Category Archives: jay kaeppel

Bean There, Done That

In this piece I wrote about a strong seasonal tendency in corn based on the planting cycle.  Turns out soybeans are in the same boat.  This can be a good thing for traders who are, a) willing to speculate, b) not dumb enough to the bet the ranch.

The Trend

Figure 1 displays the annual seasonal trend for soybeans (from www.sentimentrader.com).  Just as with corn, the months of February through April tend to see positive results.  Please note the use of the word “tend” and the lack of the words “sure” or “thing”.

bean seasonality

Figure 1- Soybean Annual Seasonal Trend (Courtesy Sentimentrader.com)

The History

Figure 2 displays a monthly chart for soybeans going back 4 decades.

2

Figure 2 – Monthly chart for Soybeans (Courtesy ProfitSource by HUBB)

Here are the two things to note (using some pretty technical terms):

*Soybeans (like most commodities)  spend a lot of time “churning”, “grinding”, “consolidating” and generally going “nowhere”

*HOWEVER, “when beans go they really go!” (hopefully that wasn’t “too technical”)

*The primary thing to remember is that when soybeans get going to the upside, typically the best thing to do is to banish the word from “overbought” from your trading lexicon.  See Figure 3.3

Figure 3 – Big moves in Beans (Courtesy ProfitSource by HUBB)

Now let’s focus on the months of February, March and April.  Figure 4 displays the hypothetical $ growth (no slippage or commissions) from holding long a 1-lot of soybean futures during February, March and April every year starting in 1976.

4

Figure 4 – Long 1 soybean futures contract during Feb-Mar-Apr every year since 1976

The Results

Some things to note regarding Feb-Apr in soybeans:

*# of times UP = 33

*# of times DOWN = 10

*Average $ gain = +$3,808

*Average $ loss = (-$1,788)

*Largest gain = +$15,025

*Largest loss = (-$3,775)

In sum, a winners to losers ratio of 3.3 (or 76% winners), an average win to average loss ratio of 2.13-to-1

Bottom line: these are great numbers for traders BUT they entail the assumption of significant risk (2017 saw a loss of over -$3,400)

An Alternative Way to Play

Ticker SOYB is the Teucrium ETF designed to track the price of soybeans.  SOYB allows traders to buy soybeans just as they would buy shares of stock.  Just remember that you don’t get the same leverage buying SOYB as you would buying a futures contract.

Figure 5 displays a monthly chart for SOYB and Figure 6 displays a daily chart.  Note the significant resistance level at around $16.96 a share.  If SOYB takes out that level sooner than later it might be a bullish sign.

5

Figure 5 – SOYB Monthly (Courtesy AIQ TradingExpert)

6

Figure 6 – SOYB Daily (Courtesy AIQ TradingExpert)

Summary

Soybeans have been beaten down a bit over the last several years.  If (and “yes”, that is a big “If”) beans are going to make a move higher, history suggests that the Feb through April period is a likely time for that to happen.

Am I “recommending” or even “merely suggesting” that you should buy soybean futures or ticker SOYB?  Not at all.  I adhere to that old media adage of “We (I) report, you decide.”

Which is better I think than the current motto of major media which appears to be “We decide, then we report our decision.”

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.

2

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.

3

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.

1

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).

4

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!!!”

2

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

3

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.

A Long and Short-Term Bond Market Perspective, Part II

In Part I here I laid out my main thoughts regarding the bond market.  The final point mentioned that two trading models for bonds that I follow are presently bullish.  So in Part II let’s bring those up-to-date.

#1. Japanese Stocks (EWJ) vs. Long-Term Treasuries (TLT)

I have written about this model on several occasions in the past (herehere and here).  But in a nutshell:

*The Japanese stock market (using ETF ticker EWJ as a proxy) and long-term U.S. treasury bonds (using ETF ticker TLT as a proxy) tend to have an inverse relationship over time.

Therefore:

*A bearish trend for EWJ (5-week moving average below 30-week moving average) tends to be bullish for bonds.

*A bullish trend for EWJ (5-week moving average above 30-week moving average) tends to be bearish for bonds.

