Apr 13, 2018 | educational newsletters, ETFs, jay kaeppel
If you have read any of my pieces lately you are already aware that as it relates to the financial markets a lot of things are presently at a critical juncture (including my sanity, but I digress). Today let’s add the U.S. Dollar to that seemingly ever longer list of financial areas that appear to be at a crossroads. And this one has some large implications simply because a lot of other markets are affected at least to some extent by what happens in the dollar.
Figure 1 displays the Spot U.S. Dollar on a monthly basis.
The reality is that there is no one definitive price at which to draw a “definitive” line in the sand. So I arbitrarily picked two. There is nothing “magical” about these two lines and a move above or below either does not technically “prove” anything. Still, as far as this range goes, a lot of previous price moves have “gone here to die” so to speak.
Now this is the point in the article where a skilled analyst would explain in painstaking detail why the dollar is absolutely, positively destined to move higher (or lower) from here. Sorry, folks I honestly don’t know. But there are two things I do know which might still prove useful:
1) For every prognosticator out there pounding the table that the dollar is sure to move higher there is another (equally slightly crazed) prognosticator averring that the dollar is destined to decline. And the key thing to note is that they both can make a pretty compelling case.
2) A lot rides on which way the dollar goes from here, because there is no shortage of markets that react – at least in part – to the movements of the U.S. dollar. This means that alot of trading opportunities will be affected/created by the next big move from the dollar.
A few examples appear in Figure 2 below which displays the inverse nature of the correlation between the U.S. Dollar (using ticker UUP as a proxy) and the market in question (for the record, a figure of 1000 means the market moves exactly like the dollar and a figure of -1000 means the market moves exactly inversely to the dollar).
Now the fact that foreign currencies (ticker FXE – which tracks the Euro) move inversely to the U.S. Dollar is fairly obvious. But note that on this list are:
*Foreign Bonds and U.S. Bonds (BWX and TLT)
*Precious Metals (GLD and SLV)
*Commodities (like coffee, soybeans and crude oil)
*Broad Commodity Indexes (DBC and GSG)
This encompasses a pretty darn wide swath of the trading world. And every single one of them will be influenced to some extent by which way the dollar goes from here.
As you can see in Figures 3 through 6 (click to enlarge any of the charts), what happens to the U.S. Dollar can matter a lot to what happens in these markets.
So the bottom line is that I do not know which way the dollar goes from here. But I do know that whichever way it goes a lot of “things” will likely go “the other way.” And everything listed in Figure 2 represents a lot of trading opportunities.
This represents a good time to invoke:
Jay’s Trading Maxim #17: (with credit given to George and Tom at Optionetics back in the day): Investing success involves two “simple” steps. #1) Spot opportunity. #2) Exploit opportunity. Everything you do as a trader or investor falls into one of these two categories.
A bunch of opportunities may soon be spotted (assuming the dollar actually ever does get around to deciding which way it wants to go…).
So focus here, people, focus…
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.
Apr 6, 2018 | educational newsletters, jay kaeppel, market timing
There are times when the market just moves along from day-to-day and us “junkies” might hang on every move but to the average investor what happens today or tomorrow is really not all that meaningful in the whole big spectrum of things.
And then there are times like now. As you can see in Figure 1, the major market indexes are struggling and are testing their respective 200-day moving averages. How this “dance” plays out may have important implications for virtually all stock market investors.
First off let me say this: There is nothing “magic” about a 200-day moving average. It was interesting that the other day when the S&P 500 Index closed below its 200-day average (it was the only major index to do so) roughly 22,367 articles appeared on the internet sounding the alarm. Now I do pay a lot of attention to moving averages, but more to get a sense of trend than as automatic buy and sell triggers. Which leads me to invoke:
Jay’s Trading Maxim #81: Contrary to popular belief, a price drop below a “key” moving average does NOT imply the onset of immediate and total Armageddon.
Jay’s Trading Maxim #81a: Um, but it could. So best to pay attention.
Actually there are a few others but the most likely outcomes – and the implications – are:
1. A reversal back to the upside – If the major averages hold here above their recent lows. If this happens a strong rally to the upside is a strong possibility. Which is one reason it is too soon to “jump ship.”
2. A breakdown by all major indexes – If a majority of the major indexes break down below their recent lows investors are urged to take defensive measure. Whether that involves selling shares/funds/ETFs/etc or hedging with options and/or inverse products is up to each investor.
3. A whipsaw – One other dreaded possibility involves both of the above – i.e., the average break down far enough briefly to trigger a defensive action only to quickly reverse back to the upside. This often leaves a lot of investors standing there dumbstruck and unable to pull the trigger to get back in.
