May 15, 2014 | bonds, ETFs, group sector rotation, trading strategies
…and down will come, well just about everything, as far as I can tell.
OK, for the record maybe it should say “If the Dow Breaks.” After all I am still firmly ensconced here at “Camp Bull.” I would like to attribute this to disciplined nerves of steel, but it would be an understatement to say that that would be an overstatement. The truth is my crystal ball broke a very long time ago (sadly I continued believing what it portended for a long time before I realized it was actually broken). So I have long since held dual citizenship in “Camp Trend Follower”.
But I have got be honest…..I am feeling the urge to run like a sissy through the woods to “Camp Yikes”.
The Overall Market
Defining the “overall” market is something of a crapshoot these days, as some of the “overall” market seems to be going one way and another part of the “overall” market seems to be going another way. In Figure 1 we see the Dow, the S&P 500, the Nasdaq 100 and the Russell 2000.
Figure 1 – The Four Major Averages with 200-day moving averages (charts courtesy AIQ TradingExpert Pro)
In a nutshell, the “Generals” are still marching but the “Troops” are in retreat. Now every market pundit seems to be offering up their opinion as to whether the “Generals” will ultimately lead the troops higher or the other way around. With my crystal ball still out of order I must unfortunately go with my stock answer here of “it beats the heck out me.” And “hey things are swell here at Camp Bull.” But I have been around this business long enough to remember several instance where the “Troops” led the way (1984, 1987, 1990, 2000, 2008) and the “Generals” followed. So we’ll see what we see.
OK, just in case that little segment was not foreboding enough, let’s get to the really “scary” part.
Sectors Suck in Summer (during Mid-term years)
One caveat before I even launch, the sample size of what I am about to detail is very small (6 calendar years each four years apart starting in 1990). Also, that’s the good news. As a “seasonalaholic” (“Hi, my name is Jay”) I am acutely aware of the following facts:
1. The market tends to perform better between the end of October and the third trading day of the following May than it does from the third trading day of May through the end of October (also known as “Where We Are Now.”)
2. This is a mid-term election year.
I also do a lot of work with sectors and sector funds as I have found that investing at the right sector at the right time is – all kidding aside – one heck of a great way to invest.
So I was curious as to which sectors tended to perform the best during the May to October period during mid-term election years. Here is the short list:
Health Care. Period.
Everything else. Well on a buy in May and sell in October basis – let’s just say it isn’t pretty. So here is the test I ran:
Tracking the growth of $1,000 invested in each Fidelity Select Sector fund only:
*Between the close of May trading day 3 and the end of September (for the record, October tends to be an OK month during mid-term election years – more on this topic in a future article) during each mid-term election year.
The results appear below in Figure 2. If you are squimish you might want to brace yourself.
|
Fund
|
%+(-)
|
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FBIOX
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(12.1)
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FBMPX
|
(34.5)
|
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FBSOX
|
(36.9)
|
|
FCYIX
|
(28.8)
|
|
FDCPX
|
(42.4)
|
|
FDFAX
|
(3.7)
|
|
FDLSX
|
(45.9)
|
|
FIDSX
|
(55.9)
|
|
FNARX
|
(35.4)
|
|
FPHAX
|
(18.6)
|
|
FSAGX
|
(1.6)
|
|
FSAIX
|
(65.7)
|
|
FSAVX
|
(71.4)
|
|
FSCGX
|
(58.9)
|
|
FSCHX
|
(49.7)
|
|
FSCPX
|
(31.2)
|
|
FSCSX
|
(35.9)
|
|
FSDAX
|
(62.7)
|
|
FSDCX
|
(38.2)
|
|
FSDPX
|
(57.5)
|
|
FSELX
|
(71.0)
|
|
FSENX
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(42.9)
|
|
FSESX
|
(65.3)
|
|
FSHCX
|
(20.1)
|
|
FSHOX
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(79.1)
|
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FSLBX
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(59.1)
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|
FSLEX
|
(49.6)
|
|
FSMEX
|
(12.0)
|
|
FSNGX
|
(47.5)
|
|
FSPCX
|
(27.2)
|
|
FSPHX
|
41.6
|
|
FSPTX
|
(42.0)
|
|
FSRBX
|
(59.5)
|
|
FRESX
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(26.4)
|
|
FSRFX
|
(61.2)
|
|
FSRPX
|
(43.8)
|
|
FSTCX
|
(35.4)
|
|
FSUTX
|
(12.1)
|
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FSVLX
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(59.1)
|
|
FWRLX
|
(32.8)
|
|
FNARX
|
(35.4)
|
Figure 2 – Net %+(-) invested only between 3rd trading day of May and last trading day of September during mid-term election years (1990 , 1994, 1998, 2002, 2006, 2010, 2014)
Anyone notice a trend? To see just how bad things can be, once you are able to work yourself back up out of the fetus position, take a glance at Figure 3, which shows the three worst performers during the May-Sep mid-term year period – FSAIX (-71%), FSELX (-71%) and FSHOX (-79%).
