Quick Market update video

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

  • Salesforce.com replaced Exxon Mobil, Amgen replacedd Pfizer and Honeywell replaced Raytheon Technologies.
  • The changes were due to Apple’s 4-for-1 stock split, which significantly reduced the indexes exposure to the information technology sector.
  • The Dow 30 is a price weighted index.

Dow 30 MACD picture – Dotcom vs Covid

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.

Thoughts on the Energy Sector (just in case we ever leave our homes again)

In a few recent articles (for example here) I suggested that one day we would look back on this period as a terrific buying opportunity for energy related issues.  At the same time, I still have yet to become comfortable “pulling the trigger”.  Thank goodness for small favors.

Anyway, the overall sentiment still holds.  Energy is dirt cheap as are shares of most energy related stocks/ETFs etc.  Again, that doesn’t necessarily mean that now is the exact moment to “load up”.  To say that there is a wee bit of uncertainty regarding the future would be about the greatest understatement one could presently make.  Still, it is important to plan ahead and to be prepared when the time comes.  So, what follows should be considered “food for thought” and not “an immediate call to action.”

A Few Things Energy

Ticker TAN

According to conventional wisdom, the future is “green”.  I’ll be candid – I am all for green energy, as long as when I flip the switch the lights come on AND when I look at my energy bill I don’t faint.  So, let’s start with a “green” play.

Turth be told, ticker TAN (Invesco Solar Energy ETF) has never been much of a performer.  Still, its in the solar business which people keep telling me is “the future.”  In reality the primary thing it has going for it is that it hasn’t completely cratered to the same degree as just about every other stock in the energy sector.  As you can see in Figure 1, TAN actually bottomed out at $12.60 in 2012 and – despite a near 50% decline during the recent panic – is presently trading around $26 a share.  Not necessarily a screaming buy signal, but a nice relative performance as we will see in a moment.

Figure 1 – Ticker TAN (Courtesy WinWayCharts TradingExpert Pro)

Ticker UGA

In a sure “Sign of the Times”, the Good News is that gasoline prices are at their lowest levels in year, while the Bad News is that we don’t have anywhere to drive to except the grocery store.  Figure 2 displays the chart for ticker UGA – the United States Gasoline Fund, and ETF that tracks the price of gasoline.

While attempting to “pick a bottom” is a fool’s errand, the primary point is that it is not that hard to envision the price of this ETF being significantly higher at some point in the years ahead.  Whether an investor has the fortitude to weather whatever the short-term uncertainty and the patience to see how the long-term plays out are the primary issues associated with contemplating this ticker at the moment.

Figure 2 – Ticker UGA (Courtesy WinWayCharts TradingExpert Pro)

Ticker XLE

Ticker XLE is a play on the broad (mostly fossil fuel related) energy sector.  As you can see in Figure 3, XLE has plunged to price levels not since 2004. In addition, it presently yields roughly 8.8%.  That being said, an investor has to realistically expect that dividend payments in the hard-hit energy sector will see some significant cuts as things play out in the months ahead.

With an oil price war in full swing, not to mention a sharp decline in demand for the foreseeable future due to the coronavirus pandemic, the fundamentals for this sector are unlikely to improve soon.  Nevertheless, the reality is that – at least for the time being – the world runs on crude oil.  As a result, the current price range may one day be looked back upon as a once-in-a-generation buying opportunity.

Figure 3 – XLE (Courtesy ProfitSource by HUBB)

Ticker PAGP

OK, let’s throw in one obscure, totally speculative – yet fundamentally intriguing – thought for consideration.  Ticker PAGP (Plains GP Holdings, L.P.).  Here is what they do (straight from their website):

“Plains engages in the transportation, storage, terminalling, and marketing of crude oil and refined products, as well as in the storage of natural gas, and the processing, transportation, fractionation, storage, and marketing of natural gas liquids.

Assets include:

*17,965 miles of active crude oil and NGL pipelines and gathering systems (emphasis mine as these things will continue to function as long as crude and NG need to be moved – which they do)

*50 barges and 20 transport tugs

*109 million barrels of storage capacity

*1,600+ trucks and trailers

*9,100 rail cars”

The bottom line is that as long as crude oil and natural gas needs to be moved, PAGP has a niche in which to operate.  For the record, at $6.35 a share the stock’s present dividend comes to a yield of 22.7%.  Certainly, the prospect of a significant dividend cut is a Signiant risk associated with this stock.  But for the moment anyway the price is near an all-time low and the dividend yield is attractive.

