Category Archives: market timing

The Best Bear Market Strategy

OK, I suppose I should refer to this as “my” best bear market strategy.  For the record, “the” best bear market strategy is to sell short at the top and buy back at the bottom.  Which reminds me, if you possess information on how to achieve this objective please feel free to pass your contact info on to me.  Barring that, what follows is a pretty decent approach to dealing with bear markets.

Also, I will grant you that this is not the most “timely” article in the world, since we are not technically now in a bear market.  Still it never hurts to “be prepared”, so I want to highlight one approach to trading a bear market.

First the bad news: this method involves a fair amount of trading – at least two trades a month to be specific.  While this may not be everyone’s cup of tea, ultimately – using here the ubiquitous, annoying and yet highly appropriate phrase for our times – “It is what it is.”

Jay’s Bear Market Method

There are three parts:

  1. The Dow versus its 200-day moving average
  2. Specific trading days of the month
  3. Market Holidays

Dow versus 200-day moving average

For our purposes we will designate the stock market as being in a bear market when the Dow Jones Industrials Average is below its 200-day moving average.  To sum it up as succinctly as possible:

Dow > 200-day moving average = GOOD

Dow < 200-day moving average = BAD

One important note: For trading purposes I use a one-day lag when a crossover occurs.  If the Dow closes above the 200-day MA on Monday and then closes below it on Tuesday, then in theory the market turns bearish at the close on Tuesday.  However, for actual trading purposes it is pretty tough to get a trade off at the close on Tuesday when you don’t know for sure that you should until…the close on Tuesday.

So for the record, for our purposes a “bearish” period begins at the close on the day afterthe Dow first closes below its 200-day moving average.  Likewise, the bearish period ends at the close one trading day after the Dow closes back above its 200-day moving average.

Trading Days of Month

When our 200-day moving average indicator above is “bearish” we designate the following trading days of the month as “bullish”

*The last 4 trading days of the month and the first 3 trading days of the next month

*Trading days #9, 10, 11 and 12

In other words, when the Dow is below its 200-day moving average we want to be long the stock market on these days

Holidays

In addition to the trading days listed above, when our 200-day moving average indicator above is “bearish” we also want to be long the stock market on the 3 trading days before and the 3 trading days after each stock market holiday (New Years, Martin Luther King Day, President’s Day, etc.)

Results

So what does all of this do for us?  The results appear in Figure 1 below.  To review, these results measure the growth of $1,000 invested in the Dow Jones Industrials Average only when:

*The Dow is below its 200-day moving average (with a 1-day lag following the crossover before a bearish period begins or ends)

*Today is within 3 trading days before or after a market holiday OR today is one of the last 4 trading days of the months, one of the first 3 trading days of the month or falls within trading days #9 through 12.

The blue line depicts the growth using Jay’s Bear Market Method.  The red line depicts the growth from buying and holding the Dow Industrials Average while our 200-day moving average indicator is  “bearish.”

1

Figure 1 – Growth of $1,000 invested in Dow using Jay’s Bear Market Method (blue line) versus $1,000 invested in Dow on all days when the Dow is below its 200-day moving average* (red line); 12/31/1938-9/26/2016

* – using a 1-day lag for crossovers

For the record, since 12/31/1938:

*$1,000 invested in the Dow only when the trend is “bearish” (i.e., below the 200-day moving average with a 1-day lag on crossovers) grew to $1,675 (or+67%)

*$1,000 invested in the Dow only when Jay’s Bear Market Method is bullish grew to $22,542 (or +2,154%).  Now that’s what I call “making the best of a bad situation”.

The Worst of the Worst

Figure 2 displays the performance of the Dow during the “Worst of the Worst” trading days.  In this scenario:

*The Dow is below its 200-day moving average (again with a 1-day lag for crossovers)

*Today is NOT one of the trading days of the month listed above and is NOT within 3 trading days of a market holiday.

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Figure 2 – Growth of $1,000 invested in Dow when Dow is below 200-day moving average AND today is NOT one of the favorable trading days listed above; 12/31/1938-9/26/2016

For the record, $1,000 invested in the Dow ONLY on these “Worst of the Worst” trading days by -88% to $114 since 1938. Now that’s what I call a bear market.

