Let’s face it, the human eye is naturally drawn to the “shiny object.” Hence the reason all the focus is on the Nasdaq Index (by the way, I think there was a glitch with my price quote software yesterday, because at one point it showed that the Nasdaq 100 Index was negative for the day. I contacted my quote service and pointed out this obvious error and apparently they fixed it because the Nasdaq – as it is supposed to be – was again showing a gain by the end of the day – while all the other indexes were down. But I digress.)
The bottom line is that the type of large-cap/technology related/growth stocks that are presently dominating the Nasdaq 100 Index are (or at least “have”) been the place to be since the market bottomed in March. Figure 1 displays the performance of ticker QQQ (an ETF that tracks the Nasdaq 100) relative to the performance of the Vanguard Total Stock Market ETF.
Figure 1 – Ticker QQQ versus ticker VTI (Courtesy StockCharts.com)
The message is pretty obvious, right? Pile into Apple, Microsoft and Amazon (which account for roughly 34% of the value of the index at the moment) and forget everything else!!!
Oh sure, if you want to toss in a little Facebook, Google, Tesla and NVIDIA just for “diversification”, that’s OK too. But avoid “everything else”!
And it’s a great strategy…. Well, as least as long as it lasts.
The “Stuff” Index
Anyway, I created my own index dubbed “Stuff” – it would probably be more accurate to call it the “metals and material” index, but I prefer “Stuff” (sorry, it’s just my nature). Figure 2 displays a monthly chart; Figure 3 displays a daily chart.
This index bottomed on 3/18, since then it has climbed +44% (for the record, like everything else it has lagged the Nasdaq 100 which is up +50% over the same time, but it has outperformed all other relevant major stock market indexes).
The index is comprised of the following ETFs:
CPER (copper)
GLD (gold)
LIT (lithium)
PALL (palladium)
PPLT (platinum)
SLV (silver)
URA (uranium)
The top performer among this group since the 3/18 low is LIT which is up +84%.
OK, so this “Stuff” index has still underperformed the Nasdaq Index, so what’s the point?
The Point
Except for gold – which has rallied to a seven year high – no one it seems has the slightest idea that there is “life beyond” large-cap/tech/growth monolith presently sucking up all the sunshine.
Where do things go from here? Will Nasdaq keep running? Or is this rally overdone? And what about “Stuff”? Is there any guarantee that it’s strong run will continue? I don’t claim to have the answers.
As you can see in Figures 2 and 3, the Stuff Index is presently bumping up against resistance (while the Nasdaq has broken out to the upside and running to new highs).
So here is an interesting rhetorical question to ponder;
First look at Figure 4 which displays the monthly Nasdaq 100 on the top and my Stuff Index on the bottom.
Figure 4 – Nasdaq 100 Index vs. Stuff Index (Courtesy AIQ TradingExpert)
The question to ponder: Which has more upside potential going forward?
See also Jay Kaeppel Interview in July 2020 issue of Technical Analysis of Stocks and Commodities magazine
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 represents 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.
Inflation was a big deal – back in the late 70’s and early 80’s. Since then it has been the subject of a whole lot of “the boy crying wolf” scenarios. Take a look at Figure 1. The red line displays the 12-month rate-of-change in the Consumer Price Index (i.e., the annual rate of inflation) since 1913.
Figure 1 – The Consumer Price Index (1913-2020)
Things to note, focusing on 1930 forward to the present:
*In the 1930’s we had deflation (actually much worse than inflation as the economy essentially spirals lower and slower) with the CPI reaching almost -10%
*There were peaks in the 15% range in the late 1940’s and late 70’s/early 80’s
*As you can see in the black box to the right hand side, inflation has been less than 5% annually for most of the last 35 years
As a result, most investors have been conditioned to not fret too much about inflation. And any time spent actually worrying about inflation in the past several decades has been a waste of good anxiety.
But nothing lasts forever. Especially in the financial markets, where things tend to move in a cyclical nature over long periods of time. To illustrate this point with a random, yet related example, consider Figure 2 which displays the yield on 30-year treasury bonds since 1942.
Figure 2 – 30-year treasury bond yield (1942-2020) (Courtesy: www.StockCharts.com)
Since the early 1980’s, investors have been nicely rewarded for holding bonds – especially long-term bonds. But from the mid 1950’s into 1980 the experience was much different (rising yields equate to lower bond prices). Presumably someday rates will rise again and an entire generation of bond investors will have no idea what is happening to their investments (see here, here, here and here). But for now, we are focusing on inflation.
How to Know When to Worry About Inflation
I’ll give you three things to follow.
#1. Gold
In a recent paper co-authored by legendary trader Paul Tudor Jones (see here) the authors laid out the case for higher inflation in the years ahead and suggested gold bullion could reach $2,400 an ounce. Is this a possibility? Absolutely.
