*”Every situation in life represents an opportunity”
*”Opportunity is where you find it”
Nowhere is this truer than in the financial markets.
To wit, in this article dated 3/26/2020 (cue the scary music) – when things looked their absolute worst – I highlighted four tickers in the energy sector (yes, THAT energy sector, the one that has been a disaster and loathed and unloved for some time now). Now it would have taken a true “Buy when there is blood in the streets” mentality, and/or almost foolhardy nerves of steel to actually pile into those issues at the time.
But that is sort of the point.
Figure 1 displays the tickers and their price action since the close on 3/26/2020.
Figure 2 displays the comparative performance versus the S&P 500 and the Nasdaq 100.
Figure 2 – “Blood in the Streets” energy stocks versus major indexes
As you can see in Figure 2 these four stocks as a whole have actually outperformed both the S&P 500 Index and the Nasdaq 100 Index.
Now the point IS NOT that I am some great stock-picker (because I am not). The point is that, well, see the two quotes above.
A Broader Look at Energy
For someone with less of the “buy when there is blood in the streets” mentality and more of “trend-following” mentality, a simple trend-following method may soon (at long last) swing to the bullish side.
It works like this:
*Two “tickers” see their respective 5-week average cross above their respective 30-week average
*Ticker 1 is ticker XLE (the SPDR energy ETF)
*Ticker 2 is an index (I created) of securities that have an inverse correlation to the U.S. Dollar
Editors Note: To create an inverse index of the ticker XLE, you’ll first need to use the Matchmaker tool and run a correlation between XLE and your database of stocks. The stocks that correlate the least with have the highest negative correlation.
To create the index. Make a new list in AIQ Data Manager, create a new group ticker called ANTIUS3 and add it to the list. Add the least correlated tickers from Matchmaker to this group, then use Compute Group/Sector Indices to compute all dates for this list. You’ll now have an equivalent to the ANTIUS3.
You can see these two – along with their respective 5-week and 30-week – in Figure 3.
Figure 3 – Ticker XLE and Jay’s ANTIUS3 index w/5-week and 30-week averages (Courtesy TradingExpert)
As you can see in Figure 3 the two have a tendency to often move together. At other times they do not. The key point here is that we ONLY pay attention when the two tickers are both trending in the same direction.
Why is this important?
Figure 4 displays the cumulative price growth for ticker XLE (as a proxy for the broad energy sector) under two separate circumstance:
*When BOTH XLE and ANTIUS3 are in uptrends (i.e., 5-week average ABOVE 30-week average)
*When EITHER XLE or ANTIUS3 is NOT in an uptrend (i.e., 5-week average BELOW 30-week average)
Figure 4 – XLE cumulative %+(-) depending on trend status for XLE and ANTIUS3
To put it in numbers:
When BOTH are in Uptrends: XLE = +82.3%
When EITHER is NOT in an Uptrend: XLE = -65.5%
Summary
Another glance at Figure 1 reveals that ANTIUS3 is in an uptrend and that XLE is not quite there yet. So, at the moment there is no bullish signal from the method described above. However, energy does appear to be “trying” to rally. Investors looking for “opportunity” may be wise to keep an eye on the 5-week and 30-week averages of ticker XLE in the weeks and month ahead.
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented represents the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed 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. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
In the late 1980’s, Japan seemed destined to “rule the financial world”. But when it comes to the financial markets – things don’t always pan out as they appear destined to. The Nikkei Index topped out in late 1989, didn’t bottom out until February 2009 and has yet to return to its 1989 peak.
But it sure is trying. This past week the Nikkei reached its highest level 1991. So, hooray for the Japanese. Back here in the US of A there may be a slightly different take. For as we will discuss in a moment, what is good for Japanese stocks is (apparently) bad for US bonds.
Ticker EWJ
As our proxy for Japanese stocks we will use ticker EWJ (iShares Japan). In Figure 1 you can the monthly action since the ETF started trading in 1996.
Since 1996 EWJ has broken in the $60 a share range on 5 previous occasions, only to be rebuffed. You can see the latest upward thrust at the far right. Will this be the time it breaks through? It beats me and in fact that is not really the focus of this article. The real question posed here is “what about U.S. treasury bonds?” Huh? Consider Figure 2.
