Jul 5, 2017 | bonds, educational newsletters, ETFs, indexes, jay kaeppel, market timing
In the end it is not so much about “predicting” what will happen next in the financial markets, but rather recognizing – and being prepared for – the potential risks, that makes the most difference in the long run. So let’s start by looking at current trends.
Stocks
Let’s start with a most simple trend-following model that works like this:
-A sell signal occurs when the S&P 500 Index (SPX) registers two consecutive monthly closes below its 21-month moving average
-After a sell signal, a buy signal occurs when SPX register a single monthly close above its 10-month moving average.
Figure 1 displays recent activity.
Figure 1 – SPX Trend-Following signals (Courtesy
WinWayCharts)
The good news is that this model does a good job of being out of stocks during long bear markets (1973-74, 2000-2002, 2008-2009). The bad news is that – like any trend-following model – it gets “whipsawed” from time to time. In fact the two most recent signals resulted in missing out on the October 2015 and March 2016 rallies.
But note the use of the phrase “simple trend-following model” and the lack of phrases such as “precision market timing” and “you can’t lose trading the stock market”, etc.
For now the trend is up. A few things to keep an eye on appear in Figures 2 and 3. Figure 2 displays four major averages. Keep an eye to see if these averages break out to the upside (see here) or if they move sideways to lower.
Figure 2 – Four Major Market Averages (Courtesy
WinWayCharts)
In addition, I suggest following
the 4 tickers in Figure 3 for potential “early warnings” – i.e., if the major averages hit new highs that are not confirmed by the majority of the tickers in Figure 3
.
Figure 3 – Four potential “Early Warning” tickers (Courtesy
WinWayCharts)
Bonds
My main “simple bond trend-following model” remains bearish. As you can see in Figure 4, a buy signal for bonds occurs when the 5-week moving average for ticker EWJ (Japanese stocks) drops below its 30-week moving average and vice versa.
Figure 4 – Ticker EWJ 5-week and 30-week moving average versus ticker TLT (Courtesy
WinWayCharts)
A 2nd model using metals to trade bonds has been bullish of late but is close to dropping back into bearish territory. Figure 5 displays the P/L from holding a long position of 1 t-bond futures contract ONLY when both the EWJ AND Metals models are bearish (red line) versus when EITHER model is bullish (blue line)
Figure 5 – T-bond futures $ gain/loss when EWJ OR Metals Models are Bullish (blue line) versus when EWJ AND Metals Models are both Bearish (red line); August 1990-present
Gold
My most basic gold trend-following model is still bearish. This model uses my “Anti-Gold Index” (comprised of tickers GLL, SPX, UUP and YCS). It is bullish for gold when a Front-Weighted Moving Average (detailed here) is below the 55-week exponential moving average and vice versa.
Figure 6 – Jay’s “Anti-Gold Index” versus ticker GLD (Courtesy
WinWayCharts)
Summary
So at the moment the stock model is bullish and the bond and gold models are bearish. Are these trends certain to persist ad infinitum into the future? Definitely not. Will the models detailed here provide timely signals regarding when to get in or out the next time around? Sorry, but it doesn’t always work that way with trend-following.
But as for me I prefer “riding the trend” to “predicting the future.”
Some painful lessons just stick with you I guess.
Jay Kaeppel Chief Market Analyst at JayOnTheMarkets.com and TradingExpert Pro client.
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
May 8, 2017 | bonds, EDS, EDS code, educational newsletters, ETFs, jay kaeppel
There is great trepidation in the bond market these days. Most investors seem to have the “interest rates are sure to rise” mantra playing on auto loop in their head. And this is not entirely unwarranted. Given the historical tendency for bond yields to move in long, slow trends (20 years or more essentially in one direction is not uncommon), I for one am pretty confident in believing that interest rates will be higher 20 years from now than they are now.
But that is not the fear that is playing in people’s heads. The fear in people’s heads is that rates are rising soon (like immediately) and in a big way. This however, may or may not prove to be the case.