Figure 3 – FSAIX, FSELX, FSHOX – growth of $1,000 May through Sep of mid-term election years (1988-present)
Now I have an obvious flare for the obvious (which I think should be pretty obvious – also I tend to repeat myself) but I am not even going to comment on Figures 2 and 3.
The Good News
The one mistake you should not make based on looking at these numbers and charts is to assume that it is not possible to make money in sector funds between May and September of mid-term years. It just requires something better than a buy and hold approach. Several momentum systems and seasonal plays that I have developed over the years have still managed to show some pretty good gains historically “among the ruins” of midterm election summer months.
But if you’re gonna play, you’d better bring your “A” game.
Summary
Repeating now – I am still in “Camp Bullish.” And ideally I’d like to spend the summer. There seems to be a lot of fear and loathing among the “crowd” that I follow regarding the stock market. Typically that’s a good thing and suggests that the stock market just might surprise everyone this time around. And I hope that it does.
But I will be keeping a pretty close eye on my “camp mates” in the days and week ahead. Any sign of “trouble” (i.e., Dow, S&P breaking below 200-day moving averages) and they are going to have to send a search party out to find me……
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client
Jay has published four books on futures, option and stock trading. He was Head Trader for a CTA from 1995 through 2003. As a computer programmer, he co-developed trading software that was voted “Best Option Trading System” six consecutive years by readers of Technical Analysis of Stocks and Commodities magazine. A featured speaker and instructor at live and on-line trading seminars, he has authored over 30 articles in Technical Analysis of Stocks and Commodities magazine, Active Trader magazine, Futures & Options magazine and on-line at www.Investopedia.com.
May 3, 2014 | chart patterns, Risk management, Seasonality, trading strategies
I have to admit I am a little surprised. It is the last day of April and so far I have only seen a couple hundred thousand “Sell in May and Go Away” related articles, as opposed to the usual several hundred bazillion such articles that usually make their appearance about his time each year. Still, what with May due to pop up at midnight tonight it seems like as good a time as any to chime in.
What You Probably Already Know
Historically the stock market has performed much better between the end of October and the third trading day of May that it has between the third trading day of May and the end of October. To wit, sees Figure 1 and 2.
.
Figure 1 – $1,000 in the Dow from October 31st through 3rd trading day of May (1960-present)
Figure 2 – $1,000 in the Dow from 3rd trading day of May to October 31st (1960-present)
Starting on 10/31/60:
* $1,000 invested in the Dow Industrials each year at the close of trading on the last trading day of October and held through the close of the third trading day of May grew to $47,280.
* $1,000 invested in the Dow Industrials each year at the close of trading on the third trading day of May and held through the close of the last trading day of October decreased to $599.
So to put it in blunt terms:
October to May = +4,628%
May to October = (-40%)
So clearly there is something to the “Sell in May” thing. There is a caveat, however. As you can see from a perusal of Figure 2 it is not as though the stock market declines each and every year during the May to October period. So during many years selling in May and getting back in at the end of October would cause your returns to trail that of the overall market (and we can’t have that now can we?).
