All posts by admin

Summer Fun with Biotech and Real Estate

ETFS, jay kaeppel, seasonal
Studies suggest that buying an upside breakout can be a good strategy.  It sure can be scary though.  There is always that underlying fear of looking like “the last fool in” if the security in question experiences only a false breakout and then reverses back to the downside (and I hate it when that happens).  Still, for a stock to go from $50 to $100 it first has to go to $50.01, then $50.02, etc.
Buying into an impending breakout can be an even dicier proposition since this involves buying into what is essentially a “topping formation.”  I recently wrote about consolidation patterns in biotech and real estate.  These sectors appear to be getting closer to a resolution.  Consider tickers XBI (biotech ETF) and IYR (real estate ETF) as shown in Figure 1.
1Figure 1 – Biotech and Real Estate (Courtesy AIQ TradingExpert)
XBI appears to be breaking out to the upside – at least for now.  IYR is close to breaking out – however, one could look at it in an exactly opposite manner and claim that it is “running into resistance near the old highs and therefore may be forming a top.”
Ah, the eye of the beholder.
A Seasonal Play in Biotech and Real Estate
It is pretty widely known at this point that the summer months tend not to be very favorable for the stock market overall (although July of this year might be an exception to the rule).  But biotech and real estate often provide a summer trading opportunity.
The seasonally favorable period extends from:
*The close on June trading day #17 (6/23/2017 this year)
*Through the close on July trading day #21 (7/31/2017 this year)
Figure 2 displays the growth of $1,000 split evenly between ticker FBIOX (Fidelity Select Biotech) and ticker FRESX (Fidleity Select Real Estate) every since 1989 during this period.
2Figure 2 – Growth of $1,000 split between FBIOX and FRESX during seasonally favorable summer period (1989-2016)
Figure 3 displays a summary of the results since 1989.
Measure Result
# Years UP 22 (79%)
# Years DOWN 6 (21%)
Average All Years +3.3%
Average UP Year +5.0%
Average DOWN Year (-2.9%)
Best UP Year +14.9% (2009)
Worst DOWN Year (-4.3%) (2004)
Figure 3 – Summary Results
One thing to  note is the lack of downside volatility despite the fact that both biotech and real estate can be quite volatile (worst down period was -4.3% in 2004).
Year-by-Year Results Appear in Figure 4.  For comparisons sake the annual performance for the Dow Jones Industrials Average (DJIA) during the same period is included.
  Year        FBIOX/FRESX    DJIA    Diff
1989 4.8 5.1 (0.3)
1990 2.8 2.1 0.7
1991 5.8 3.6 2.2
1992 7.0 3.2 3.7
1993 0.8 2.1 (1.3)
1994 (0.6) 1.8 (2.4)
1995 3.5 2.7 0.8
1996 (4.1) (4.1) 0.1
1997 2.9 6.4 (3.5)
1998 1.8 2.2 (0.5)
1999 4.4 (0.1) 4.5
2000 0.3 1.1 (0.8)
2001 (3.6) 0.1 (3.8)
2002 (1.5) (4.9) 3.4
2003 8.0 1.0 7.0
2004 (4.3) (2.9) (1.4)
2005 9.6 2.1 7.5
2006 4.0 1.8 2.2
2007 (3.2) (1.0) (2.1)
2008 6.7 (1.9) 8.6
2009 14.9 10.0 4.9
2010 2.0 1.6 0.4
2011 3.0 0.8 2.2
2012 5.7 4.0 1.7
2013 12.6 5.2 7.5
2014 1.1 0.4 0.7
2015 0.6 (2.2) 2.8
2016 8.6 2.3 6.2
Figure 4 – Annual Results for FBBIOX/FRESX during seasonally favorable  summer period versus Dow Jones Industrials Average
For the record,during the seasonally favorable summer period:
*The FBIOX/FRESX combo has outperformed the Dow in 19 out of 28 years.
*$1,000 invested in FBIOX/FRESX grew to $2,440
*$1,000 invested in the Dow Industrials grew to $1,505
Summary
So is biotech and real estate the place to be in the month ahead?  Well, that’s “the thing” about seasonal trends – there’s no way to know for sure what it’s going to be “this time around.”
On a cautionary note, it should be pointed out that the FBIOX/FRESX combo has registered a gain during the seasonal summer period – and outperformed the Dow – in each of the last 9 nine years.
So is it “Away We Go” or this the year that “Murphy’s Law” exacts its revenge?  As always, time will tell.
Jay Kaeppel  Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqeducation.com) client. 
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.

