Santa Claus Is Coming to Town

Nov 14, 2013 | Uncategorized

OK I’ll admit I am a little early with this one.  But maybe not as early as you might think.  In fact, as I was out driving I saw the first house in my neighborhood to have Christmas lights up…and lit.  Hey, desperate times I guess.

While the stock market continues to push to new highs, “morale” is not quite what one might expect.  This may be due in part to the fact that it is near impossible to peruse the financial media these days and not come away with a sense of foreboding, given all of the warnings and admonitions and liberal use of word like “frothy” and “bubble.”  And make no mistake, I have voiced a few concerns recently myself and have gone so far as to suggest that investors consider hedging with VXX call options (http://jayonthemarkets.com/2013/10/30/is-vxx-issuing-a-warning/) from time to time.

Still, as a person who has been involved in the financial markets for a while I understand the power of the trend.  So despite all of my personal concerns about the economy, debt, etc., etc., 2013 has been good to “go with the flow” kind of people.   In the short-term, the stock market does appear to be a bit “overbought” and perhaps “due for a correction.”  But while anything can happen, history suggests that people who are looking for a stock market collapse before the end of the year may be disappointed.  Cue the Christmas music.

The Santa Claus Rally

As I define it, the Santa Claus rally time period:

-Begins at the close of trading on the Friday before Thanksgiving.
-Extends through the close of the third trading day of January.

And that’s all there is to it.

So how has the stock market performed during this period in the past?  I am so glad you asked.
Figure 1 displays the growth of $1,000 invested in the Dow Jones Industrials Average only during the pre-Thanksgiving through post-New Year’s period I just described, starting in November 1949.

Figure 2 displays some important figures regarding this performance.

One other thing to note is that this Santa Claus Rally time period has witnessed an advance by the Dow during 26 of the last 28 and 32 of the last 35 years.   It’s tough to the beat that kind of consistency.

Summary

So does all of this mean that “you can’t lose” trading stocks during this “sure thing” time period guaranteed to generate “above average, risk free” returns?  Ah, if only.  All any of this really means is that stocks have performed well during this time period in the past.  What will happen this year remains to be seen.

Still, the real point is that investors may be wise to give the bullish case every benefit of the doubt starting in late November.

Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://aiq.com) client

P.S.  For all of you “numbers geeks” out there, the annual performance during the Santa Claus Rally Time period appears below

Reversing the MACD: The Sequel

Nov 11, 2013 | Uncategorized

In “Reversing MACD: The Sequel” in the November 2013 issue of Stocks and Commodities, author Johnny Dough presents functions that return price values for the MACD indicators. I am providing AIQ code for the following functions based on the AmiBroker code given in Dough’s article:

• PMACDsignal returns price where the MACD crosses its signal line or where there is an MACD histogram cross of the zero line
• PMACDlevel returns price where the MACD is equal to the level value
• PMACDeq returns price where the MACD is equal to the previous bar MACD.

I created some additional rules to show reports that display the price values of the functions:

• The ShowValues rule will display all function values for stocks that are over the minPrice level input
• The NearXO rule will list only those stocks that are less than or equal to the average range percentage of crossing over of the MACD oscillator
• The PMACxup rule lists cross-ups today on the MACD oscillator using the PMACDsignal price
• The PMACxdn “if” rule lists cross-downs today on the MACD oscillator using the PMACDsignal price.

The NearXO report is useful if you want to enter a position on a buy or sell stop-on-close when the MACD oscillator crosses zero. This report sorts by the MACD oscillator. The ones with a positive MACD oscillator amounts calculate the price that would be used to go short at the close for a cross-down on the oscillator. The ones with negative MACD oscillator amounts calculate the price that would be used to go long at the close for a cross-up on the oscillator.

I ran the NearXO report on September 10, 2013 using the NASDAQ 100 list of stocks. There were 12 that showed up on the report, meaning they were near a cross-up or cross-down of the MACD oscillator.

In Figure 5, I show a chart of Qiagen NV (QGEN), which appeared on the report. The report showed that a next day’s close price of 20.72 or higher would cause the MACD oscillator to go from negative to positive. On September 11, 2013, QGEN closed at 20.98 and the MACD oscillator moves to a positive number.

The AIQ code and EDS file can be downloaded from www.TradersEdgeSystems.com/traderstips.htm.

