Category Archives: market timing

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.

1a

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.

2a

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

AIQ Market Timing signals a sell

The AIQ TradingExpert Pro Market Timing Expert System uses over 400 rules based on numerous technical indicator conditions to determine if a change in the current trend is imminent. The signals can be quite early and confirmation from other indicators not used in the AI system, like Phase are recommended. Quick disclaimer, we are not advisors and do not give recommendations.

Here’s the signal from last week. The number of stocks with new highs vs new lows is clearly showing a persistent down trend, while the market has been flat.

By clicking the ER button in Charts we can see some of the major rules that have fired to generate the signal

The AIQ market Log in Reports  provides additional information that gives us some broader information on the market. here we can see how a broad range of indicators on the market are fairing and also the percentage of buy vs sell signals on stocks in the S & P 500 (Unconfirmed signals 43-57, confirmed signals 33-67) .
The market action from Tuesday generated a second down signal of 2-98, following the 200 point fall in the Dow. The major rules that fired this time are below.
While never perfect, we always take heed when this many rules are firing

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.

2

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