Category Archives: jay kaeppel

Watch This Indicator

So, the big question on every investor’s mind is “What Comes Next?”  Since this is not an advisory service (and given the fact that I am not too good at predicting the future anyway) I have avoided commenting on “the state of the markets” lately.  That being said, I do have a few “thoughts”:

*The major averages (as of this exact moment) are still mostly above their longer-term moving averages (200-day, 10-month, 40-week, and so on and so forth).  So, on a trend-following basis the trend is still “up”.

0Figure 1 – The Major Index (Courtesy AIQ TradingExpert)

*We are in the most favorable 15 months of the 48-month election cycle (though off to a pretty awful start obviously) which beings Oct.1 of the mid-term year and ends Dec. 31st of the pre-election year.

*Investors should be prepared for some volatility as bottoms following sharp drops usually take at least a little while to form and typically are choppy affairs.  One day the market is up big and everyone breathes a sigh of relief and then the next day the market tanks.  And so on and so forth.

An Indicator to Watch

At the outset let me state that there are no “magical” indicators.  Still, there are some that typically are pretty useful.  One that I follow I refer to as Nasdaq HiLoMA.  It works as follows:

A = Nasdaq daily new highs

B = Nasdaq daily new lows

C = (A / (A+B)) * 100

D = 10-day moving average of C

C can range from 0% to 100%.  D is simply a 10-day average of C.

Nasdaq HiLoMA = D

Interpretation: When Nasdaq HiLoMA drops below 20 the market is “oversold”.

Note that the sentence above says “the market is oversold” and NOT “BUY NOW AGGRESSIVELY WITH EVERY PENNY YOU HAVE.”  This is an important distinction because – like most indicators – while this one may often give useful signals, it will occasionally give a completely false signal (i.e., the market will continue to decline significantly).

A couple of “finer points”:

*Look for the indicator to bottom out before considering it to be “bullish”.

*A rise back above 20 is often a sign that the decline is over (but, importantly, not always).  Sometimes there may be another retest of recent lows and sometimes a bear market just re-exerts itself)

*If the 200-day moving average for the Dow or S&P 500 is currently trending lower be careful about using these signals.  Signals are typically more useful if the 200-day moving average for these indexes is rising or at least drifting sideways rather than clearly trending lower (ala 2008).

Figures 2 through 8 displays the S&P 500 Index with the Nasdaq HiLoMA indicator.  Click to enlarge any chart.

1Figure 2 – SPX with Jay’s Nasdaq HiLoMA ending 2006 (Courtesy AIQ TradingExpert)

2Figure 3 – SPX with Jay’s Nasdaq HiLoMA ending 2008 (Courtesy AIQ TradingExpert)

3Figure 4 – SPX with Jay’s Nasdaq HiLoMA ending 2010 (Courtesy AIQ TradingExpert)

4Figure 5 – SPX with Jay’s Nasdaq HiLoMA ending 2012 (Courtesy AIQ TradingExpert)

5Figure 6 – SPX with Jay’s Nasdaq HiLoMA ending 2014 (Courtesy AIQ TradingExpert)

6Figure 7 – SPX with Jay’s Nasdaq HiLoMA ending 2016 (Courtesy AIQ TradingExpert)

7Figure 8 – SPX with Jay’s Nasdaq HiLoMA ending 2018 (Courtesy AIQ TradingExpert)

Summary

The stock market is in a favorable seasonal period and is oversold.  As long as the former remains true, react accordingly (with proper risk controls in place of course).

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 (Potential) Bullish Case for Bonds

OK, first the bad news.  In terms of the long-term, we are probably in the midst of a rising interest rate environment.  Consider the information contained in Figure 1 from McClellan Financial Publications.

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Figure 1 – The 60-year cycle in interest rates (Courtesy: www.mscoscillator.com)

Though no cycle is ever perfect, it is only logical to look at Figure 1 and come away thinking that rates will rise in the years (and possibly decades) ahead.  And one should plan accordingly, i.e.:

*Eschew large holdings of long-term bonds. Remember that a bond with a “duration” -Google that term as it relates to bonds please – of 15 implies that if interest rates rise 1 full percentage point then that bond will lose roughly 15% of principal.  Ouch.

*Stick to short to intermediate term bonds (which will reinvest at higher rates more quickly than long-term bonds as rates rise) and possibly some exposure to floating rate bonds.

That is “The Big Picture”.

In the meantime, there is a potential bullish case to be for bonds in the shorter-term.  The “quick and dirty” guide to “where are bonds headed next” appears in the monthly and weekly charts of ticker TLT (iShares 20+ years treasury bond ETF).  Note the key support and resistance levels drawn on these charts.

