Category Archives: jay kaeppel

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.

All Eyes on Energy

The energy sector – not just unloved, but pretty much reviled not that long ago – is suddenly everybody’s favorite sector.  And why not, what with crude oil rallying steadily in the last year and pulling pretty much everything energy related higher with it?

Anecdotally, everything I read seems to be on board with a continuation of the energy rally. And that may well prove to be the case. But at least for the moment I am waiting for some confirmation.

Two Concerns

The first – which I mentioned in this article – is the fact that the best time of year for energy is the February into early May period.  See Figure 1.

0

Figure 1 – Ticker XLE Seasonality (www.Sentimentrader.com)

With that period just about past it is possible that the energy sector may at least pause for a while.

The second concern is that a lot of “things” in the energy sector are presently “bumping their head” against resistance.  Here is the point:

*This does not preclude a breakout and further run to higher ground.

*But until the breakout is confirmed a little bit of caution is in order.

I created an index comprised of a variety of energy related ETFs. As you can see in Figures 2 through 4 that index recently was turned away at a significant resistance level.

Figure 3 shows the same information on a weekly chart.

2a

Figure 3  – Jay’s Energy ETF Index – Weekly (Courtesy AIQ TradingExpert)

Figure 4 zooms in to view the action on a daily basis.

3

Figure 4  – Jay’s Energy ETF Index – Daily (Courtesy AIQ TradingExpert)

As you can see in Figure 4, the index made an effort to break out above the January high then reversed and closed lower before declining a little bit more the next day.

The action displayed in the charts above may prove to be nothing more that “the pause that refreshes.” If price breaks out to the upside another bull leg may well ensue.  But note also in Figure 5 that ticker XLE – the broad-based SPDR Energy ETF – demonstrated the same type of hesitation as the ETF Index in the previous charts.

It too faces it’s own significant resistance levels as seen in Figure 5.

5

Figure 5 – Ticker XLE faces resistance  (Courtesy AIQ TradingExpert)

Summary

Energies have showed great relative strength of late even in the context of a choppy stock market overall.   So there is no reason to believe that the rally can’t continue. But two things to watch for:

1. If energy related assets clear their recent resistance levels a powerful new upleg may ensue.

2. Until those resistance levels are pierced, a bit of caution is in order.  Energy has been the leading sector of late.  Any time the leading sector runs into trouble it pays to “keep an eye out” for trouble in the broader market.

No predictions one way or the other – just some encouragement to pay close attention at a potentially critical juncture.

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.

Does it all Hinge on BID?

The question posed in the title is essentially, “does the fate of the stock market hinge on the action of Sotheby’s Holdings” (ticker BID)?  Sotheby’s is the oldest stock on the NYSE and is the only publicly traded investment opportunity in the art market.  As the art market is highly sensitive to the overall economy it has been argued that BID is a potential stock market “bellwether”.
Still, the most obvious answer to the question posed above is of course “No.”  Of course the performance of the whole stock market does not come down to the performance of one stock.  That’s the obvious answer.
The more curious answer is arrived at by first looking at Figure 1.  Figure 1 displays a monthly bar chart for BID in the top clip and the S&P 500 Index in the bottom clip.  What is interesting is that historically when BID tops out, bad things tend to follow for the broader stock market.1
Figure 1 – BID tops often foreshadow SPX weakness (Courtesy AIQ TradingExpert)
Consider:
*The bear market of 2000-2002 was presaged by a dramatic top for BID in 1999, and confirmed again in late 2000.
*The great bear market of 2008 was also preceded by a top and breakdown in BID.
*The 2011 top in BID was followed by a quick but sharp -21% SPX decline.
*The 2013-2014 BID top was followed by roughly 2 years of sideways SPX price action.
*More recently the top in 2017-2018 top has been accompanied by much volatility and consternation in the broader market.
Figure 2 “zooms in” to recent years using weekly data.
2
Figure 2 – BID Weekly chart (Courtesy AIQ TradingExpert)
In Figure 2 we can see how poor performance for BID presaged an extended period of sideways trading for the SPX.  At the far right we can also see that BID is at something of a critical juncture.  If it punches through to the upside and moves higher it could be something of an “All Clear” sign for the market.  On the other hand, if BID fails here and forms a clear multiple top, well, history suggests that that might be an ominous sign for the broader market.
Other Bellwethers
BID is one of four market “bellwethers” that I like to monitor.  The other 3 are SMH (semiconductor index), TRAN (Dow Transports) and ZIV (inverse VIX).  You can see the status of each in Figure 3.
3
Figure 3 – Four stock market “Bellwethers” (Courtesy AIQ TradingExpert)
To sum up the current status of these bellwethers:
*All 4 (including ZIV as of the latest close) are above their respective 200-day moving average.  So technically, they are all in “up trends.”
*All 4 are also threatening to create some sort of topping formation.
In sum, as long as all four of these bellwethers continue to trend higher, “Life is Good” in the stock market.  At the same time, if some or all of these fail to break through and begin to top out, the broader market may experience more trouble.
Bottom line: Now is a good time to pay close attention to the stock market for “tells”.
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 or Miners? It’s One or the Other

