Category Archives: market timing

When It All Becomes Too Obvious

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

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

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

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

The Major Averages

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

(click to enlarge)

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

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

(click to enlarge)

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

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

(click to enlarge)

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

The VIX Index

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

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

(click to enlarge)

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

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

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

*The market bellwethers are so far not confirming

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

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

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

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

*Buying 5 Oct VXX 31 calls @ $2.74

*Selling 4 Oct VXX 36 calls @ $1.82

(click to enlarge)

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

(click to enlarge)

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

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

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

Jay Kaeppel

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

“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)

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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).

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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).

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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.

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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.

Prepare to Bounce

2018 sure was a great year for the stock market.  For almost a month anyway.  Since then, not so much.  And on the heels of last week’s selloff a lot of pundits and prognosticators are suggesting more loudly that the Great Bull Run is dead. And maybe they are right.  But maybe not.

It is almost always a mistake to hang your hat on one indicator to guide your actions going forward.  But at the same time, sometimes one indicator generates a signal so clear it perhaps should grab your attention.  Let’s look at one that is on the verge of sending an important signal.

The VixRSIRatio Indicator

This is an indicator that I developed a number of years ago by basically – I am going to use some highly technical terms here to describe the process I followed so please try to stay with me – mashing together several other indicators from other people.  If you are interested in the actual calculations they appear at the end of the article.  For now, just know that I refer to it as VixRSIRatio.  As I follow it, it gives meaningful signals very infrequently.  But that is OK as the signals it does give often prove to be useful.

For our purposes we will apply it to ticker SPY – an ETF that tracks the S&P 500 Index. The rule is simple:

*A “Bullish Alert” occurs when VixRSIRatio drops to -210 or below and then turns up.

That’s it. Now please note the use of the phrase “Bullish Alert” and the lack of the words “You”, “Can’t” and “Lose”, as well as the lack of the phrase “by putting all of your money in the market at the exact moment a signal occurs.”

This is key.  Also note that there is nothing “magic” about the value -210. Nothing scientific about it. It just seems like a useful cutoff.  Now let’s look at the “Bullish Alert” signals in recent years.  They appear in Figures 1 through 4.

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Figure 1 – Jay’s VixRSIRatio; 2014-2018 (Courtesy AIQ TradingExpert)

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Figure 2 – Jay’s VixRSIRatio; 2010-2013(Courtesy AIQ TradingExpert)

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Figure 3 – Jay’s VixRSIRatio; 2006-2009 (Courtesy AIQ TradingExpert)

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Figure 4 – Jay’s VixRSIRatio; 2001-2005 (Courtesy AIQ TradingExpert)

As you can see in Figures 1 through 4:

a) Readings below -210 tend to be followed by – at the least – decent trading opportunities.

b) Often these readings presage significant market advances

c) And alas, sometimes the signals come too soon and/or are not followed by much of an advance.

The Here and Now

As of 3/23/18 the VixRSIRatio for ticker SPY stood -354.  So clearly “Buy Alert” is at hand.  So the obvious question is “What comes next”?  Will it be a, b, or c above?

As always, time will tell.

Calculations

In a nutshell, VixRSIRatio combines Larry Williams’ Vixfix indicator with Welles Wilder’s 3-day and 14-day RSI indicators to create two more indicators – VixRSI3 and VixRSI14.  We then divide VixRSI3 by VixRSI14 and invert the whole thing (so that we get an indicator that gives negative readings when the market goes down).

Now you see why I put this at the end….

Below is the code for AIQ Expert Design Studio

############## Larry Williams Vixfix #################

xx is 15.

hivalclose is hival([close],22).

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

############ Welles Wilder RSI 3-day ##############

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))).

############ Welles Wilder RSI 14-day ##############

Define days14 27.

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

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

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

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

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

############Jay’s VixRSIRatio ##############

VixRSI3 is expavg(vixfix,3)/expavg(RSI3,3).

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

VixRSIRatio is -((((VixRSI3/VixRSI14)-1)*100)-50).