Figure 1 displays the EWJ on top with TLT on the bottom.  Note the general inverse correlation in price movement.

1

Figure 1 – T-Bonds (ticker TLT in bottom clip) tend to move inversely to Japanese stocks (ticker EWJ with 5-weel and 30-week moving averages in top clip) (Courtesy AIQ TradingExpert)

#2. Gold/Copper Ratio versus Bonds

I have written about this before here.  In a nutshell:

*The gold/copper ratio has a relatively high correlation to the price of t-bonds (current correlation coefficient = 0.73; a reading of 1.00 means they mirror each other, a reading of -1 means there are trade exactly inversely).

Figure 2 displays treasury bond futures prices (blue) versus the Gold/Copper Ratio (x10) since 2001.  The correlation is fairly obvious to the naked eye.

2

Figure 2 – T-bond futures price (blue) versus Gold/Copper ratio (x10); 12/31/01-1/11/2019

*When the gold/copper ratio is in an uptrend (see here for how that designation is made) this indicator is considered bullish for bonds

*When the gold/copper ratio is in a downtrend this indicator is considered bearish for bonds

Putting the Two Together

*If either of the models is bullish that is considered bullish for bonds

*If both models are bearish that is considered very bearish for bonds

Figure 3 displays the gain or loss from holding a long position in a treasury bond futures contract depending on whether, a) neither model is bullish (red), or, b) one or more of the models is bullish (blue)

3

Figure 3 – Cumulative $ gain (loss) from holding long t-bond futures if 1 or more model is bullish (blue) versus if neither model is bullish (red); 7/22/96-1/11/19

As you can see, a bullish reading in no way guarantees higher bond price and a bearish reading in no way guarantees lower bond price.  Still, given the stark differences between the performance of the blue line and the red line, that would seem to be the way to bet.

For what it is worth, both models detailed above are bullish at the moment.

Summary

*In Part I, I basically inferred a preference for short to intermediate term bonds for people who buy and hold bonds (or bond funds) as part of a longer-term investment strategy (if rates rise 1 percentage point, a 30-year bond paying 4% a year, will lose -15% in principal – too much risk from my perspective).

*At the same time, as highlighted here in Part II, long-term bonds can still offer outstanding trading opportunities both on the long side and the short side – for those inclined to play.

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.

All Eyes on Key Bellwether Support Levels

First the reality.  Nobody knows what the market is going to do.  Yes, I am aware that there are roughly a bazillion people out there “prognosticating” (myself included) about the stock market.  And yes, if one makes enough “predictions”, the law of averages dictates that one will be correct a certain percentage of the time.

Still, the market does offer clues.  Sometimes those clues turn out to be false leads.  But sometimes they do offer important information.  For example, Figure 1 displays four major market indexes.  As you can see, in the Aug-Sep-Oct time frame all four of these averages “broke out” to new all-time highs (i.e., The Good News) and then broke back down below the previous resistance line drawn on each chart (i.e., The Bad News).

1

Figure 1 – Four major indexes breakout then fail (Courtesy AIQ TradingExpert)

False breakouts happen all the time.  And the reality here is that sometimes they mean something and sometimes they don’t.  But when all four major average do the same thing, a warning sign has been issued to those who are interested in seeing it.  That’s why it can be useful to seek “confirmation”.  For my purposes I look to what I refer to as my 4 “bellwethers”, which are:

SMH – Semiconductors

TRAN – Dow Transportation Average

ZIV – Velocity Shares Inverse VIX Index

BID – Sotheby Holdings

These tickers appear in Figure 2 (click to enlarge).

2

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

While the major indexes were testing new highs in Aug/Sep and then breaking down in October:

SMH – Never really came close to breaking out above its March high

TRAN – Followed the major indexes by hitting new highs in Aug/SP and then breaking down in October

ZIV – Never came anywhere close to its Jan-2018 high

BID – Broke to a new high in Jun/Jul, then failed badly.

In a nutshell, the failed major index breakouts were accompanied by absolutely no positive signs from the 4 bellwethers. So, the warning signs were there if one wished to see them.