(click to enlarge)1

Figure 2 – Monthly TLT with support and resistance (Courtesy ProfitSource by HUBB)

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Figure 3 – Weekly TLT with support and resistance (Courtesy ProfitSource by HUBB)

There is nothing magic about these lines, but a break above resistance suggests a bull move, a break below support suggests a bear move, and anything in between suggests a trading range affair.

Now let’s look at some potentially positive influences.  Figure 4 displays a screen from the excellent site www.sentimentrader.com that shows that sentiment regarding the long treasury bond is rock bottom low.  As a contrarian sign this is typically considered to be bullish.

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Figure 4 – 30-year treasury investor sentiment is extremely low (Courtesy Sentimentrader.com)

Figure 5 – also from www.sentimentrader.com – suggests that bonds may be entering a “bullish” seasonal period between now and at least late-November (and possibly as long as late January 2019).

(click to enlarge)4

Figure 5 – 30-year treasury seasonality (Courtesy Sentimentrader.com)

Figure 6 displays the 30-year treasury bond yield (multiplied by 10 for some reason).  While rates have risen 27% from the low (from 2.51% to 3.18%), they still remain below the long-term 120-month exponential moving average.

(click to enlarge)5

Figure 6 – Long-term treasury bond yields versus 120-month moving average (Courtesy AIQ TradingExpert)

Finally, two systems that I developed that deems the bond trend bullish or bearish based on the movements of 1) metals, and 2) Japanese stocks turned bullish recently.  The bond market has fallen since these bullish signal were flashed – possibly as a result of the anticipated rate hike from the Fed.  Now that that hike is out of the way we should keep a close eye on bonds for a potential advance in the months ahead.

(click to enlarge)6a

Figure 7 – Bonds tend to move inversely to Japanese stocks; Ticker EWJ 5-week average is below 30-week average, i.e., potentially bullish for bonds (Courtesy AIQ TradingExpert)

Summary

It’s a little confusing here.

a)  The “long-term” outlook for bonds is very “iffy”, so bond “investors” should continue to be cautious – as detailed above.

b) On the other hand, there appears to be a chance that bonds are setting up for a rally in the near-term.

c) But, in one final twist, remember that if TLT takes out its recent support level, all bullish bets are off.

Are we having fun yet?

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.

New Highs, Check…Now What?

Let’s open with Jay’s Trading Maxim #7.

Jay’s Trading Maxim #7: Being able to identify the trend today is worth more than 1,000 predictions of what the trend will be in the future.

Yes trend-following is boring.  And no, trend-following never does get you in near the bottom nor out at the top.  But the reality is that if you remain long when the trend appears to be up (for our purposes here let’s define this roughly as the majority of major market averages holding above their long-term moving averages) and play defense (i.e., raise cash, hedge, etc.) when the trend appears to be down (i.e., the majority of major market averages are below their long-term moving averages), chances are you will do pretty well for yourself.  And you may find yourself sleeping pretty well at night as well along the way.

To put it more succinctly:

*THE FOREST = Long-term trend

*THE TREES = All the crap that everyone tells you “may” affect the long-term trend at some point in the future

Human nature is a tricky thing.  While we should clearly be focused on THE FOREST the reality is that most investors focus that majority of their attention on all those pesky trees.  Part of the reason for this is that some trees can offer clues.  It’s a question of identifying a few “key trees” and then ignoring the rest of the noise.

A New High

With the Dow Industrials rallying to a new high virtually all the major averages have now reached a new high at least within the last month.  And as you can see in Figure 1 all are well above their respective 200-day moving average.  Long story short the trend is “UP”.

(click to enlarge)1Figure 1 – U.S. Major Market Indexes in Uptrends (Courtesy AIQ TradingExpert)

Now What? The Good News

As strong as the market has been of late it should be noted that we are about to enter the most favorable seasonal portion of the 48-month election cycle.  This period begins at the close of September 2018 and extends through the end of December 2019.

Figure 2 displays the growth of $1,000 invested in the Dow Industrials only during this 15-month period every 4 years.  Figure 3 displays the actual % +(-) for each of these periods.  Note that since 1934-35, the Dow has showed a gain 20 out of 21 times during this period.

2a

Figure 2 – Growth of $1,000 invested in Dow Industrials ONLY during 15 bullish months (mid-term through pre-election year) within 48-month election cycle.