Like I said, this is a critical juncture. Whatever happens, investors need to pay attention and stand ready to, a) do nothing, or, b) take defensive action, or, c) take defensive action and then undo the defensive action and get bullish again (in the event of a whipsaw).
Steady, people, steady….
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.
Apr 2, 2018 | educational newsletters, indexes, indicators, jay kaeppel, stock market
A glance at the history of the Presidential Election Cycle in the stock market suggests that we should:
*Not be surprised that the stock market is foundering a bit at the moment
*Not be terribly surprised if things get worse – particularly during the months of June through September of this year
*Anticipate that if the market does take a bigger hit in the months ahead that it may well set the stage for another significant advance into the middle of the mid-term election year.
A Little Presidential Election Cycle History
For our purposes we will start the test on 12/31/1932 and define the cycle as containing the following four years:
First the Bad News: Figure 1 displays the growth of $1,000 invested in the S&P 500 Index (using monthly closing price data) ONLY from the end of January of each Mid-Term Election Year through the end of September of each Mid-Term Election Year (i.e., the latest iteration began on 1/31/2018 and will extend through 9/30/2018).
Figure 1 – Growth of $1,000 invested in S&P 500 Index ONLY from Jan31 through Sep30 of each Mid-Term Election Year (1932-2018)
As you can see, the cumulative performance for the S&P 500 Index during the Mid-Term February through September period is a fairly painful -44.3% (for the record, the cumulative gain from buying and holding the S&P 500 from 12/31/1932 through 2/28/2018 was +39,288%, so yes, this qualifies as a period of some serious under performance).
That being said, it should be noted that this Mid-Term Feb through Sep period showed a gain 12 times and a loss only 9 times. So a “rough patch” is no sure thing. The problem is that when this period is bad, it is “very bad”. As you can see in Figure 3 later, this period experienced 6 losses in excess of -17.5% (FYI, a -17.5% decline from the 1/31/2018 close of 2823.81 would see the S&P 500 Index hit 2330).
Then the Good News: On the brighter side, Figure 2 displays the growth of $1,000 invested in the S&P 500 Index (using monthly closing price data) ONLY from the end of September of each Mid-Term Election Year through the end of July of each Pre-Election Year (i.e., the latest iteration begins on 9/30/2018 and will extend through 7/31/2019).
Figure 2 – Growth of $1,000 invested in S&P 500 Index ONLY from Sep30 of each Mid-Term Election Year through Jul31 of each Pre-Election Year (1932-2018)
Notice any difference between Figures 1 and 2? This favorable period saw the S&P 500 register a gain during 20 of the past 21 completed election cycles (i.e., 95% of the time), with an average gain of +21.6%, and a cumulative gain of +3,730%.
Figure 3 displays the numerical results for each cycle.
| Mid-Term |
Pre-Election |
Mid-Term Feb through Sep |
Mid-Term Oct thru Pre-Election July |
| 1934 |
1935 |
(18.5) |
21.8 |
| 1938 |
1939 |
14.5 |
(1.6) |
| 1942 |
1943 |
0.5 |
32.0 |
| 1946 |
1947 |
(19.4) |
5.3 |
| 1950 |
1951 |
14.1 |
15.2 |
| 1954 |
1955 |
23.9 |
34.7 |
| 1958 |
1959 |
20.0 |
20.9 |
| 1962 |
1963 |
(18.3) |
22.9 |
| 1966 |
1967 |
(17.6) |
23.8 |
| 1970 |
1971 |
(0.8) |
13.4 |
| 1974 |
1975 |
(34.2) |
39.7 |
| 1978 |
1979 |
14.9 |
1.2 |
| 1982 |
1983 |
0.0 |
35.0 |
| 1986 |
1987 |
9.2 |
37.8 |
| 1990 |
1991 |
(7.0) |
26.7 |
| 1994 |
1995 |
(3.9) |
21.5 |
| 1998 |
1999 |
3.7 |
30.6 |
| 2002 |
2003 |
(27.9) |
21.5 |
| 2006 |
2007 |
4.4 |
8.9 |
| 2010 |
2011 |
6.3 |
13.2 |
| 2014 |
2015 |
10.6 |
6.7 |
Figure 3 – Unfavorable versus Favorable portions of Election Cycle
So what does it all mean? Well, it means a few things. By my objective measurements the overall trend is still “bullish” and a number of “oversold” indicators are suggesting that a bounce of some significance may be at hand. That being said, if the major market indexes do start to break down below their respective 200-day moving averages investors may be wise to take some defensive action. If the market does experience a further break between now and the end of September, it may well be “one of the painful kind.” So if you haven’t already, make your contingency plans now.
