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AI Market Timing system – saw the fall coming, so now what

educational newsletters, expert system

What is the AI in AIQ?

The AI in TradingExpert Pro is programmed with the knowledge and insight of many stock market professionals, and is capable of making market recommendations based on this knowledge and insight; recommendations are made on a scientific basis free of bias, emotion, or hidden motives. 

The AI or expert systems are programmed with rules that combine sound principles of technical analysis with the knowledge and experience of market professionals.  Technical analysis, as used by AIQ, is based on the logic that price is the result of supply and demand.  An AIQ timing signal, therefore, reflects all available knowledge and opinions such as news of the day, earnings, product reports, and company forecasts.

Technical analysis recognizes price and volume movement as the voice of the market itself and hence the only data necessary to determine what the market is likely to do next.

The AIQ Expert System


As an expert system, TradingExpert Pro is comprised of two knowledge bases – one for market timing and a second for stock selection – and an inference engine. Knowledge, in the form of rules, is stored in the knowledge bases. The inference engine is the thinking component of an expert system.

Each of the two knowledge bases within TradingExpert Pro has its own unique rules. The rules operate on facts which are values of the technical indicators. The indicators are computed from daily price, volume, and breadth data.

The rules employed in ATQ TradingExpert Pro are derived from the knowledge of many experts of market action and market timing. The reliability of these rules is maximized by combining them into a higher level of Expert Rules. Market analysts have found that no single rule or indicator works all the time. In AIQ, the Expert Rules and technical indicators work together to generate upside and downside signals.

Different knowledge bases for different market cycles


Continuing research at AIQ has shown that a single knowledge base can be improved if it is split into several knowledge bases, one for each phase of the market cycle. This advancement has been incorporated in the market timing knowledge base. The crest, trough, up slope, and down slope are each addressed by a specific set of rules specialized and weighted for that specific phase of the market cycle.

Each market day, then, the system determines the strength and  direction of the phase, or trend.  If there is no trend, it is first determined if the cycle is at a crest prior to a downtrend, or in a trough before the next uptrend.  A more specialized knowledge base is used for each of these conditions, increasing the overall market timing effectiveness.


The inference engine

The knowledge base fuels the second part of the AIQ expert system, the inference engine.  The inference engine is the thinking component of an expert system, and mimics the way humans think.

To understand how the AIQ inference engine works, picture a decision tree. The procedure starts from the tree’s trunk, where the major rules are located. Each rule is represented as a node, or fork, where the tree splits into three branches-representing a yes, a no, or a maybe.  If the expert system determines that the premise of a rule is true, then the rule is considered to have fired, giving one of those three answers.

As each rule is evaluated, the process moves on to the next node and subsequent branches and continues to move on through the tree. Each rule node has an assigned value.  That value is added to a node total that is accumulated as the inference engine passes through the tree. When all the rules have been evaluated, the resulting node total is normalized and becomes an AIQ Expert Rating.  


Finally


The Expert Ratings are based on a scale of 0 to l00. The higher the Expert Rating, the stronger the signal.  An Expert Rating of 95 or higher is considered a strong signal, meaning that there is a strong possibility that the price trend is about to change direction.


Confirmation of Expert Ratings


Research has shown that a change in direction of the Phase indicator (changing up for up ER, changing down for down ER) at or close to the high Expert Rating date provides a higher degree of confidence in the rating. Phase is not part of the Expert System.


So let us examine the last 7 weeks market action.



2-98 down signal 9/18/2018, 9/18/18 and 9/20/18 all with these primary riles firing confirmed by phase


Intraday high prices of the market have increased to a 21 day high.  Never the less, the advance/decline oscillator is negative. This unusual event is read as a very strong bearish signal that is often  followed by an downward price movement. 


Closing prices on the market have increased to a 21 day high but market breadth as measured by advances and declines is declining. This non-confirmation in a trading market is a weak bearish signal indicating a possible downward price movement.  

DJIA with the 3 successive down signals

Confirmed down signal 4-96 on 10/05/18 these primary rules fires

Trend Status has changed to a strong down trend.  This indicates that a downward trend has started that may continue in this direction. This is a  moderate bearish signal. 

The 21 day stochastic has declined below the 80% line and the price phase indicator is decreasing. In this strongly downtrending market this is an indication that the downtrend will continue.  

Confirmed down signal 5-95 on 10/18/2018 these primary rules fires

The market closing average has dropped below the 21 day exponentially smoothed average price.  At the  same time, accumulation is decreasing. In this down trending market, this is taken as a very bearish signal that could be followed by further decreases in price.  