Start Date End Date Dow % +(-)
9/30/1934 12/31/1935 +55.6%
9/30/1938 12/31/1939 +6.2%
9/30/1942 12/31/1943 +24.5%
9/30/1946 12/31/1947 +5.1%
9/30/1950 12/31/1951 +18.9%
9/30/1954 12/31/1955 +35.5%
9/30/1958 12/31/1959 +27.7%
9/30/1962 12/31/1963 +31.8%
9/30/1966 12/31/1967 +16.9%
9/30/1970 12/31/1971 +17.0%
9/30/1974 12/31/1975 +40.2%
9/30/1978 12/31/1979 (-3.1%)
9/30/1982 12/31/1983 +40.4%
9/30/1986 12/31/1987 +9.7%
9/30/1990 12/31/1991 +29.2%
9/30/1994 12/31/1995 +33.1%
9/30/1998 12/31/1999 +46.6%
9/30/2002 12/31/2003 +37.7%
9/30/2006 12/31/2007 +13.6%
9/30/2010 12/31/2011 +13.0%
9/30/2014 12/31/2015 +2.2%

Figure 3 – 15 bullish months (mid-term through pre-election year) within 48-month election cycle

Now What? The Worrisome Trees

While the major averages are setting records a lot of other “things” are not.  My own cluster of “market bellwethers” appear in Figure 4.  Among them the Dow Transportation Index is the only one remotely close to a new high, having broken out to the upside last week.  In the meantime, the semiconductors (ticker SMH), the inverse VIX index ETF (ticker ZIV) and Sotheby’s (ticker BID) continue to meander/flounder. This is by no means a “run for the hills” signal.  But the point is that at some point I would like to see some confirmation from these tickers that often (though obviously not always) presage trouble in the stock market when they fail to confirm bullish action in the major averages.

(click to enlarge)4Figure 4 – Jay’s 4 Bellwethers (SMH/TRAN/ZIV/BID) (Courtesy AIQ TradingExpert)

Another source of potential concern is the action of, well, the rest of the darn World.  Figure 5 displays my own regional indexes – Americas, Europe, Asia/Pacific and Middle East.  They all look awful.

(click to enlarge)3Figure 5 – 4 World Regional Indexes (Courtesy AIQ TradingExpert)

Now the big question is “will the rest of the world’s stock markets start acting better, or will the U.S. market start acting worse?”  Sadly, I can’t answer that question.  The key point I do want to make though is that this dichotomy of performance – i.e., U.S market soaring, rest of the world sinking – is unlikely to be sustainable for very long.

Summary

It is hard to envision the market relentlessly higher with no serious corrections over the next 15 months.  And “yes”, those bellwether and world region indexes trees are “troublesome”.

Still the trend at the moment is inarguably “Up” and we about to enter one of the most seasonally favorable periods for the stock market.

So, my advice is simple:

1) Decide now what defensive actions you will take if the market does start to breakdown

2) Resolve to actually take those actions if the need arises

3) Enjoy the ride as long as it lasts.

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.

Attention Wild-Eyed Speculators

Most people are familiar with ADHD, manic-depressive disorder, depression and schizophrenia.  But one common affliction within our trading community that gets almost no attention is WESS.  That stands for “Wild-Eyed Speculation Syndrome”.  And it’s more common than you think (“Hi, my name is Jay”).

The exact symptoms vary, but generally speaking they go something like this:

*A person gets up in the morning with a hankering to make a trade

*Said person then finds “some reason” to make some trade in something

*If the person happens to make money on that trade then the affliction is reinforced by virtue of IGTS (“I’ve Got the Touch Syndrome”, which is one of the occasional side effects of WESS)

*If the person loses money on the trade the side effects can vary but may include: angry outbursts, kicking oneself in the head (typically figuratively), vows to either stop the behavior or at least do it better, and so on.

*The most common side effect of WESS is a declining trading account balance (which not coincidentally is how this disorder is most commonly diagnosed).

For those suffering from WESS – with the caveat/disclosure that I am not a medical professional (although I have found that ibuprofen really clears up a lot of stuff, but I digress) – I am here to help.

If you find yourself suffering from Symptom #1 above:

The most effective step is to go back to bed until the urge passes.  If this doesn’t work or is not possible (for instance, if you have one of those pesky “jobs” – you know, that 8-hour a day activity that gets in the way of your trading), repeat these two mantras as many times as necessary:

Mantra 1: “I must employ some reasonably objective, repeatable criteria to find a trade with some actual potential”

Mantra 2: “I will risk no more than 2% of my trading capital” on any WESS induced trade (and just as importantly, you must fend off the voice on the other shoulder shouting “But this is the BIG ONE!!”)

Repeat these mantras as many times as necessary to avoid betting the ranch on some random idea that you “read about on the internet, so it must be true.”

Regarding Mantra 1

There are a million and one ways to find a trade.  There is no one best way.  But just to give you the idea I will mention one way and highlight a current setup. IMPORTANT: That being said, and as always, I DO NOT make recommendations on this blog.  The particular setup I will highlight may work out beautifully, or it may be a complete bust.  So DO NOT rush out and make a trade based on this just because you read it – you know – on the internet.