The top clip of Figure 2 displays a weekly chart of EWJ with a 5-week and 30-week moving average drawn. The bottom clip displays a weekly chart of ticker TLT – the iShares ETF that tracks the long-term U.S. treasury bond.
Note that – using highly technical terms – when one “zigs”, the other “zags.”
The thing to note is the inverse correlation between the two – i.e., when Japanese stocks advance, US treasuries tend to decline and vice versa. For the record (and for you fellow numbers geeks out there) the correlation coefficient in the last 2 years is -0.45 (1 means they trade exactly the same, -1 means they trade exactly inversely).
For my purposes:
*EWJ 5-week MA < EWJ 3-week MA = BULLISH for US treasuries
*EWJ 5-week MA > EWJ 3-week MA = BEARISH for US treasuries
Any real merit to this?
*The blue line in Figure 3 displays the cumulative $ +(-) achieved by holding a long position in t-bond futures ($1,000 a point) when the EWJ indicator is BULLISH (for U.S. bonds)
*The orange line in Figure 3 displays the cumulative $ +(-) achieved by holding a long position in t-bond futures ($1,000 a point) when the EWJ indicator is BEARISH (for U.S. bonds)
Figure 3 – $ + (-) for Treasury Bond Futures when EWJ indicator is BULLISH for bonds (blue) or BEARISH for bonds (orange)
Summary
Bond investors might keep a close eye on Japanese stocks for a while. If the latest thrust higher follows through and becomes the move that finally breaks out to the upside, the implication would appear to be negative for U.S. long-term treasury bonds. On the flip side, if Japanese stocks fail once again to break through and reverse to the downside, then things might look a whole lot better for the 30-year US treasury.
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented represents the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed 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. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
It’s been a couple of months since we last looked at the Market Timing AI Expert System. Since that time the 400 rules that make up this AI system have generated a cluster of 3 down signals, followed by a buy signal and then most recently another down signal.
In this 7 minute video Steve Hill, CEO of AIQ Systems explores the signals and the confirmation techniques used to verfiy the ratings, together with the primary rules that fired.
For the record, I am an avowed “trend-follower.” But I also know that no trend lasts forever. So, while I have gotten pretty good at “riding along”, I do – like most people – like to “look ahead” since I do know that the landscape will forever be changing.
So, with the caveat that none of what follows should be considered a “call to action”, only as a “call to pay attention”, let’s venture out “into the weeds.”
AIROIL
Here is an ugly pairing – airline stocks and traditional energy stocks – yikes! In Figure 1 you see an index that I created and followed call AIROIL comprised of three airline stocks and five “Big Oil” stocks. During the pandemic meltdown this index fell to a level not seen since 2007 before “bouncing”.
Editors Note:
Jay's AIROIL Index is built using the AIQ Data Manager by creating a list andcreating a group ticker (in this case AIROIL).
Stocks are inserted under the ticker and the index is then computed using Compute Group/Sector indices.
In the bottom clip you see an indicator I call VFAA. Note that when VFAA tops out and rolls over, meaningful advances in the index tend to follow. In addition, VFAA is at a high level seen only once before in 2009. Following that reversal, the index rose almost 500% over the next 9 years.
So, is now a great time to pile into airlines and big oil? One would have to be a pretty hard-core contrarian to pound the table on this one. The airlines are in terrible shape due to the pandemic and vast uncertainty remains regarding when things might improve. And “Big Oil” is about as unloved as any sector has ever been.
So, am I suggesting anyone “load up” on airlines and oil? Nope. What I am saying is that I am watching this closely and that if and when VFAA “rolls over” I may look to commit some money to these sectors on a longer-term contrarian basis.
International/Commodities/Value
Also known of late as “the barking dogs”. If you have had money committed to any or all of these asset classes in recent years you are shaking your head right about now. These areas have VASTLY underperformed a simple “buy-and-hold the S&P 500 Index” approach for a number of years.
Is this state of affairs going to change anytime soon? Regarding “anytime soon” – it beats me. However, I am on the record as arguing that at some point this WILL change. History makes one thing very clear – no asset class has a permanent edge. So, given that the S&P 500 Index has beaten these above mentioned by such a wide margin for such a long time (roughly a decade or more) I am confident that one day in the next x years, the “worm will turn.”