!REVERSING MACD: THE SEQUEL
!Author: Johnny Dough, TASC November 2013
!Coded by: Richard Denning 9/9/2013
!www.TradersEdgeSystems.com
!INPUTS:
price is [close].
period_X is 12.
period_Y is 25.
period_Z is 9.
level is 0.
minPrice is 10.
rangeFactor is 1.
!PMACDsignal returns price where MACD crosses signal line
!  or MACD histogram cross of 0:
alphaX is 2 / ( 1 + period_X ).
alphaY is 2 / ( 1 + period_Y ).
alphaZ is 2 / ( 1 + period_Z ).
One_alphaX is 1 – alphaX.
One_alphaY is 1 – alphaY.
One_alphaZ is 1 – alphaZ.
MACDvalue is expavg( price, period_X ) – expavg( price, period_Y ).
MACDvalue_1 is valresult(MACDvalue,1).
MACDsignal is expavg( MACDvalue, period_Z ).
PMACDsignal is ( MACDsignal – expavg( price, period_X ) * one_alphaX
+ expavg( price, period_Y ) * one_alphaY ) / ( alphaX – alphaY ).
!PMACDlevel returns price where MACD is equal to level value
! e.g. PMACDlevel(0, C, 12, 16) would return the series
!      where next price would make MACD=0
PMACDlevel is (Level + expavg( price, period_Y ) * one_alphaY
– expavg( price, period_X )* one_alphaX ) / ( alphaX – alphaY ).
!PMACDeq returns price where MACD is equal to previous bar MACD
PMACDeq is ( expavg( price, period_X ) * alphaX
– expavg( price, period_Y )* alphaY ) / ( alphaX – alphaY ).
!ADDITIONAL CODE NOT PROVIDED BY AUTHOR:
PMACDsignal_1 is valresult(PMACDsignal,1).    !PLOT-OFFSET BY ONE DAY
MACDosc_1 is val([MACD osc],1).              !Prior day’s MACD oscillator value
!RULES FOR GENERATING REPORTS:
PMACxup if price > PMACDsignal_1
and valrule(price <= PMACDsignal_1,1) and price > minPrice.
PMACxdn if price < PMACDsignal_1
and valrule(price >= PMACDsignal_1,1) and price > minPrice.
PMACDsigPct is (PMACDsignal / [close] – 1) * 100.
AvgRangePct is simpleavg(([high]/[low]-1)*100,200).
NearXO if price > minPrice and abs(PMACDsigPct) <= AvgRangePct*rangeFactor.
ShowValues if price > minPrice.
—Richard Denning
info@TradersEdgeSystems.com
for AIQ Systems

Feel the Electricity

Nov 6, 2013 | Uncategorized

This post is more of an FYI than a specific call to action, still a reasonably good trend is a reasonably good trend.

As many investors know by now the November 1^st into May time period has historically been very good for the stock market.  One of the better performing sectors during this time period has tended to be the semiconductor/electronics sectors.  Among tickers worthy of analysis are:

-FSELX (Fidelity Select Electronics mutual fund)
-SMH (HOLDRs Semiconductor ETF)

In a nutshell, the semiconductor/electronics sectors tend to perform well between October 31^st and April 30^th.  The results for FSELX since October 1994 appear in Figure 1.

A chart of the annual growth of $1,000 appears in Figure 2.

In a nutshell:

-FSELX has been up 14 times (74%) and down 5 times (26%).
-The average gain was +18.7% and the median gain was +13.7%.
-The worst declines were -32.9% during 2000 to 2001 and -19.9% during 2007 to 2008, so remember that there is definitely risk involved

Figure 3 – Fidelity Select Electronics (Ticker FSELX) (Courtesy: AIQ TradingExpert)

Summary

Please do not read this post and think “Aha, semiconductor/electronic stocks are sure to rally.”  That is not the implication I am trying to make.  Simply remember that the “trend is your friend” and that this sector tends to perform well during this time period.  As long as these stocks act well it may be wise to give the bullish case the benefit of the doubt.

ay Kaeppel

Another BRIC in the Wall

Nov 1, 2013 | Uncategorized

A lot of U.S investors have come to realize in recent years that there are many trading opportunities outside the USA.  This creates something of a bad news, good news, bad news, good news situation.

-The bad news is that picking individual stocks is never an easy thing even if you focus only on domestic U.S. companies.  For the average investor to successfully pick and choose among individual stocks around the globe is simply too much to expect.

-The good news is that the proliferation of international ETFs – Single country funds, regional funds, global funds, etc. – has made it much easier for investors to diversify across the globe than it used to be.

-The bad news is that the proliferation of ETFs has also reached a point where choosing an international ETF is getting to be almost as confusing as choosing a phone plan.

-The good news is that there are ways to simplify and systematize things.

So let’s take a look at “one way” to play the international stocks game.

BRIC vs. SPX

BRIC refers to an index comprised of stocks from Brazil, Russia, India and China.  For the purposes of this article I will demonstrate a simple method for switching between BRIC and the S&P 500 Index.

The Vehicles:

For calculating switches I will use:

1) An index I created using AIQ TradingExpert.  I refer to it as BRICINDX and it is comprised of single-country ETF tickers EWZ (Brazil), RSX (Russia), INP (India) and FXI (China).