Gold, gold stocks and commodities in general are starting to get a lot of notice lately.  And not without good reason.  Consider the bullish implications for all things precious metal in the articles below – one from Tom McClellan of the McClellan Report and one from the Felder Report.
*Gold/Silver Ratio Tom McClellan
I have also previously touched on these themes time or two (or four) of late.
Where We Are Now
So on the one hand, it can be argued that gold, mining stocks and commodities in general are poised for a significant move to the upside.
Consider the “coiling” action displayed in Figure 1, which is a monthly chart for a mining index that I track that I’ve labeled GLDSLVJK.
1a
Figure 1 – Jay’s Gold Stock (GLDSLV) Index (Courtesy AIQ TradingExpert)
I look at the coiling action displayed in Figure 1 – in conjunction with the information contained in the articles linked above – and I can’t help but to think that a big upside breakout in gold stocks is imminent.
The “Fly in the Ointment”
When it comes to all of this metals/miners/commodities bullishness there’s just one “fly in the ointment” – the U.S. Dollar. Let’s be succinct here and invoke:
Jay’s Trading Maxim #102: Whichever way the dollar goes, a lot of things go the other way.
To wit, see Figure 2, which highlights the inverse nature of, well, a lot of things to the U.S. Dollar (a value of 1000 means 100% correlation and a value of -1000 means a 100% inverse correlation.
1
Figure 2 – Things that trade inversely to the U.S. Dollar (Courtesy AIQ TradingExpert)
In other words, when the U.S. dollar goes up, the things listed on the right hand side of Figure 2
Now consider Figure 3 – which appears to be showing a potential upside breakout for the U.S. dollar.
3
Figure 3 – U.S. Dollar; breaking out to the upside? (Courtesy ProfitSource by HUBB)
Which brings us back to the title – Dollar or Miners, it’s One or the Other.
If the U.S. Dollar is truly staging an upside breakout, chances are gold miners will not.
Stay tuned….and keep a close on the buck.
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.

