Category Archives: jay kaeppel

The VixRSI14 Indicator – Part 2

In this article I detailed an indicator I refer to as VixRSI14 using monthly charts. Today let’s apply the same method to weekly bar charts.  Before we do that a quick look at how this indicator functions.
VixRSI combines two indicators – Larry William’s VixFix and Welles Wilder’s Relative Strength Index (RSI).  In Figure 1 you see a weekly bar chart for YHOO.  Notice that as price declines the VixFix indicator rises and RSI falls. VixRSI14 essentially measures the difference between the two and looks for extremes as a sign of a potential reversal. See Figure 5 for YHOO with VixRSI14.
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Figure 1 – YHOO with Williams VixFix (with 3-day exponential smoothing) and Wilder’s 14-period RSI (Courtesy AIQ TradingExpert)
The Weekly Version of VixRSI14
We will use the same method I described in the previous article, i.e.:
*We will calculate the VixRSI14 indicator (see code at end of article) on a weekly basis
*A “buy alert” occurs when VixRSI14 drops below 3.00 after first rising to 3.50 or higher
Once again, please note that:
*There is nothing magic about 3.50 or 3.00
*Not every “buy alert” is followed by an immediate rally (or even any rally at all for that matter)
*Any actually trading”results” will depend heavily on what you trade, how much of it you trade, when you actually get in, when you get out with a profit and/or when you get out with a loss.
*This VixRSI14 alert signal is simply serving notice that a given security may be overdone on the downside and may be ready soon to reverse to the upside.  Nothing more, nothing less.1
Figure 2 – AAPL(Courtesy AIQ TradingExpert)
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Figure 3 – AXP (Courtesy AIQ TradingExpert)
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Figure 4 – IP (Courtesy AIQ TradingExpert)
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Figure 5 – YHOO (Courtesy AIQ TradingExpert)
Summary
In 2018 I intend to try to share a few more trading “ideas” that maybe are not quite “finished products”.  VixRSI14 fits neatly into the “Idea” category. Sometimes the alerts are early.  Sometimes the alerts are late.  Sometime the alerts don’t really pan out at all.  Sometimes alerts are followed by one more sharp decline which is then followed by a major rally. So maybe some sort of trend reversal confirmation would be helpful.  I don’t know.
Hey, that gives me an idea….
Code:
William’s VixFix is simply the 22-period high price minus today’s low price divided by the 22-day period price (I then multiply by 100 and then add 50).  That may sound complicated but it is not.
The code for AIQ TradingExpert appears below.
########## VixFix Code #############
hivalclose is hival([close],22).
vixfix is (((hivalclose-[low])/hivalclose)*100)+50.
###############################
####### 14-period RSI Code ###########
Define periods14 27.
U14 is [close]-val([close],1).
D14 is val([close],1)-[close].
AvgU14 is ExpAvg(iff(U14>0,U14,0),periods14).
AvgD14 is ExpAvg(iff(D14>=0,D14,0),periods14).
RSI14 is 100-(100/(1+(AvgU14/AvgD14))).
###############################
VixRSI14 is then calculated by dividing the 3-period exponential average of VixFix by the 3-period exponential average of RSI14
####### 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.

The VixRSI14 Indicator – Part 1

While the bulk of the financial world focuses most of its attention on whether or not Bitcoin will turn to sh, er, something that rhymes with Bitcoin, a lot of “old timers” continue on with trying to look at markets in a more traditional way. Unfortunately, some people who try to look at markets in a more traditional way also spend an inordinate amount of time “dividing one number by another” thinking there is some purpose to it (“Hi. My name is Jay”)

The only good news is that every once in awhile something useful – or at least potentially useful (since no single calculation guarantees profitability which also involves other “minor” issues such as which securities to trade, allocation size, entry method, profit taking criteria, stop loss triggers and so on and so forth). A number of years ago I stumbled upon a calculation that I ultimately refer to as VixRSI (for reasons that will become fairly obvious soon).  More specifically I have a few different versions but one I like is call used VixRSI14.

First the Good News: In this and some future articles I will detail how I apply VixRSI14 to monthly, weekly and daily price charts.

Now the Bad News: Nothing that I will write in any of those articles will detail a “simple automated system that generates you can’t lose trading signals guaranteed to make you rich beyond the dreams of avarice.”  Sorry about that. But I thought you should know.

The truth is that the indicator generates signals – and yes, a certain percentage of the time those signals aren’t that great.  And even on occasions when the signals are decent all of the factors I mentioned above (securities traded, capital allocation, etc.) still hold the key to turning a “signal” into a “profit”.

VixRSI14

VixRSI14 is calculated by combining Larry William’s “VixFix” indicator with the standard old 14-day RSI from Welles Wilder. I’ve decided to put the calculations at the end of the article in order to avoid scaring anyone off.