So that explains why roughly half of the bazillion annual “Sell in May” related articles warn against blindly selling in May.
What You Probably Don’t Know
Like they always say, sometimes it’s not what you know but who you know that counts. Or in this case, not even someone I have personally met but do associate with. Rob Hanna is the head of Hannah Capital Management (www.QuantifiableEdges.com) and is a colleague of mine in AAPTA (American Association of Professional Technical Analysts). Rob revealed in some of his work the following “guide” for determining whether to “sell in May” or not:
-If the S&P 500 experiences a drawdown of 5% or more between December 31st and April 30th, then sell in May.
-If the S&P 500 DOES NOT experience a drawdown of 5% or more between December 31st and April 30th, then DO NOT sell in May.
Doesn’t get much simpler than that. Since 1960 there have been 14 years during which the S&P 500 did not experience a 5% drawdown and an investor would have simply remained in the market. The results appear in Figures 3 and 4.
Figure 3 – $1,000 in the Dow during bullish periods applying Hanna Sell in May Filter (1960-present)
Figure 4 – $1,000 in the Dow during bearish periods applying Hanna Sell in May Filter (1960-present)
In cold hard numbers:
* $1,000 invested in the Dow Industrials each year durung the “bullish” periods described grew to $70,244.
* $1,000 invested in the Dow Industrials each year duirng the “beairsh” periods describeed decreased to $403.
So to put it in blunt terms, applying Rob Hanna’s Sell in May Filter:
*October to May (plus May to October when no Sell in May IS NOT triggered) = +6,924%
*May to October (only during years when Sell in May IS triggered) = (-59.7%)
Here’s The Bad News
As you can see in Figure 5, the S&P 500 experienced a drawdown of -5.76% between the end of December and the end of April. And -5.76% is greater than -5% (OK, mathematically speaking -5.76 is technically LESS than 5%, but you get my drift – there was a drawdown in excess of 5%).
Figure 5 – S&P 500 for 2014
So by that rule, the Sell in May model that I prefer says to sell at the close on the third trading day of May and to buy back in at the end of October (although for the record, buying at the end of September is typically better in a mid-term election year, but that’s a topic for another article).
Summary
So because the S&P 500 experienced a -5.76% drawdown is the stock market absolutely, positively doomed to decline between May and the end of October? Of course not. But the historical odds seem to suggest that caution may be in order.
Jay Kaeppel Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client
Jay has published four books on futures, option and stock trading. He was Head Trader for a CTA from 1995 through 2003. As a computer programmer, he co-developed trading software that was voted “Best Option Trading System” six consecutive years by readers of Technical Analysis of Stocks and Commodities magazine. A featured speaker and instructor at live and on-line trading seminars, he has authored over 30 articles in Technical Analysis of Stocks and Commodities magazine, Active Trader magazine, Futures & Options magazine and on-line at www.Investopedia.com.
Apr 21, 2014 | chart patterns, indicators, Moving averages, trading strategies
OK, first off you have to admit that we are getting a little bit soft, don’t you think? I mean, after marching relentlessly higher to the tune of 34% since the November 2012 low, the Dow pulls back about 4.3%. And from all of the racket you would think that the end of the freaking world is apparently just around the corner. We used to be made of sterner stuff. Or so it seemed.
So there is a part of me that wants to shout “Buck up, people”. As a TFF (“Trend Followin’ Fool”) from way back, I would like to think that given the fact that the major stock market averages are above their respective long-term moving averages, we should stop all of the hand wringing and simply acknowledge that (at least for now) the major trend of the stock market is still bullish.