Lines in the Sand; The Bonds, REIT and MLP Edition

Last week I wrote an article purporting to highlight significant levels of support and resistance across a variety of financial markets.  Well, it turns out there are more.
More Notes on “Lines”
I certainly look at the markets more from the “technical” side than the “fundamental” side (not even a conscious choice really – I just never really had much success buying things based on fundamentals. That doesn’t mean I think fundamentals are useless or that they don’t “work” – they just didn’t work for me).
Once I settled on the technical side of things, I started reading books about technical analysis.  All the classics.  I learned about chart patterns and trend lines.  By definition, a trend line is a line drawn on a price chart that connects two or more successive lows or highs.
And then I got to work looking through charts and applying everything that I thought I had learned. And like a lot of “newbie” technicians – and a surprising number of seasoned ones – I typically ended up drawing “lines on charts” that would resemble something like what you see in Figure 1.
1
Figure 1 – “Important” trend lines (or not?) (Courtesy AIQ TradingExpert)
For a technical analyst this is sort of the equivalent of “throwing up” on a chart (and the real pisser was that back  in the day a fresh updated booklet of charts would show up in the mail each week – so you had to “throw up’ all over all the charts again and redraw every #$^& “important” line!!).
At some point I realized that perhaps every “important” line that I was drawing on a multitude of charts was perhaps maybe not so “important” after all. This revelation led me to establish the following maxim (as much to force me to “fight the urge” as anything:
Jay’s Trading Maxim #18: If you draw enough lines on a bar chart, price will eventually hit one or more of them.
(See also JayOnTheMarkets.com: The Line(s) in the Sand for Everything)     
True Confession Time
There are certain dirty little secrets that no respectable technician should ever utter. But just to “get a little crazy” (OK, at last by my standards – which are quite low, apparently) I’m going to put it down in print:
I hate trend lines
There, I said it.  Now for the record, up sloping and down sloping trend lines are a perfectly viable trading tool if used properly.  I personally know plenty of people trading successfully using trend lines drawn on a price chart.  Sadly, I’m just not one of them.
So remember the lesson I learned the hard way – “There is no defense for user error.”
The full truth is that I have nothing against trend lines, and yes I understand that there are “objective” methods out there detailing the “correct” method for choosing which two points to connect to draw a proper trend line (DeMark, Magee, I think Pring to name a few).  But I somehow seem to have failed that lesson.
One Line I Do Like
I still draw slanting trend lines from time to time. But the only lines I really like are lines that are drawn horizontally across a bar chart – i.e., “support” and “resistance” lines.  A multiple top or a multiple bottom marks a level where the bulls or the bears made a run and could not break through. Now that’s an “important” price level.  If that price level ultimately holds it means the charge failed and that a significant reversal is imminent.  If it ultimately fails to hold it means a breakout and a possible new charge to ever further new highs or lows as the case may be (for the record, it could also mean that a false breakout followed by a whipsaw is about to occur.  But, hey, that’s the price of admission).
I also like horizontal lines because even if very single horizontal line does not prove to be useful as a trading tool, it can still serve a purpose as a “perspective tool”.  Rather than explaining that theory let’s just “go to the charts.”
More “Lines in the Sand”
Figure 2 displays an index of bond and income related ETFs that I created.  Roughly half of the ETFs have a higher correlation to treasury bonds and the other half to the S&P 500 Index (i.e., CWB – convertible bonds, JNK – high yield corporate, PFF – preferred stock and XLU – utilities all react to interest rates but are more correlated to the stock market than to treasury bonds).
aiq bonds1
Figure 2 – Bond and Income Related ETF Index (Courtesy AIQ TradingExpert)
This monthly chart clearly illustrates the struggle going on in the interest rate related sector.  Interest rates mostly bottomed out in 2013 and have been grinding sideways to higher since.  As you can see, interest rate related securities have been trapped in a sort of large trading range for years.  Eventually, if the long-term trend in rates turns higher this chart should be expected to break through the lower (support) line Figure 2.
Still focusing on interest rate related sectors, Figure 3 displays a monthly index comprised of 3 REITs.  Talk about a market sector trapped in a range.
aiq reit
Figure 3 – REIT Index; Monthly (Courtesy AIQ TradingExpert)
For what it is worth, Figure 4 displays a weekly chart of the same index with an indicator I call Vixfixaverage (code for this indicator appears at the end of the article).  Typically, when this indicator exceeds 60 and then tops out, a decent rally often ensues (one word of warning, there is also often some further downside before that rally ensues to caution is in order).
reit 2
Figure 4 – REIT Index; Weekly (Courtesy AIQ TradingExpert)
Speaking of oversold “things”, Figure 5 displays an index of Master Limited Partnerships (MLP’s).  As you can see in Figure 5, a) divergences between price and the 4-month RSI are often followed by significant rallies, and b) a new such divergence has just been established.  Does this mean that MLP’s are destined to rally higher?  Not necessarily, but given the information in Figure 5 and the fact that everybody hates MLP’s right now, it’s something to think about.
aiq mlp
Figure 5 – MLP Index (Courtesy AIQ TradingExpert)
AIQ TradingExpert Code for Vixfixaverage
hivalclose is hival([close],22).
vixfix is (((hivalclose-[low])/hivalclose)*100)+50.
vixfixaverage is Expavg(vixfix,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.

What to Watch in Energies

With crude oil hitting its highest level since November of 2014, the energy sector is suddenly drawing a lot of interest.  But there are few caveats that investors might want to keep in mind before getting too far ahead of themselves.