Figure 4 – Ticker PAGP (Courtesy ProfitSource by HUBB)

Summary

As allows, DO NOT look upon what I have written as “recommendations.”  Particularly in the current environment.  They are simply “food for thought.”

Given current fundamentals:

*An ongoing oil price war (making drilling and refining unprofitable for many companies)

*An economy on shutdown (which cripples demand)

*An existential struggle between “green” energy and “traditional” fossil fuel-based sources (which creates uncertainty about future expectations)

All combine to make the energy sector a giant question mark at the present time.  But if the old adage that the time to buy is when there is “blood in the streets”, than investors might be well served in the long run to start thinking now about how much capital they might be willing to commit to energy, and what type of catalyst might prompt them to actually “take the plunge.”

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 does not represent 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.

HiLo Indicator Nears an Important Point

The old adage is that we should “buy when there is blood in the streets.”  It basically means to buy when things look their worst.  Well, for the record I am not actually a fan of this intonation. While it is probably a fair statement, I for one prefer to see some sign of hope – some sign of a trend reversal at the very least – before taking the plunge.

One historically useful indicator suggests we may be nearing that point.

I refer to this indicator as JKHiLo.  I included my initials in the acronym because I “developed” it.  OK, all I really did was take one guy’s useful indicator and multiply it by another guy’s useful indicator and voila.

In a nutshell JKHilo multiplies Norman Fosback’s HiLo Logic Index by Gerald Appel’s High/Low Indicator.

The Fosback HiLo Logic Index (FHLLI)

I wrote two articles here and here about this indicator.  In short, a very low number of stocks making new lows is bullish for the stock market – it indicates that stocks overall are going up and is bullish.  At the same time, a very low number of stocks making new highs is also (typically) ultimately bullish going forward, as it tends to signal a “washed out” market.

So this indicator:

*takes the lower of new highs and new lows each day

*divides that number by the total number of issues trades

*takes a 10-day moving average of daily readings

Specifically, the Fosback HiLo Logic Index (HLLI) is calculated as follows:

A=Daily Nasdaq New Highs

B=Daily Nasdaq New Lows

C=The lower of A and B

D=The total number of Nasdaq issues traded

E = (C / D) * 100

FHLLI = 10-day average of E

Readings above 2.15% are considered a sign of “churning”, i.e., a lot of new highs AND new lows.  Reading below 0.40% are considered “bullish” because either new highs OR new lows is very low.

The Fosback HiLo Logic Index finally dropped below 0.40% on 3/23/20.  Figure 1 displays the OTC Composite Index with this indicator through 12/31/2019.

Figure 1 – Fosback HiLo Logic Index

The Appel High/Low Indicator

This indicator (heretofore AHLI) is more of a trend-following indicator.  It simply divides the number of new highs each day by the total of new highs AND new lows, then takes a 10-day average.

The AHLI is calculated as follows:

A=Daily Nasdaq New Highs

B=Daily Nasdaq New Lows

C = A / (A+B)

AHLI = 10-day average of C

Figure 2 displays this indicator versus the OTC Composite from 12/29/17 through 3/23/20.

Figure 2 – Appel High/Low Indicator (x100; blue line) with OTC Composite (/100; red line); Dec17 through 3/23/20

Extremely low readings tend to highlight oversold market conditions.  For the record, an actual “buy signal” for this indicator occurs when it drops below 0.20 (or 20 in Figure 3 since the blue line is the indicator x 100) and then rises back above that level.

The JK Hilo Index (JKHiLo)

So then one day some young punk comes along and multiplies the Fosback indicator by the Appel indicator and has the audacity to add his own initials.  Some people. Anyway:

JKHiLo = (FHLLI x AHLI) x 500

A “12-month Buy Signal” occurs when this indicator:

*drops below 5.00

*then turns higher for one day

The first part of this signal has happened.  As of the close on 3/23/20 JKHL has plunged to 1.8.

Let’s look at previous instances when JKHL fell below 5.00 and then ticked higher for one day.

IMPORTANT: This upside reversal technically constitutes a “12-month buy signal”.  What does that mean?  It means:

*We expect the market to be higher 12-months later

*HOWEVER, it is NOT an “All Clear, Everything is Great, You Can’t Lose” signal

The bottom line is that it typically does NOT mark the actually bottom.  In most cases, another new low or at least a retest of the low follows within a few months.  But not always.

Figure 3 displays the 7 buy signals that have occurred since 1990.