One Good Reason NOT to Pick a Bottom in DIS

back testing, educational newsletters, jay kaeppel, seasonal
A better title for this article might be “How to Avoid Losing 98% in Disney.”
The recent dip in the price of Disney stock may ultimately prove to be a buying opportunity.  But for reasons detailed below I am going to let this one pass.
If you have read my stuff in the past you know that I look a lot at seasonal trends.  This is especially true for sectors and commodities – which in some cases can be tied to recurring fundamental factors.  I have occasionally looked at individual stocks (here and here and here), but tend to think that an individual company’s fundamentals can change so drastically over time that a persistent seasonal trend is less likely.
It appears that there are exceptions to every rule.
In Figure 1 below we see that after a strong run up from its 2009 low, Disney finally topped out in August of 2015. Since that time it’s been a string of large moves up and down – with the latest being down. This might prompt one to consider the latest dip as a buying opportunity.  And in fact, maybe it is. But I won’t be making that play myself based simply on a seasonal trend in DIS stock that was highlighted by Brooke Thackray in his book Thackray’s 2017 Investor’s Guide.
0Figure 1 – Is latest dip in DIS a buying opportunity?  Maybe, but history suggests we look elsewhere….(Courtesy AIQ TradingExpert)
When NOT to Own Disney Stock
In his book, Thackray highlights the period from June 5th through the end of September as an “unfavorable” period for DIS stock.  He also listed a specific “favorable” period that I’ll not mention here.  For purposes of this article I made the following changes:
*The “unfavorable” period begins at the close on the 5th trading day of June and ends at the close on the last trading day of September.
*The rest of the year – i.e., end of September until the close on the 5th trading day of June – is considered the “favorable” period.
Also, the test uses price data only.  No dividends are included nor is any interest assumed to be earned while out of DIS stock.
The results are fairly striking.  From the end of 1971 through the end of 2016:
*$1,000 invested in DIS on a buy-and-hold basis grew +8,042% to $81,422 (average annual +/- = +15.8%)
*$1,000 invested in DIS only during the “favorable” period grew +430,874% to $4,309,735 (average annual +/- = +25.0%)
*$1,000 invested in DIS only during the “unfavorable” period declined -98% to $18.89 (average annual +/- = (-6.9%))
It’s sort of hard to ignore the difference between +430,784% and -98%.
Figure 1 displays the cumulative performance during the unfavorable period from 1971 through 2016.
1
Figure 1 – Growth of $1,000 invested in DIS only from close of June Trading Day #5 through the end of September (1971-2016)
Figure 2 displays the growth of $1,000 during the favorable period (blue line) versus a buy-and-hold approach (red line).
2
Figure 2 – Growth of $1,000 invested in DIS only from the end of September through June Trading Day #5 (blue) versus Buy-and-Hold (red); 1971-2016
*The favorable period showed a net gain in 39 out of 45 years (87%)
*The unfavorable period showed a net gain in only 13 out of 45 years (29%)
*Buy-and-hold showed a net gain in 28 out of 45 years (62%)
Figure 3 displays year-by-year results.
Year Favorable Unfavorable Buy/Hold
1972 78.1 (3.5) 71.9
1973 (53.5) (12.0) (59.1)
1974 4.4 (56.4) (54.4)
1975 175.6 (12.4) 141.5
1976 5.2 (6.9) (2.0)
1977 (28.2) 19.1 (14.4)
1978 4.6 (3.3) 1.2
1979 1.2 10.5 11.9
1980 20.8 (5.8) 13.8
1981 42.8 (28.7) 1.9
1982 16.0 4.4 21.1
1983 (5.7) (11.6) (16.7)
1984 25.6 (9.6) 13.6
1985 94.4 (3.3) 88.0
1986 98.3 (23.0) 52.8
1987 14.6 20.1 37.6
1988 4.2 6.5 10.9
1989 32.7 28.3 70.3
1990 28.4 (29.4) (9.3)
1991 14.4 (1.5) 12.8
1992 51.3 (0.7) 50.2
1993 16.0 (14.5) (0.8)
1994 23.2 (12.4) 7.9
1995 27.7 0.3 28.0
1996 18.4 0.0 18.4
1997 43.3 (0.9) 41.9
1998 36.9 (33.6) (9.1)
1999 15.8 (15.8) (2.5)
2000 4.0 (4.8) (1.1)
2001 23.6 (42.1) (28.4)
2002 12.6 (30.1) (21.3)
2003 50.9 (5.2) 43.0
2004 28.9 (7.6) 19.2
2005 (2.5) (11.6) (13.8)
2006 41.8 0.8 43.0
2007 (6.2) 0.4 (5.8)
2008 (24.4) (7.0) (29.7)
2009 29.1 10.1 42.1
2010 16.1 0.2 16.3
2011 30.4 (23.4) (0.0)
2012 15.9 14.6 32.8
2013 54.3 (0.6) 53.4
2014 17.2 5.2 23.3
2015 20.4 (7.3) 11.6
2016 5.0 (5.6) (0.8)
2017 ? ? ?
# Years UP 39 13 28
# Years DOWN 6 32 17
Average % +/- 25.0 (6.9) 15.8
Figure 3 – Year-by-Year Results
Summary
Brooke Thackray found an extremely interesting and robust “unfavorable” seasonal trend in DIS stock.  Of course none of the data above guarantees that DIS stock is doomed to languish and/or decline in the months ahead.  But I for one do not intend to “buck the odds” and play the long side of DIS for a while.
Jay Kaeppel  Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro http://www.aiqsystems.com) client. 
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.