(BTW: If you enjoy reading JayOnTheMarkets.com – heck, even if you hate reading JayOnTheMarkets.com – please tell others and encourage them to stop by, “Like” an article, link an article, etc..  Thanks, The Management)

Energy Seasonality

Figure 1 (from www.Sentimentrader.com, which is quickly becoming one of my favorite sites) displays the annual seasonal calendar for ticker XLE – the SPDR Energy ETF. While it should be pointed out that it certainly is not like every year plays out like this chart, the primary point is that the “meat” part of year of from the end of January through the end of April is nearing the end of the line.0Figure 1 – XLE Seasonality (Courtesy: www.Sentimentrader.com)

XLE Overhead Resistance

XLE has had a terrific month of April, rallying over 14% since the low on 4/2.  And while it has been an impressive show of momentum, a look at the “bigger picture” points to some key levels of potential resistance just ahead.

Figure 2 is a monthly bar chart of XLE with two significant resistance levels drawn (at roughly $78.25 and $80.50). XLE has failed twice previously at roughly $78.40 – in December 2016 and again in January of 2018.1Figure 2 – XLE Monthly with overhead resistance (Courtesy ProfitSource by HUBB)

On the plus side, XLE is clearly trending higher at the moment and there is still another 6.4% and 9.4% of upside potential between the current price and the resistance levels drawn in Figure 2.  So short-term upside potential remains.

The only real “warning” I am raising is to pay attention to “what happens (if and) when we get there” (“there” being the $78.25-$80.50 range).

Jay’s Energy ETF Index

I created and follow an index of all manner of energy related ETFs (it combines traditional fossil fuel related ETFs with alternative energy source ETFs). A monthly chart with a significant resistance level drawn appears in Figure 3.2Figure 3 – Jay’s Energy ETF Index (Courtesy AIQ TradingExpert)

Figure 4 “zooms in” on Figure 3 using a daily bar chart of my Energy ETF Index.  As you can see, as nice as the latest rally has been, there is a “day of reckoning” looming out there somewhere if the energy sectors keeps going and retests this significant level.

2aFigure 4 – Jay’s Energy ETF Index; Daily (Courtesy AIQ TradingExpert)

For the record this index is comprised of:

GEX – Alternative Energy

KOL – Coal

LIT – Lithium

NLR – Nuclear

OIH – Oil Service

TAN – Solar

UGA – Gasoline

UHN – Heating Oil

UNG – Natural Gas

URA – Uranium

USO – Crude Oil

XLE – Energy Sector

Summary

Some might interpret this piece as a bearish to neutral word of warning related to the energy sector.  In reality I am pretty agnostic when it comes to energy and (sadly) can’t offer you a “prediction” that would do you any good.

But I will be watching closely to see what happens to XLE and my own index if and when the key resistance levels are tested – especially if that test occurs after the end of the most favorable February through April period.

Commodity related assets – such as energy, especially fossil fuels – appear “due” for a favorable move relative to stocks.  If and when these key resistance levels are pierced we could see an “off to the races” situation unfold.

Until then, be careful about  “bumping your head.”

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.

Yes, the U.S. Dollar is at a Critical Juncture

If you have read any of my pieces lately you are already aware that as it relates to the financial markets a lot of things are presently at a critical juncture (including my sanity, but I digress).  Today let’s add the U.S. Dollar to that seemingly ever longer list of financial areas that appear to be at a crossroads.  And this one has some large implications simply because a lot of other markets are affected at least to some extent by what happens in the dollar.

Figure 1 displays the Spot U.S. Dollar on a monthly basis.

1

Figure 1 – U.S. Dollar Monthly (Courtesy ProfitSource by HUBB)

The reality is that there is no one definitive price at which to draw a “definitive” line in the sand.  So I arbitrarily picked two.  There is nothing “magical” about these two lines and a move above or below either does not technically “prove” anything.  Still, as far as this range goes, a lot of previous price moves have “gone here to die” so to speak.

Now this is the point in the article where a skilled analyst would explain in painstaking detail why the dollar is absolutely, positively destined to move higher (or lower) from here.  Sorry, folks I honestly don’t know. But there are two things I do know which might still prove useful:

1) For every prognosticator out there pounding the table that the dollar is sure to move higher there is another (equally slightly crazed) prognosticator averring that the dollar is destined to decline.  And the key thing to note is that they both can make a pretty compelling case.

2) A lot rides on which way the dollar goes from here, because there is no shortage of markets that react – at least in part – to the movements of the U.S. dollar.  This means that alot of trading opportunities will be affected/created by the next big move from the dollar.

