all long positions in May beans before that date.  This can involve taking profits, rolling into July or both.
Crude Oil (ETF ticker USO)
In this article I wrote about entering a somewhat bullish position using put options on ticker USO.  As you can see in Figure 2, it is “so far so good”.  At this point the trade has captured $588 of the initial $689 credit.
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Figure 2 – USO put position (Courtesy www.OptionsAnalysis.com)
One position management note: USO is at a key price level as you can also see in Figure 2.  If USO fails to break through to the upside I would consider taking some (or even all) profits and moving on to the next trade, rather than waiting another 3 months in hopes of capturing the remaining profit potential.
Gold
In this article I wrote about a relatively crude moving average method I use to help identify the trend of gold.  As you can see in Figure 3, my “Anti-Gold” index recently flipped back to being “bullish” for gold (by virtue of the fact that the “anti-gold” index flipped to being bearish).3
Figure 3 – Ticker GLD vs. Jay’s “Anti-Gold” Index (Courtesy AIQ TradingExpert)
So does this mean it is “clear sailing” for all things gold related?  Not at all.  All moving average systems are susceptible to whipsaws.  This one is no exception.  In the short-term gold and gold stocks appear to be overbought.  Still, as you can see in Figure 4, the Elliott Wave count for ticker GLD is suggesting the possibility for higher prices in the not too distant future.
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Figure 4 – Bullish Elliott Wave count for GLD (Courtesy ProfitSource by HUBB)
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and TradingExpert Pro client

We’ve been watching MIDZ – Direxion Daily Mid Cap bear 3X

We’ve been watching MIDZ – Direxion Daily Mid Cap bear 3X in our barometer the last few trading days. This 3 x bearish ticker has been in a long down trend, but recently Moneyflow has begun to show signs of accumulation and the MACD diverged up when the price was still heading down.
The 5 day barometer readings on Moneyflow and MACD in our Quotes montage are showing some bullish signs either all green or green arrow up. Maybe times are a changing.
How do we do what we do? TRY US http://aiqeducation.com/

The TradingExpert Pro Market Log – remember this?

The TradingExpert Pro Market Log

Trading and investing becomes clearer when you’re armed with this snapshot of the market and SP 500 stocks every day.
– AI rating on the market and how long it has been in place
– AI rating on all Sp 500 stocks percentage showing up ratings vs down ratings
– Bullish vs bearish levels on the market on multiple techncial indicators
– Bullish vs bearish percentage of SP 500 groups trending up vs down and the change from prior day
– Bullish vs bearish levels summary for all the SP 500 stocks on multiple indicators

Higher Highs and Lower Lows

The AIQ code based on Vitali Apirine’s article in February  issue of Stocks and Commodities, “Higher Highs and Lower Lows,” is shown here.
The code provided computes the indicator values for the HHS and LLS indicators as well as allowing us to plot the indicator on a chart.
Figure 8 shows the indicator on a chart of Align Technology (ALGN).

Sample Chart

FIGURE 8: AIQ. Here, the HHS and LLS indicators are shown on a chart of ALGN.
EDS code is shown below.

!HIGHER HIGHS AND LOWER LOWS

!Author: Vitali Aprine, TASC Feb 2016

!Coded by: Richard Denning, 12/09/2015

!TradersEdgeSystems.com