A = Date of signal – i.e., date the JKHL indicator ticked up one day after dropping below 5

B = SPX closing price on date of signal

C = Subsequent low closing price for SPX

D = SPX closing price 12 months after signal date

E = # of trading days between date of signal and ultimate low

F = % decline by SPX from date of signal to ultimate low

G = % change in SPX closing price 1 year after date of signal

Figure 3 – JKHL 12-month buy signals

It is important to note that each previous “buy signal” was followed by further downside price movement prior to the ultimate low.  It ranged from 2 trading days in 2018 to 101 trading days in 2008.  6 of the 7 signals saw a further decline of no more than -6.3%.  But the 2008 signal saw the market continue to plunge another -31% of the following 3+ months.

So, like I said earlier, even when this indicator does turn up and generate a new signal, that DOES NOT mean “All Clear”.  Still, to get an idea of what we might expect, each of the previous signals are displayed in the Figures below.

Figure 4 – 1990 signal (-3.4% to low, +25.6% 12 months later)
(Courtesy WinWayCharts TradingExpert)

Figure 5 – 1998 signal (-6.3% to low, +31.3% 12 months later)
(Courtesy WinWayCharts TradingExpert)

Figure 6 – 2002 signal (-4.1% to low, +24.3% 12 months later)
(Courtesy WinWayCharts TradingExpert)

Figure 7 – 2008 signal (-31.3% to low, +10.7% 12 months later)
(Courtesy WinWayCharts TradingExpert)

Figure 8 – 2011 signal (-0.5% to low, +25.4% 12 months later)
(Courtesy WinWayCharts TradingExpert)

Figure 9 – 2016 signal (-4.1% to low, +19.1% 12 months later)
(Courtesy WinWayCharts TradingExpert)

Figure 10 – 2018 signal (-2.4% to low, +28.9% 12 months later)
(Courtesy WinWayCharts TradingExpert)

We DO NOT have a new signal yet, but JKHiLo is below 5, so it is just a matter of waiting for the daily value to tick higher for one day (and then – if history is a guide – waiting for the ultimate low to be put in before a subsequent rally).

Figure 11 – As of 3/23/20(Courtesy WinWayCharts TradingExpert)

Summary

Are we on the cusp of a new opportunity?  Or on the edge of a cliff?  In this time of unprecedented uncertainty, I can’t pretend to know the answer.  So, I rely on objective indicators to guide me.

At this moment in time the “trend-following” indicators are bearish and so caution is undoubtedly in order.  But other indicators such as the one discussed here remind us to remain alert to new opportunities.

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 does not represent 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.

Houston, We Have a Parabola

Everybody likes it when an asset that they hold goes up in price.  In fact, the more the better.  But only to a point as it turns out.  When price gets carried away to the upside – we trader types typically refer to it as a “going parabolic”, i.e., a situation when prices are essentially rising straight up – it almost invariably ends very badly.  We have seen a couple of examples recently.

Palladium

Palladium is a metal that according to Bloomberg’s “About 85% of palladium ends up in the exhaust systems in cars, where it helps turn toxic pollutants into less-harmful carbon dioxide and water vapor. It is also used in electronics, dentistry, medicine, hydrogen purification, chemical applications, groundwater treatment, and jewelry. Palladium is a key component of fuel cells, which react hydrogen with oxygen to produce electricity, heat, and water.”

And it was pretty hot stuff for some time.  At least until it wasn’t.  As a proxy we will look at the ETF ticker symbol PALL, which attempts to track the price of palladium.

*From January 2016 into January 2018, PALL rose +139%

*In the next 7 months it declined by -26%

*And then the fun really began – Between August 2018 and February 2020 PALL rose +245%, with a +110% gain occurring in the final 5+ months of the advance

What a time it was.  Until it wasn’t anymore.

Since peaking at $273.16 a share on 2/27/2020, PALL plunged -50% in just 12 trading days.  To put it another way, it gave back an entire year’s worth of gains in just 12 trading days.

Was there any way to see this coming?  Maybe. In Figure 1 we see a monthly chart with an indicator called “RSI32” in the bottom clip.  This indicator is derived by taking the 2-month average of the standard 3-month Relative Strength Index (RSI).

