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A Long and Short-Term Bond Market Perspective, Part I

January 20, 2019commodities, ETFS, jay kaeppeladmin

Meanwhile, back in the bond market. Yes, the stock market has been the place for “action” recently. First a massive decline in short order followed immediately by a stunning advance. But many investors also look to the bond market in order to achieve their long-term goals. So, let’s try to put things in perspective a bit.

The Main Points

*Point A: Rates will likely work their way higher over time

There has historically been a roughly 60-year cycle in interest rates (See Figure 1). If this holds to form, odds are the next 30 years will not look anything like the last 30 years in the bond market, i.e., rates will likely work their way higher over time.

Figure 1 – 60-year cycle in rates suggest higher yields in years ahead (Source: mcoscillator.com)

*Point B: Investors should be wary of buying and holding long-term bonds

Figure 1 does not mean that rates will rise in a straight-line advance. But again, odds are that rates will rise over time, so as a result, investors should be wary of buying and holding long-term bonds (as they stand to get hurt the most if rates rise). That being said, in the short-term anything can happen, and long-term bonds may still be useful to shorter-term traders, BUT…

…Short to intermediate term bond funds are better now for investors than long-term bonds (if rates rise over time investors in short/intermediate term bonds can reinvest more quickly at higher rates, while long-term bond holders just lose principal).

Figure 2 – Affect of rising rates on bonds of various maturities (Source: AAII.com)

*Point C: It appears to be too soon to declare a confirmed “Bond Bear Market!!!”

Bond yields looked in 2018 like they were staging a major upside breakout – and then reversed back to the downside. So – Point A above not withstanding – it appears to be too soon to declare confirmed “Bond Bear Market!!!”

Figure 3 – 10-year treasury yield “breakout fake out” (Source: AIQ TradingExpert)

Figure 4 – 30-year treasury yield tested 120-month moving average, then failed (Source: AIQ TradingExpert)

*Point D: Corporate bonds as a whole carry more risk than in years past

The risk associated with corporate bonds as an asset class are higher than in the past due to A) a higher rate of debt, and B) a large segment of the corporate bond market is now in the BBB or BBB- rating category. If they drop one grade they are no longer considered “investment grade” and many institutional holders will have no choice but to sell those bonds en masse. Which raises the age-old question, “too whom?”

For more on this topic see here, here and here.Figure 5 – Rising corporate debt (Source: Real Investment Advice)

*Point E:

On the brighter side, two bond market models that I follow are presently bullish. More about these in Part II.

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.

A Long and Short-Term Bond Market Perspective, Part II

January 20, 2019commodities, educational newsletters, jay kaeppeladmin

In Part I here I laid out my main thoughts regarding the bond market. The final point mentioned that two trading models for bonds that I follow are presently bullish. So in Part II let’s bring those up-to-date.

#1. Japanese Stocks (EWJ) vs. Long-Term Treasuries (TLT)

I have written about this model on several occasions in the past (here, here and here). But in a nutshell:

*The Japanese stock market (using ETF ticker EWJ as a proxy) and long-term U.S. treasury bonds (using ETF ticker TLT as a proxy) tend to have an inverse relationship over time.

Therefore:

*A bearish trend for EWJ (5-week moving average below 30-week moving average) tends to be bullish for bonds.

*A bullish trend for EWJ (5-week moving average above 30-week moving average) tends to be bearish for bonds.

Figure 1 displays the EWJ on top with TLT on the bottom. Note the general inverse correlation in price movement.

Figure 1 – T-Bonds (ticker TLT in bottom clip) tend to move inversely to Japanese stocks (ticker EWJ with 5-weel and 30-week moving averages in top clip) (Courtesy AIQ TradingExpert)

#2. Gold/Copper Ratio versus Bonds

I have written about this before here. In a nutshell:

*The gold/copper ratio has a relatively high correlation to the price of t-bonds (current correlation coefficient = 0.73; a reading of 1.00 means they mirror each other, a reading of -1 means there are trade exactly inversely).

Figure 2 displays treasury bond futures prices (blue) versus the Gold/Copper Ratio (x10) since 2001. The correlation is fairly obvious to the naked eye.