Figure 4 – Major Market Indexes with 200-day moving averages (Courtesy TradingExpert)
At the same time, as the end of September of 2018 nears – especially if the stock market has experienced or is experiencing at the time, a significant break – remember that history suggests that that will be a good time to “think bullish.”
Call me a cynic, but my guess is that alot of investors will do exactly the opposite on both counts (i.e., hang on if the market breaks down and then sell as the next bottom forms – Same it as ever was….)
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 14, 2018 | EDS, educational newsletters, ETFs, indexes, jay kaeppel
In this article I wrote about an index I follow that combines the biotech sector with the gold stock sector. I also wrote about “one way” to trade that index. This article builds on that piece and adds a new “rule” to create more trading opportunities.
The BIOGOLD Index
Figure 1 displays the index that I created using TradingExpert. It combines ticker FBIOX (Fidelity Select Biotech) with ticker FSAGX (Fidelity Select Gold).
Also included in the lower clip is an indicator referred to as RSI32, which is the 2-day average of the standard 3-day RSI.
The Old System
In the original article I tested an approach that works as follows using monthly data:
*When the RSI32 drops to 32 or below, buy BOTH FBIOX and FSAGX
*After a buy signal, sell both funds when RSI32 rises to 64 or higher
The New System
The “new rules” are as follows:
A “buy signal” occurs when either:
*The RSI32 drops to 32 or below
*The RSI32 drops below 50 (but not as low as 32) and then reverses to the upside for one month
After either of the buy signals above occurs, buy BOTH FBIOX and FSAGX
*After a buy signal, sell both funds when RSI32 rises to 64 or higher
Figure 2 displays the BIOGOLD Index with various buy and sell signals marked.
Figure 2 – Jay’s BIOGOLD Index with RSI32 signals (Courtesy
TradingExpert)To test results we will:
*Assume that after a buy signal both FBIOX and FSAGX are bought in equal amounts
*We will assume that both funds are held until RSI32 reaches 64 or higher (i.e., there is no stop-loss provision in this test)
For testing purposes we will not assume any interest earned while out of the market, in order to highlight only the performance during active buy signals. Figure 3 displays the hypothetical growth of $1,000 (using monthly total return data) using the “system”.
Figure 3 – Hypothetical Growth of $1,000 using Jay’s BIOGOLD System (1986-present)
Summary
For the record, I am not “recommending” that anyone go out and initiate trading biotech and gold based on what I have written here. Before trading using any approach it is essential for a trader to do their own homework and carefully consider all of the pro’s and con’s associated with any specific approach. For example, while the trade-by-trade results for the above look reasonably good, it should be noted that there have been 4 separate drawdown’s in excess of -19% along the way, including a maximum drawdown of -37% in 2008. In considering any approach to trading it is essential to first think long and hard about how well one would “weather the storms”, BEFORE focusing on potential profitability.
To put it more succinctly is the simple phrase “Don’t cross the river if you can’t swim the tide.”
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 24, 2018 | jay kaeppel, market timing, stock market
In the article linked below, investor and Forbes columnist Kenneth Fisher writes about what to look for at a market top (How to Tell a Bull Market from a Bear Market Blip). One piece of advice that I have heard him offer before is to wait at least 3 months after a top in price to worry about whether or not we are in a bear market. That is good advice and provided the impetus for a simple trend-following model I follow based on that “wait 3 months” idea.
First, a few key points:
*Trend-following is NOT about picking tops and bottoms or timing the market with “uncanny accuracy”. So don’t expect any trend-following system to do so.
*The primary edge in any trend-following method is simply missing as much of the major soul – and capital – crushing bear markets as possible, with the understanding that you will miss some of the upside during bull markets.
*Starting in November 1970 this system has beaten a buy and hold strategy
*This system requires no math. There are no moving averages, etc. Anyone can look at a monthly S&P 500 bar chart and generate the signals. And it literally takes less than 1 minute per month to update.
*Every trend-following method known to man experiences whipsaws, i.e., a sell signal followed by a buy signal at a higher price. This system is no exception.
*Due to said whipsaws this system has significantly underperformed the S&P 500 buy-and-hold since the low in early 2009.
For what it’s worth, my educated guess is that following the next prolonged bear market, that will change. But there are no guarantees.
OK, all the caveats in place, here goes.
Jay’s Monthly SPX Bar Chart Trend-Following System
*This system uses a monthly price bar chart for the S&P 500 (SPX) to generate trading signals.
*For the purposes of this method, no action is taken until the end of the month, even if a trend change is signaled earlier in the month.