For now let’s look at what to look for on a monthly price chart.

VixRSI14 on a Monthly Chart

OK, true confession time: there is (at least as far as I can tell) no “one best way” to use VixRSI14 on a monthly chart.  So I will simply show you “One way.”

*A “buy alert” is triggered when the monthly value for VixRSI14 first rises to 3.5 or higher and then drops back to 3.0 or below

*Before going on please note that there is nothing “magic” about 3.5 or 3.  Different values can be used and will generate varying results.

*Also, some may prefer to simply look for a drop from above 3 to below 3 without requiring a move above 3.5

*Finally please note the use of the phrase “buy alert” and the lack of the phrase “BUY AS MUCH AS YOU CAN RIGHT THIS VERY MINUTE!!!!”

Figures 1 through 4 show several different Dow30 stocks “through the years.

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Figure 1 – Ticker AXP (Courtesy AIQ TradingExpert)

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Figure 2 – Ticker BA (Courtesy AIQ TradingExpert)

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Figure 3 – Ticker HPQ (Courtesy AIQ TradingExpert)

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Figure 4 – Ticker IBM (Courtesy AIQ TradingExpert)

Summary

Buy alerts on monthly charts using the criteria I described are obviously very rare.  In fact many securities never see the VixRSI14 rise high enough to trigger an alert.  Likewise, not every 3.5 then 3 event for every stock will work out as well as those depicted in Figures 1 through 4.

Still, remember that I am just presenting an “idea” and not a finished product.

Code:

William’s VixFix is simply the 22-day high price minus today’s low price divided by the 22-day high price (I then multiply by 100 and then add 50).  That may sound complicated but it is not.

The code for AIQ TradingExpert appears below.

########## VixFix Code #############

hivalclose is hival([close],22).

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

###############################

####### 14-period RSI Code ###########

Define periods14 27.

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

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

AvgU14 is ExpAvg(iff(U14>0,U14,0),periods14).

AvgD14 is ExpAvg(iff(D14>=0,D14,0),periods14).

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

###############################

VixRSI14 is then calculated by dividing the 3-period exponential average of VixFix by the 3-period exponential average of RSI14

####### 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.

Trend or Countertrend? Why Not Both?

First the brutal disclaimers: What follows is NOT a trading “system.” It is merely an “idea.” Even more brutally, I can’t even claim that it “works”.  All the testing I have done so far is more anecdotal. Also to an extremely huge degree, the actual entry trigger and exit trigger that  trader might choose to use will have – as always – at least as much if not more impact on overall trading results as the actual “alert” signal detailed below.
Got that?  OK, then let’s proceed.
The Debate
The ongoing debate in trading is always – trend-following or countertrend?  Which is the way to go?  There are (conservatively) at least a bazillion and one ways to argue one way or the other.       Figure 1 displays ticker TXN with upper and lower “Acceleration Bands” (code for AIQ TradingExpert appears after disclaimer at end of article) drawn.
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Figure 1 – Ticker TXN with Acceleration Bands (Courtesy AIQ TradingExpert)
Want to start a debate?  Ask this question: Is it better to buy when price hits the upper band or the lower band?  Sometimes price hits the upper band and just keeps going.  Sometimes it hits the upper band and the move peters out and reverses fairly quickly.
Going with the trend can lead to some big winning trades along the way, but typically involves a lot of whipsaws as well. Trading countertrend can lead to some great, quick profits – expect of course for when the initial trend never quite reverses and quick losses accrue instead.
What to do, what to do?
So the “idea” I mentioned at the outset generally goes like this:
*In an uptrend (which we will define in a moment)
*Wait for price to hit the Upper Band
*Then wait for a pullback
*Then wait for the uptrend to reassert itself
Got that? OK, me neither exactly.  So let’s try to define things a little more clearly.
1. As long as the closing price remains above the 200-day moving average, we will call that an “uptrend”
2. Within an uptrend wait for the high of a trading day to reach or exceed the Upper Acceleration Band.
3. Following #2, wait for the 4-day RSI to drop to 32 or lower with the following caveats:
*If price touches the Lower Acceleration Band OR closes below the 200-day moving average
*Then the setup is invalidated
This is the “Setup”.  For sake of example I will add an entry trigger as follows:
4. Following a valid #3 Alert Signal, buy when price exceeds the previous day’s high
I am going to purposely NOT add an exit trigger – just so that no one decides to “try it out” without at least giving it some thought on their own.
So Figure 2 shows the “Alerts” and “Entry Triggers” for the chart in Figure 1.
2Figure 2 – Ticker TXN with Example “Entry Triggers” (Courtesy AIQ TradingExpert)
So Figure 3 shows the “Alerts” and “Entry Triggers” for ticker EBAY3
Figure 3 – Ticker EBAY with Example “Entry Triggers” (Courtesy AIQ TradingExpert)
So Figure 4 shows the “Alerts” and “Entry Triggers” for ticker CSCO
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Figure 4 – Ticker CSCO with Example “Entry Triggers” (Courtesy AIQ TradingExpert)
So are these signals any good? Well, like a lot of trading methods, some look pretty good and others do not.  As I also mentioned earlier, a lot depends on the method or methods you use to exit each trade.
Summary
The reality is that there is a chance that the “idea” contained herein is just no darn good.
But also remember that there are other “trend filters” (besides the 200-day moving average), there are other “bands” (besides Acceleration Bands”), there are other oversold indicators (besides 4-day RSI) and there are other entry and exit triggers.
As such, this piece is essentially for people who are willing to do a little digging on their own and, a) become comfortable (or not) with the idea, and b) develop  some position sizing, stop-loss and profit-taking criteria.
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.
Acceleration Bands Code for AIQ Expert Design Studio EDS
a is ([high]-[low]).
b is ([high]+[low])/2.
c is (a / b).
d is (c*2).
e is (1+d).
f is (1-d).
g is ([high]*e).
h is ([low]*f).
AccelUB is Simpleavg(g, 20).
AccelLB is Simpleavg(h, 20).

