Sep 28, 2016 | educational newsletters, jay kaeppel, market timing
OK, I suppose I should refer to this as “my” best bear market strategy. For the record, “the” best bear market strategy is to sell short at the top and buy back at the bottom. Which reminds me, if you possess information on how to achieve this objective please feel free to pass your contact info on to me. Barring that, what follows is a pretty decent approach to dealing with bear markets.
Also, I will grant you that this is not the most “timely” article in the world, since we are not technically now in a bear market. Still it never hurts to “be prepared”, so I want to highlight one approach to trading a bear market.
First the bad news: this method involves a fair amount of trading – at least two trades a month to be specific. While this may not be everyone’s cup of tea, ultimately – using here the ubiquitous, annoying and yet highly appropriate phrase for our times – “It is what it is.”
- The Dow versus its 200-day moving average
- Specific trading days of the month
- Market Holidays
Dow versus 200-day moving average
For our purposes we will designate the stock market as being in a bear market when the Dow Jones Industrials Average is below its 200-day moving average. To sum it up as succinctly as possible:
Dow > 200-day moving average = GOOD
Dow < 200-day moving average = BAD
One important note: For trading purposes I use a one-day lag when a crossover occurs. If the Dow closes above the 200-day MA on Monday and then closes below it on Tuesday, then in theory the market turns bearish at the close on Tuesday. However, for actual trading purposes it is pretty tough to get a trade off at the close on Tuesday when you don’t know for sure that you should until…the close on Tuesday.
So for the record, for our purposes a “bearish” period begins at the close on the day afterthe Dow first closes below its 200-day moving average. Likewise, the bearish period ends at the close one trading day after the Dow closes back above its 200-day moving average.
When our 200-day moving average indicator above is “bearish” we designate the following trading days of the month as “bullish”
*The last 4 trading days of the month and the first 3 trading days of the next month
*Trading days #9, 10, 11 and 12
In other words, when the Dow is below its 200-day moving average we want to be long the stock market on these days
In addition to the trading days listed above, when our 200-day moving average indicator above is “bearish” we also want to be long the stock market on the 3 trading days before and the 3 trading days after each stock market holiday (New Years, Martin Luther King Day, President’s Day, etc.)
So what does all of this do for us? The results appear in Figure 1 below. To review, these results measure the growth of $1,000 invested in the Dow Jones Industrials Average only when:
*The Dow is below its 200-day moving average (with a 1-day lag following the crossover before a bearish period begins or ends)
*Today is within 3 trading days before or after a market holiday OR today is one of the last 4 trading days of the months, one of the first 3 trading days of the month or falls within trading days #9 through 12.
The blue line depicts the growth using Jay’s Bear Market Method. The red line depicts the growth from buying and holding the Dow Industrials Average while our 200-day moving average indicator is “bearish.”
Figure 1 – Growth of $1,000 invested in Dow using Jay’s Bear Market Method (blue line) versus $1,000 invested in Dow on all days when the Dow is below its 200-day moving average* (red line); 12/31/1938-9/26/2016
* – using a 1-day lag for crossovers
For the record, since 12/31/1938:
*$1,000 invested in the Dow only when the trend is “bearish” (i.e., below the 200-day moving average with a 1-day lag on crossovers) grew to $1,675 (or+67%)
*$1,000 invested in the Dow only when Jay’s Bear Market Method is bullish grew to $22,542 (or +2,154%). Now that’s what I call “making the best of a bad situation”.
Figure 2 displays the performance of the Dow during the “Worst of the Worst” trading days. In this scenario:
*The Dow is below its 200-day moving average (again with a 1-day lag for crossovers)
*Today is NOT one of the trading days of the month listed above and is NOT within 3 trading days of a market holiday.
Figure 2 – Growth of $1,000 invested in Dow when Dow is below 200-day moving average AND today is NOT one of the favorable trading days listed above; 12/31/1938-9/26/2016
For the record, $1,000 invested in the Dow ONLY on these “Worst of the Worst” trading days by -88% to $114 since 1938. Now that’s what I call a bear market.
Sep 2, 2016 | educational newsletters, ETFs, jay kaeppel, seasonal
Recently Jay Kaeppel of Jay On The Markets posted an update on the Seasonal Bonds Strategy using TMF. The gist of the strategy is straightforward, “Long TMF on the last 5 day of each month”
I’ve posted the article below.
Here’s a seasonal chart of the last 3 years with the average of the 3 years (black line). I colored the last 5 trading days of the average line in yellow to see what Jay was referring to. 8 of the 12 months were positive, 2 flat and 2 negative. Looks pretty good. At the bottom of the page you can see the returns this strategy yields.
BTW this Chart type, known as a seasonality chart will be included in the next AIQ TradingExpert Pro release this fall (OK marketing bit over)
So of course the bond market
rewarded my “brilliance” with a swift kick in the you know where in the months of March and April 2015 and especially in August 2015.