And when I say “I would like to”, I mean I really would “like to”. But the truth is there are a lot of good reasons to be keeping a close eye on the exits. To wit:
Indexes vs. Moving Averages
There is nothing magical about the relationship between the price of an asset/stock/index and its 200-day moving average. That being said, I sure do rely on it a lot – maybe because the interpretation is pretty darn simple:
Price > 200-day moving average = GOOD
Price < 200-day moving average = BAD
In Figure 1 we see four major stock market indexes (the Dow, the Nasdaq 100, the S&P 500 and the Russell 2000 clockwise from upper left).
Figure 1 – Major stock indexes versus their 200-day moving averages (Courtesy: AIQ TradingExpert)
The thing to note is that with the exception of the Russell 2000 – which is only slightly above it’s MA – they are still well above their respective 200-day moving averages. Now granted this could change quickly if prices keep heading south. But the point is that for now, an objective trend-follower still has to designate the major trend as “up.”
Alright, I hope you enjoyed the “Good News”
Is Elliott Wave Waving “Goodbye” (to the Bull)?
Figure 2 displays the Elliott Wave count for the Dow and the Nasdaq 100 as calculated mechanically by ProfitSource by HUBB.
Figure 2 – Dow and Nasdaq completing Elliott Wave 5? (Source: ProfitSource by HUBB)
OK, a few things. For the uninitiated, the Elliott Wave Theory is based on work by – who else, a guy named Elliott – that suggests that price moves up in 5 waves – 3 waves up, 2 waves down – and then declines in 5 waves – 3 waves down and 2 waves up. Now the truth is that a lot of Elliott Wave counts don’t pan out. But I known a lot of people who’s market opinion I respect who follow “the Wave”.
As you can see in Figure 2 both the Dow and the Nasdaq 100 appear to have formed or are in the process of forming a completed 5-wave “up” pattern. The implication going forward is for lower prices ahead.
Sell In May – with MACD Filter (SMMF)
The “Sell in May” pattern was first reported by Yale Hirsch and since then The Hirsch Organization’s Stock Trader’s Almanac has kept track of an updated – and improved version – that uses the MACD indicator to determine the exact entry and exit dates.
By my calculations, this SMMF method issued an early “sell” signal on 4/7/14 as shown in Figure 3. This sell signal remains in effect until at least the end of September (which is significant, as we will see shortly).
Figure 3 – Early “Sell in May” signal on 4/7/14 as MACD Oscillator turns negative (Courtesy: AIQ TradingExpert)
Why does this SMMF signal matter? In Figures 4 and 5 you can see the growth of $1,000 during bullish and bearish periods as signaled by the “Sell in May with MACD Filter” Method since 12/31/1949.
Figure 4 – Growth of $1,000 invested in Dow Industrial when SMMF Method is bullish
Figure 5 – Growth of $1,000 invested in Dow Industrial when SMMF Method is bearish
Notice any difference? For the record – and excluding any interest earned while of the market:
Bullish Phase gain = +24,753%
Bearish Phase loss = (-68%)
This method is now deemed”bearish.” ‘Nuff said.
Mid-Term Election Time of Year
Let me sum up the historical trend for mid-term election years as succinctly as possible by stating:
“Everything until September 30th is a crapshoot, but ignore any bad news after that.”
This summary is nicely illustrated in Figure 6.
*The blue line in Figure 6 displays the growth of $1,000 invested in the Dow between December 31st of the post-election year and September 30th of the mid-term election year.
* The red line in Figure 6 displays the growth of $1,000 invested in the Dow between September 30th of the mid-term year and December 31st of the mid-term year.
Figure 6 – Stock market shows bullish trend September 30 of mid-term election year through December 31st (Red line)
Again, the interpretation is fairly simple:
Jan 1 to Sep 30 – “Whatever”
Oct 1 to Dec 31 – “Bullish (usually)”
Summary
As a dutiful trend follower – and with the major indexes still holding above their long-term moving averages – I am still wearing the “brave face” and hoping that the stock market will continue to move higher. But if weakness persists or accelerates, it would appear that investors might be wise to take some defensive action (hedge, raise cash, go short) and to check back around September 30th of this year.