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 Gathering Storm

First the Good News:
*The market averages are still in an up trend
*The Fed has yet to “remove the punch bowl”
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Figure 1 – Major Averages still in Up Trends (Courtesy AIQ TradingExpert)
Fed Balance Sheet
Figure 2 – Fed Quantitative Easing propels the stock market (Courtesy RealInvestmentAdvice.com)
Now the bad news
Market Bellwethers Flashing Warnings
In this article I wrote about four tickers I follow for signs of early warnings of trouble.  At the moment, all four are flashing warnings.
bellwether 4
Figure 3 – Bellwethers flashing potential warnings (Courtesy AIQ TradingExpert)
Stocks are Extremely Overvalued
Something important to note: valuation indicators are NOT good timing indicators.  The overall market can be over or undervalued for years. However, overvalued valuation readings are extremely reliable at telling us what will come next once the top is in (whenever that may be).  Figure 4 displays the Schiller CAPE model which measures adjusted P/E ratio.schiller cape w datesFigure 4 – Schiller Adjusted PE (Courtesy: Schiller Data Library)
1901: Dow -37% in 32 months
1929: Dow -89% in 3 years
1932: Dow -49% in 13 months
1965: Dow sideways to 40% lower for 17 years
2000: Nasdaq 100 -87%
2007: Dow -55% in 17 months
2017: ??
When will the exact top form?  Don’t know
What will likely follow?  Don’t Ask
The Decennial Pattern
As I wrote about here and as you can see in Figures 5 and 6, the Year 7 into Year 8 period has historically witnesses significant market weakness.  That does not mean that that is what will happen this time around.  But it is reason for caution.
decennial
Figure 5 – Stock Market Decennial Pattern (Courtesy: OptionStrategist.com)
Year 7 2
Figure 6 – Trouble in Late Year “7”  (Courtesy: OptionStrategist.com)
Figure 7 from Tom McLellan illustrates this phenomenon even more clearly.
Year 7 3
Figure 7 – Trouble in Late Year “7”  (Courtesy: www.mclellanoscillator.com)
September
What a crummy time for September to roll around.  Figure 8 displays the fact that the Dow has lost -80% during the month of September since 1897.sep
Figure 8 – Dow has lost -80% during September since 1897
Figure 9 displays the fact that since 1955 most of the “September Nasty” has occurred in that last 10 trading days of the month (after the close on 9/15 this year)
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.