The price phase indicator is positive but volume distribution has started to advance. This is a nonconformation that, regardless of the type of market, is a bearish signal which usually results in an downward movement of the market. 

DJIA with 2 more down signals confirmed by phase

Unconfirmed up signal on 10/16/18 – phase did not change direction


Volume accumulation percentage is increasing and the 21 day stochastic has moved above the 20% line. In this downtrending market, this is taken as a   strong bullish signal that could be followed by an upward price movement. 


The price phase indicator is negative but volume accumulation has started to advance.  This is a  non-conformation that, regardless of the type of market, is a bullish signal which usually results in an upward movement of the market. 

The new high/new low indicator has reversed to the upside. This is a reliable bullish signal that is often followed by an upward movement in prices. In this weak downtrending market an uptrend could  start shortly. 



DJIA on 10/16/18 97-3 up no phase confirmation


Confirmed up signal 10/31/18 98-2


The 21 day stochastic has advanced and crossed the 20% line and the price phase indicator is also in- creasing.  In this weakly downtrending market this is taken as a strong bullish signal suggesting an increase in prices. 


Volume accumulation percentage is increasing and the 21 day stochastic has moved above the 20% line. In this downtrending market, this is taken as a strong bullish signal that could be followed by an upward price movement. 


The new high/new low indicator has reversed to the upside. This is a reliable bullish signal that is often followed by an upward movement in prices. In this weak downtrending market an uptrend could  start shortly. 

DJIA on 10/31/18 with confirmed up signal 98-2

While never perfect, the Expert rating provides a formidable advantage to the trader looking for signs of direction changes in the market. As of 11/7/18 close the DJIA was at 26180

DJIA as of 11/7/18

‘Dogs’ ‘Due’ for ‘Days’

commodities, ETFS, indexes, jay kaeppel

While I am by and large an avowed “trend-follower” I also recognize that sometimes things get beaten down so much that they ultimately offer great potential long-term value.  Or, as they say, “every dog has it’s day.”  So, let’s consider some “dogs”.

For the record, and as always, I am not “recommending” these assets – I am simply highlighting what look like potential opportunities.

Dog #1: Soybeans (ticker SOYB)

As I wrote about in this article, soybeans are very cyclical in nature.  According to that article there are two “bullish seasonal periods” for beans and one “bearish”:

*Long beans from close on the last trading day of January through the close on 2nd trading day of May

*Short beans from the close on 14th trading day of June through the close on 2nd trading day of October

*Long beans from the close on 2nd trading day of October through the close on 5th trading day of November

In Figure 1 (ticker SOYB – an ETF that tracks the price of soybean futures) has been beaten down quite a bit.  This doesn’t mean price can’t go lower.  However, given the cyclical nature of bean prices they probably won’t go down forever.

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Figure 1 – Weekly SOYB; prices beaten down (Courtesy AIQ TradingExpert)

Figure 2 is a daily chart of SOYB and displays the recent “bearish” seasonal period and the latest “bullish” period so far.

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Figure 2 – Daily SOYB (Courtesy AIQ TradingExpert)

Dog #2: Uranium (ticker URA)

In this article and this article, I wrote about the prospects for uranium and ticker URA – an ETF that tracks the price of uranium.  Since that time URA has basically continued to go nowhere.  As you can see in Figure 3, it has been doing just that for some time.  While there is no guarantee that the breakout out of the range indicated in Figure 2 will be to the upside, historically, elongated bases such as this often lead to just that.  A trader can buy it at current levels and put a stop loss somewhere below the low for the base and take a reasonable amount of risk if they are willing to bet on an eventual upside breakout.

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Figure 3 – Ticker URA with a long (really long) base (Courtesy AIQ TradingExpert)

Dog #3: Base Metals (Ticker DBB)

Under the category of – I called this one way, way too soon – in this article I wrote about the potential for ticker DBB to be an outperformer in the years ahead.  As you can see in Figure 4, so far, not so good.

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Figure 4 – Base Metals via ticker DBB (Courtesy AIQ TradingExpert)

Still, the argument for base metals is this:

*In Figure 3 is this article you can see that commodities as an asset class are due for a good move relative to stocks in the years ahead.

*In addition, the Fed is raising interest rates.

As discussed historically base metals have been the best performing commodity sector when interest rates are rising.  Ticker DBB offers investors a play on a basket of base metals.

Summary

Will any of these “dog” ideas pan out?  As always, only time will tell.  But given the cyclical nature of commodities and the price and fundamental factors that may impact these going forward, they might at least be worth a look.

In the meantime, “Woof” (which – as far as I can tell – means “Have a nice day”).