So where are the bellwethers now?  Another close look at Figure 2 reveals that:

SMH – the key support level at 80.92

TRAN – the key level for the Dow Transports is 8744.36

ZIV – the key support level is 60.60

BID – a potential support level is 32.95 (the Apr 2013 low)

Summary

*Given the washed-out/oversold level that many indicators and sentiment surveys have reached…

*…Combined with the fact that we are in the seasonally favorable pre-election year (no down pre-election years since the 1930’s)

*There is a chance that 2019 could be surprisingly bullish, and shell-shocked investors should not stick their heads in the sand to the possibility.

At the same time:

*Based solely on trend-following indicators ALL of the major market indexes are technically in confirmed bear markets.  As a result, there is absolutely nothing wrong with having some portion of one’s capital in defensive positions at the moment (30% cash or short-term bonds?).

*Keep a close eye on January performance.  A bullish January would be a positive sign just as a negative January could – in this case – signal a continued market decline.

*Keep a close eye on the 4 Bellwethers relative to their respective support levels.

In a nutshell:

*Up January + Bellwethers holding above support = GOOD

*Down January + Bellwether breaking down below support = BAD

Those are all the “clues” I can offer at the moment.

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.

1

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

2

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%.

3

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)

1

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

2

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.

3

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.

4

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.

An Obscure but Potentially Useful Oversold Indicator

Trend-following is essentially a “tried and true’ approach to investing.  But overbought/oversold (i.e., attempting to buy low/sell high) – that’s where the “excitement” is.  Of course, when it comes to trading and investing, “excitement” can be highly overrated.  Nevertheless, in this piece I want to talk about a relatively obscure indicator that may be useful in identifying vastly oversold situations.

EDITORS NOTE: The AIQ EDS file for Jay Kaeppel’s indicator is available to download at

The VixRSI14 Indicator

Part of the reason this indicator is obscure is because I think I “invented” it – but only by mashing together an indicator from Larry Williams and an indicator from Welles Wilder.  The first part is the standard Welles Wilder 14-day Relative Strength Index, more commonly referred to as “RSI”.

The 2nd part of VixRSI14 is an indicator created by famed trader Larry Williams which he dubbed “VixFix”.  This indicator is an effort to create a “Vix Index-like” indicator for any security.

AIQ TradingExpert code for these indicators appears at the end of the article.

A Few Notes

*For the record, VixRSI14 is calculated by taking a 3-day exponential average of VixFix and dividing that by a 3-day exponential average of RSI14 (are we having fun yet?).  Please see code at the end of the article.

*I prefer to use VixRSI14 using weekly data rather than daily data

*(Unfortunately) There are no “magic numbers” that indicate that a completely risk-free, you can’t lose, just buy now and watch the money roll in” buying opportunity is at hand (Disclaimer: If there was, I would probably just keep it to myself and not bother writing the article – sorry, it’s just my nature).  That being said, a decent “rule of thumb” is to look for a reading above 3.5 followed by a downside reversal.

(Click any chart below to enlarge)

With those thoughts in mind, Figure 1 displays a weekly chart of Wynn Resorts (WYNN) with the two indicators plotted separately below the bar chart.1

Figure 1 – WYNN with William’s VixFix and Wilder’s RSI 14-day (Courtesy AIQ TradingExpert)

Note that as price declines, VixFix tends to rise and RSI14 tends to fall.  VIXRSI14 essentially identifies “extremes” in the difference between these two.  Figure 2 displays WYNN with VixRSI14 plotted below the bar chart.

2

Figure 2 – WYNN with VixRSI14 (Courtesy AIQ TradingExpert)

More “examples” appear in Figures 3 through 8 below.

3

Figure 3 – AMD (Courtesy AIQ TradingExpert)

4

Figure 4 – BAC (Courtesy AIQ TradingExpert)

5

Figure 5 – DISH (Courtesy AIQ TradingExpert)

6

Figure 6 – GRMN (Courtesy AIQ TradingExpert)

7

Figure 7 – NTAP (Courtesy AIQ TradingExpert)

8

Figure 8 – YHOO (Courtesy AIQ TradingExpert)

Summary

As always, I merely present “ideas” here at JOTM.  So, do not assume from the charts above that you have found the “keys to the kingdom”.  But if used in conjunction with other confirming indicators – and remembering to employ some sort of risk control for those instances when a stock price decline fails to arrest itself even after VixRSI4 peaks above 3.5 – VixRSI14 may hold some value.