Respect the Trend, But Beware

It is hard to look at Figure 1 and argue that the trend of the stock market is anything but bullish.  Major averages making new all-time highs is essentially the very definition of a bull market.  And indeed the market may continue to push higher indefinitely.
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Figure 1 – Four Major Averages all at or near all-time highs (Courtesy AIQ TradingExpert)
Trying to “pick a top” usually ends with an embarrassed prognosticator.  Particularly when the major market averages are posting new highs.  Still, there comes a time when it can pay to pay close attention for signs of “Trouble in Paradise”.  That time may be now.
Four Bellwethers
In this article I wrote about 4 “bellwethers” that I follow for potential “early warning signals”.  So far no “run for cover” signals have appeared.  Two of the four have confirmed the new highs in the market averages and the other two have not.  If and when 3 or 4 of them fail to confirm that may signal trouble ahead.
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Figure 2 – XIV and BID confirm news highs; SMH and TRAN so far have not (Courtesy AIQ TradingExpert)
XIV and BID have confirmed new highs in the major averages (although the parabolic nature of XIV’s run is somewhat troubling to me) while SMH and the Dow Transports have not.
Post-Election/Year “7” Bermuda Triangle
have written about this a few times but it bears repeating here.  Post-Election Years and Years ending in “7” (1907, 1917, etc.) have typically witnessed “trouble” in the second half of the year.  Figures 3 and 4 are posted courtesy of a Twitter post from Larry McMillan of the Option Strategist.
Figure 3 highlights the fact that the 2nd half of “Years 7” have often witnessed “trouble.”
Figure 4 show that each “7” year posted a high during the 2nd half of the year (or in June) and then suffered a decline.  This does not guarantee a repeat this year but it is a warning sign.
Year 7 1
Figure 3 – Decade Pattern for the Dow Jones Industrials Average (Courtesy: Options Strategist)
Year 7 2
Figure 4 – Years “7” (Courtesy: Options Strategist)
Also, during years that are both “post-election” years AND “Years ending in 7”, the August through October results have been brutal- as depicted in Figure 5 – with an average 3-month decline of -15%.2
Figure 5 – August/September/October of Post-Election Years that also End in “7”
Nothing in Figures 3 through 5 “guarantee” an imminent market decline.  They do however, constitute the reason the word “Beware” appears in the headline.
Valuation
Last week I witnessed a presentation where a quite knowledgeable gentleman posted a chart of the Schiller PE Ratio.  He made note of the fact that the Schiller PE Ratio has only been higher twice in modern history – 1929 and 2000.  The 1929 peak was followed by an 89% decline by the Dow and the 2000 peak was followed by an 83% decline by the Nasdaq.  So are we doomed to experience a devastating decline?  Not necessarily.  At least not necessarily anytime soon.  The stock market became “overvalued” in 1995 and then continued to  rally sharply higher for another 4+ years.  Likewise, the market as theoretically been “overvalued” since 2013 – and so far so good.
Figure 6 shows the price action of the Dow Jones Industrials Average since 1901 in blue and the movements of the Schiller PE Ratio in green.
The peaks in the Schiller PE ratio in:
1901
1929
1937
1965
1995-2000
2003-2008
Were all followed by “something bad”.
While the exact timing is unknowable, as you can see in Figure 6, history does suggest that ultimately a “happy ending” is unlikely.
PE Ratio chart
Figure 6 – A History Lesson in High Shiller PE Ratio Readings: Dow Jones Industrials Average (blue line) and Schiller PE Ratio (green line); 1901-present
Summary
I absolutely, positively DO NOT possess the ability to “predict” what is going to happen in the financial markets.  I have gotten pretty good however, at identifying when risk is unusually high or low.
Current Status: Risk High
Because I don’t offer investment advice on this blog – and because my track record of “market calls” is so bad, no one should interpret anything in this article as a call to “Sell Everything”, especially since I  haven’t even done that myself  – us “trend-followers” usually take awhile to give up the ghost.  In reality, I hope that stocks continue to rally and that this article ends up making me looking stupid, er, I mean “overly cautious”.
But the real point is simply that having plans, mechanisms, etc. to reduce risk in your portfolio makes sense.
Jay Kaeppel Chief Market Analyst at JayOnTheMarkets.com and TradingExpert Pro client. 
Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

A Focus on the Trends in Stocks, Bonds and Gold

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

This is What a Lack of Fear Looks Like (I Think)