2) Ticker SPX (i.e., the S&P 50 Index)

For actual trading purposes there are a few choices that I will discuss a little later.

The Method:

I will use a method I learned a long time ago from David Vomund, President of Vomund Investment Management, LLC and the author of “ETF Strategies Revealed.”  The measure calculates the relative strength between two assets on a weekly basis.  When the trend of relative strength reverses in a particular direction for two consecutive weeks it signals a switch into the stronger index.

The Test:

We start our test on 10/26/01 simple because that is the first time we can get a good reading using back data.  Each week we look at the relative strength of my BRICINDX versus the S&P 500 Index (ticker SPX).  If the RSMD rises for two consecutive weeks we want to switch into the BRICINDX and if the RSMD declines for two consecutive weeks we want to switch into the S&P 500 Index.

Figure 2 displays the switches over the past several years.

When an “Up” arrow occurs in Figure 2, the system switches into BRICINDX, when a “Down” arrow occurs in Figure 2 the system switches into ticker SPY.  The results of this “System” are displayed in Figure 3.  Note the two columns at the far right:

Switch: The growth of $1,000 using the system
Split: The growth of $1,000 split evenly between BRICINDX and SPY.

Figure 4 displays the trade-by-trade result in graphical form. 

A Few Performance Notes

-An investor who had split $1,000 between BRICINDX and SPY in 2001 would now have $2,893, a gain of 189.3%

-An investor who had utilized this switching system starting with $1000 in 2001 would now have $5,900, a gain of 490%.

So you clearly see the potential long-term benefit.

-Long-term is the key phrase.  While the system clearly outperformed over time, over any trade or series of trades there is no guarantee that that will be the case.

-One other thing to note is that this particular system is allows long the stock market, either foreign or domestic.  This means that if there is a global bear market (such as 2008) this system will suffer.  Therefore, aggressive investors might consider building in some sort of market timing in order to avoid some of the downside.

 A Few Trading Notes

For actual trading purposes a trader can emulate my BRICINDEX by splitting money between the four ETFs that comprise the index.  There are other, easier alternatives including:

-Ticker VWO: Vanguard Emerging Markets ETF does not track these four funds exactly but has a correlation of roughly 97% with the BRICINDX and enjoys active trading volume.

-Ticker BKF: iShares BRIC Index Fund is the fund most closely correlated to my BRICINDX, however, trading is very thin.

-Ticker DXELX: This is the Direxion 2x leveraged Emerging Markets open end mutual fund.  The leverage creates more profit potential (with commensurate downside risk) and this is a good choice for someone who would rather trade a standard mutual fund than an ETF.

-Ticker EDC: I am leery of 3x leveraged ETFs, but someone looking to “go for the gusto”, -Direxion Emerging Markets 3x ETF offers a lot of upside potential (but also a great deal of downside risk)

 Summary

The “system” I’ve detailed here isn’t necessarily something that you should rush out and start trading right this very minute.  Still, it does illustrate a few things:

-It is possible to “beat the market” (in this case, the “market” is defined as a portfolio evenly split between foreign and domestic stock indexes) over time using a mechanical approach.

-It is possible to profit from global stock market trends without becoming an expert in Chinese stocks or Russian stocks (or whatever country’s stocks).

-Demonstrating the discipline to follow an objective approach to investing is one of the keys to long-term success.

All in all it’s just another, well, you can sing the rest of it yourself……

Is VXX Issuing a Warning?

Oct 30, 2013 | Uncategorized

They say that complacency is the enemy of the stock market.  If so, the action of ticker VXX – the exchange-traded fund designed to track the VIX Index – may be of interest. 

The indicator known as “Narrow Range 7”, or NR7 for short was first introduced by Toby Crabel some time back in the 1980’s or 1990’s.  The theory is that when the difference between today’s high price and low price for a given security is the smallest it’s been over the past 7 trading days, that security is said to be “contracting” or “compressing.”  The theory goes that – just as ying follows yang – once the compression is over there should be an “expansion”, – i.e., a meaningful price movement.

Now this is not always necessarily the case – i.e., a security can remain mired in a range for a good long while.  In addition, a simple NR7 gives no indication on its own as to whether the ensuing price expansion will be to the upside or to the downside.    Still, please note the chart in Figure 1.  This extreme compression DOES NOT guarantee or even imply that the stock market is about to decline.  But it sure does seem to signal a whole lot of complacency among investors. 

In all candor I am not entirely sure what this means.  My gut tells me that following the whole “shutdown/debt limit” crisis, and with QE2IB (Quantitative Easing to Infinity and Beyond) set to feed liquidity to the market until the end of time, it is pretty much assumed that the stock market has nowhere to go but higher.

Complicating this for me personally is that most of my indicators are bullish, so I am not inclined to pound the table and shout “the end is near!” (although it is kind of fun to see the looks on people’s faces when I do it just for fun.)