Figure 1 displays a history of 10-year treasury yields through about 2012 (FYI 10-yr. yields are roughly in changed since that time). Note the long-term nature of interest rate trends and that while there are “spikes” here and there, most major moves play out over time and not in “here today, sharply higher tomorrow” fashion.
Also, you can see in Figure 2 – one can make a compelling argument that bond yields are not “officially rising”, at least not yet.
Figure 2 – Yields still “officially” in a downtrend
Bonds are Due to Bounce – But Will They?
One way to identify important turning points in any market is when a market doesn’t do something that it would normally be expected to do. For example, here is a simple thought process:
1) The bond market is oversold
2) In the past 30 years, pretty much anytime it would get oversold a rally ensued
3) Therefore, bonds should rally soon
But will they – that is the question. And in my opinion, the answer is important.
*If bonds rally soon (i.e., over the course of say the next several months) then “the status may still be quo”.
*If bonds do not rally soon, then it may be a sign that “things are changing”
Which Way Bonds?
Figures 3 and 4 below display ticker TLT (an ETF that tracks the long-term treasury bond) with an indicator I call UpDays20. In this case we are looking at weekly bars and not daily bars, but the concept is the same.
UpDays20 is calculated by simply adding up all of the weeks that have showed a weekly gain over the past 20 weeks and then subtracting 10 (the WinWay Charts Expert Design Studio code appears at the end of this article, after the disclaimer).
If 10 of the past 20 weeks have showed a weekly gain then the upDays20 indicator will read 0 (i.e., a total of 10 weeks were up minus 10 = 0). If only 6 weeks showed a gain in the past 20 weeks then the UpDays20 indicator will read -4, etc.
What to look for: Typically (at least in the declining rate environment of recent decades) when UpDays20 rises by a value of 2 from a low of -2 or less, a decent rally in bonds has ensued.
For example, if UpDays20 falls to -4 then a rise to -2 or higher triggers a buy signal. If it falls only as low as -3 then a rise to -1 or higher is required. If it falls only as low as -2 then a rise to 0 or higher is required.
Figures 3 and 4 highlight signals since roughly 2004.
Figure 3 – Ticker TLT with UpDays20 weekly buy signals (2004-2010); (Courtesy
WinWay TradingExpert )
Figure 4 – Ticker TLT with UpDays20 weekly buy signals (2010-2017); (Courtesy
WinWay TradingExpert )
As you can see in Figures 3 and 4, most of the signals highlighted were followed by at least a decent short-term rally.
In 2017, buy signals from the UpDays20 indicator occurred on 1/13 and 4/14. TLT is up +0.3% since the 1/13 signal and down -1.4% since the 4/14 signal.
Summary
Either:
1) This is an excellent time to buy the long-term bond (looking for at least a short to intermediate term rally) as a rally is overdue
OR
2) The “times they may be a changing” for bonds
So keep an eye on TLT over the next several months.
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
WinWay TradingExpert Expert Design Studio Code for UpDays20
Up1 if [close] > val([close],1).
Up2 if val([close],1) > val([close],2).
Up3 if val([close],2) > val([close],3).
Up4 if val([close],3) > val([close],4).
Up5 if val([close],4) > val([close],5).
Up6 if val([close],5) > val([close],6).
Up7 if val([close],6) > val([close],7).
Up8 if val([close],7) > val([close],8).
Up9 if val([close],8) > val([close],9).
Up10 if val([close],9) > val([close],10).
Up11 if val([close],10) > val([close],11).
Up12 if val([close],11) > val([close],12).
Up13 if val([close],12) > val([close],13).
Up14 if val([close],13) > val([close],14).
Up15 if val([close],14) > val([close],15).
Up16 if val([close],15) > val([close],16).
Up17 if val([close],16) > val([close],17).
Up18 if val([close],17) > val([close],18).
Up19 if val([close],18) > val([close],19).
Up20 if val([close],19) > val([close],20).
UpCount is (Up1+ Up2+Up3+Up4+Up5+Up6+Up7+Up8+Up9+Up10+Up11+Up12+Up13+Up14+Up15+Up16+Up17+Up18+Up19+Up20)-10.