The Divergence

Lots of trades get made based on “divergence”.  In this case we are talking about the divergence between price and a given indicator – or even better, series of indicators.  There is nothing magic about divergence, and like a lot of things, sometimes it works and sometimes it doesn’t.  But the reason it is a viable consideration is that when an indicator flashes a bullish divergence versus price it alerts us to a potential – nothing more, nothing less – shift in momentum.

Let’s look at ticker GDX – an ETF that tracks an index of gold mining stocks.  In Figure1 1 through 4 below we see:

*GDX price making a lower low

*A given indicator NOT confirming that new low (i.e., a positive divergence)

1Figure 1 – GDX and MACD (Courtesy AIQ TradingExpert)

2Figure 2 – GDX and 3-day RSI (Courtesy AIQ TradingExpert)

3Figure 3 – GDX and TRIX (Courtesy AIQ TradingExpert)

4Figure 4 – GDX and William’s Ultimate Oscillator (Courtesy AIQ TradingExpert)

So, do the divergences that appear in Figures 1 through 4 justify a trade?  Well, here is where the aforementioned affliction comes into play.

Average Trader: “Maybe, maybe not.  In either case I am not entirely sure that trying to pick a bottom in gold stocks based solely on indicator divergences is a good idea”

WESS Sufferer: “Absofreakinglutely!!  Let’s do this!!”

You see the problem.

So, let’s assume that a WESS Sufferer likes what he or she sees in Figures 1 through 4.  The good news is that we have met the minimum criteria for Mantra #1 above – we have employed some reasonably objective, repeatable criteria (i.e., a bullish divergence between price and a number of variable indicators) to spot a potential opportunity.

Now we must follow Mantra #2 of risking no more than 2% of my trading capital.  Let’s assume our WESS Sufferer has a $25,000 trading account.  So he or she can risk a maximum of $500 ($25,000 x 2%).

In Figure 5 we see a potential support area for GDX at around $16.40 a share.

5Figure 5 – Ticker GDX with support at $16.40 (Courtesy AIQ TradingExpert)

So, one possibility would be to buy 300 shares of GDX at $17.84 and place a stop loss order below the “line in the sand” at say $16.34 a share.  So if the stop is hit, the trade would lose -$450, or -1.8% of our trading capital (17.84 – 16.34 = -1.50 x 300 shares = -$450).

Summary

Does any of the above fit in the category of “A Good Idea”.  That’s the thing about trading – and most things in life for that matter – it’s all in the eye of the beholder.  Remember, the above is NOT a “recommendation”, only an “example.”

The real key thing to note is that we went from being just a random WESS Sufferer to a WESS Sufferer with a Plan – one that has something other than just an “urge” to find a trade, AND (most importantly) a mechanism for limiting any damage that might be done if things don’t pan out.

And if that doesn’t work, well, there’s always ibuprofen.

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 It All Becomes Too Obvious

Investors who pay close attention to the financial markets by and large spend a fair amount of time being “perplexed.”  If you take all the “news” related to the markets and combine that with all the day-to-day and week-to-week gyrations of the markets, there often seems to be no rhyme or reason for what goes on (hence the reason I generally advocate a slightly less hyper, more trend-driven approach).

But sometimes it all seems to come crystal clear.  In the most recent fortnight most of the major market averages (with the Dow and S&P 500 being the primary exceptions) have touched or at least teased new highs.  Facebook got crushed and the market didn’t tank.  Tesla struggled mightily before bursting back into the bright sunlight – and the market didn’t tank.  In fact, all kinds of things have happened and still the major U.S. averages march relentlessly higher backed by a strong economy, reasonably moderate inflation and higher, yet by no means high interest rates.

At this point, it appears “obvious” that there is no end in sight to the Great Bull Market.  A number of momentum studies I have read lately seem to all confirm that the U.S. market will continue to march higher to significantly higher new highs.

And the fact that it is so “obvious” scares the $%^& out of me.  Don’t misunderstand.  This is not about to devolve into a hysterical “Sell Everything!” screed.  The trend is bullish therefore so am I.  But the “what could possibly go wrong” antennae still pop up from time to time.  So here are some random views regarding all things stock market.

The Major Averages

Figure 1 displays 4 major U.S. market averages.  All are in uptrends above their respective 200-day moving averages and all are close to all-time highs.  The big question is “what happens when they get there?”  Do they all break through effortlessly?  Or do we get a “struggle?”

(click to enlarge)

1

Figure 1 – The Major U.S. Averages; clearly in up trends, but… (Courtesy AIQ TradingExpert)

Figure 2 displays my own 4 market “bellwethers”, including the semiconductors (SMH), Dow Transports (TRAN), Inverse VIX ETF (ZIV) and Sotheby’s Holdings (BID).  At the moment, none of these are actively “confirming” new highs and they each have a clear “line in the sand” resistance level overhead.  So, for the moment they presently pose something of a minor warning sign.