Still, it is not a stretch to think that we could be setting up for a nasty surprise in the near-term (i.e., sometime in the next several weeks) which would certainly surprise the heck out of most investors.   People who are inclined to hedge might consider buying VXX December 13 strike price call options (as I write, it is $99 for a 1-lot, with the futures suggesting that stock indexes will open higher, i.e., that VXX will open lower).  

 
 
                                     Figure 2 – VXX December 13 call (Courtesy: ww.OptionsAnalysis.com)

Summary

Everything – trend-following, seasonal, liquidity – seems to point to a bullish trend in the stock market.  And I am not one to stand in the way.  But historically when everything “looks good” for the stock market, one of two things happens:  Either the stock market:

a)  trends higher based on the bullish confluence of indicators, or,
b) the market surprises the daylights out of the majority with a nasty surprise.

$99 to insure against b seems like a reasonable price to pay.

When to Own Retailing Stocks

Oct 25, 2013 | Uncategorized

I am a fan of “simple” strategies.  For the record, yes, I have multiplied the standard deviation of the regression line times the implied volatility of the 90+ day options in order to, in order to, um, well, I seem to recall that there was a really important reason why I did it at the time.  Or so it seemed.  Still, I am reminded of:

Jay’s Trading Maxim #316: When it comes to analyzing markets and indicators, multiplying (or dividing) two numbers just “because you can”, is not necessarily helpful.

So again, I generally try to keep things simple.  Which is great, because the idea in this piece is something I first discovered in the 1990’s, and “trading systems” (such as it is, in this case) don’t get much simpler.  So here goes.

When to Own Retailing Stocks

The “system” I discovered in the 1990’s for retailing stocks works like this:

-Buy and hold retailing stocks during the months of February, March, October and November.
That’s it. 

As with most things in life there is some good news and some bad news.  Let’s start with the bad news.  Like a lot of things, this “system” got crushed during the 2008 meltdown, suffering a -48% drawdown.  

For those of you who are about to stop reading because of that last figure, just let me say DO NOT STOP READING!

The good news is that despite being fully invested in retailing stocks during the worst meltdown in modern history, the system has since soared to much higher new highs and has outperformed a buy and hold approach by 40% (+791% for the system vs. +562% for buy and hold) since December 1989.

What this means in a nutshell is that if you held retailing stocks only during all eight of the other months every year since 1990, you would actually have lost about -26%.  This dichotomy of performance would not seem evident from a cursory glance at Figure 1.

Figure 2 displays the growth of $1,000 invested in Fidelity Select Retailing fund (ticker FRSPX) only during the months of February, March, October and November, starting in December 1989.

Figure 4 displays the performance of FSRPX during the four “favorable” months (i.e., the “system”) versus the performance of FSRPX during all other months (i.e., the “Anti System”) on an annual basis.  The results are fairly striking

A few things to note:

-The System has showed a gain 21 out of 24 years.
-The Anti System showed a gain in only 11 years.
-The System outperformed the Anti System 75% of the time.
-The System showed a net gain of +794%.
-The Anti System showed a net loss of -30%.

Summary

Obviously during some years retailing stocks will rally outside of our four “favorable” months (for example, this year).  But the long-term results suggest that investors would do well to focus on retailing stocks during February, March, October and November.

A Note for Option Traders

One less expensive way to make this play is to buy a deep-in-the-money call option on ticker XRT (SPDR Retail ETF).  Here is an example:

-On 9/30/2013 a trader could have purchased 400 shares of XRT at $82.01 a share.  The cost of this trade would be $32,804.  The net delta of this position is 400.

-An option trader could have bought 5 December XRT 76 call option at $6.90.  The cost of this trade would be $3,450.  This option has a delta of 81.29, so buying 5 contracts yields a net delta of 401.26.  In other words, this position will behave just like the stock position, but at a fraction of the cost  ($3,450 versus $32,804). 

  Figure 6 –XRT December 76 call option as a replacement for stock shares (Courtesy: www.OptionsAnalysis.com)

As this is written:

-400 XRT shares are up 2% on an investment of $32,804 since 9/30.

-5 XRT December 76 calls options are up 13% on an investment of $3,450 since 9/30.

Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://aiq.com) client

 

http://jayonthemarkets.com/

Jay has published four books on futures, option and stock trading. He was Head Trader for a CTA from 1995 through 2003. As a computer programmer, he co-developed trading software that was voted “Best Option Trading System” six consecutive years by readers of Technical Analysis of Stocks and Commodities magazine. A featured speaker and instructor at live and on-line trading seminars, he has authored over 30 articles in Technical Analysis of Stocks and Commodities magazine, Active Trader magazine, Futures & Options magazine and on-line at www.Investopedia.com.