Figure 2 displays an index that I created and follow that tracks an international ETF, a commodity ETF and a value ETF. The VFAA indicator appears in the bottom clip.
Now if history is a guide, then the recent “rollover” by VFAA suggests that this particular grouping of asset classes should perform well in the coming years. Two things to note:
1. There is no guarantee
2. There is absolutely no sign yet that “the turn” – relative to the S&P 500 – is occurring
Figure 3, 4 and 5 are “relative strength” charts from www.StockCharts.com. They DO NOT display the price of any security; they display the performance of the first ETF list compared to the second ETF listed. So, Figure 3 displays the performance of ticker EFA (iShares MSCI EAFE ETF which tracks a broad index of stocks from around the globe, excluding the U.S.) relative to the S&P 500 Index.
When the bars are trending lower it means EFA is underperforming SPY and vice versa. The trend in Figure 3 is fairly obvious – international stocks continue to lose ground to U.S. large-cap stocks.
If your goal is to pick a bottom, have at it. As for me, I am waiting for some “signs of life” in international stocks relative to U.S. stocks before doing anything.
Figure 4 displays ticker DBC (a commodity-based ETF) versus SPY and Figure 5 displays ticker VTV (Vanguard Value ETF) versus ticker VUG (Vanguard Growth ETF). Both tell the same tale as Figure 3 – unless you are an avowed bottom-picker there is no actionable intelligence. Still, both these trends are now extremely overdone, so a significant opportunity may be forming.
*Nothing is happening at the moment with everything displayed above…
*…But something will (at least in my market-addled opinion) – so pay close attention.
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented represents the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed 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. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
The bond market was very quiet in the 3rd quarter. Figure 1 displays ticker IEF (7-10 year treasuries ETF) in the to clip and ticker AGG (Aggregate Bond Index ETF) in the bottom clip.
Essentially the entire bond market has been flat since early June. The market seems to be assuming that “the Fed will take of everything” and keep interest rates low and stable for the foreseeable future so…..ZZZZZZZZ.
But this type of activity often breeds complacency. I am not making any predictions here but I do want to raise a question that investors might wish to ponder, i.e., “what would be more shocking that a spike in interest rates?” OK, yes, I realize it is 2020 and it is pretty much hard to be shocked by anything anymore. But still, on a relative basis how many investors are even thinking about the potential risk of higher interest rates at the moment?
Could it Happen?
The Bond Market VIX (ticker MOVE) recently fell to its lowest level ever (before spiking sharply higher on 10/5/20). As you can see in Figure 2 this type of “quietness” often precedes a significant move in the bond market. For the record, low readings in MOVE can be followed by large up moves in price as easily as large down moves in price. So, a low MOVE reading is not “bearish” per se, but rather merely suggests that we are experiencing the “calm before the storm.”
So why is my “Spidey sense” tingling? Figure 3 displays the yield on 30-year treasuries (ticker TYX) on the bottom and an indicator I refer to as VFAA on the bottom (the calculation appears at the end of this piece). VFAA is a derivative on a Larry William’s indicator he calls VixFix.
Figure 3 – 30-year treasury yields with VFAA suggesting a potential bottoming area (Courtesy TradingExpert)
As you can see in Figure 3, peaks in the VFAA indicator often occur near intermediate term lows in bond yields (reminder: bond prices move inversely to yield, so a bottom in interest rates indicates a top in bond prices). As you can also see on the far-right hand side, the stage clearly appears to be set for “the next go round.”
Why does this matter? If interest rates do rise in the months ahead bond prices – particularly long-term bond prices can get hit hard. To illustrate the potential risks, Figure 4 displays the action of treasury security ETFs of various maturity during a 5-month rise in rates back in 2016.
Figure 4 – Bond ETF action during rate rise in 2016
Summary
It is possible for long and short-term bonds to “de-couple”. In other words, the possibilities are:
*Short-term rates remain stable (as the Fed keeps pumping) while long-term rates rise (as inflation fears arise as a result of all the Fed pumping)
*Short-term rates remain stable while long-term rates plummet (if the economy appears to be weakening). This would result in gains for long-term bonds only
*None of the above
The bottom line: Bonds have fallen asleep – but DO NOT fall asleep on bonds.