I keep hearing that investors are “skittish” and “concerned” about the markets and the economy and so forth.  But the recent action in a relatively obscure ETF jumped out at me and seems to suggest that this is not necessarily the case – at least not among those who are active in the markets.  From what I can tell these people don’t have a care in the world.  See what you think.
What is Ticker SVXY?
A few key concepts:
*Implied volatility (IV) essentially measures the level of time premium built into the price of a given option or series of options on a given security.  In anxious times implied volatility will rise – sometimes sharply – as an increase in demand by speculators rushing to buy options to protect / hedge / speculate / etc in a given security, causes time premium to inflate.  When traders are less worried or more complacent then implied volatility will typically fall as decreased option buying pressure results in lower time premiums.
In sum, high and/or sharply rising IV typically signals fear, low and or declining IV typically signals a lack thereof.
*The VIX Index (see Figure 1) measures the implied volatility of options for the S&P 500 Index traded at the CBOE.  Typically when the stock market declines – especially when it declines sharply – the VIX index tends to “spike” as fearful traders rush in and bid up S&P 500 Index option prices
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Figure 1 – VIX Index (trading inversely to S&P 500 Index) (Courtesy AIQ TradingExpert)
*In essence, the VIX Index is “inversely correlated” to the stock market.
*Ticker SVXY is an ETF that is designed to track the “inverse” of the VIX Index.  In other words, when VIX rises, SVXY falls and vice versa.  This also means the following:
*Ticker SVXY is highly correlated to the SP 500 Index.  In other words, as the stock market moves higher SVXY typically also moves higher and vice versa.
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Figure 2 – SVXY (movements are correlated to the S&P 500 index)(Courtesy AIQ TradingExpert)
In sum, a declining trend in the price of SVXY shares typically signals fear, while a rising trend in the price of SXVY typically signals a lack thereof.
Now to My Concern
Hopefully some of that made sense.  In a nutshell, the key takeaways are that when fear is low:
*SVXY rises
*Implied volatility declines
But what if both go to extremes?  Is that a bad thing?  The reason I ask appears in Figure 3. 3
Figure 3 – Ticker SVXY at an all-time high with implied volatility for options on ticker SVXY plunging (both pointing to a lack of fear)
As far as I can tell, this is what a lack of fear looks like:
*Ticker SVXY is rising dramatically
*Implied volatility (SVXY options) is plunging
In the last 4 years there has never been a bigger disparity between these two measures of “fear” – and they are both pointing to “no fear.”
Summary
So the obvious question now is – does any of this matter?  I mean this is more of a “perspective” indicator (“where we are now”) than a “timing’  indicator (“where we are headed next”).  I cannot presently point out a way to use this to generate specific buy and sell signals.
In addition, as a trend-follower I am not the type to make any “Aha, the End is Near” type pronouncements.  As long as the market wants to keep running higher I am happy to “go along for the ride.”
But the less I see my fellow riders being concerned about the market, the more concerned I become.
In the long run that instinct has served me well.
(Here’s hoping that my instinct is wrong this time)
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client. http://jayonthemarkets.com/
Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

March and April (and the Train Rolls On)

The stock market is off to a flying start in 2017.  We have a buy signal from the January Barometer, the 40-Week Cycle just turned bullish  and most of the major U.S. indexes soaring to new all-time highs.  See Figure 1.

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Figure 1 – Major U.S. Average hitting new highs (charts courtesy AIQ TradingExpert Pro)

With the turn of the month near, what lies ahead for March and April?  Well, it’s the stock market, so of course no one really knows for sure.  Still, if history is an accurate guide (and unfortunately it isn’t always – and I hate that part), the odds for a continuation of the advance in the months just ahead may be pretty good.

Figure 2 displays the growth of $1,000 invested in the Dow Jones Industrials Average ONLY during the months of March and April starting in 1946.

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Figure 2 – Growth of $1,000 invested in the Dow Jones Industrials Average ONLY during the months of March and April (1946-2016)

For the record, the months of March and April combined:

*Showed a gain 53 times (75% of the time)

*Showed a loss 18 times (25% of the time)

*The average UP year showed a gain of +5.2%

*The average DOWN year showed a loss of (-3.3%)

*The largest Mar/Apr gain was +15.9% (1999)

*The largest Mar/Apr loss was (-6.0%) (1962)

Summary

So is the stock market train sure to “roll on” during the March/April timeframe?  Not at all.  But with “all systems Go” at the moment and with a historically favorable period approaching – and despite a lot of overly bullish sentiment beginning to bubble up – I feel compelled to stay on board at least until the next stop..

Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client. http://jayonthemarkets.com/

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

The Trend, the Trend, the Trend

In real estate, it’s “Location, Location, Location.” In the financial markets it’s “the Trend, the Trend, the Trend.”  There is a great deal of certainty about what will happen next in stocks, bonds and gold.  But the key to successfully navigating these turbulent times starts not with predicting the future but rather with identifying the current trend in the here and now and going from there.  So let’s take a look at, well, what else, the trends.