(click to enlarge)

2Figure 2 – Jay’s Market “Bellwethers”; stuck in “nowhere” (Courtesy AIQ TradingExpert)

While the U.S. economy and stock market appear to be hitting on all cylinders, the rest of the world is sort of “chugging along.”  Figure 3 displays 4 “Geographic Groups” that I follow – The Americas, Asia/Pacific, Europe and Middle East.  The good news is that each group is presently holding above it’s respective 21-month moving average.  So technically, the trend is “Up.”  But the bad news is that each group has some significant overhead resistance, so the current uptrend is by no means of the “rip roaring” variety.

(click to enlarge)

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Figure 3 – Major Geographic Groups; Hanging onto uptrends but serious overhead resistance (Courtesy AIQ TradingExpert)

The VIX Index

Traders have been pretty much conditioned in recent years to assume that the VIX Index – which measures volatility and by extension, “fear” – is and will remain low as the market chugs higher.  And that may prove to be true.  But when everything gets to “obvious” (i.e., the U.S. market is “clearly” heading higher) and things get too quiet (VIX dropped below 11% for the 1st time in 3 months) it can pay to “expect the unexpected.”

Figure 4 is from www.sentimentrader.com and displays those instances in the past when the VIX Index fell below 11% for the first time in 3 months.  Historically, VIX makes some kind of an up move in the 2 to 3 months following such occurrences.

(click to enlarge)

4

Figure 4 – VIX Index performance after VIX Index drops below 11% for 1st time in 3 months (Courtesy Sentimentrader.com)

Things may or may not play out “like usual” this time around, however, given that…

*The U.S. averages are “obviously” heading higher

*The market bellwethers are so far not confirming

*The rest of the worlds stock markets are nowhere near as strong

*VIX has a history of “spiking”, especially during the seasonally unfavorable months of August and September

…It might make sense to consider a long volatility play (NOTE: Long volatility plays using ticker VXX have a long history of not panning out as ticker VXX is essentially built to go to zero – for more information on VXX and the effects of “contango” please see www.Google.com.  Long VXX trades are best considered).

One example appears in Figures 5 and 6.  This trade involves:

*Buying 5 Oct VXX 31 calls @ $2.74

*Selling 4 Oct VXX 36 calls @ $1.82

(click to enlarge)

5Figure 5 – VXX example trade particulars (Courtesy www.OptionsAnalysis.com)

(click to enlarge)

6

Figure 6 – VXX example trade risk curves (Courtesy www.OptionsAnalysis.com)

The maximum risk is $642 if VXX fails to get above the breakeven price of $32.28 by October 19th.  On the other hand, if something completely not “obvious” happens and volatility does in fact spike, the trade has significant upside potential.

(NOTE: As always, please remember that this is an “example” of a speculative contrarian trade, and NOT a “recommendation.”  If the stock market rallies – as it “obviously” seems to want to do, this trade will likely lose money.)

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.

Dollar and Gold ‘To the Barricades’

This week it is the U.S. dollar and Gold taking their turns testing critical inflection points.

U.S. Dollar

As you can see in Figure 1, on a seasonal basis the dollar is moving into a traditionally weaker time of year.1Figure 1 – U.S. Dollar seasonality (Courtesy Sentimentrader.com)

In Figure 2 you can see that traders have been and remain pretty optimistic.  This is traditionally a bearish contrarian sign.2Figure 2 – U.S. Dollar trade sentiment (Courtesy Sentimentrader.com)

In Figure 3 we see the “line in the sand” for ticker UUP – an ETF that tracks the U.S. Dollar.  Unless and until UUP punches through to the upside there is significant potential downside risk.3Figure 3 – U.S. Dollar w/resistance (Courtesy AIQ TradingExpert)

Gold

As you can see in Figure 4, on a seasonal basis the dollar is moving into a traditionally stronger time of year.4Figure 4 – Gold seasonality (Courtesy Sentimentrader.com)

In Figure 5 you can see that traders have been and remain pretty pessimistic.  This is traditionally a bullish contrarian sign.5Figure 5 – Gold trader sentiment (Courtesy Sentimentrader.com)

In Figure 6 we see the “line(s) in the sand” for ticker GLD – an ETF that tracks gold bullion.

6Figure 6 – Gold w/support (Courtesy  AIQ TradingExpert)

I would be hesitant about trying to “pick a bottom” as gold still looks pretty week.  But if:

a) GLD does hold above the support area in Figure 6 and begins to perk up,

AND

b) Ticker UUP fails to break out to the upside

Things could look a lot better for gold very quickly.

Summary

As usual I am not actually making any “predictions” here or calling for any particular action.  I mainly just want to encourage gold and/or dollar traders to be paying close attention in the days and weeks ahead, as the potential for a major reversal in both markets appears possible.