The Biotech-Gold Stock Connection

At first blush there might not seem to be much to connect biotech stocks and gold stocks.
One type of company hires people to engage in high tech biomedical engineering in order to develop potentially life-saving – or at least, life altering – medical breakthroughs…
…while the other hires people to (essentially) dig holes in the ground and mine stuff (granted, valuable stuff, but stuff mined out of the ground nevertheless).
But there is one other connection – stocks of both categories are quite volatile. And that alone may be enough to create a potential opportunity.
The BioGold Index
I created an “index” (such as it is) that combines Fidelity Select Biotech (FBIOX) and Fidelity Select Gold (FSAGX).  The index appears in Figure 1.  Like every other index in the world this index fluctuates up and down.
1Figure 1 – Jay’s BioGold Index (Courtesy AIQ TradingExpert)
The RSI32 Index
The RSI32 Index is simply a 2-day average of the standard 3-day RSI Index.  The code for AIQ TradingExpert EDS is below:
Define days3 5.
U3 is [close]-val([close],1).
D3 is val([close],1)-[close].
AvgU3 is ExpAvg(iff(U3>0,U3,0),days3).
AvgD3 is ExpAvg(iff(D3>=0,D3,0),days3).
RSI3 is 100-(100/(1+(AvgU3/AvgD3))).
RSI32 is simpleavg(RSI3,2).
The RSI32 Index for the BioGold Index appears on the monthly bar chart in Figure 2.
2aFigure 2 – The BioGold Index with RSI32 (drop to 33 or below = BUY) (Courtesy AIQ TradingExpert)
The BioGold “System”
The BioGold System works as follows:
*When the monthly RSI32 Index drops to 33 or lower, buy BOTH FBIOX and FSAGX
*After a “Buy Signal” then when the monthly RSI32 rises to 64 or higher, sell BOTH FBIOX and FSAGX
For testing purposes we will use monthly total return data for both FBIOX and FSAGX from the PEP Database from Callan Associates.
The Results
Figure 3 displays the results of the buy signals generated using the rules above (assumes that both FBIOX and FSAGX are bought after monthly RSI32 drops to 33 or lower and are held until monthly RSI32 rises to 64 or higher.
Buy Signal Sell Signal FBIOX+FSAGX % +(-)
4/30/1992 12/31/1992 +14.4%
2/26/1993 4/30/1993 +14.7%
4/29/1994 9/30/1994 +7.2%
12/30/1994 4/28/1995 +9.8%
4/30/1997 9/30/1997 +18.4%
11/28/1997 4/30/1998 +10.4%
6/30/1998 12/31/1998 +16.1%
3/30/2001 6/29/2001 +22.7%
7/31/2002 12/31/2002 +18.1%
7/30/2004 10/29/2004 +11.2%
3/31/2005 7/29/2005 +10.2%
4/30/2008 7/31/2008 +9.4%
9/30/2008 6/30/2009 +3.8%
5/31/2012 9/28/2012 +20.0%
2/28/2013 2/28/2014 +28.6%
8/31/2015 4/29/2016 +22.2%
12/30/2016 2/28/2017 +13.2%
Average % +14.7%
Median % +14.4%
Std. Deviation % 6.4%
Max % +(-) +28.6%
Min % +(-) +3.8%
Figure 3 – Trade-by-Trade Results
For the record, the “System” has been in FBIOX and FSAGX only 28% of the time (88 months) and out of the market 72% of the time (223 months).
Figure 4 displays the trades in recent years.
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Figure 4 – BioGold System trades; 2012-2017 (Courtesy AIQ TradingExpert)
*The Good News is that all 17 signals since 1992 showed a profit, with an average gain if +14.7%.
*The Bad News is that, a) 17 trades in 25 years is a pretty small number of trades and, b) there are some not insignificant drawdowns along the way (-22.8% in 1998 and -22.4% in 2008, -14.1% in 2013 and -13.6% in 2016).
Still, for what it is worth the monthly equity curve appears in Figure 5.
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Figure 5 – Growth of $1,000 invested using the “BioGold System”; 12/31/1991-12/29/2017
For the record, the “System” has been in FBIOX and FSAGX only 28% of the time (88 months) and out of the market 72% of the time (223 months).
For the record, the “System” has been in FBIOX and FSAGX only 28% of the time (88 months) and out of the market 72% of the time (223 months).  No interest is assumed to be earned while out of the market in the test above.
If we invest in short-term treasuries (1-3 yr.) while not in the stock market we get the results shown in Figure 6.
In Figure 6:
*The blue line represents the growth of $1,000 achieved by holding FBIOX and FSAGX when the BioGold System is on a “buy signal” and 1-3 yr. treasuries the rest of the time.
*The red line represents the growth of $1,000 achieved by buying and holding both FBIOX and FSAGX and then rebalancing at the end of each year.
The “System” grew to $19,863 and the “split” grew to $12,844.
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Figure 6 – Growth of $1,000 using BioGold System plus 1-3 yr. treasuries when out of stocks (blue) versus buying and holding FBIOX and FSAGX and rebalancing each year (red);12/31/1991-12/29/2017
Summary
So is the “BioGold System” really a viable investment idea?  That’s not for me to say.  The per trade returns are pretty good but there aren’t a whole lot of trades and if history is a guide an investor would likely have to ride some significant drawdowns in order to reap the gains.
Still, market-beating performance is market-beating performance, so who knows?
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.