This would typically be enough to cause many people to go, “Well that guy’s and idiot” and to move on. But fortunately in this case, the market is a marathon and not a sprint.
Update
Figure 1 displays the results generated by:
*Holding long 1 t-bond futures contract ONLY for the last 5 days of each month since 12/30/1983
*Holding long 1 t-bond futures contract during all other days since 12/30/1983
Figure 1 – Long 1 t-bond futures contract ONLY during last 5 trading days of month (blue) versus long 1 t-bond futures contract on all other days (red); 12/31/1983-8/12/2016
The results sort of speak for themselves.
After I wrote about my aggressive TMF strategy, TMF (of course)
got hit very hard (as triple leveraged ETFs will do from time to time, hence the use of the words “aggressive” and “risky”), in March 2015 (-4.5%), April 2015 (-5.3%) and especially in August 2015 (-11.5%).
Still, as you can see in Figure 2, things have rebounded nicely since (hmmm, maybe I should be worried).
Figure 2– Growth of $1,000 Long ETF ticker TMF ONLY during last 5 trading days of month (blue) versus long TMF all other days; (red); 12/9/2009-8/12/2016
So far the “Long TMF on the last 5 day of each month” strategy is up +31.8% for the year in 2016.
| Year |
Last 5 TDM Long TMF |
| 2009* |
+12.9% |
| 2010 |
+33.4% |
| 2011 |
+15.2% |
| 2012 |
+35.7% |
| 2013 |
+6.7% |
| 2014 |
+45.7% |
| 2015 |
+6.8% |
| 2016** |
+31.8% |
*-Starting 4/16/2009 when TMF started trading
**-Through 8/12/2016
Summary
So did this odd little strategy “weather the storm” and “take the market’s best shot” in 2015 and now it is “smooth sailing”? Probably not. Make no mistake – this is a strategy that entails a great deal of risk. Still, for aggressive traders looking for an “edge”, it might be worth a closer look.
Jay Kaeppel
Aug 23, 2016 | educational newsletters, jay kaeppel, seasonal, trading strategy
Some days are just better than others – am I right or am I right? As a corollary, some days are worse than others. Wouldn’t it be nice to know in advance which days were going to be which?
Well, when it comes to the stock market, maybe you can.
The 3 Days to Miss
For our purposes we will refer to the very last trading day of the month as TDM -1. The day before that will be TDM -2, the one before that TDM -3, etc. Now let’s focus specifically on TDMs -7, -6 and -5.
Let’s now assume that we will buy and hold the Dow Jones Industrials Average every day of every month EXCEPT for those three days – i.e., we will sell at the close of TDM -8 every single month and buy back in 3 days later. We will refer to this as Jay’s -765 Method. Granted some may not be comfortable trading this often, but before dismissing the idea please consider the results.
Figure 1 displays the growth of $1,000 invested in the Dow as described above versus the growth of $1,000 from buying and holding the Dow.
*The starting date for this test is 12/1/1933.
*For this test no interest is assumed on the 3 days a month spent out of the market.
Figure 1 – Growth of $1,000 invested in Dow Industrials during all days EXCEPT TDM -7,TDM -6 and TDM -5 (blue line) versus $1,000 invested in Dow Industrials using buy-and-hold (red line); 12/1/1933-8/15/2016
For the record:
*Jay’s -765 Method gained +94,190%
*The Dow buy-and-hold gained +18,745%
While these results are compelling, the real “Wow” comes from looking at would have happened if you had been long the Dow ONLY on TDMs -7,-6 and -5 every month since 1933. These results appear in Figure 2 (but you’d better brace yourself before taking a glance).
Figure 2 – Growth of $1,000 invested in the Dow ONLY on the 7th to last, 6th to last and 5th to last trading days of every month since 12/1/1933
The net result is an almost unrelenting 83 year decline of -80%.
Summary
I would guess that some readers would like me to offer a detailed and logical reason as to why this works. Unfortunately, I will have to go with my stock answer of “It beats me.” Of course, as a proud graduate of “The School of Whatever Works” (Team Cheer: “Whatever!”) I am not as interested in the “Why” of things as I am the “How Much.”
Sorry, it’s just my nature.
Jay Kaeppel
Jul 29, 2016 | educational newsletters, ETFs, jay kaeppel, trading strategy
It pains me to say that I don’t know where the stock market is going next. You would think that after being in the markets for so long and following a bunch of indicators and systems etc., that by now I would have developed some ability to divine what is coming next.
Alas, I have not.
But I do know three things:
*My trend-following stuff is bullish so I need to give the bullish case the benefit of the doubt (no matter how nervous or cynical I may be).