I have certain trend-following models that I follow to help me to determine which way to be leaning in the markets.  Like any trend-following method they are far from perfect (my stock market model for example, suffered not one but two significant whipsaws in the last year+).  But for me there is no expectation that they will be perfect.  The only goal is to catch most of the upside during major bull markets, and miss much of the downside during major bear markets.
Stocks
For stocks I look at the 10-month and 21-month moving averages for the S&P 500 Index and use the following rules:
*A sell signal occurs when the S&P 500 closes 2 consecutive months below its 21-month moving average AND is also below its 10-month moving average
*Following a sell signal a new buy signal occurs when the S&P 500 registers a monthly close above its 10-month moving average
stock-trend
Figure 1 – Stock Market trend-following signals (Courtesy AIQ TradingExpert)
This method avoided much of the 1973-1974, 2000-2002 and 2008 bear market destruction.  That’s the good news.  The bad news is that it sold at the end of September 2015 and at the end of February 2016 – both just prior to powerful upside reversals (like I said, trend-following models ain’t perfect).
The most recent signal was a buy signal on 3/31/2016.  
So the trend for stocks is presently BULLISH
Bonds
I have written several posts about this in the past.  My favorite bond timing indicator is Japanese stocks.  No seriously.  They have a string tendency to trade inversely to the 30-yr US t-bond.  I track ticker EWJ and watch the 5-week and 30-week moving averages.  Because Japanese stocks and t-bonds trade inversely I use the following rules:
*A buy signal for bonds occurs when the 5-week moving average for EWJ drops below the 30-week moving average for EWJ
*A sell signal for bonds occurs when the 5-week moving average for EWJ rises above the 30-week moving average for EWJ
The most recent signal was a sell signal for t-bonds on 6/10/2016
So the trend for bonds is presently BEARISH
bond-trend
Figure 2 – Bond trend-following signals(Courtesy AIQ TradingExpert)
Gold
For gold I use two moving averages on a weekly chart for something I refer to as Jay’s Anti-Gold Index.  Rather than go into a long explanation I will link to the original article on the topic and offer a short explanation.  In AIQ TradingExpert I created a ticker comprised of 4 other tickers (GLL, RYSDX, SPX and YCS) which all trade in a negatively correlated manner to the price of gold (er, usually).
One moving average I call the “FrontWeighted36DayMA” (“FrontWeightedMA” for short.  The calculations are based on someone else’s work – unfortunately I cannot recall the person’s name so cannot give proper credit.  Hopefully Karma will work and somewhere that person will  Have a Nice Day without really knowing why.  The calculations are a bit long-winded so the AIQ TradingExpert code appears at the end of this article.
The other is the 55-week exponential moving average.
(CAVEAT: Because some of these tickers did not exist until 2006 trading signals began on 12/31/1996, so yes, it is by my standards a relatively short test period for a long -term moving average method.  To put it another way, don’t bet the ranch on  gold basedon this one indicator)
The trading rules are as follows:
*When the FrontWeightedMA closes a week BELOW the 55-week MA then a BUY signal for gold occurs.
*When the FrontWeightedMA closes a week ABOVE the 55-week MA then a BUY signal for gold occurs.
gold-signals-3
Figure 3 – Gold Trading Signals (Courtesy AIQ TradingExpert)
The most recent signal was a buy signal on 3/18/16.
So the trend for gold is presently BULLISH.
Summary
These indicators represent “my opinion as to where the markets are headed next” (because the truth is I don’t know).  There are objective, mechanical measures of where things stand today.  Nothing more, nothing less.
Also, none these indicators falls into the “World Beater” or “You Can’t Lose in Investing” categories.  But then again they are not really designed to (BTW if you do posses methods that do fit into either of the aforementioned categories, I would love to hear from you – off the record, of course).  What they do achieve is to offer a decent frame of reference during times of doubt.
And that is one of the most powerful tools any investor can possess.
So in sum, the current trend (at least according to what you’ve seen here) for stocks and gold is bullish and the current trend for bonds is bearish.
How long any of these trends will remain in place is anyone’s guess.  So enjoy them while they last.

Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client