Apr 7, 2017 | educational newsletters, ETFs, indicators, jay kaeppel
First things first: I am primarily a trend-follower (this is based on, a) the relative long-term benefits of following trends and b) my lack of ability to actually “predict” anything – but I digress).
As a trend-follower I love the fact that the stock market has been trending higher and the fact that there is so much “angst” regarding the “inevitable top.” Still, like a lot of investors I try to spot “early warning signs” whenever possible. Here are the four “things” I am following now for signs of trouble.
Fidelity Select Electronics
In Figure 1 you see, a) the blow-off top of 1999-2000 and b) today. Are the two the same? I guess only time will tell. But the point is, I can’t help but think that if and when the bloom comes off of the electronics boom, overall trouble will follow. Here is hoping that I am not as correct here as I was
here.
Just asking.
Transportation Index
As you can see in Figure 2, the Dow Transports has a history of making double tops which is followed by trouble in the broader market. Are we in the process of building another double top? And will trouble follow if we are? Dunno, hence the reason it is on my “Watch List” rather than on my “OH MY GOD SELL EVERYTHING NOW!!!!! List”.
I guess we’ll just have to wait and see.
Ticker XIV
Ticker XIV is an ETF that is designed to track inverse the VIX Index. As a refresher, the VIX Index tends to “spike” higher when stocks fall sharply and to decline when stocks are rising and/or relatively quiet. To put it in simpler terms, in a bull market ticker XIV will rise. As you can see in Figure 3 one might argue that XIV has gone “parabolic”. This is a potential warning sign (assuming you agree that the move is parabolic) as a parabolic price move for just about anything is almost invariably followed by, well, let’s just say, “not so pretty”.
Let’s hope not. Because if it does qualify as parabolic that’s a very bad sign.
Ticker BID
This one may or may not be relevant but for what it is worth, Sotheby’s (ticker BID) has on several occasions served as something of a “leading indicator” at stock market tops (for the record it has also given some false signals, so this one is more for perspective purposes rather than actual trading purposes). Still, if this one tops out in conjunction with any or all of the above, it would likely serve as a useful warning sign.
Summary
There is no “urgent action” to be taken based on any of this. Bottom line: Nothing in this article should trigger you to run for the exits.
Still, it might be wise to at least take a look around and “locate the exit nearest you.”
You know, just in case.
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.
Mar 23, 2017 | educational newsletters, indicators, MACD
There are many ways to use the MACD indicator developed long ago by Gerald Apel. This is one of them. Maybe. Nothing more, nothing less.
First the caveat: what follows is NOT a “trading system” or even something that you should consider on a standalone basis.
MACD
The MACD indicator uses exponential moving averages to identify the underlying trend for a given security and is also used by many traders to identify divergences which may signal an impending change of trend.
Figure 1 displays the daily MACD for ticker SPY.
Figure 1 – Ticker SPY with MACD Indicator (Courtesy
WinWay Charts )
While this is NOT intended to be a mechanical signal, I am going to put specific rules on it just to give it some structure. The rules:
1) If the daily MACD (12,26,9) has declined for at least 7 consecutive trading days AND
2) The 2-day RSI is at 64 or above
Then an “alert” signal is flashed. The key thing to note is that if the MACD ticks higher on the day that the 2-day RSI rises above 64, the signal is negated.
Before proceeding please note that the 12,26,9 parameter selection is simply the “standard” for MACD. Also, there is nothing magic about 7 consecutive days – so one might experiment with different values there. Finally, using the 2-day RSI and a “trigger” value of 64 are also both arbitrary. There may be better values and/or different overbought/oversold indicators to use.
Ticker GS
A “classic” example of the MACD Tell appears in Figure 2 using ticker GS.
The MACD Tell is typically best used as a short-term indicator. In this case a short-term trader might have considered playing the short side of GS – or even better – using option strategies such as buying puts or selling bear call spreads.
Summary
No one should rush out and start trading put options based on this indicator (or any other indicator for that matter) without spending some time doing some homework and testing out the viability for producing profits.
In reality, this is the type of indicator that should typically be combined with “something else” and/or used as a confirmation rather than as a standalone approach.