Figure 3 displays from 2005 through 2012:
*ticker GLD (an ETF that tracks the price of gold bullion)
*my own index called ANTIGLD3 (components highlighted on right) with a Front Weighted Moving Average and a 55-week exponential moving average)
The ANTIGLD3 Index is a contrarian trend-following tool, i.e., when this index is in a downtrend it is bullish for gold and vice versa.
Figure 3 – Ticker GLD versus Jay’s ANTIGLD3 Index (2005-2012) (Courtesy AIQ TradingExpert)
Figure 4 displays the same tickers from 2012 into 2020
Figure 4 – Ticker GLD versus Jay’s ANTIGLD3 Index (2012-2020) (Courtesy AIQ TradingExpert)
The key thing to note in Figure 4 is that after several years of whipsaws the two trend-following indicators applied to ANTIGLD3 are in a clear downtrend (since this is a contrarian index that means it is purportedly bullish for gold).
So, is it off to the races for gold? I can’t say for sure. But it appears to be trying. Also note that gold can rally significantly in price for reasons other than inflation (see 2005-2011 rally)
I have positions in gold and gold stocks but not huge ones. For whatever reason, so far, I am “not feeling it.” As you will see in a moment, some inflation trend-following “things” that I watch have yet to confirm that inflation is an imminent threat at this exact moment.
But I am holding my positions just in case gold itself is the actual “leading indicator” in this story.
#2. The Aussie Dollar versus its 24-month moving average
I covered this in detail here so will not get too in-depth here. But you can get the gist of it pretty simply from Figure 5. The top chart is ticker FXA with a 24-month exponential moving average and the bottom chart is ticker GSG which tracks the Goldman Sachs Commodity Index.
Long story short, commodities – or “hard assets”, are typically a good place to be during a period of sharply rising and/or high inflation – perform better when FXA is in an uptrend (i.e., above the 24-month EMA) than when below. As of early July FXA has just moved above its 24-month EMA. For the record, I usually only consider this at month-end. So, check back after 7/31.
If FXA establishes an uptrend, the likelihood of higher prices for commodities – including gold – rises. Thus, an uptrend for FXA would be another potential warning sign of impending inflation.
#3. TIPs versus Long-Term Treasuries
TIPs bonds are Treasury Inflation Protected securities, i.e., the principal can rise as inflation (based on the Consumer Price Index) rises (see here). In other words, a TIP bond can gain value as inflation rises. Long-term treasuries on the other hand are the securities most likely to get hurt by a rise in inflation (as the rate of return is fixed once you buy the bond and a rise in inflation can reduce the future value and/or purchasing power of that fixed return).
So, in a low inflationary period we typically see TIPs fall relative to long-term treasuries and during rising inflation we would expect to see TIPS rise relative to long-term bonds.
Figure 6 displays the chart of ticker TIP relative to ticker TLT on a weekly basis (with a 200-wekk moving average) from www.StockCharts.com.
Figure 6 – Ticker TIP relative to ticker TLT (weekly) still trending lower (Courtesy: www.StockCharts.com)
The bottom line: While gold itself is attempting to breakout to the upside and the Aussie Dollar is trying to establish an uptrend, the TIP:TLT relationship is not presently indicating any meaningful inflationary concerns.
Summary
Inflation has been low for about 35 years. But as they say, “don’t go to sleep on it.”
If you want to be objectively prepared, keep an eye on:
*Gold bullion (in an uptrend, confirmed by a downtrend in my “anti-gold index”)
*The Aussie Dollar (No trend at the moment, but trying to establish an uptrend)
*Ticker TIP versus ticker TLT (Nowhere close to an uptrend right now)
So one up, one down and one sideways. But pay close attention going forward.
If and when all three establish uptrends, the game we’ve all been playing for several decades will likely change dramatically.
See also Jay Kaeppel Interview in July 2020 issue of Technical Analysis of Stocks and Commodities magazine
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 represents 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.
Market volatility continues. In this update we’ll take a look at the current AI signals on the Dow Jones. For folks less familiar with our AI engine here’s a recap of what we do.
TradingExpert Pro uses two AI knowledge bases, one specifically designed to issue market timing signals and the other designed to issue stock timing signals.
Each contains approximately 400 rules, but only a few “fire” on any given day. In the language of expert systems, those rules that are found to be valid on a particular day are described as having “fired”.
Rules can fire in opposite directions. When this happens, the bullish and bearish rules fight it out. It’s only when bullish rules dominate that the Expert Rating signal is bullish, or when bearish rules dominate that the Expert Rating signal is bearish.
The Expert Rating consists of two values.
The upside rating is the value on the left and the downside rating is on the right. Expert Ratings are based on a scale of 0 to 100. An Expert Rating of 95 to 100 is considered a strong signal that the Stock or market may change direction.