Sounds like a good time to invoke one of the most useful old adages:
“Hope for the best, prepare for the worst”
Jay Kaeppel Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client
Jay has published four books on futures, option and stock trading. He was Head Trader for a CTA from 1995 through 2003. As a computer programmer, he co-developed trading software that was voted “Best Option Trading System” six consecutive years by readers of Technical Analysis of Stocks and Commodities magazine. A featured speaker and instructor at live and on-line trading seminars, he has authored over 30 articles in Technical Analysis of Stocks and Commodities magazine, Active Trader magazine, Futures & Options magazine and on-line at www.Investopedia.com.
Apr 14, 2014 | Uncategorized
If there is one thing I have learned about trading over the years it is that there sure are a lot of ways to play. I mean there are literally thousands of stocks, bonds, funds, ETFs, options, FOREX, and so and so forth to choose from. From there a trader can analyze roughly a bazillion (give or take) different indicators, oscillators, trend following methods, fundamental factors, etc., etc.
No wonder people get confused and no wonder there is a tendency for a trader to “try” one method for “a while” and as soon as that one isn’t faring as well as something else they’ve heard about, well, that trader to move on to another method (you know who you are).
And then of course there are the pundits, you know wise guys like me who like to imply that they know everything there is to know about trading. And so traders sometimes feel compelled to listen to someone else if they assume that that person knows more about trading than them. The paradox here is that is that – as with any endeavor – it does make sense to listen people with more knowledge than you on given topic in order to learn things. But trading is a little trickier. So this seems like a good time to invoke:
Jay’s Trading Maxim #215: Whenever you hear someone say “In order to be successful in the markets you must……”, what they really should be saying is “In order for me to be successful in the market I must…..what you must do may be something completely different.”
In other words you need to take in a lot of information and then go through the painstaking process of stripping away about 90% of what you’ve been told and boil it down to just that which allows you to be successful. And whatever anyone else does is not relevant.
Buy the way it is not an easy process.
One other suggestion:
Jay’s Trading Maxim #218: Once you settle on a trading plan/method, DO NOT TINKER with it day in and day out. Revisit your trading plan/method a few times a year and see if you’ve learned anything that can add value. Otherwise “Trade, don’t Tinker.”
A Simple Signal
So all of that being said, I still can’t fight the urge to be a wise guy and offer up a simple “buy signal” using the Commodity Channel Index (or CCI). Now please not that there is no inference made that this is the “be all, end all” of trading. In fact, it really is only useful (I have found) for very short-term trading and for traders who are diligent about cutting losses. In other words if you have a recent history of buying something and then when it came time to cut a loss you said “Well, I’ll just give it a little while longer to see what happens”, then beware.
So any way here goes. If:
– SPY > 200-day moving average
– CCI drops to -90 or below and then turns up for one day
– then the next time SPY takes out the previous day’s high enter a long position
BUT WAIT! Before you even think about trying to use this idea note that you will need to develop some profit-taking and stop-loss criteria. One place to start would be to exit on the first profitable close. In other words, yes it can be that short-term in nature. If that is not your “cup of tea” you need to either, a) figure out a different way to use the idea, or b) ruthlessly discard it along with the 90% of ideas that you encounter that do you absolutely no good.
Again, there is no inference made that every new signal equates to “Happy Days are Here Again!” What I have described simply signals that maybe, just maybe the market will follow through at least a little bit to the upside. Do not read more into it than that.
In Figures 1 and 2 below, the green bars highlight days when CCI trend up from -90 or below while SPY was above its 200-day moving average. The red arrows highlight the next time SPY took out the previous day’s high. The key thing to note is that sometimes there is follow through and sometimes there is not.
It is how you deal with the “sometimes there is not” occasions that matters the most.