Bitcoin May Rise Another 20-fold, But First….

First off, for the record I am an “Old Dog” and Bitcoin is a “New Trick”. That creates a problem right there.  The truth is also that can’t honestly say that I fully understand what Bitcoin actually is or how it actually works (which technically means I am in pretty good company with a lot of people who are actually trading it, but I digress).  And as a “grizzled veteran” (of the markets) there is a part of me that instinctively wants to dismissively shout “bubble” and sneeringly walk away.  It’s not like it hasn’t been seen before – tulip bulbs, the Nifty 50, silver, technology/dot.com stocks, interest only mortgages and so on.
Most of you know the drill:
*Some form of “investment” catches lightning in a bottle
*The investment world (for lack of a more professional phrase) “wet’s itself”
*Price soars beyond all rational levels
You know, sort of like what you see in Figure 1…
BitcoinFigure 1 – Bitcoin price (Bitcoin.com)
…And then it all ultimately plummets painfully to earth.
Well, at least temporarily. I mean sure tulip bubbles never ascended the heights again, but a lot of the Nifty 50 went on to still be major companies even after their stock cratered.  The same for a lot of the major dot.com era companies.  Silver is still trading as a serious commodity and real estate seems to have rebounded.
In sum: Is Bitcoin forming a price “bubble”? It’s hard to look at Figure 1 and not think so.  Of course, even if it is the questions no one can answer for sure are “When” and “from what level”?
The other question is “if it is a bubble and the bubble bursts, will crypto currencies go the way of tulip bulbs (as an investment) or is there a future for them in the long run?”
A Recent Bubble History Lesson
In the late 90’s into 2000 a bubble formed in tech stocks. And the bubble burst and it was ugly. And many “hot” companies folded and vanished. But not all of them and certainly not the major players.  And certainly not the industry as a whole.  Like I said before I don’t truly understand Bitcoin and crypto currencies. So I can’t say for sure if they are a “craze” – like tulip bulbs in the 1600’s during “Tulipmania” or something more viable and sustainable – like technology stocks.  To understand why this distinction matters, consider the stocks listed in Figure 2.aFigure 2 – Dot.com bubble stocks that survived and thrived
As you can see in Figure 2 through 7 each of these stocks experienced a “bubble” and a “crash”.  Interestingly, the companies themselves ultimately rebounded and thrived.
The average “crash” was -87% and the average post-crash advance (so far) is about 16,000%.aaplFigure 3 – Apple (Courtesy AIQ TradingExpert)
amznFigure 4 – Amazon (CourtesyAIQ  TradingExpert)
msftFigure 5 – Microsoft (Courtesy AIQ TradingExpert)
nvdaFigure 6 – Nvidia (Courtesy AIQ TradingExpert)
pclnFigure 7 – Priceline (Courtesy AIQ TradingExpert)
Summary
The only thing we can say for sure is that some people will make a great deal of money from Bitcoin/crypto currencies and others will likely get wiped out.  The danger is obvious: whenever you have a lot of investors “chasing” something – especially something that many of them don’t even understand – it is a recipe for trouble.
That being said, in my (market addled) mind the real “long-term” question is, will crypto currencies still be “a thing” after the bottom falls out?  If Bitcoin is a bubble, then if history is a guide we can look or a decline in price somewhere in the 80% to 99% range after the top is ultimately made.
From there, if history is also a guide then depending on whether or not crypto currencies prove to be a viable thing, we can expect them to either:
a) Vanish altogether
OR
b) Rise 15-20 fold from the bottom
So here is my Bitcoin/crypto currency investing guide:
*It is OK to pile in and buy Bitcoin in hopes of getting rich (as long as you do not “bet the ranch”, invest only a small portion of your capital and acknowledge that a 100% loss is absolutely a possibility and that you are willing and able to accept that risk).
*It is also OK to sneer and shout “bubble” and not invest.  But if and when the bottom drops out and prices crater remember to peruse the wreckage.  There just might be an opportunity there (remember, Priceline lost -99% when the dot.com bubble burst, then gained 32,000%).
In any event, hold on tight people, this is NOT going to be a smooth ride.
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 Bottom-Picking Portfolio