Likewise, if no reversal does take place – and if the dollar breaks out to the upside and gold breaks down, both markets may be “off to the races.”

So dollar and gold traders – take a deep breath; focus your attention; and prepare for action…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.

Here Are The Warning Signs to Watch For

Here’s a number for you – 88%.  Since 1948, over any 10-year period the Dow has showed a gain 88% of the time.  That’s a pretty good number.  It also explains why we should give bull markets the benefit of the doubt (for the record, if you only hold the Dow between the end of October and the end of May every year you would have a showed a 10-year gain 98% of the time!  But this article is not about seasonality per se, so that’s a topic for another day).
Of course, there is a lot of variability along the way, and if you Google “current signs of a bear market” you come up with 4,280,000 articles to peruse.  So, few investors ever feel “contented”.  We’re always waiting for the “other shoe to drop.”
Some Warning Signs to Look For
#1. Major Indexes
Figure 1 displays the four major average – Dow, S&P 500, Nasdaq 100 and Russell 2000 with their respective 200-day moving averages.  In the last few days the Dow slipped a little below its 200-day average, the other three remain above.

(click to enlarge)1aFigure 1 – Four major market averages with 200-day moving averages (Courtesy AIQ TradingExpert)

Warning Sign to Watch For: If 3 or more of these averages drop below their 200-day moving average.
#2. Market Bellwethers
Figure 2 displays my four market “bellwhethers” – tickers SMH (semiconductors), TRAN (Dow Transports), ZIV (inverse VIX) and BID (Sotheby’s Holdings) with their respective 200-day moving averages.  At the moment only ZIV is below it’s 200-day moving average but some of the others are close

(click to enlarge)2Figure 2 – Four market bellwethers with 200-dqy moving averages (Courtesy AIQ TradingExpert)

Warning Sign to Watch For: If 3 or more of these averages drop below their 200-day moving average.
#3. S&P 500 Monthly Method
In this article I detailed a simple timing method using S&P 500 Index monthly closing prices.  Figure 3 show the S&P 500 Index with it’s “trigger warning” price of 2,532.69 highlighted.

(click to enlarge)3Figure 3 – S&P 500 Index Monthly Method Trigger Points (Courtesy AIQ TradingExpert)

Warning Sign to Watch For: If SPX closes below 2532.69 without first taking out the January high of 2872.87
#4. International Growth Stocks
When growth stocks around the world are performing well, things are good.  When they top out, try to rebound and then fail, things are (typically) not so good.  The last two major U.S. bear markets were presaged by a break in ticker VWIGX (Vanguard International Growth) as seen in Figure 4.

(click to enlarge)4Figure 4 – Dow Jones Industrials Average (top) and previous warnings from ticker VWIGX (bottom)(Courtesy AIQ TradingExpert)

Warning Sign to Watch For: Technically this one is currently flashing a warning sign.  That warning will remain active unless and until VWIGX takes out the January high of 33.19.
#5. The 10-Year minus 2-Year Yield Spread
This is one of the most misrepresented indicators, so I will state it as plainly as possible:
*A narrowing yield curve IS NOT a bearish sign for the stock market
*An actual inverted yield curve IS a bearish sign for the stock market
Figure 5 displays the latest 10-year minus 2-year spread.  Yes, it has narrowed quite a bit.  This has launched a bazillion and one erroneously frightening articles.  But remember the rules above.

(click to enlarge)5Figure 5 – 10-year treasury yield minus 2-year treasury yield (Courtesy: www.StockCharts.com)

Warning Sign to Watch For: If the 10-year yield minus the 2-year yield falls into negative territory it will flash a powerful warning sign for the stock market and the overall economy.  Until then ignore all the hand-wringing about a “flattening” yield curve.
Summary
We are in a seasonally unfavorable period for the stock market and – as always – we are bombarded daily with a thousand and one reasons why the next bear market is imminent.
So my advice is to do the following:
1. Ignore it all and keep track of the items listed above
2. The more warning signs that appear – if any – the more defensive you should become
In the meantime, try to go ahead and enjoy your summer.
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.

What in the World to Watch

If an investor were to sit down and peruse the Web looking for guidance regarding the stock market, there is a good chance they would come away bewildered and confused.

So, let’s try to simplify things a bit.

The Current Trend

Here I will defer to:

Jay’s Trading Maxim #14: When in doubt, usually the best question to ask is “What is the trend right now?”

There are always a million and one reasons why an investor may feel doubt.  But answering that simple question can often lead to a much greater deal of clarity.  Like now for instance.

In Figure 1 we see the Dow, Nasdaq 100, Russell 200 small-cap index and the S&P 500.  The key thing to note is that all 4 of them are above their respective 200-day moving average, i.e., “right now” the trend is up.