*A buy signal occurs when during the current month, SPX exceeds its highest price for the previous 6 calendar months.
A sell signal occurs as follows:
a) SPX registers a month where the high for the month if above the high of the previous month. We will call this the “swing high”.
b) SPX then goes 3 consecutive monthly bars without exceeding the “swing high.” When this happens, note the lowest low price registered during those 3 months. We will call this price the “sell trigger price.”
c) An actual sell trigger occurs at the end of a month when SPX register a low that is below the “sell trigger price”, HOWEVER,
d) If SPX makes a new monthly high above the previous “swing high” BEFORE it registers a low below the “sell trigger price” the sell signal alert is aborted
Sounds complicated right? It’s not. Let’s illustrate on some charts.
In the charts that follow:
*An Up green arrow marks a buy signal
*A Down red arrow marks a sell signal
*A horizontal red line marks a “sell trigger price”.
Sometimes a sell trigger price is hit and is marked by a down red arrow as a sell signal. Other times a sell trigger price is aborted by SPX making a new high and negating the potential sell signal.
To demonstrate results we will use monthly close price data for SPX. If the system is bullish then the system will hold SPX for that month. If the system is bearish we will assume interest is earned at an annual rate of 1% per year.
Figure 6 displays the results of the System versus Buy and Hold starting with $1,000 starting November 1970 through 1994 (roughly 24 years).
Figure 6 – Growth of $1,000 invested using System versus Buy-and-Hold; Nov-1970 through Dec-1994
Figure 7 displays the results of the System versus Buy and Hold starting with $1,000 starting at the end of 1994 through the most recent close.
Figure 7 – Growth of $1,000 invested using System versus Buy-and-Hold; Dec-1994 through Feb-2018
Figure 8 displays the growth of $1,000 generated by holding the S&P 500 Index ONLY when the trend-following system is bearish. In Figure 8 you will see exactly what I mentioned at the outset – that the key is simply to miss some of the more severe effects of bear markets along the way.
Figure 8 – Growth of $1,000 invested ONLY when trend-following model is Bearish; 1970-2018
Finally, Figure 9 displays trade-by-trade results (using month-end price data).
Figure 9 – Trade-by-trade results; Month end price data
So is this “The World Beater, Best Thing Since Sliced Bread” system? Not at all. If you had started using this system in real time in March of 2009 chances are by now you would have abandoned it and moved on to something else, as the whip saw signals in 2011-2012 and 2016 has the System performing worse than buy and hold over a 9 year period.
But here is the thing to remember. Chances are prolonged bear markets have not been eradicated, never to occur again. 100+ years of market history demonstrates that bear markets of 12 to 36 months in duration are simply “part of the game”. And it is riding these bear markets to the depths that try investors souls – and wipe out a lot of their net worth in the process.
Chances are when the next 12 to 36 month bear market rolls around – and it will – a trend-following method similar to the one detailed here may help you to “save your sorry assets” (so to speak).
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 18, 2018 | educational newsletters, ETFs, indexes, jay kaeppel, market timing, stock market
In this article titled “World, Meet Resistance” – dated 12/21/2017 – I noted the fact that many single country ETFs and regional indexes were closing in on a serious level of potential resistance. I also laid out three potential scenarios. So what happened? A fourth scenario not among the three I wrote about (Which really pisses me off. But never mind about that right now).
As we will see in a moment what happened was:
*(Pretty much) Everything broke out above significant resistance
*Everything then reversed back below significant resistance.
World Markets in Motion
Figure 1 displays the index I follow which includes 33 single-country ETFs. As you can see, in January it broke out sharply above multi-year resistance. Just when it looked like the index was going to challenge the all-time high the markets reversed and then plunged back below the recently pierced resistance level.
(click to enlarge)
Figure 1 – Jay’s World Index broke out in January, fell back below resistance in February (Courtesy TradingExpert)
The same scenario holds true for the four regional indexes I follow – The Americas, Europe, Asia/Pacific and the Middle East – as seen in Figure 2.
(click to enlarge)
Figure 2 – Jay’s Regional Index all broke above resistance, then failed (Courtesy TradingExpert)
So where to from here? Well I could lay out a list of potential scenarios. Of course if history is a guide what will follow will be a scenario I did not include (Which really pisses me off. But never mind about that right now).
So I will simply make a subjective observation based on many years of observation. The world markets may turn the tide again and propel themselves back to the upside. But historically, when a stock, commodity or index tries to pierce a significant resistance level and then fails to follow through, it typically takes some time to rebuild a base before another retest of that resistance level unfolds.
Here’s hoping I’m wrong
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.
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