A few examples appear in Figure 2 below which displays the inverse nature of the correlation between the U.S. Dollar (using ticker UUP as a proxy) and the market in question (for the record, a figure of 1000 means the market moves exactly like the dollar and a figure of -1000 means the market moves exactly inversely to the dollar).

2

Figure 2 – Correlations to U.S. Dollar (Courtesy AIQ TradingExpert)

Now the fact that foreign currencies (ticker FXE – which tracks the Euro) move inversely to the U.S. Dollar is fairly obvious.  But note that on this list are:

*Foreign Bonds and U.S. Bonds (BWX and TLT)

*Precious Metals (GLD and SLV)

*Commodities (like coffee, soybeans and crude oil)

*Broad Commodity Indexes (DBC and GSG)

This encompasses a pretty darn wide swath of the trading world.  And every single one of them will be influenced to some extent by which way the dollar goes from here.

As you can see in Figures 3 through 6 (click to enlarge any of the charts), what happens to the U.S. Dollar can matter a lot to what happens in these markets.

3

Figure 3 – Dollar vs. Euro (Courtesy AIQ TradingExpert)

4

Figure 4 – Dollar vs. Bonds (Courtesy AIQ TradingExpert)

5

Figure 5 – Dollar vs. Metals (Courtesy AIQ TradingExpert)

6

Figure 6 – Dollar vs. Commodity Indexes (Courtesy AIQ TradingExpert)

Summary

So the bottom line is that I do not know which way the dollar goes from here.  But I do know that whichever way it goes a lot of “things” will likely go “the other way.”  And everything listed in Figure 2 represents a lot of trading opportunities.

This represents a good time to invoke:

Jay’s Trading Maxim #17: (with credit given to George and Tom at Optionetics back in the day): Investing success involves two “simple” steps. #1) Spot opportunity.  #2) Exploit opportunity.  Everything you do as a trader or investor falls into one of these two categories.

A bunch of opportunities may soon be spotted (assuming the dollar actually ever does get around to deciding which way it wants to go…).

So focus here, people, focus…

Jay Kaeppel

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

“Yes”, We are at a Critical Juncture

There are times when the market just moves along from day-to-day and us “junkies” might hang on every move but to the average investor what happens today or tomorrow is really not all that meaningful in the whole big spectrum of things.

And then there are times like now.  As you can see in Figure 1, the major market indexes are struggling and are testing their respective 200-day moving averages.  How this “dance” plays out may have important implications for virtually all stock market investors.

(click to enlarge)

1

Figure 1 – Major indexes “on the edge” (Courtesy AIQ TradingExpert)

First off let me say this: There is nothing “magic” about a 200-day moving average.  It was interesting that the other day when the S&P 500 Index closed below its 200-day average (it was the only major index to do so) roughly 22,367 articles appeared on the internet sounding the alarm.  Now I do pay a lot of attention to moving averages, but more to get a sense of trend than as automatic buy and sell triggers.  Which leads me to invoke:

Jay’s Trading Maxim #81: Contrary to popular belief, a price drop below a “key” moving average does NOT imply the onset of immediate and total Armageddon.

And

Jay’s Trading Maxim #81a: Um, but it could. So best to pay attention.

3 Possibilities

Actually there are a few others but the most likely outcomes – and the implications – are:

1. A reversal back to the upside – If the major averages hold here above their recent lows.  If this happens a strong rally to the upside is a strong possibility. Which is one reason it is too soon to “jump ship.”

2. A breakdown by all major indexes – If a majority of the major indexes break down below their recent lows investors are urged to take defensive measure.  Whether that involves selling shares/funds/ETFs/etc or hedging with options and/or inverse products is up to each investor.

3. A whipsaw – One other dreaded possibility involves both of the above – i.e., the average break down far enough briefly to trigger a defensive action only to quickly reverse back to the upside. This often leaves a lot of investors standing there dumbstruck and unable to pull the trigger to get back in.

Like I said, this is a critical juncture.  Whatever happens, investors need to pay attention and stand ready to, a) do nothing, or, b) take defensive action, or, c) take defensive action and then undo the defensive action and get bullish again (in the event of a whipsaw).

Steady, people, steady….

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 Pause That $@%! Refreshes?