Which leads to:

Jay’s Trading Maxim #14a: If the trend right now is “Up”, act accordingly.  At least until the answer changes.

1

Figure 1 – Major U.S. Indexes in Up Trends (Courtesy AIQ TradingExpert)

SPX Monthly Trend-Following

I wrote here and here about a simple monthly trend-following method using the S&P 500 Index.

This method gave an “alert” when the S&P 500 went 3 calendar months (Feb, March and April) without making a new high.

The “line in the sand” is the low during this period of 2532,69.  As long as price holds above this level, this method deems the trend as still “Up”.

It will take a move above the January high 2872.87 to eliminate this line in the sand.  Between here and there there is resistance at 2801.90.

4

Figure 2 – S&P 500 Index key support and resistance (Courtesy AIQ TradingExpert)

The (Problematic) World

I am not speaking in any geopolitical sense here.  And I don’t want to sound like the Ugly American.  But while the U.S. stock market is “taking care of business” and moving higher, the stock markets of much of the rest of the world are not.  And I am not sure if I should worry about this or not.

But for what it is worth, all 4 regional single country ETF indexes that I created (Americas, Asia/Pacific, Europe and Middle East) and follow are not looking terribly inspiring at the moment.

(click to enlarge)

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Figure 3 – The Rest of the World Lags (Courtesy AIQ TradingExpert)

Summary

The trend “right now” is “Up”.  So enjoy.

But maybe check back again soon.  Just in case.

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.

World, Interrupted

I suppose a more accurate title would be, “A Bunch of Single Country ETFs, Interrupted”, but, well, that just doesn’t have quite the same succinct simplicity.

I always (always, always) try to make an effort to focus on “the current trend” and to avoid focusing on things that “maybe might prove to be ominous signs in retrospect” or to imply that a certain tidbit of information is predictive when in reality it is mostly just anecdotal.  Still, human nature is – unfortunately, in this case – a powerful force.  Which reminds me to invoke:

Jay’s Trading Maxim #17: Human nature is a detriment to trading and investment success, and should be avoided as much as, well, humanly possible.

The bottom line is that despite my very own warnings and admonitions, sometimes that pesky human nature gets the best of me.

What Has My Attention

OK, rather than me telling you what I think, please simply peruse the charts in Figures 1, 2 and 3 and see if anything jumps out at you.

(click to enlarge)1

Figure 1 – India, Sweden, Japan, Germany (clockwise); (Courtesy AIQ TradingExpert)

(click to enlarge)2

Figure 2 – Switzerland, Netherlands, South Korea, Austria (clockwise); (Courtesy AIQ TradingExpert)

(click to enlarge)3a

Figure 3 – South Africa, China, Taiwan, Thailand (clockwise); (Courtesy AIQ TradingExpert)

Perhaps you noticed the same thing I did, i.e., a whole bunch of single country ETF’s hitting new highs or testing old resistance and getting rejected. In a number of cases, after appearing to break out to new highs for a period of weeks or month only to fall back below the “line in the sand.”

It’s sort of like the World Cup of Failed Breakouts.

Summary

Now here’s the thing.  I have displayed a bunch of charts that anecdotally seem to imply something bearish.  To spell it out, failed breakouts are often – though definitely not always – followed by something much worse.

So the line of reasoning goes like this, “If the stock market in umpteen countries is failing to advance then this must be a bad thing.”

But the reality is that all these markets have to do is rally and this whole sort of made up area of concern goes away.

Still, until that actually happens I think I will:

a) Enjoy the rally here in the U.S.

b) Remain vigilant

It seems like a reasonable plan.

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.

Buy Low(?)