Figure 1 – SPY 2013-2014 (Courtesty: AIQ TradingExpert)
Figure 2 – SPY 2012 (Courtesty: AIQ TradingExpert)
Jay Kaeppel Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client
Jay has published four books on futures, option and stock trading. He was Head Trader for a CTA from 1995 through 2003. As a computer programmer, he co-developed trading software that was voted “Best Option Trading System” six consecutive years by readers of Technical Analysis of Stocks and Commodities magazine. A featured speaker and instructor at live and on-line trading seminars, he has authored over 30 articles in Technical Analysis of Stocks and Commodities magazine, Active Trader magazine, Futures & Options magazine and on-line at www.Investopedia.com.
Mar 26, 2014 | Uncategorized
The AIQ code based on Perry Kaufman’s article in March 2014 Stocks & Commodities, “Timing The Market With Pairs Logic,” is provided at www.TradersEdgeSystems.com/traderstips.htm.
The code I am providing will backtest only the long trading and will not test the hedging portion of the system. For live trading, I provided a manual input for the total value of the open positions, which would have to be computed separately and then entered daily as an input before the daily report is run once the hedge rule becomes true.
!TIMING THE MARKET WITH PAIRS
!Author: Perry Kaufman, TASC March 2014
!Coded by: Richard Denning 1/7/2014
!www.TradersEdgeSystems.com
!INPUTS:
stoLen is 60.
idx is "NDX".
hedgeETF is "PSQ".
eLvl is 10.
xLvl is 50.
sLoss is 0.10.
hedgeLen is 60.
hedgeRatio is 0.50.
minP is 3.
invest is 5000.
totValOpenPos is 100000. !open position value must be set manually
H is [high].
L is [low].
C is [close].
O is [open].
idxH is tickerUDF(idx,H).
idxL is tickerUDF(idx,L).
idxC is tickerUDF(idx,C).
idxO is tickerUDF(idx,O).
hedgeC is tickerUDF(hedgeETF,C).
PEP is {position entry price}.
!STRESS CODE:
rngStk is highresult(H,stoLen) - lowresult(L,stoLen).
rngIdx is highresult(idxH,stoLen) - lowresult(idxL,stoLen).
stoStk is (C - lowresult(L,stoLen)) / rngStk.
stoIdx is (idxC - lowresult(idxL,stoLen)) / rngIdx.
stoDiff is stoStk - StoIdx.
rngDiff is highresult(stoDiff,stoLen) - lowresult(stoDiff,stoLen).
stressVal is ((stoDiff - lowresult(stoDiff,stoLen)) / rngDiff) * 100.
!PAIRS SYSTEM CODE:
Buy if C > minP and countof(C > minP,4,1)=4 and stressVal <= eLvl and symbol()<>hedgeETF.
StressExit if stressVal >= xLvl.
ExitBuy if countof(C > minP,5)<>5 or C/PEP-1 < -sLoss or StressExit.
!TREND CODE:
idxTrnd is simpleavg(idxC,hedgeLen).
Hedge if idxTrnd < valresult(idxTrnd,1) and symbol()=hedgeETF .
!SIZING CODE:
chgStk is C/valresult(C,1) - 1.
chgIdx is idxC/valresult(idxC,1) - 1.
idxSMA is simpleavg(idxC,hedgeLen).
size is floor(invest / C).
hedgeSize is floor(totValOpenPos / hedgeC*hedgeRatio) .
ShowAllValues if countof(C > minP,5)=5.
To get a correlated list of stocks that show good correlation to the index of choice (I used the NDX), AIQ has a matchmaker module that will quickly generate a list of stocks that show significant correlation to an index. In Figure 7, I show the matchmaker setup I used to quickly get a list of stocks in the NASDAQ 100 that were highly correlated to the NDX. In Figure 8, I show the results (part of which are hidden). After highlighting the ones desired for a list, simply click on the “data manager” button and a list is created, which is then used to run the tests.
FIGURE 7: AIQ, MATCHMAKER SETUP. Here is the setup used to get a list of stocks in the NASDAQ 100 that are highly correlated to the NDX.
FIGURE 8: AIQ, RESULTING LIST. Here are sample results of running the setup shown in Figure 7.
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