*Based on a variety of indicators the market is certainly getting overbought
So, a thought today for those who might be wishing to hedge away some of their market risk.
Ticker TZA
Ticker TZA is not necessarily one of my favorites. It is an ETF that tracks 3 times the inverse of the Russell 2000 small-cap index. In other words, if ticker RUT falls 1% today then TZA should rise 3%. There are two primary concerns to keep in mind before considering buying shares of TZA are:
*The shares are extremely volatile
*The shares have experienced a serious downside bias – even when RUT is headed sideways (See Figure 1).
Figure 1 – Ticker TZA (black bars) versus Ticker RUT (Russell 2000) (Courtesy
AIQ TradingExpert)
So if you are going to buy TZA you’d better pick your spots. As I discussed here we are entering an “interesting” time for the market. So let’s explore the possibility of buying a call option on ticker TZA as a hedge against a potential market decline.
Call Option on TZA
Remember, TZA should increase in value if the Russell 2000 declines. Therefore, a call option on TZA should also increase in value if the Russell 2000 declines.
As you can see in Figure 2, the “implied volatility” (which generally tells you whether there is a lot of time premium built into the price of the options for a given security) for options on TZA is near the low end of the historical range. This tells us that there is relatively little time premium built into TZA options, therefore they are “cheap”.
Figure 2 – Implied option volatility for options on TA near the low end of the historical range (Courtesy
www.OptionsAnalysis.com)
Next I ran the “Percent to Double” routine in
www.OptionsAnalysis.com (see output in Figure 3. The phrase “percent to double” tells us what percentage the underlying stock must rise in order for the call option to double in price.
Figure 3 – Percent to Double routine suggests buying Sep30 TZA call which will double in price if TZA rises 12.56% (i.e., if RUT declines by roughly -4.19%) (Courtesy
www.OptionsAnalysis.com)
Figures 4 and 5 display the particulars and risk curves for buying 10 TZA Sep 30 calls.
A few things to note:
*The cost to buy 10 is $2,550.
*TZA is trading at $30.25/share.
*The breakeven price for this trade is $32.25 (if TZA is below $32.25 at expiration and we still hold this position then we will lose -$2,250)
*There are 50 days left until September expiration
*The trade has unlimited profit potential
Regarding potential, in Figure 6 we see that if TZA rallies back to its June low of $33.77 this trade will generate a profit of between $1,500 and $2,400 depending on how soon that price is reached
Summary
Is this a good trade? I can’t say for sure that it is. In fact, the only way this trade makes money is if the broader market suffers a hit, so a good part of me would prefer to see this trade “not work out”.
But the point of all of this is simply to point out that it is possible to hedge against a significant market decline by buying call options on an inverse leveraged ETF.
Mr. Market, you take it from here.
Jay Kaeppel
Jul 28, 2016 | educational newsletters, jay kaeppel, seasonal
We are entering an “interesting” time of year for investors (Unfortunately, that’s “Interesting” as in the ancient Chinese curse stating “May you live in interesting times”).
Now I personally I have no idea if the stock market is going to break out to the upside and rally to further new highs or if this latest lull will be followed by a painful reversal of fortune. I am willing to play the long side as long as things are holding up/moving in the right direction. But investors should be aware that the August/September timeframe is the “Danger Zone” for the stock market historically.
August/September Historically
Figure 1 speaks for itself. The chart displays the growth of $1000 invested in the Dow Jones Industrials Average only during the months of August and September every year starting in1934.
Figure 1 – Growth of $1,000 invested in Dow Jones Industrials Average (using price data only) ONLY during August and September; 12/31/1933-present
Two key takeaways:
*The net result has been a loss of -53% or the past 82 year. Not exactly the kind of returns most of us are looking for.
HOWEVER
*Despite the negative net results, the fact is that the Aug/Sep period has showed a gain more often (45 times) than not (37 times).
So while caution appears to be in order, no one should assume that the next two months are doomed to show a loss.
Stocks versus Bonds
Figure 2 compares the performance of:
Ticker VFINX – Vanguard S&P 500 Index fund
*Ticker VFIIX – Vanguard Mortgage Bond Fund
(*VFIIX is used as a proxy for intermediate-term treasuries as it has a high correlation to IT treasuries and a longer data history. Any short-to-intermediate term treasury fund or ETF would likely produce similar results)
The test starts in 1980 (when VFIIX started trading) and shows the total return for buying and holding each fund ONLY during the months of August and September each year since.
Figure 2 – Growth of $1,000 invested in VFINX (stocks; blue line) versus VFIIX (bonds; red line); August 1980 to present
Summary
So what will it be this year? A breakout to new highs? Or something much worse? I wish I could tell you the answer. But at least now you have some information to help guide your “speculative” versus “conservative” instincts in the months ahead.
Jay Kaeppel
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