Figure 2 – T-bond futures price (blue) versus Gold/Copper ratio (x10); 12/31/01-1/11/2019

*When the gold/copper ratio is in an uptrend (see here for how that designation is made) this indicator is considered bullish for bonds

*When the gold/copper ratio is in a downtrend this indicator is considered bearish for bonds

Putting the Two Together

*If either of the models is bullish that is considered bullish for bonds

*If both models are bearish that is considered very bearish for bonds

Figure 3 displays the gain or loss from holding a long position in a treasury bond futures contract depending on whether, a) neither model is bullish (red), or, b) one or more of the models is bullish (blue)

Figure 3 – Cumulative $ gain (loss) from holding long t-bond futures if 1 or more model is bullish (blue) versus if neither model is bullish (red); 7/22/96-1/11/19

As you can see, a bullish reading in no way guarantees higher bond price and a bearish reading in no way guarantees lower bond price. Still, given the stark differences between the performance of the blue line and the red line, that would seem to be the way to bet.

For what it is worth, both models detailed above are bullish at the moment.

Summary

*In Part I, I basically inferred a preference for short to intermediate term bonds for people who buy and hold bonds (or bond funds) as part of a longer-term investment strategy (if rates rise 1 percentage point, a 30-year bond paying 4% a year, will lose -15% in principal – too much risk from my perspective).

*At the same time, as highlighted here in Part II, long-term bonds can still offer outstanding trading opportunities both on the long side and the short side – for those inclined to play.

Jay Kaeppel

All Eyes on Key Bellwether Support Levels

January 14, 2019chart patterns, educational newsletters, jay kaeppel, Stock tradingadmin

First the reality. Nobody knows what the market is going to do. Yes, I am aware that there are roughly a bazillion people out there “prognosticating” (myself included) about the stock market. And yes, if one makes enough “predictions”, the law of averages dictates that one will be correct a certain percentage of the time.

Still, the market does offer clues. Sometimes those clues turn out to be false leads. But sometimes they do offer important information. For example, Figure 1 displays four major market indexes. As you can see, in the Aug-Sep-Oct time frame all four of these averages “broke out” to new all-time highs (i.e., The Good News) and then broke back down below the previous resistance line drawn on each chart (i.e., The Bad News).

Figure 1 – Four major indexes breakout then fail (Courtesy AIQ TradingExpert)

False breakouts happen all the time. And the reality here is that sometimes they mean something and sometimes they don’t. But when all four major average do the same thing, a warning sign has been issued to those who are interested in seeing it. That’s why it can be useful to seek “confirmation”. For my purposes I look to what I refer to as my 4 “bellwethers”, which are:

SMH – Semiconductors

TRAN – Dow Transportation Average

ZIV – Velocity Shares Inverse VIX Index

BID – Sotheby Holdings

These tickers appear in Figure 2 (click to enlarge).

Figure 2 – Jay’s Market Bellwethers (Courtesy AIQ TradingExpert)

While the major indexes were testing new highs in Aug/Sep and then breaking down in October:

SMH – Never really came close to breaking out above its March high

TRAN – Followed the major indexes by hitting new highs in Aug/SP and then breaking down in October

ZIV – Never came anywhere close to its Jan-2018 high

BID – Broke to a new high in Jun/Jul, then failed badly.

In a nutshell, the failed major index breakouts were accompanied by absolutely no positive signs from the 4 bellwethers. So, the warning signs were there if one wished to see them.

So where are the bellwethers now? Another close look at Figure 2 reveals that:

SMH – the key support level at 80.92

TRAN – the key level for the Dow Transports is 8744.36

ZIV – the key support level is 60.60

BID – a potential support level is 32.95 (the Apr 2013 low)

Summary

*Given the washed-out/oversold level that many indicators and sentiment surveys have reached…

*…Combined with the fact that we are in the seasonally favorable pre-election year (no down pre-election years since the 1930’s)

*There is a chance that 2019 could be surprisingly bullish, and shell-shocked investors should not stick their heads in the sand to the possibility.

At the same time:

*Based solely on trend-following indicators ALL of the major market indexes are technically in confirmed bear markets. As a result, there is absolutely nothing wrong with having some portion of one’s capital in defensive positions at the moment (30% cash or short-term bonds?).

*Keep a close eye on January performance. A bullish January would be a positive sign just as a negative January could – in this case – signal a continued market decline.

*Keep a close eye on the 4 Bellwethers relative to their respective support levels.

In a nutshell:

*Up January + Bellwethers holding above support = GOOD

*Down January + Bellwether breaking down below support = BAD

Those are all the “clues” I can offer at the moment.

Jay Kaeppel

The 2018 updated SP500 Group and Sector

January 7, 2019group and sectoradmin

The 2018 updated SP500 Group and Sector structure for TradingExpert Pro is now available

This completely updated structure is current through the end of December 2018. Many sectors and groups have been renamed by S&P and the new structure reflects these changes. The old SP500 structure in your program will be replaced if you choose to install the update.