This is What a Lack of Fear Looks Like (I Think)

ETFS, jay kaeppel, market timing
I keep hearing that investors are “skittish” and “concerned” about the markets and the economy and so forth.  But the recent action in a relatively obscure ETF jumped out at me and seems to suggest that this is not necessarily the case – at least not among those who are active in the markets.  From what I can tell these people don’t have a care in the world.  See what you think.
What is Ticker SVXY?
A few key concepts:
*Implied volatility (IV) essentially measures the level of time premium built into the price of a given option or series of options on a given security.  In anxious times implied volatility will rise – sometimes sharply – as an increase in demand by speculators rushing to buy options to protect / hedge / speculate / etc in a given security, causes time premium to inflate.  When traders are less worried or more complacent then implied volatility will typically fall as decreased option buying pressure results in lower time premiums.
In sum, high and/or sharply rising IV typically signals fear, low and or declining IV typically signals a lack thereof.
*The VIX Index (see Figure 1) measures the implied volatility of options for the S&P 500 Index traded at the CBOE.  Typically when the stock market declines – especially when it declines sharply – the VIX index tends to “spike” as fearful traders rush in and bid up S&P 500 Index option prices
1
Figure 1 – VIX Index (trading inversely to S&P 500 Index) (Courtesy AIQ TradingExpert)
*In essence, the VIX Index is “inversely correlated” to the stock market.
*Ticker SVXY is an ETF that is designed to track the “inverse” of the VIX Index.  In other words, when VIX rises, SVXY falls and vice versa.  This also means the following:
*Ticker SVXY is highly correlated to the SP 500 Index.  In other words, as the stock market moves higher SVXY typically also moves higher and vice versa.
2
Figure 2 – SVXY (movements are correlated to the S&P 500 index)(Courtesy AIQ TradingExpert)
In sum, a declining trend in the price of SVXY shares typically signals fear, while a rising trend in the price of SXVY typically signals a lack thereof.
Now to My Concern
Hopefully some of that made sense.  In a nutshell, the key takeaways are that when fear is low:
*SVXY rises
*Implied volatility declines
But what if both go to extremes?  Is that a bad thing?  The reason I ask appears in Figure 3. 3
Figure 3 – Ticker SVXY at an all-time high with implied volatility for options on ticker SVXY plunging (both pointing to a lack of fear)
As far as I can tell, this is what a lack of fear looks like:
*Ticker SVXY is rising dramatically
*Implied volatility (SVXY options) is plunging
In the last 4 years there has never been a bigger disparity between these two measures of “fear” – and they are both pointing to “no fear.”
Summary
So the obvious question now is – does any of this matter?  I mean this is more of a “perspective” indicator (“where we are now”) than a “timing’  indicator (“where we are headed next”).  I cannot presently point out a way to use this to generate specific buy and sell signals.
In addition, as a trend-follower I am not the type to make any “Aha, the End is Near” type pronouncements.  As long as the market wants to keep running higher I am happy to “go along for the ride.”
But the less I see my fellow riders being concerned about the market, the more concerned I become.
In the long run that instinct has served me well.
(Here’s hoping that my instinct is wrong this time)
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client. http://jayonthemarkets.com/
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.