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
Feb 27, 2017 | educational newsletters, ETFs, trading strategies
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.
Figure 1 – Major U.S. Average hitting new highs (charts courtesy WinWay TradingExpert)
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.
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)
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..
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.
Feb 2, 2017 | educational newsletters, jay kaeppel, seasonal, Stock trading
I’ve been seeing a number of panicked missives lately regarding the retailing sector. They typically go something like this:
“Despite new highs for most of the major market indexes, the retailing sector has been struggling – and in some cases hit hard – therefore it is clearly (paraphrasing here) THE END OF THE WORLD AS WE KNOW IT, AHHHHHHHHHHHHH……………………..”
Or something along those lines. And the truth is that they may be right. But as it turns out, with the retailing sector it is typically more a question of “when” and not “what” (or even WTF
Recent Results
The concerns alluded to above are understandable given recent results in certain segments of the retailing sector. Figure 1 displays the stock price action for four major retailers. It isn’t pretty.
(click to enlarge)
So if major retailers are performing poorly one can certainly see why someone might extrapolate this to conclude that the economy is not firing on all cylinders and that the recent rally to new highs by the major averages is just a mirage. And again, that opinion may ultimately prove to be correct this time around.
But before swearing off of retailing stocks, consider the following.
Retailers – When not What
For our test we will use monthly total return data for the Fidelity Select Retailing sector fund (ticker FSRPX). Figure 2 displays the growth of $1,000 invested in FSRPX only during the months of:
*February, March, April, May, November, December
Figure 2 – Growth of $1,000 invested in ticker FSRPX only during the “favorable” months since 1986
For the record:
*An initial $1,000 grew to $50,274, or +4,927% (this test does not include any interest earned during the months out of FSRPX).
*# of years showing a net gain = 27
*# of years showing a net loss = 4
*Average UP year = +17.0%
*Average DOWN year = (-3.4%)
*Maximum UP Year = +50.0% (1990)
*Maximum DOWN Year = (-5.9%) (1994)
The Year-by-Year Results appear in Figure 3
| Year |
% +(-) |
| 1986 |
26.2 |
| 1987 |
15.8 |
| 1988 |
12.2 |
| 1989 |
16.9 |
| 1990 |
50.0 |
| 1991 |
45.5 |
| 1992 |
8.0 |
| 1993 |
4.6 |
| 1994 |
(5.9) |
| 1995 |
3.0 |
| 1996 |
26.1 |
| 1997 |
18.1 |
| 1998 |
45.7 |
| 1999 |
4.0 |
| 2000 |
1.8 |
| 2001 |
12.5 |
| 2002 |
(0.1) |
| 2003 |
18.5 |
| 2004 |
11.3 |
| 2005 |
10.3 |
| 2006 |
0.1 |
| 2007 |
(2.8) |
| 2008 |
(4.7) |
| 2009 |
44.9 |
| 2010 |
24.5 |
| 2011 |
4.6 |
| 2012 |
10.8 |
| 2013 |
16.6 |
| 2014 |
11.5 |
| 2015 |
6.1 |
| 2016 |
9.2 |
Figure 3 – Year-by-Year Results for “Favorable” Months since 1986
The Rest of the Year
If for some reason you had decided to skip the months above and hold FSRPX only during all of the other months of the year, your results appear in Figure 4.
Figure 4 – Growth of $1,000 invested in ticker FSRPX only during the “unfavorable” months since 1986
For the record:
*An initial $1,000 grew to $1,037, or +3.7% (this test does not include any interest earned during the months out of FSRPX).
Summary
Is the retailing sector guaranteed to generate a gain during our “favorable” months in 2017? Not at all. Still, given that retailing is presently beaten down a bit and the fact that the worst full year loss during the favorable months was -5.9%, it may be time to think about taking a look (although – as always, and for the record – I am not “recommending” retailing stocks, only pointing out the historical trends).
Still, as the old saying goes, the results below are what we “quantitative types” refer to as “statistically significant”.
*Favorable months since 1986 = +4,927%
*Unfavorable months since 1986 = +3.7%
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