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 Look Ahead in Stocks, Bonds and Commodities

commodities, educational newsletters, indexes, jay kaeppel, technical indicator

In the interest of full disclosure, the reality is that I am not great at “predicting” things.  Especially when it involves the future.  That being said, I am pretty good at:

*Identifying the trend “right now”

*Understanding that no trend lasts forever

*Being aware of when things are getting a bit “extended”

So, I am going to highlight a few “thoughts” regarding how one might best be served in the markets in the years ahead.

Where We Have Been

*After 17 years of sideways action (1965-1982) the stock market has overall been in a bullish trend since about 1982 – albeit with some major declines (1987, 2000-2002 and 2007-2009) when the market got significantly overvalued.

*Bond yields experienced a long-term decline starting in 1981 and bottomed out in recent years.

*Commodities have mostly been a “dog” for many years.

The way the majority of investors approach these goings on is to:

*Remain bullish on the stock market (“Because it just keeps going up”)

*Continue to hold bonds (“Because I have to earn a yield somewhere”)

*Avoid commodities (“Because they suck – and they’re scary”)

And as an avowed trend-follower I don’t necessarily disapprove.  But as a market observer I can’t help but think that things will be “different” in the not too distant future.

Considerations Going Forward

Stocks

Figure 1 displays the Shiller P/E ratio.  For the record, valuation measures are NOT good “timing” tools.  They don’t tell you “When” the market will top or bottom out.  But they do give a good indication of relative risk going forward (i.e., the higher the P/E the more the risk and vice versa).

Note:

*The magnitude of market declines following previous peaks in the P/E ratio

*That we are presently at (or near) the 2nd highest reading in history

(click on any chart below to enlarge it)

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Figure 1 – Shiller P/E Ratio (and market action after previous overvalued peaks) (Courtesy: www.multpl.com/shiller-pe/)

The bottom line on stocks:  While the trend presently remains bullish, valuation levels remind us that the next bear market – whenever that may be – is quite likely to be “one of the painful kind”.

Bonds

Figure 2 displays the 60-year cycle in interest rates.2

Figure 2 – 60 -year cycle in interest rates (Courtesy: www.mcoscillator.com)

Given the historical nature of rates – and the Fed’s clear propensity for raising rates – it seems quite reasonable to expect higher interest rates in the years ahead.

Commodities

As you can see in Figure 3 – which compares the action of the Goldman Sachs Commodity Index to that of the S&P 500 Index) – commodities are presently quite undervalued relative to stocks.  While there is no way to predict when this trend might change, the main point is that history strongly suggests that when it does change, commodities will vastly outperform stocks.3Figure 3 – Commodities extremely undervalued relative to stocks (Courtesy: Double Line Funds)

The Bottom Line – and How to Prepare for the Years Ahead

*No need to panic in stocks.  But keep an eye on the major averages.  If they start to drop below their 200-day averages and those moving average start to “roll over” (see example in Figure 4), it will absolutely, positively be time to “play defense.”

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Figure 4 – Major stock average rolling over prior to 2008 collapse (Courtesy AIQ TradingExpert)

*Avoid long-term bonds.  If you hold a long-term bond with a duration of 15 years that tells you that if interest rates rise one full percentage point, then that bond will lose roughly 15% in value.  If it is paying say 3.5% in yield, there is basically no way to make up that loss (except to wait about 4 years and hope rates don’t rise any more in the interim – which doesn’t sound like a great investment strategy).

*Short-term to intermediate-term bonds allow you to reinvest more frequently at higher rates as rates rise. Historical returns have been low recently so many investors avoid these.  But remember, recent returns mean nothing going forward if rates rise in the years ahead.

*Consider floating rate bonds.  Figure 5 displays ticker OOSYX performance in recent years versus 10-year t-note yields. While I am not specifically “recommending” this fund, it illustrates how floating rate bonds may afford bond investors the opportunity to make money in bonds even as rates rise.5

Figure 5 – Ticker OOSYX (floating rate fund) versus 10-year treasury yields)

*Figure 6 display 4 ETFs that hold varying “baskets” of commodities (DBC, RJI, DJP and GSG clockwise from upper left).  When the trend in Figure 3 finally does reverse, these ETFs stand to perform exceptionally well.6

Figure 6 – Commodities performance relative to stock performance (GSCI versus SPX)

Finally, the truth is that I don’t know “when” any of this will play out.  But the bottom line is that I can’t help but think that the investment landscape is going to change dramatically in the years ahead.

So:

a) Pay attention, and

b) Be prepared to adapt

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.