Detecting Swings

back testing, EDS, Stocks & Commodities traders tips, technical indicator

The AIQ code based on Domenico D’Errico’s article in the May 2017 issue of Stoks Commodities, “Detecting Swings,” is provided below.

I tested the author’s four systems using the NASDAQ 100 list of stocks on weekly bars, as did the author, from 3/16/2005 through 3/14/2017. Figure 7 shows the comparative metrics of the four systems using the four-week exit. The results were quite different than the author’s, probably due to a different test portfolio and also a 10-year test period rather than the author’s 20-year period. In addition, my test results show longs only, whereas the author’s results are the average of both the longs and shorts.

Sample Chart
 
FIGURE 7: AIQ. As coded in EDS, this shows the metrics for the author’s four systems run on NASDAQ 100 stocks (weekly bar data) over the period 3/16/2005 to 3/14/2007.

The Bollinger Band (Buy2) system showed the worst results, whereas the author’s results showed the Bollinger Band system as the best. The pivot system (Buy1) showed the best results, whereas the author’s results showed the pivot system as the worst. I am not showing here the comparative test results for the Sell1 thru Sell4 rules, as all showed an average loss over this test period.

!DECTECTING SWINGS
!Author: Domenico D'Errico, TASC May 2017
!Coded by: Richard Denning, 3/15/17
!www.TradersEdgeSystems.com

!Set to WEEKLY in properties

Low is  [low].
Low1  is valresult(Low,1).
Low2  is valresult(Low,2). 
High is [high].
High1  is valresult(High,1).
High2  is valresult(High,2). 
PivotLow if Low1 < Low2  and Low1 < Low.
PivotHigh if High1 > High2  and High1 > High.

Buy1 if  PivotLow.  
Sell1 if  PivotHigh.    

!Set parameter for bollinger bands to 12 with 2 sigma (weekly) in charts:
Buy2 if [close] > [Lower BB] and valrule([close] <= [Lower BB],1).
Sell2 if [close] < [Upper BB] and valrule([close] >= [Upper BB],1).

!Set parameter for Wilder RSI to 5 (weekly) in charts:
Buy3 if [RSI Wilder] > 40 and valrule([RSI Wilder] <= 40,1).
Sell3 if [RSI Wilder] < 60 and valrule([RSI Wilder] >= 60,1).

Buy4 if [RSI Wilder] < 40  And Low > Low1.
Sell4 if [RSI Wilder] > 60  And High < High1.    