An Expert Rating below 90 is considered meaningless. A low rating means that there is not enough consistency in the rules that fired to translate to a signal. The expert system has not found enough evidence to warrant a change from the last strong signal.
The importable AIQ EDS file based on Markos Katsanos’ article in the March 2020 issue of Stocks & Commodities, “Using Relative Strength To Outperform The Market,” can be obtained on request via email to info@TradersEdgeSystems.com. The code is also available below.
I coded the indicator described by Katsanos in his article. Figure 5 shows the RSMK indicator with a 90-bar length on a chart of Fire Eye (FEYE). The trading system is also coded.
!USING RELATIVE STRENGTH TO OUTPERFORM THE MARKET !Author: Markos Katsanos, TASC March 2020 !coded by: Richard Denning, 01/13/2020 !www.TradersEdgeSystems.com !RSMK (Relative Strength) Indicator !Copyright Markos Katsanos 2020 C is [close]. RSBARS is 90. SK is 3. SEC2 is tickerudf("SPY",C).
!RSMK: RSMK is expavg(ln(C/(SEC2))-ln(valresult(C/(SEC2),RSBARS)),3)*100.
!RSMK System: Buy if RSMK > 0 and valrule(RSMK<0,1) and hasdatafor(200) >= 150. Sell if {position days} >= 9*21.
FIGURE 5: AIQ. The RSMK indicator is shown on a chart of FEYE during 2018 and 2019.
I hope all of you are keeping healthy and staying safe during this COVID-19 pandemic. Over the last month, we have seen a significant drop in new cases of COVID-19 in most states, but now that most establishments of business have opened, there is some speculation that we may see a rise in COVID-19 cases again.
RECAP:
Over the last month, as COVID-19 cases have dropped, the stock and bond markets have risen dramatically. As of last Friday, however, most of the indexes are still slightly to moderately down. The technology-laden companies in the NASDAQ are the beneficiaries of this “stay at home” policy with returns up 10% this year.
The value sector, which contains the small to midcap companies, banks, energy companies, the retail sector, the airlines, telecommunications, restaurants, and more, are still down by 6-23% for 2020, but are rising dramatically as speculators try to get in now to buy cheap shares. The growth sector has done relatively well, but only a few large companies have contributed.
CURRENT TRENDS:
I continue to like the large tech and health care companies, however, the very large-cap NASDAQ stocks like Apple and Google should start to slow. If the market DOESN’T have a correction in the fall, then we should see the markets continue to recover, then the midcap to small-cap stocks may show a continuation of its upward trend. I am recommending clients move the large-cap growth profits towards the midcap sector somewhat. The Midcaps are down 6.7-11.76% depending on if its growth or value, and particular issues have more of a potential to move upward, in my opinion. A year or two out from this point, I think this sector and the markets should continue the trend nicely higher.
Can it go down from here into the fall and winter if we have a second wave down? Absolutely, but it is an excellent time to add money to your equity side in a diversified portfolio over the next 6 -12 months I like the corporate bond sector better than the government sector going forward. Many people are doubling up their contributions monthly. If you are more than five years before retirement, you may want to think about doing something similar. If stocks are cheap, then isn’t it smart to buy when they are reasonably priced if, over the long term, the market should be higher? But over the short term. I think the markets have risen too fast and over the short-term, I can see up to another 5% more but not much after that. If you are in or nearing retirement, this may be an excellent time to take a little money out of the stock market over the next few weeks.
Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until June 8, 2020. These are passive indexes.
Dow Jones -4.0% S&P 500 -.50% EQUAL WEIGHTED S&P 500 -4.0% NASDAQ Aggressive growth +10% Large Cap Value -12.5% I Shares Russell 2000 ETF (IWM) Small cap -9.0% Midcap stock funds -6.7-11.76% International Index (MSCI – EAFE ex USA -8.2% Financial stocks -14% Energy stocks -23.53% Healthcare Stocks +1.8%
Moderate Mutual Fund Investment Grade Bonds (AAA) Long duration -2.5% High Yield Merrill Lynch High Yield Index -3.8%
Floating Rate Bond Funds -4.4% Short Term Bond +1.1% Fixed Bond Yields (10 year) .95% Yield
Classicalprinicples.com and Robert Genetskis Excerpts:
Stocks continued to move higher this past week. The major indexes added 2%-3%, while small-cap ETFs led with gains of 4%-6%. The S&P 500 is now within 3% of my estimate of its value. A replay of the failed Occupy Wall Street lawlessness will drive more support for law and order. Rather than hurt Trump, it should help to reelect him. There is also some good news on the virus. Despite the reopening of the economy, active cases have begun declining. Up to now, my expectation that stocks would begin consolidating has not materialized. The stock market assumes my forecast for a rapid recovery will occur without any setbacks. Hope so. Nonetheless, with both cautious state Governors and fed policy paying people not to work, a temporary setback can always arise. Although the market is fully-valued, the outlook for stocks remains mostly bullish.