The complete install and further instructions are available at http://aiqsystems.com/sp500_update_2019.html

The SP500 structure in AIQ Charts and Data Manager showing new group and sector naming shown below

Weekly & Daily Stochastics

January 6, 2019back testing, Stocks & Commodities traders tips, technical indicatoradmin

The AIQ code based on Vitali Apirine’s article in the September issue of Stocks and Commodities, “Weekly and Daily Stochastics, is provided below

Using Apirine’s weekly and daily stochastic indicators and a moving average to determine trend direction, I created an example system (long only) with the following rules:

Enter long next bar at open when all of the following are true:

The 200-day simple average of the NDX is greater than the day before
The 200-day simple average of the stock is greater than the day before
Both the weekly and daily stochastic indicators have been below 20 in the last five days
Both the weekly and daily stochastic indicators are greater than the day before.

I tested three exits. Figure 8 shows a 21-day hold then exit. Figure 9 shows a three-moving-average trend-following exit. Figure 10 shows an exit using only the weekly & daily stochastic, once both are lower than the day before.

Sample Chart

FIGURE 8: AIQ, BUY and HOLD. Here is the sample equity curve (blue) compared to the NDX (red) for the test using a 21-day hold exit.

Sample Chart

FIGURE 9: AIQ, TREND-FOLLOWING EXIT. Here is the sample equity curve (blue) compared to the NDX index (red) for the test using a trend-following exit.

Sample Chart

FIGURE 10: AIQ, W and D STOCHASTIC EXIT. Here is the sample equity curve (blue) compared to the NDX index (red) for the test using the weekly and daily stochastic indicators.

The 21-day hold test showed a 11.2% return with a maximum drawdown of 29.3%. The trend-following exit test showed a 17.6% return with a maximum drawdown of 28.8%. The test using an exit based on only the weekly and daily stochastic indicators showed a return of 2.9% with a maximum drawdown of 32.5%. All the tests used the same entry rule and were run on an old 2016 list of the NASDAQ 100 stocks with the stocks that are no longer trading deleted.

!WEEKLY AND DAILY STOCHASTIC
!Author: Vitali Apirine, TASC Sept 2018
!Coded by: Richard Denning 7/7/2018
!www.TradersEdgeSystems.com

!INPUTS:
Periods is 14.
Periods1 is 3.
Pds is 70. 
Pds1 is 3.
smaLen1 is 70.
exitType is 1.

!ABBREVIATIONS:
C is [close].
H is [high].
L is [low].

!INDICATOR CODE:
STOCD is (C-LOWRESULT(L,Periods))/(HIGHRESULT(H,Periods)-LOWRESULT(L,Periods))*100. 
SD is Simpleavg(Stocd,Periods1).
StocW is (C-LOWRESULT(L,Pds))/(HIGHRESULT(H,Pds)-LOWRESULT(L,Pds))*100.
SW is Simpleavg(Stocw,Pds1).
HD if hasdatafor(1000) &gt;= 500.
SMA200 is simpleavg(C,200).
SMA200ndx is tickerUDF("NDX",SMA200).

!SYSTEM CODE:
Buy if SMA200ndx &gt; valresult(SMA200ndx,1)
          and SMA200 &gt; valresult(SMA200,1)
          and SW &gt; valresult(SW,1) 
          and SD &gt; valresult(SD,1) 
          and countof(SW &lt; 20,5)&gt;=1 
          and countof(SD &lt; 20,5)&gt;=1 
          and HD.
smaLen2 is smaLen1*2.
smaLen3 is smaLen1*4.
SMA1 is simpleavg(C,smaLen1).
SMA2 is simpleavg(C,smaLen2).
SMA3 is simpleavg(C,smaLen3).
PD is {position days}.

!EXIT TYPE 1 USES THE INDICATOR ONLY
!EXIT TYPE 2 IS TREND FOLLOWING
Sell if (SD &lt; valresult(SD,1) and SW &lt; valresult(SW,1) and exitType=1)
       or (exitType = 2 
           and ((Valresult(C,PD)valresult(SMA1,PD) And Cvalresult(SMA2,PD) And Cvalresult(SMA3,PD) And C 250)).

RSS is C/valresult(C,120).
RSL is C/valresult(C,240).

—Richard Denning

info@TradersEdgeSystems.com

for AIQ Systems

AIQ TradingExpert Pro

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All posts by admin

A Long and Short-Term Bond Market Perspective, Part I

A Long and Short-Term Bond Market Perspective, Part II

All Eyes on Key Bellwether Support Levels

The 2018 updated SP500 Group and Sector

Weekly & Daily Stochastics