In a recent article I highlighted some stocks that appeared to have a chance of “putting in a low”.  In another article, I highlighted the potential usefulness of “horizontal lines” on a chart.  The phrase “putting in a low” is essentially a kindler, gentler version of the phrase “Hey, let’s pick a bottom”.
The reality is that the ability to “pick tops and/or bottoms” on any kind of a consistent basis is a skill that roughly 99.2% of all investors and traders do not possess.  That being said, there is such a thing as a legitimate “bottom formation” (at least in my market addled opinion).  A security that bounces several or more times off a particular price is sending information that the sellers may be running out of ammunition.  These levels can be observed by drawing horizontal trend lines across a price chart – connecting recent highs and/or lows at roughly similar prices.
“Loading up” in this situation is not recommended. But committing an acceptable percentage of one’s portfolio (a level which each investor must decide on their own) to such opportunities is a perfectly acceptable form of speculation.
So for arguments sake, below is a “Bottom Pickers Portfolio”.  As always, I am not recommending this as an investment, simply highlighting an alternative idea for your further consideration.
The Tickers
The tickers included in this portfolio are mostly all commodity related.  That is not a purposeful choice; they simply “fit the model”.
First is ticker BAL – an ETF that tracks the price of cotton futures.  The critical level for BAL is roughly the $43.50 area.
1Figure 1 – Ticker BAL (Courtesy AIQ TradingExpert)
Ticker GDX tracks a gold stock index and has been consolidating in a relatively tight range after last year’s sharp rally and subsequent pullback.
2Figure 2 – Ticker GDX (Courtesy AIQ TradingExpert)
Ticker JO tracks the price of coffee futures.  This is one of the weakest charts on the list and is dangerously close to failing to the downside.  However, if the low holds this will strengthen the outlook a great deal.
3Figure 3 – Ticker JO (Courtesy AIQ TradingExpert)
Ticker SGG tracks the price of sugar futures. SGG has been consolidating in a narrow range for about four months.  Key price levels on the downside are $26.50 and the August 2015 low of $24.79.
4Figure 4 – Ticker SGG (Courtesy AIQ TradingExpert)
Ticker SWN is Southwestern Energy Co.  After a long, devastating decline the stock is attempting to form a low in the $5 a share range.
5Figure 5 – Ticker SWN (Courtesy AIQ TradingExpert)
Ticker UNG tracks natural gas futures.  Thanks to the advent of fracking – which is made natural gas abundantly available – the price of natural gas has collapsed in recent years.  In the past week it retested its 2016 low and then ticked higher.  Like JO, this one is precariously close to “failing”.  But for now…
6Figure 6 – Ticker UNG (Courtesy AIQ TradingExpert)
The Bottom Pickers Portfolio                      
I use AIQ TradingExpert software to create my own “Groups”.  So I created one called “Lows” to include the six tickers above.  The group consists of an equal dollar investment in each ticker.  The chart for this combination of tickers appears in Figure 7.EDITORS NOTE: Creating your own groups is accomplished in the TradingExpert Data Manager information can be found in this article ‘Adding groups and sectors to your Group/Sector List’