VFAA Formula
Below is the code for VFAA
VixFix is an indicator developed many years ago by Larry Williams which essentially compares the latest low to the highest close in the latest 22 periods (then divides the difference by the highest close in the latest 22 periods). I then multiply this result by 100 and add 50 to get VixFix.
*Next is a 3-period exponential average of VixFix
*Then VFAA is arrived at by calculating a 7-period exponential average of the previous result (essentially, we are “double-smoothing” VixFix)
Are we having fun yet? See code below:
hivalclose is hival([close],22).
vixfix is (((hivalclose-[low])/hivalclose)*100)+50.
vixfixaverage is Expavg(vixfix,3).
vixfixaverageave is Expavg(vixfixaverage,7).
VFAA = vixfixaverageave
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented represents the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed 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. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
Truth be told I am not much of a “stock picker”. Oh, I can pick ‘em alright just like anyone else. They just to don’t go the right way as often as I’d like. I also believe that the way to maximize profitability is to follow a momentum type approach that identifies stocks that are performing well and buying them when they breakout to the upside (ala O’Neil, Minervini, Zanger, etc.) and then riding them as long as they continue to perform. Unfortunately, I’m just not very good at it.
Back when I started out, there was such a thing as a “long-term investor.” People would try to find good companies selling at a decent price and they would buy them and hold them for, well, the long-term. Crazy talk, right? As I have already stated, I am not claiming that that is a better approach. I am just pointing out that it was “a thing.”
An Indicator
There is an indicator (I will call it VFAA, which is short for vixfixaverageave, which – lets face it – is a terrible name) that I follow that was developed as an extension of Larry William’s VixFix Indicator. There is nothing magic about it. Its purpose is to identify when price has reached an exceptionally oversold level and “may” be due to rally. The code for this indicator appears later.
For the record, I DO NOT systematically use this indicator in the manner I am about to describe, nor am I recommending that you do. Still, it seems to have some potential value, so what follows is merely an illustration for informational purposes only.
The Rules
*We will look at a monthly bar chart for a given stock
*A “buy signal” occurs when VFAA reaches or exceeds 80 and then turns down for one month
*A “sell (or exit) signal” occurs when VFAA subsequently rises by at least 0.25 from a monthly closing low
Seeing as how this is based solely on monthly closes it obviously this is not going to be a “precision market timing tool.”
Some “Good Companies” with “Troubled Stocks”
So now let’s apply this VFAA indicator to some actual stocks. Again, I AM NOT recommending that anyone use this approach mechanically. The real goal is merely to try to identify situations where a stock has been washed out, reversed and MAY be ready to run for a while.
Ticker BA
Figure 1 displays a monthly chart for Boeing (BA) with VFAA at the bottom. The numbers on the chart represent the hypothetical + (-) % achieved by applying the rules above (although once again, to be clear I am not necessarily suggesting anyone use it exactly this way).
From March 2019 into March 2020 BA declined -80%. It has since bounced around and VFAA has soared to 110.88. VFAA has yet to rollover on a month-end basis, so nothing to do here except exhibit – what’s that word again – oh right, “patience.”
Ticker GD
Figure 2 displays a monthly chart for General Dynamics (GD) with VFAA at the bottom.
Are these “world-beating numbers”? Not really. But in terms of helping to identify potential opportunities, not so bad. VFAA gave a “buy signal” for GD at the end of July. So far, not so good as the stock is down about -6%.
Ticker WFC
Figure 3 displays a monthly chart for Wells Fargo (WFC) with VFAA at the bottom.
There are not many “signals” but the ones that occurred have been useful. Between 2018 and 2020 WFC declined -65%. It has since bounced around and VFAA has soared to 102.44. VFAA has yet to rollover on a month-end basis. But at some point it will, and a potential opportunity may arise.
VFAA Formula
Below is the code for VFAA
VixFix is an indicator developed many years ago by Larry Williams which essentially compares the latest low to the highest close in the latest 22 periods (then divides the difference by the highest close in the latest 22 periods). I then multiply this result by 100 and add 50 to get VixFix.