A Look-Back
Private employment increased by 3 million in May, close to my estimate of 4 million. The rebound was well above the widely predicted loss of 81⁄2 million jobs. Private payrolls remain 18 million less than at their peak in February. Earlier in the week, the ISM business surveys show the economy grew modestly going into early May. The improvement appears to have brought the economy from 80% of its peak performance to 85%. Auto sales went from 50% of normal levels in April to 70% in May. New orders for manufacturing and service companies also improved in May. Orders in May were 30% below their peak compared to 40% below in April. My forecast for job gains in May was based on Weekly insured unemployment claims which were 50% less than the number in April.
Dr. Genetski’s opinion is that every person and circumstance is different. Please call me to address your holistic goals to strategize. There are no guarantees expressed or implied in any part of this correspondence.
Dow Jones
As you can see the Dow Jones is now only down 4% for 2020. I do not see more than a 5% upward move before it is fully valued. There are three resistance points to the left, the first level of resistance is 27424 area, the second is 28404 area, and the third level is the 29000 area. You may be shocked that the market has gone this high. Remember, the stock and bond markets NEVER accommodates the majority of thinking. So when everyone that the markets are going lower it doesn’t, and when everyone it will continue higher it tops out.
The Momentum indicator signal of a BUY is when the pink line crosses above the blue line and a Sell signal is when it crosses on the downside. Currently it still is on the buy side. But it is getting long in the tooth and overbought.
The indicator to the lower left is call the SD-SK Stochastics indicator. When both of the lines go over 88 the market is very overbought and could be setting up for a fall. It is almost very overbought, but not yet.
Summary: I am still long term bullish, but only see the rally to continue for a short period more before I see a flattening or decline of the markets.
NASDAQ QQQ
The true Champ this year again has been the NASDAQ. These stocks include, Facebook, Amazon, Docusign, Paypal, Mcrosoft, Netflix, etc. All of the stocks that benefit by you and your businesses being home. The NASDAQ is now up 10% for the year while everything else in the normal world is down 6-33%. The NASDAQ is now getting a little OVERBOUGHT so I would not go out and buy a bunch of ultra large tech stocks here. In fact, the NASDAQ is right at its high for the year and if I had a lot of my money in the ultra large NASDAQ stocks I would probably redeploy some towards the midcap stocks with go balance sheets and prospects for a bright future. I will also get VERY CAUTIOUS if the NASDAQ closes below the lower trend line currently at the 9505 level. This trend line rises daily so please call me for a strategy session.
The MACD or momentum indicator is still positive, so as long as the trend is up, I am somewhat positive , but it is now getting over bought. Retirees may want to reduce a little at this point.
The SK-SD Stochastics is overbought just like it was in the Dow Jones. On Balance Volume is showing great conviction. That is a Bullish signal as it has broken to a new high
Support levels on the S&P 500 area are 3140, 3070, 2944, and 2796. These might be accumulation levels, especially2649, or 2500. 2936 and 3015 is resistance.
Support levels on the NASDAQ are 9675, 9513, and 9326 Topping areas 9845 and 10000 On t
The Dow Jones support is at 25245, 24,900, and 23951. Topping areas 27377 and 28419, 29020 and 29561.
These may be safer areas to get into the equity markets on support levels slowly on the accumulation areas.
THE BOTTOM LINE:
The market has rebounded nicely over the last month, mainly on the decline in Covid19 cases, and the economy is reopening. The NASDAQ has done the best and should continue to do well IF the market continues higher, the Midcap and Small caps, both growth and value side would probably outperform if the rally continues from here. My thinking is that the market continues to rally a little more, but as the Euphoria continues, I feel the market may stall a little above where we are now. If there is a significant rise in the number of new cases of COVID-19 before any successful treatment or vaccine, then the market would probably selloff, not to new lows but down to a support level listed above. There are trend-lines right below the markets, and if they are broken and close below those areas, then the markets could start a correction again. Trend-lines are essential to hold. If they don’t hold, then there could be a setback to support the levels stated above. I still like the USA market better than the international one.
Best to all of you,
Joe Bartosiewicz, CFP® Investment Advisor Representative 92 High Street Thomaston, CT 06787
860-940-7020
Charts provided by AIQ Systems:
Technical Analysis is based on a study of historical price movements and past trend patterns. There is no assurance that these market changes or trends can or will be duplicated shortly. It logically follows that historical precedent does not guarantee future results. Conclusions expressed in the Technical Analysis section are personal opinions: and may not be construed as recommendations to buy or sell anything.
Disclaimer:
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Past performance cannot guarantee future results. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Please note that individual situations can vary. Therefore, the information presented in this letter should only be relied upon when coordinated with individual professional advice.
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