There are a lot of ways to play this game.
For the record, I am a big believer in trend-following.  Picking tops and bottoms with any consistency is essentially impossible (at least in my opinion and/or experience).  So from that perspective going with the trend makes a lot of sense.  I am also a big believer in relative strength.  Much evidence over the years suggests that buying what is “already moving” is a very viable approach to investing.  Other studies have demonstrated pretty clearly that you are generally much more likely to succeed by buying stocks making new highs than by buying stocks making new lows.
These approaches make good sense and they work very well over time.  Despite this many (most?) investors still feel those pangs to “buy low” in hopes of getting in early and riding a major trend.  And the truth (I think) is that this can work too, if done correctly.
Like I said, there are a lot of ways to play this game.  But there is a definite “right” way and “wrong” way when it comes to “buying low.”
Buying Low (The Wrong Way): Buy things are plummeting or that have recently plummeted.
The Right Way (The Right Way): Buy things that have, a) plummeted, b) stopped plummeting and, c) have since been moving sideways for some period of time.
Last year I wrote about a “Buy Low” portfolio that I had concocted at the time.  Unfortunately, several of the ETFs involved have since ceased trading.  So in this piece I will introduce my updated “Buy Low” portfolio.  For the record – and as always – I am not “recommending” this portfolio.  It is essentially an experiment in one alternative approach to investing.
The “Buy Low” Portfolio
The Buy Low Portfolio consists of the following ETF’s and ETN’s:
CANE – Tecrium Sugar
JJOFF – Coffee Subindex Total Return
DBA – PowerShares Agricultural
WEAT – Tecrium Wheat
GLD – StreetTracks Gold Trust
PPLT – ETFS Physical Platinum Shares
SLV – iShares Silver Trust
GDX – Market Vectors Gold Miners
UNG – United States Natural Gas
URA – Global X Uranium
Monthly charts for these tickers appear in Figures 1 through 3.  A chart of the composite index I created by combining all of these appears in Figure 4 (Click any chart to enlarge).
1aFigure 1 – CANE/DBA/GDX/GLD (courtesy AIQ TradingExpert Pro)
2Figure 2 – JJOFF/PPLT/SLV/UNG (courtesy AIQ TradingExpert Pro)
3Figure 3 – URA/UNG (courtesy AIQ TradingExpert Pro)
4Figure 4 – Buy Low Composite Index (courtesy AIQ TradingExpert Pro)
Editors note: To create an index like Jay’s Trending Low, follow the instructions at the end of this article ‘Creating an index for a group of tickers in Data Manager’
Summary
Securities that have plummeted in price and then moved sideways for a period of time can (unfortunately) continue to move sideways for quite a while longer before (hopefully) breaking out to the upside.  Even worst, they can also fail and breakdown through the previous low. But extended consolidation patterns are often followed by something good.
As you can see all of the tickers in the list above are commodity related.  As I’ve written about here and here there is reason to believe that commodities will outperform in the years ahead.  That being said, with the stock market rallying in the near-term and with the U.S. Dollar strong there is no compelling reason to think that this “Buy Low Portfolio” is going to make a lot of  headway anytime soon.
The Index in Figure 4 is presently 8.2% above its January 2016 low.  As long as that low holds I’ll give this experiment more time to work out.
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.
Creating an index for a group of tickers in Data Manager


NOTE: tickers with X in list need to be added to the Data Manager as new tickers and downloaded from your data service

When you create an index for a group of tickers, you can display a chart of the index as well as the underlying tickers. A group index can be analyzed on charts using technical indicators, and Expert Ratings are generated for the group index (except for mutual fund
groups).

The procedure for creating an index for a group of tickers is as follows:

  • First, create a group ticker for the index.
  • Then create a list to insert the group ticker into.
  • Add tickers to the group.
  • Finally, create the index by executing the Compute Group/Sector Indices function.


To create an index for a group of tickers, follow the steps below.

First, create a group ticker:

1. First, add a new group ticker to your Master Ticker List. Select the
Ticker command on the menu bar. Then select New to display the
New Ticker dialog box.
2. Enter a ticker for the new group, then be sure to enter the proper
Type designation (group or mutual fund group).
3. Click OK, and the second dialog box for entering a new ticker
appears.
4. Type in a name (Description) and the First Date for data. The
remaining default settings on this second dialog box can remain the
same.
5. Click OK and the group ticker is added to your Master Ticker List.

Then, create a list to insert the group ticker into:

1. Select the List command on the menu bar.
2. Select New on the drop-down menu and a dialog box appears.
3. Type in a name (8 characters maximum) in the text box.
4. Click OK and the list name appears in the Selected List text box
located on the toolbar.
5. The list name is also displayed in the List window. Insert the group
ticker from your Master Ticker List under the list name. To insert a ticker directly under a list, do the following:

  • Highlight (by clicking) the group ticker in the Master Ticker List.
  • Click the list name in the List window.
  • Click the Insert to List button on the toolbar (or select the Insert Ticker command from the List sub-menu).
  • The group ticker will appear in the List window under the list name.

6. Next, insert tickers into the group. To insert tickers into a group:
Under the new group, insert all of the tickers that will make up the
group by doing the following:

  • Select the group ticker in the List window by clicking on it.
  • Select in your Master Ticker List the tickers that you want to add to the group. If you are inserting multiple tickers, hold down the Ctrl key while clicking each ticker.
  • Click the Insert to List button on the toolbar (or select the Insert Ticker command from the List sub-menu).
  • The tickers will appear in the List window under the group ticker.

7. Finally, compute the index for the new group. To compute a group index:

  • Select Compute Group/Sector Indices from the Utilities sub-menu.
  • In the Compute Group/Sector Indices dialog box, click the Compute List(s) option button.
  • In the text box for Compute List(s), select the name of the list you created above.
  • Under Range, choose Update from Last Date of Data and click OK.