Indicator Code

EDITORS NOTE: The AIQ EDS file for Jay Kaeppel’s indicator is available to download at

Below is the code for VixFix, RSI14 and VixRSI14 from AIQ Expert Design Studio.

!#######################################

!VixFix indicator code

hivalclose is hival([close],22).

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

!#######################################

!#######################################

!RSI14 code

Define days14 27.

U14 is [close]-val([close],1).

D14 is val([close],1)-[close].

AvgU14 is ExpAvg(iff(U14>0,U14,0),days14).

AvgD14 is ExpAvg(iff(D14>=0,D14,0),days14).

RSI14 is 100-(100/(1+(AvgU14/AvgD14))).

!#######################################

!#######################################

!VixRSI14 code

VixRSI14 is expavg(vixfix,3)/expavg(RSI14,3).

!#######################################

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.

An Obscure But Useful Trend-Following Tool

Everyone has heard about trend-following.  And most traders have at least a foggy grasp of the relative pros and cons associated with trend following.  And anyone who has ever employed any type of trend-following technique is aware that they are great when there is an actual trend, but that whipsaws are inevitable.

What I am about to show you will not change these facts.  But today’s piece is just a “quickie” to highlight an obscure way to use a common indicator as a “confirmation/ denial” check when assessing the trend of a given security.  For the record, I am making no claim that this indicator generates profitably “trading signals in and of itself.  Its one of those things that – and I hate this phrase as much as you do but – should be used in conjunction with other indicators to get a good sense of the current “state of the trend” for a given security.

Nothing more, nothing less.

MACD Stretched Long

Most traders are familiar with the MACD indicator.  Originally popularized by Gerald Appel, it uses a set of moving averages to attempt to assess the trend in price (and many traders also use it to try to identify overbought or oversold situations).  Standard parameters are 9,26 and 12.  The version I use is different in several ways:

*Whereas the standard MACD generates two lines and a histogram can be drawn of the difference between the two, this version just generates one line – we will call in the trend line (catchy, no?)

*We will use parameters of 40 and 105

*One other note is that (at least according to me) this indicator is best used with weekly data.

The MACD4010501

Here is the formula for AIQ TradingExpert Expert Design Studio:

Define ss3 40.

Define L3 105.

ShortMACDMA3 is expavg([Close],ss3)*100.

LongMACDMA3 is expavg([Close],L3)*100.

MACD4010501Value is ShortMACDMA3-LongMACDMA3.

As I said this should be used with “other” indicators.  For example, one might consider the current price versus a 40-week moving average.

Standard Interpretation:

*If price is above the 40-week moving average (or if whatever other trend-following indicator you are using is bullish), AND

*The MACD4010501 is trend higher THEN

ONLY play the long side of that security

Likewise:

*If price is below the 40-week moving average (or if whatever other trend-following indicator you are using is bearish), AND

*The MACD4010501 is trend lower THEN

ONLY play the short side of that security (or at least DO NOT play the long side)

Finally, DO NOT assume that every change of trend in MACD4010501 is some sort of buy or sell signal.  Consider it only as a filter for your trades.

Some random examples appear in Figures 1 through 4 (click to enlarge any chart)

1

Figure 1 – AMZN (Courtesy AIQ TradingExpert)

2

Figure 2 – IBM (Courtesy AIQ TradingExpert)

3

Figure 3 – WMT (Courtesy AIQ TradingExpert)

4

Figure 4 – TLT (Courtesy AIQ TradingExpert)

Summary

To repeat, the proper use of this obscure version of the popular MACD indicator is as follows:

*Consider the trend of MACD4010501

*Consider one or more other trend-following indicators

*If there is bullish agreement, then apply your own shorter-term entry and exit techniques to trade the long side.

*If there is bearish agreement, then apply your own shorter-term entry and exit techniques to trade the short side (or simply stand aside).

Trade on!

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.