Jay Kaeppel

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

Weekend Strategy Review July 10, 2016

The Dow rallied for 251 points on Friday, closing at 18,147.   It was up 197 points for the week.  The NASDAQ finished up 80 points on Friday and up 94 points for the week.
After the BLS said that 287K new jobs were created in June, the market shot up and tested the April 20 high.  The Dow actually came within one point of making a new high before pulling back from overbought conditions.
This week I’m posting three charts that show where the Dow, Gold, and the Dollar are in their current patterns. 
The first chart of the Dow shows that once again, the 2-period RSI Wilder is overbought with No Trend in place.  So the Dow should start to pull back early next week.
Gold and the Dollar are another matter.  As you can see from the second chart, GLD continues to remain in a strong uptrend.  The VTI is above the 70 level and continues to move higher.  GLD closed at 130.52 on Friday and appears to be right on track for a move to the 134+ level. 
But the chart of the Dollar shows a fly in the ointment.  For the past three days, the VTI on the chart of UUP is showing that it is also starting to enter the Trend Mode.  This is a major concern, because it is extremely unusual for the Dollar and Gold to be rising at the same time.  The only time this tends to happen is when there is major trouble in the world. 
It happens because people are so concerned about their money that they are flocking to safe havens.  And it’s not only happening with individual investors, it’s happening with companies too. We’re seeing this in a lot of European countries now where investors are willing to pay the banks money (negative interest) just so they can get their money back at some point in the future. It’s insane!
Prior to Brexit, I warned that this could happen.  I said U.S stocks, gold and the Dollar could be perceived as safe havens, and all three could rise post-Brexit.  But I don’t believe this condition will last.  Something has to give.  A strong dollar makes it extremely difficult for most U.S. companies to sell their products abroad.  It will impact their earnings.  There are no two ways about it.  As long as the dollar continues to rise, large cap U.S. stocks will face strong headwinds.
And right now, most U.S. stocks are not cheap.  The current P/E ratio for the S&P500 is a whopping 24.61!  Compare this to its historic mean of 15.60 and you will quickly see that stocks are severely overvalued.  The reason they are being priced so high now is because companies are buying back shares, and  investors are being pushed into stocks because most other investments are paying diddly squat.  This is a very dangerous situation.
The fact that most companies are buying back their own shares is really something you should think about.  Usually the only time a company buys back its own shares is because they believe the stock price is too cheap!  The stock price might have been reduced because of a temporary slip in earnings or some unusual one time event.  In normal times, a company would not do this. In normal times, a company would use any excess cash it generates to expand. They would buy additional equipment or hire more people.  After all, they’re in business to make money.  But this is NOT happening now.  The reason its not happening now is because companies are worried. They are not buying new equipment or hiring new workers despite the fact that the June Jobs Report was positive.  Given May’s horrible report of only 34K new jobs and its subsequent downward revision to 11K, the June report MUST be considered suspect. 
So think about this.  If a company is worried about its future, doesn’t it seem strange to pay on average, 25 times earnings to buy back its stock? If they were buying back stock at 10-12 tries earnings, I could understand. But at 25 times earnings, buying back shares is not a strange strategy, it’s crazy!
It’s a strategy that can support the price of the stock for a while, but longer term, it’s not something that will lead to actual growth.  I also believe it’s a very risky strategy. Share buyback programs and cost cutting measures are temporary accounting tricks. They make the price of a stock seem attractive to unsuspecting investors, especially seniors, who are being forced into the stock market because they need income (dividends). But eventually, if companies are going to keep their share price supported, they will have to show profits produced by real growth.  With earnings season about to begin next week, and an overbought market, it should be interesting to watch what what happens as these companies report.
Protect yourself.

That’s what I’m doing,
The Professor

AIQ Market AI signals a 100 rating to the downside

Artificial Intelligence Market Signal issues a 0-100 to the downside on June 10, 2016
AIQ TradingExpert AI signals are designed to anticipate changes in the direction of price movement.  Some are accurate and some are not.  However, more often than not, the Expert Rating signals are accurate.  The strongest level of confirmation for market timing signals like this 0-100 down on June 10, 2016 can be found by examining one of TradingExpert’s other market indication components. 

One possible confirmation of market timing signals (Expert Ratings of 95 or greater) is the the Up/Down Signal Ratio, on the Weighted Action List (WAL), an AIQ report.  A Signal Ratio of 85 or greater in the direction of the signal could be viewed as significant, as the AI system used for stocks is completely separate in terms of expert system knowledge base and data, and share no information or expert rules with the market timing system. 

The image below is taken from the AIQ Reports Daily Market Log. This report pulls elements from various parts of TradingExpert. You’ll notice the 0-100 down signal  on DJIA on 6/10/2016. Just below that is WAL 5-95. This is the Up/Down Signal Ratio from the Weighted Action List (WAL) in this case using SP500 stocks. This 5-95 confirms that 95% of the SP500 stocks have down signals according to the stock expert system.

The Access Plot area on the right gives a bullish/bearish consensus for the SP 500 stocks using 16 technical indicators.

The two independent components of TradingExpert are in agreement calling for the market to move in the same direction. This is a very powerful type of validation, both the equity and market timing systems have signaled a change in market direction at the same time.

While no system is perfect, it is interesting to note the previous 0-100 market timing signal occurred December 8, 2015 prior to the correction at the start of 2016.

Inverse Head and Shoulders on the market?

There was an interesting Inverse Head and Shoulders pattern completed last night on SPY. As SPY is the proxy ETF for the S&P500 index, it caught my attention. A closer look at the Chart attached shows this pattern usually breaks out to the upside.
Analysis of the supplementary information clearly shows that the uniformity of this inverse head and shoulders is good, however the overall quality of the pattern is only average. The biggest issue is the lack of volume and lack of power of the breakout. The volume is particularly low. More volume is needed before this pattern is confirmed, particularly on a strong up day.

Learn more about Chart Pattern Recognition for TradingExpert Pro  http://aiqsystems.com/chartpatterns.htm

The TradingExpert Pro Market Log – remember this?

The TradingExpert Pro Market Log

Trading and investing becomes clearer when you’re armed with this snapshot of the market and SP 500 stocks every day.
– AI rating on the market and how long it has been in place
– AI rating on all Sp 500 stocks percentage showing up ratings vs down ratings
– Bullish vs bearish levels on the market on multiple techncial indicators
– Bullish vs bearish percentage of SP 500 groups trending up vs down and the change from prior day
– Bullish vs bearish levels summary for all the SP 500 stocks on multiple indicators