Figure 1 – PALL with RSI32 (Courtesy WinWayCharts TradingExpert)

Notice that historically when the RSI32 indicator gets above 96, trouble tends to follow pretty quickly.  See Figure 2

Figure 2 – PALL: Peaks in RSI32 and the subsequent maximum drawdown (Courtesy WinWayCharts TradingExpert)

T-Bonds

During the panic sell-off in the stock market in recent weeks, treasury bonds became very popular as a “safe haven” as investors piled out of stocks and into the “safety” of U.S. Treasuries.  What too many investors appeared to forget in their haste was that long-term treasury can be extremely volatile (for the record, short and intermediate term treasuries are much less volatile than long-term bonds and are much better suited to act as a safe haven).  Likewise – just an opinion – buying a 30-year bond paying 1% per year is not entirely unlike buying a stock index fund when the market P/E Ratio is over 30 – there just isn’t a lot of underlying value there. So you are essentially betting on a continuation of the current trend and NOT on the ultimate realization of the underlying value – because there really isn’t any.

Anyway, Figure 3 displays a monthly chart of ticker TLT – an ETF that tracks the long-term treasury – with the RSI32 indicator in the bottom clip.

Figure 3 – TLT with RSI32 (Courtesy WinWayCharts TradingExpert)

Bond price movement is typically not as extreme and volatile as Palladium, so for bonds a RSI32 reading above 80 typically indicates that potential trouble may lie ahead.

As of the close of 3/17/20, TLT was almost -15% off of its high in just 6 trading days. We’ll see where it goes from here.

Tesla (Ticker TSLA)

Anytime you see what is essentially a manufacturing company – no matter how “hot”, “hip”, or “cool” the product they build – go up 200% in 2 months’ time, the proper response is NOT giddy delight.  The proper response is:

*If you DO own the stock, either set a trailing stop or take some profits immediately and set a trailing stop for the rest

*If you DO NOT own the stock, DO NOT allow yourself to get sucked in

Take TSLA in Figure 4 for instance. By February 2020 TSLA was up almost 200% in 2 months and almost 450% in 8 months.  The RSI32 indicator was above 96 – a stark warning sign.

19 trading days after making its closing high, TSLA is down -59%.

Figure 4 – TSLA with RSI32 (Courtesy WinWayCharts TradingExpert)

Summary

Simply remember this.  Parabolic price moves are:

*Exciting while they are unfolding

*Disastrous when they end

Typically, the security in question gives back months – or in some case, years – worth of gains in a shockingly short period of time.

Beware the parabola.

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 does not represent 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.

Please Take a Moment to Locate the Nearest Exit (Part II)

To put this piece in context please refer to Part I here.

Part I detailed the Good News (the stock market is still very much in a bullish trend and may very well continue to be for some time) and touched on one piece of Bad News (the market is overvalued on a long-term valuation basis).

The Next Piece of Bad News: The “Early Lull”

In my book, Seasonal Stock Market Trends, I wrote about something called the Decennial Pattern, that highlights the action of the stock market in a “typical” decade.

The Four Parts of the “Typical Decade” are:

The Early Lull: Market often struggles in first 2.5 years of a decade

The Mid-Decade Rally: Market typically rallies in the middle of a decade – particularly between Oct 1 Year “4” and Mar 31 Year “6”

The 7-8 Decline: Market often experiences a sharp decline somewhere in the Year “7” to Year “8” period

The Late Rally: Market often rallies strongly into the end of the decade.

Figure 1 – 1980-1989 (Courtesy WinWayCharts TradingExpert)

Figure 2 – 1990-1999 (Courtesy WinWayCharts TradingExpert)

Figure 3 – 2000-2009 (Courtesy WinWayCharts TradingExpert)

Figure 4 – 2010-2019 (Courtesy WinWayCharts TradingExpert)

We are now in the “Early Lull” period.  This in no way “guarantees” trouble in the stock market in the next two years.  But it does offer a strong “suggestion”, particularly when we focus only on decades since 1900 that started with an Election Year (which is where we are now) – 1900, 1920, 1940, 1960, 1980, 2000.

(See this article for a more detailed discussion)

As you can see in Figures 5 and 6, each of these 6 2.5-year decade opening periods witnessed a market decline – -14% on average and -63% cumulative.  Once again, no guarantee that 2020 into mid 2022 will show weakness, but….. the warning sign is there

Figure 5 – Dow price performance first 2.5 years of decades that open with a Presidential Election Year (1900-present)

Figure 6 – Cumulative Dow price performance first 2.5 years of decades that open with a Presidential Election Year (1900-present)

Summary

Repeating now: the trend of the stock market is presently “Up”.

Therefore:

*The most prudent thing to do today is to avoid all of the “news generated” worry and angst and enjoy the trend.

*The second most prudent thing to do is to acknowledge that this up trend will NOT last forever, and to prepare – at least mentally – for what you will do when that eventuality transpires, i.e., take a moment to locate the nearest exit.

Stay tuned for Part III

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 does not represent 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.

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