Watch This Indicator

EDS, educational newsletters, ETFS, indexes, jay kaeppel, technical indicator

So, the big question on every investor’s mind is “What Comes Next?”  Since this is not an advisory service (and given the fact that I am not too good at predicting the future anyway) I have avoided commenting on “the state of the markets” lately.  That being said, I do have a few “thoughts”:

*The major averages (as of this exact moment) are still mostly above their longer-term moving averages (200-day, 10-month, 40-week, and so on and so forth).  So, on a trend-following basis the trend is still “up”.

0Figure 1 – The Major Index (Courtesy AIQ TradingExpert)

*We are in the most favorable 15 months of the 48-month election cycle (though off to a pretty awful start obviously) which beings Oct.1 of the mid-term year and ends Dec. 31st of the pre-election year.

*Investors should be prepared for some volatility as bottoms following sharp drops usually take at least a little while to form and typically are choppy affairs.  One day the market is up big and everyone breathes a sigh of relief and then the next day the market tanks.  And so on and so forth.

An Indicator to Watch

At the outset let me state that there are no “magical” indicators.  Still, there are some that typically are pretty useful.  One that I follow I refer to as Nasdaq HiLoMA.  It works as follows:

A = Nasdaq daily new highs

B = Nasdaq daily new lows

C = (A / (A+B)) * 100

D = 10-day moving average of C

C can range from 0% to 100%.  D is simply a 10-day average of C.

Nasdaq HiLoMA = D

Interpretation: When Nasdaq HiLoMA drops below 20 the market is “oversold”.

Note that the sentence above says “the market is oversold” and NOT “BUY NOW AGGRESSIVELY WITH EVERY PENNY YOU HAVE.”  This is an important distinction because – like most indicators – while this one may often give useful signals, it will occasionally give a completely false signal (i.e., the market will continue to decline significantly).

A couple of “finer points”:

*Look for the indicator to bottom out before considering it to be “bullish”.

*A rise back above 20 is often a sign that the decline is over (but, importantly, not always).  Sometimes there may be another retest of recent lows and sometimes a bear market just re-exerts itself)

*If the 200-day moving average for the Dow or S&P 500 is currently trending lower be careful about using these signals.  Signals are typically more useful if the 200-day moving average for these indexes is rising or at least drifting sideways rather than clearly trending lower (ala 2008).

Figures 2 through 8 displays the S&P 500 Index with the Nasdaq HiLoMA indicator.  Click to enlarge any chart.

1Figure 2 – SPX with Jay’s Nasdaq HiLoMA ending 2006 (Courtesy AIQ TradingExpert)

2Figure 3 – SPX with Jay’s Nasdaq HiLoMA ending 2008 (Courtesy AIQ TradingExpert)

3Figure 4 – SPX with Jay’s Nasdaq HiLoMA ending 2010 (Courtesy AIQ TradingExpert)

4Figure 5 – SPX with Jay’s Nasdaq HiLoMA ending 2012 (Courtesy AIQ TradingExpert)

5Figure 6 – SPX with Jay’s Nasdaq HiLoMA ending 2014 (Courtesy AIQ TradingExpert)

6Figure 7 – SPX with Jay’s Nasdaq HiLoMA ending 2016 (Courtesy AIQ TradingExpert)

7Figure 8 – SPX with Jay’s Nasdaq HiLoMA ending 2018 (Courtesy AIQ TradingExpert)

Summary

The stock market is in a favorable seasonal period and is oversold.  As long as the former remains true, react accordingly (with proper risk controls in place of course).

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.

Just how much influence a President has on the stock market

chart patterns, indexes, market timing

I often wondered just how much influence a President has on the stock market and found this interesting chart from Macrotrends. 

In the first 21 months from their inauguration you can see the top 10 performing Presidents. Who would have thought Gerald Ford would be so far up the list. Of course geopolitical events and prior President and Congress actions also take time to percolate into the market. 

Obama came into office soon after the 2008 financial crisis unemployment near 9% in 2009 and Ford after the oil crisis and Nixon. There are of course many other influencing factors, but a good rule of thumb In economic terms, the first year or so of any administration is just a carryover from the previous administration.

Probably the most significant contributor for the last decade has been the Federal Reserve chairs who have kept short-term rates low, while driving longer-term rates down by buying up $4.5 trillion of US government bonds and mortgage-backed securities. Lower returns has driven many investors into riskier assets like Stocks and this has helped fuel the stock market run that began in March 2009 and continues today. 

Economics aside, the current correction, and yes we are still in corrective territory can be seen in this SPX monthly chart. The Fibonacci retracement drawn from the low of the February 2018 correction to the recent high shows we’re at or past the 38.2% level. The next significant level is at 50% level of around 2729.