7Figure 7 – The “Lows” Group (Courtesy AIQ TradingExpert)
Summary
Let me be blunt.  There is every chance that the majority of the tickers highlighted above will continue their long-term bearish trends and break down to the downside causing further losses for those holding these shares.
The primary thing to highlight in this piece is a personal preference.  I prefer “horizontal” lines on a chart – i.e., straight across, left to right – to the more typical slanted trend lines that most traders use.  The reason is simply – upward or downward slanting trend lines require a trader to decide which two (or more) highs (or lows) to connect in order to draw the trend line.  At the end of the day this is often a subjective decision.
Horizontal trend lines – which connect to (at least roughly equal) highs or lows – are generated by the market itself and as such, are more objective in nature.  In other words, investor buying and selling determines these levels.
Will my “Bottom Pickers Portfolio” move to the upside or fail to the downside?  We’ll just have to wait to find out.
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.

An Unusual 4 ETF Portfolio…That Seems to Work

I know I repeat it a lot but the purpose of this blog is not to offer recommendations but rather to share ideas.  So here is one that I am not quite sure about but am keeping an eye on.
The FourNonCorr Portfolio
Somewhere awhile back I started looking at trying to pair non correlated – or even inversely correlated – securities in a portfolio that had the potential to outperform the overall market. What follows is what I refer to as the FourNonCorr Portfolio.  For the record I do not trade this portfolio with real money.  I am still trying to figure out if there is something to it or not.  But given that it has outperformed the S&P 500 by a factor of 3-to-1 (granted, using hypothetical results) since December of 2007, I figure it might be worth monitoring for awhile.
The portfolio consists of four ETFs:
Ticker FXE – Guggenheim CurrencyShares Euro Trust
Ticker UUP – PowerShares DB US Dollar Index Bullish
Ticker TLT – iShares Barclays 20+ Yr Treas. Bond
Ticker XIV – VelocityShares Daily Inverse VIX ST ETN
The monthly charts for each appear in Figure 1.
1Figure 1 –The Four ETFs in The Four NonCorr Portfolio (Courtesy AIQ TradingExpert)
As you can see there is a lot of “zigging” by one accompanied by “zagging” for another.  No surprise that when the Euro rises the dollar falls and vice versa. Also, TLT often seems to move opposite XIV. That is essentially the purpose of these pairings.
Figure 2 displays the correlations between the four ETFs in the portfolio (using AIQ TradingExpert Matchmaker function from 8/31/2012 through 8/31/2017 using weekly data).  A reading of 1000 indicates a perfect correlation, a reading of -1000 indicates a perfectly inverse correlation.
FXE UUP TLT XIV
FXE (913) 77 (13)
UUP (913) (117) 43
TLT 77 (117) (234)
XIV (13) 43 (234)
Figure 2 – Correlations for the FourNonCorr Portfolio ETFs (Source: AIQ TradingExpert)
Clearly there is a whole lot of “not correlating much” going on.
Results
For testing purposes I used monthly total return data for each ETF from the PEP Database from Callan Associates.  The one exception is ticker XIV which did not start actual trading until December 2010.  For January 2008 through November 2010 I used index data for the index that ticker XIV tracks inversely (S&P 500 VIX SHORT-TERM FUTURES INDEX). Actual XIV ETF data is used starting in December 2010.
As a benchmark, I also tracked the cumulative total return for ticker SPY (that tracks the S&P 500 Index).
Figure 3 displays the cumulative percent gain or loss for both the FourNonCorr Portfolio and ticker SPY.3Figure 3 – Cumulative % gain/loss for The FourNonCorr Portfolio (blue) versus SPY (red); 12/31/2007-9/30/2017
Year-by-year results appear in Figure 4
4 NonCorr SPY Diff
2008 (6.0) (37.0) 31.0
2009 26.1 26.4 (0.3)
2010 45.2 14.9 30.3
2011 (1.3) 2.1 (3.4)
2012 34.3 15.8 18.5
2013 19.3 32.2 (12.9)
2014 5.3 13.5 (8.2)
2015 0.6 1.3 (0.8)
2016 21.0 11.8 9.2
2017* 24.4 14.1 10.2
Figure 4 – Year-by-Year Results
The results by the numbers appear in Figure 5.
4NonCorr SPY
Average 12mo % +/- 17.8 11.2
Median 12mo % +/- 14.9 15.0
Std. Deviation 17.1 16.8
Ave/Std. Dev. 1.04 0.67
Worst 12mo % (11.9) (43.2)
Max. Drawdown % (17.8) (48.4)
Figure 5 – By the numbers
All told The FourNonCorr Portfolio:
*Gained +334% versus +110% for SPY since 12/31/2007
*Experienced a maximum drawdown of -17.8% versus-48.4% for SPY
Thoughts
On paper, The FourNonCorr Portfolio looks pretty decent, particularly compared to the S&P 500 Index.  But you will recall that I stated earlier that I don’t actually trade this portfolio with real money.  Why not?  A few concerns:
*Interest rates tend to move in long-term waves up and down.  How beneficial will it be to have TLT in the portfolio if and when interest rates embark on a long-term wave up?
*I don’t entirely trust ticker XIV.  Because of the way it is built it seems to have the benefit of upward bias due to contango in the VIX futures market (the opposite of ticker VXX – please Google “VXX” and/or “contango” for an actual explanation) it also holds the potential to sell off in shocking fashion.  Using the index data as I did in order to replicate hypothetical performance from Jan 2008 through Nov 2010, XIV declined a stunning -72% between the end of May 2008 and the end of November 2008. It also experienced a -60% decline in 2015-2016. Need to give some thought to adding a security that is even capable of that to a permanent portfolio.
*On the flip side, XIV has been the driving force for gains in recent years and shows a cumulative gain of +416% since 12/31/2007.  If (and when?) we ever do see a bear market and/or a significant pickup in volatility will XIV have a large negative influence on performance?  That seems to be the $64,000 question.
Summary
As a thought experiment, The FourNonCorr Portfolio shows a pretty decent track record and seems to hold some interesting promise.  As a real money, real world experience – questions remain.
Stay tuned, tinker and experiment if you wish,and don’t be too quick to “dive in.”
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.  Whilne I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