*Next is a 3-period exponential average of VixFix
*Then VFAA is arrived at by calculating a 7-period exponential average of the previous result (essentially, we are “double-smoothing” VixFix)
Are we having fun yet? See code below:
hivalclose is hival([close],22).
vixfix is (((hivalclose-[low])/hivalclose)*100)+50.
vixfixaverage is Expavg(vixfix,3).
vixfixaverageave is Expavg(vixfixaverage,7).
VFAA = vixfixaverageave
EDITORS NOTE: The WinWay Expert Design Studio code for the indicator is available to download from here. Save this file to your /wintes32/EDS Strategies folder https://aiqeducation.com/VFAA.EDS
Summary
One thing to note is that VFAA “signals” on a monthly chart don’t come around very often. So, you can’t really sit around and wait for a signal to form on your “favorite company”. You have to look for opportunity wherever it might exist.
One last time let me reiterate that I am not suggesting using VFAA as a standalone systematic approach to investing. But when a signal does occur – especially when applied to quality companies that have recently been “whacked”, it can help to identify a potential opportunity.
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented represents the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed 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. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
Everyone hates the energy sector (Foreshadowing alert: Well, almost everyone). And a quick perusal of Figure 1 clearly illustrates why the energy sector is unloved.
Figure 1 – Ticker XLE versus ticker QQQ (Courtesy TradingExpert)
Since ticker XLE (Energy Select Sector SPDR ETF) topped out in 2014:
*XLE has lost -65%
*QQQ has gained +210%
And in another kick in the head to the energy sector, Exxon (ticker XOM) was just kicked out of the Dow Jones Industrial Average. Take that, losers!
So yeah, who wouldn’t hate energy stocks and decide to shun them? Well, as it turns out, the answer to that question of late is “the people who know the energy business the best.”
Figure 2 from www.Sentimentrader.com displays the Insider Buy/Sell ratio for executives and other muckety-mucks running energy related corporations. The picture speaks for itself.
As you can see, energy corporate insiders have been on a massive buying binge of late. Interestingly, they went on a buying binge in 2019 – apparently expecting an improvement in the sector – then the sector got waylaid by Covid-19. Instead of bailing out the insiders really kicked their share buying into overdrive as you can see at the far right of Figure 2.
Figure 3 displays ticker XLE with an indicator that I developed by simply smoothing Larry Williams VixFix indicator. The gist of the idea, is that when this indicator reaches an extreme high level and then turns down, it often highlights a “washed out” situation which may be followed by a bullish move. Ticker XLE is presently nearing that point.
EDITTORS NOTE: VixFix smoothed indicator code sections can be copied and pasted into EDS or you can download the indicator code in an EDS file from here and save it to your /wintes32/EDS Strategies folder.
This indicator is based on another indicator called VixFix which was developed many years ago by Larry Williams.
hivalclose is hival([close],22). <<<<<The high closing price in that last 22 periods
vixfix is (((hivalclose-[low])/hivalclose)*100)+50. <<<(highest closing price in last 22 periods minus current period low) divided by highest closing price in last 22 periods (then multiplied by 100 and 50 added to arrive at vixfix value)
vixfixaverage is Expavg(vixfix,3). <<< 3-period exponential average of vixfix
vixfixaverageave is Expavg(vixfixaverage,7). <<<7-period exponential average of vixfixaverage
Should savvy investors follow the insider’s lead and start piling into the energy sector? Unfortunately, hindsight is the only way to know for sure. But for what it is worth, my own answer is “probably, but maybe not just yet.”
Energy Seasonality
The primary reason for hesitation at this exact moment in time is seasonality. Let’s use ticker FSESX (Fidelity Select Sector Energy Services) as a proxy for the broader energy index. This fund’s first full month of trading was January 1986. Figure 4 displays the cumulative total return for ticker FSESX ONLY during the months of June through November every year since 1986.
Figure 4 – FSESX cumulative % return June through October (1986-2020)
The cumulative total return during these months for holders of FSESX during June through November is -94.7%(!!!) So, you see my hesitation with “piling in”.
Additionally – climate change concerns aside – much of the energy industry still revolves around crude oil. Figure 4 displays the annual seasonal trend by month for crude oil.
Seasonal trends can vary widely from year-to-year, and there is NO guarantee that trouble lies ahead in Sep-Oct-Nov for the energy sector.
But that is what history suggests.