A glance at the history of the Presidential Election Cycle in the stock market suggests that we should:

*Not be surprised that the stock market is foundering a bit at the moment

*Not be terribly surprised if things get worse – particularly during the months of June through September of this year

*Anticipate that if the market does take a bigger hit in the months ahead that it may well set the stage for another significant advance into the middle of the mid-term election year.

A Little Presidential Election Cycle History

For our purposes we will start the test on 12/31/1932 and define the cycle as containing the following four years:

*Post-Election

*Mid-Term

*Pre-Election

*Election

First the Bad News: Figure 1 displays the growth of $1,000 invested in the S&P 500 Index (using monthly closing price data) ONLY from the end of January of each Mid-Term Election Year through the end of September of each Mid-Term Election Year (i.e., the latest iteration began on 1/31/2018 and will extend through 9/30/2018).

1

Figure 1 – Growth of $1,000 invested in S&P 500 Index ONLY from Jan31 through Sep30 of each Mid-Term Election Year (1932-2018)

As you can see, the cumulative performance for the S&P 500 Index during the Mid-Term February through September period is a fairly painful -44.3% (for the record, the cumulative gain from buying and holding the S&P 500 from 12/31/1932 through 2/28/2018 was +39,288%, so yes, this qualifies as a period of some serious under performance).

That being said, it should be noted that this Mid-Term Feb through Sep period showed a gain 12 times and a loss only 9 times.  So a “rough patch” is no sure thing. The problem is that when this period is bad, it is “very bad”.  As you can see in Figure 3 later, this period experienced 6 losses in excess of -17.5% (FYI, a -17.5% decline from the 1/31/2018 close of 2823.81 would see the S&P 500 Index hit 2330).

Then the Good News: On the brighter side, Figure 2 displays the growth of $1,000 invested in the S&P 500 Index (using monthly closing price data) ONLY from the end of September of each Mid-Term Election Year through the end of July of each Pre-Election Year (i.e., the latest iteration begins on 9/30/2018 and will extend through 7/31/2019).

2

Figure 2 – Growth of $1,000 invested in S&P 500 Index ONLY from Sep30 of each Mid-Term Election Year through Jul31 of each Pre-Election Year (1932-2018)

Notice any difference between Figures 1 and 2?  This favorable period saw the S&P 500 register a gain during 20 of the past 21 completed election cycles (i.e., 95% of the time), with an average gain of +21.6%, and a cumulative gain of +3,730%.

Figure 3 displays the numerical results for each cycle.

Mid-Term Pre-Election Mid-Term Feb through Sep Mid-Term Oct thru Pre-Election July
1934 1935 (18.5) 21.8
1938 1939 14.5 (1.6)
1942 1943 0.5 32.0
1946 1947 (19.4) 5.3
1950 1951 14.1 15.2
1954 1955 23.9 34.7
1958 1959 20.0 20.9
1962 1963 (18.3) 22.9
1966 1967 (17.6) 23.8
1970 1971 (0.8) 13.4
1974 1975 (34.2) 39.7
1978 1979 14.9 1.2
1982 1983 0.0 35.0
1986 1987 9.2 37.8
1990 1991 (7.0) 26.7
1994 1995 (3.9) 21.5
1998 1999 3.7 30.6
2002 2003 (27.9) 21.5
2006 2007 4.4 8.9
2010 2011 6.3 13.2
2014 2015 10.6 6.7

Figure 3 – Unfavorable versus Favorable portions of Election Cycle

Summary

So what does it all mean?  Well, it means a few things. By my objective measurements the overall trend is still “bullish” and a number of “oversold” indicators are suggesting that a bounce of some significance may be at hand.  That being said, if the major market indexes do start to break down below their respective 200-day moving averages investors may be wise to take some defensive action.  If the market does experience a further break between now and the end of September, it may well be “one of the painful kind.”  So if you haven’t already, make your contingency plans now.

4

Figure 4 – Major Market Indexes with 200-day moving averages (Courtesy AIQ TradingExpert)

At the same time, as the end of September of 2018 nears – especially if the stock market has experienced or is experiencing at the time, a significant break – remember that history suggests that that will be a good time to “think bullish.”

Call me a cynic, but my guess is that alot of investors will do exactly the opposite on both counts (i.e., hang on if the market breaks down and then sell as the next bottom forms – Same it as ever was….)

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.