A Simple Indicator for Traders

First the Bad News: There are no “magic bullets” when it comes to trading.  There are people in this industry who have literally tested somewhere in the range of six bazillion “indicators” – give or take (“Hi. My name is Jay”).  Every trend following indicator looks like a gold mine when it latches onto a huge trend and rides it (but not so much when it starts getting whipsawed).  And every overbought/oversold indicator looks like a gift from heaven from time to time when it somehow manages to peak (or valley) and then reverses right at a high (or low).  And then the next time the thing gets oversold the security in question just keeps plunging and the previously “amazingly accurate” indicator just gets more and more oversold.

Bottom line: what I am about to discuss is likely no better or worse than a lot of other indicators.  And it is no holy grail.  Still, I kinda like it – or whatever that is worth.

EDITORS NOTE an AIQ EDS file for this indicator with the 3 step rules outlined can be downloaded from here you will need to copy or save this file into your wintes32/eds strategies folder. Alternatively the code is available at the end of this article for copying and pasting into a new EDS file.

UpDays20

I call this indicator UpDays20 and I stole, er, learned it originally from Tom McClellan of McLellan Financial Publications.  My calculation may be slightly different because I wanted an indicator that can go both positive and negative.  For a given security look at its trading gains and losses over the latest 20 trading days.

UPDays20 = (Total # of Up days over the last 20 trading days) – 10

So if 10 of the last 20 trading days showed a gain then UpDays20 would read exactly 0.

If only 6 of the last 20 trading days showed a gain then UpDays20 would read -4

You get the idea (and proving once again that it “doesn’t have to be rocket science”).  As a “trading method” it is always advised that this indicator – like most all other indicators – NOT be used as a standalone approach to trading.  That being said, the way I follow this indicator is as follows.

Step 1) UpDays20 drops to at least -2

Step 2) UpDays20 rises 2 points from a low

Step 3) The security in question then rises above its high for the previous 2 trading days

It is preferable to follow this setup hen the security in question is above its 200-day moving average, but that is up to the trader to decide (the danger to using this with a security below its 200-day moving average is that it might just be in the middle of a freefall.  The upside is that counter trend rallies can be fast and furious – even if sometimes short-lived).

Again, there is nothing magic about these particular steps.  They are simply designed to do the following:

1) Identify an oversold condition

2) Wait for some of the selling pressure to abate

3) Wait for the security to show some sign of reversing to the upside

Like just about every other indicator/method, sometimes it is uncannily accurate and sometimes it is embarrassingly wrong (hence the reason experienced traders understand that capital allocation and risk management are far more important than the actually method you use to enter trades).

In this previous article (in Figures 3 and 4) I wrote about using this indicator with ticker TLT.  Figure 1 and 2 display the “buy” signals generated using the rules above for tickers IYT and GLD.

1Figure 1 – UpDays20 “Buy” Alerts for ticker IYT (Courtesy AIQ TradingExpert)

2Figure 2 – UpDays20 “Buy” Alerts for ticker GLD (Courtesy AIQ TradingExpert)

Are these signals good or bad?  That is in the eye of the beholder and not for me to say.  One big unanswered question is “when do you exit”?  That is beyond the scope of this “idea” article – however, “sell some at the first good profit and then use a trailing stop” looks like a decent approach to consider) but would have a profound effect on any actual trading results.