Summary
The bottom line is this:
*Energy sector corporate insider buying should be seen as a bullish longer-term sign for the sector
*The energy sector is so beaten down, battered and unloved that it probably accurate to refer to the situation as “Blood in the Streets”
Based on these factors I look for energy to surprise investors in the years ahead. That being said:
*Trying to pick the exact bottom in anything is typically a fool’s errand
*Getting bullish on the energy sector in early September is at times fraught with peril.
Sometime around December 1st it will be time to take a close look at the energy sector. If an actual uptrend develops or has already developed, the time may be write for investors to join the insiders.
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented represents the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed 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. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
The Expert System in TradingExpert Pro gave a 1 – 99 down signal on the Dow Jones on 8-27-20. The market internals based on the advancing vs declining issue in the New York market continue to diverge from the market price action.
The phase indicator used to confirm Expert Ratings turned down on 8-31-20. We usually look for a phase confirmation of an Expert Rating to occur within 3 days of the rating.
The changes made in the constituents of the Dow 30 effective 8-31-20
OK, first off a true confession. I hate it when some wise acre analyst acts like they are so smart and that everyone else is an idiot. Its offensive and off-putting – not to mention arrogant. And still in this case, all I can say is “Hi, my name is Jay.”
A lot of attention has been paid lately to the fact that AAPL is essentially swallowing up the whole world in terms of market capitalization. As you can see in Figure 1, no single S&P 500 Index stock has ever had a higher market cap relative to the market cap of the entire Russell 2000 small-cap index.
Figure 1 – Largest S&P 500 Index stock as a % of entire Russell 200 Index (Courtesy Sentimentrader.com)
So of course, the easiest thing in the world to do is to be an offensive, off-putting and arrogant wise acre and say “Well, this can’t last.” There, I said it. With the caveat that I have no idea how far AAPL can run “before the deluge”, as a student of (more) market history (than I care to admit) I cannot ignore this gnawing feeling that this eventually “ends badly.” Of course, I have been wrong plenty of times before and maybe things (Offensive, Off-Putting and Arrogant Trigger Warning!) “really will be different this time around.” To get a sense of why I bring this all up, please keep reading.
In Figure 1 we also see some previous instances of a stock becoming “really large” in terms of market cap. Let’s take a closer look at these instances.
Could AAPL continue to run to much higher levels? Absolutely
Do I still have that offensive, off-putting and slightly arrogant gut feeling that somewhere along the way AAPL takes a huge whack?
Sorry. It’s just my nature.
Jay Kaeppel
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You may have seen some of the articles out there analyzing the skewed nature of the current market rally. As Joe Bartosiewicz in his August 8 Bartometer pointed out:
“The Top 15 Stocks in the S&P 500 account in Market Value 35% of the entire S&P 500 stock market. The Bottom 420 Stocks in the S&P 500 account in Market Value 33.8% of the entire S&P 500 stock market. This means that 15 stocks are controlling the entire S&P 500..”
The Dow Jones 30 index uses a price weighted criteria as part of it’s calculation, and also includes Apple; AAPL has more than doubled in price in under 5 months.
Given that there appears to be only a small basket of stocks leading this rally, we had a look back at the last time tech related stocks were driving the market higher; the dotcom bubble that ran through the 90s into the early 00s.
Monthly DJIA and MACD – left through 3/2002 – right through 10/2002
The first chart is a monthly of the Dow 30 with MACD indicator comparing the market 03/29//2002 as the dotcom bubble rolled over vs 7 months later. Students of divergence analysis, will tell you that MACD in late March 2002 clearly showed prices should be much lower still despite the @33 % rally from the September 2001 low. By late October 2002 the market had fallen again by @33%. At that time the market was close to @40% lower than the high at the start of 2000.
Monthly DJIA and MACD – left through 3/2002 – right through 8/2020
The second chart is a monthly of the Dow 30 on the right through 8/10/20 vs the rally peak of 03/29/2002. The current market has had a @50% rally from the low at the end of March 2020. The original correction was @37% from high to low, slightly bigger than the dotcom correction. The MACD, similar to 2002, is strongly diverging.
The decline in 2002, after the rally, took prices lower than the the prior bottom. If a similar pattern happens this time and the decline is @40% from the high of 29568, the Dow would at the 17700 level.
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