Some of the signals displayed in Figures 1 and 2 are obviously great, others are maybe not so hot.  Interestingly, some of the signals in Figure 1 and 2 that don’t look to timely at first blush actually offered a profitable opportunity to a trader who was inclined to take a quick profit. Again, how you allocate capital and when you exit with a profit and when you exit with a loss would likely have as much impact on results as the raw “buy” signals themselves.

Summary

No one should go out and start trying to trade tomorrow based on UpDays20.  No claim is being made that the steps detailed herein will result in profits nor even that this is a good way to trade.

But, hey, it’s one way.

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.

EDITORS NOTE an AIQ EDS file for this indicator with the 3 step rules outlined can be downloaded from here you will need to copy or save this file into your wintes32/eds strategies folder. Alternatively the code is available at the end of this article for copying and pasting into a new EDS file.

! UpDays20 – I call this indicator UpDays20. For a given security look at its trading gains and losses over the latest 20 trading days.

! UPDays20 = (Total # of Up days over the last 20 trading days) – 10

! So if 10 of the last 20 trading days showed a gain then UpDays20 would read exactly 0.

! If only 6 of the last 20 trading days showed a gain then UpDays20 would read -4

Upday if [close]>val([close],1).

totalupdayslast20days is CountOf(upday,20).

updayindicator is totalupdayslast20days – 10.

! How to follow this indicator

! Step 1) UpDays20 drops to at least -2

! Step 2) UpDays20 rises 2 points from a low

! Step 3) The security in question then rises above its high for the previous 2 trading days

UpDays20rises2points if updayindicator>valresult(updayindicator,1) and valresult(updayindicator,1)>valresult(updayindicator,2).

updays20atminus2orlower if valresult(updayindicator,2)<=-2.

closesabovehighof2priordays if [close]>val([high],1) and [close]>val([high],2).

Upsignal if UpDays20rises2points and updays20atminus2orlower and closesabovehighof2priordays.

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”
1
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)
sep x
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.

One More Cry of ‘Wolf’

If I were the type to make bold proclamations I would probably consider “taking my shot” right here and shout “This is the Top” and/or “The Market May Crash.”  Unfortunately, on those occasions (well) in the past when I would make bold public predictions of what was about to happen in the financial markets I would almost invariably end up looking pretty stupid. So even if I did make a “bold proclamation” it wouldn’t necessarily mean that anyone should pay any attention.
Besides all that the last thing I want is for “the party to end”.  Even if you do think the market is about to tank it’s a pretty crummy thing to have to root for.  Even if you did manage to “call the top”, the ripple effect of the ramifications associated with a serious stock market decline can have pretty negative effect on just about everyone’s life.
So let’s put it this way: I am concerned – and prepared to act defensively if necessary – but still have money in the market and am still hoping for the best.
Reasons for Caution (Indexes)
Figure 1 displays four major indexes. The Dow keeps hitting new highs day after day while the others – at the moment – are failing to confirm.  That doesn’t mean that they won’t in the days ahead.  But the longer this trend persists the more negative the potential implications.
1
Figure 1 – Dow at new highs, small-caps, Nasdaq and S&P 500 not quite (Courtesy AIQ TradingExpert)
Reasons for Caution (Bellwethers)
Figure 2 displays 4 “bellwethers” that I follow which may give some early warning signs.
2
Figure 2 – Market Bellwethers possibly flashing some warning signs (Courtesy AIQ TradingExpert)
*SMH soared to a high in early June and has been floundering a bit since.
*Dow Transports tried to break out to the upside in July but failed miserably.
*XIV is comfortably in new high territory.
*BID tried to break out in July and then collapsed.  It is presently about 12% off of its high.
In a nutshell – 3 of the 4 are presently flashing warning signs.
Reasons for Caution (Market Churn)
In this article I wrote about an indicator that I follow that can be useful in identify market “churn” – which can often be a precursor to market declines.  Spikes above 100 by the blue line often signify impending market trouble
It should be noted that the indicators signals are often early and occasionally flat out wrong.  Still, a churning market with the Dow making new highs has often served as a “classic” warning sign.
3
Figure 3 – JK HiLo Index (blue) versus Nasdaq Compsite / 20 (red); 12/31/2006-present
Summary
Again, and for the record, I do not possess the ability to “predict” the markets.  But I have seen a few “warning signs” flash bright red at times in the past.  As a general rule, it is best to at least pay attention – and maybe make a few “contingency plans” – you know,  just in case.
Here’s hoping my gut is wrong – again.
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.