Exit if {position days} >= 4.
—Richard Denning
info@TradersEdgeSystems.com
for AIQ Systems
Editor note: The code and EDS file can be downloaded from http://aiqsystems.com/Detecting_Swings_TASC_May_2017.EDS

It’s Soon or Never for Bonds

EDS, jay kaeppel
There is great trepidation in the bond market these days. Most investors seem to have the “interest rates are sure to rise” mantra playing on auto loop in their head.  And this is not entirely unwarranted.  Given the historical tendency for bond yields to move in long, slow trends (20 years or more essentially in one direction is not uncommon), I for one am pretty confident in believing that interest rates will be higher 20 years from now than they are now.
But that is not the fear that is playing in people’s heads. The fear in people’s heads is that rates are rising soon (like immediately) and in a big way.  This however, may or may not prove to be the case.
Figure 1 displays a history of 10-year treasury yields through about 2012 (FYI 10-yr. yields are roughly in changed since that time).  Note the long-term nature of interest rate trends and that while there are “spikes” here and there, most major moves play out over time and not in “here today, sharply higher tomorrow” fashion.
1Figure 1 –
10-year treasury bond yields; 1900-2012(Courtesy: ObservationsandNotes.blogspot.com)
Also, you can see in Figure 2 – one can make a compelling argument that bond yields are not “officially rising”, at least not yet.
1
Figure 2 – Yields still “officially” in a downtrend
Bonds are Due to Bounce – But Will They?
One way to identify important turning points in any market is when a market doesn’t do something that it would normally be expected to do.  For example, here is a simple thought process:
1) The bond market is oversold
2) In the past 30 years, pretty much anytime it would get oversold a rally ensued
3) Therefore, bonds should rally soon
But will they – that is the question.  And in my opinion, the answer is important.
*If bonds rally soon (i.e., over the course of say the next several months) then “the status may still be quo”.
*If bonds do not rally soon, then it may be a sign that “things are changing”
Which Way Bonds?
Figures 3 and 4 below display ticker TLT (an ETF that tracks the long-term treasury bond) with an indicator I call UpDays20.  In this case we are looking at weekly bars and not daily bars, but the concept is the same.
UpDays20 is calculated by simply adding up all of the weeks that have showed a weekly gain over the past 20 weeks and then subtracting 10 (the AIQ TradingExpert Expert Design Studio code appears at the end of this article, after the disclaimer).
If 10 of the past 20 weeks have showed a weekly gain then the upDays20 indicator will read 0 (i.e., a total of 10 weeks were up minus 10 = 0).  If only 6 weeks showed a gain in the past 20 weeks then the UpDays20 indicator will read -4, etc.
What to look for: Typically (at least in the declining rate environment of recent decades) when UpDays20 rises by a value of 2 from a low of -2 or less, a decent rally in bonds has ensued.
For example, if UpDays20 falls to -4 then a rise to -2 or higher triggers a buy signal.  If it falls only as low as -3 then a rise to -1 or higher is required.  If it falls only as low as -2 then a rise to 0 or higher is required.
Figures 3 and 4 highlight signals since roughly 2004.
3
Figure 3 – Ticker TLT with UpDays20 weekly buy signals (2004-2010); (Courtesy AIQ TradingExpert)
4a
Figure 4 – Ticker TLT with UpDays20 weekly buy signals (2010-2017); (Courtesy AIQ TradingExpert)
As you can see in Figures 3 and 4, most of the signals highlighted were followed by at least a decent short-term rally.
In 2017, buy signals from the UpDays20 indicator occurred on 1/13 and 4/14.  TLT is up +0.3% since the 1/13 signal and down -1.4% since the 4/14 signal.
Summary
Either:
1) This is an excellent time to buy the long-term bond (looking for at least a short to intermediate term rally) as a rally is overdue
OR
2) The “times they may be a changing” for bonds
So keep an eye on TLT over the next several months.
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.
AIQ Expert Design Studio Code for UpDays20
Up1 if [close] > val([close],1).
Up2 if val([close],1) > val([close],2).
Up3 if val([close],2) > val([close],3).
Up4 if val([close],3) > val([close],4).
Up5 if val([close],4) > val([close],5).
Up6 if val([close],5) > val([close],6).
Up7 if val([close],6) > val([close],7).
Up8 if val([close],7) > val([close],8).
Up9 if val([close],8) > val([close],9).
Up10 if val([close],9) > val([close],10).
Up11 if val([close],10) > val([close],11).
Up12 if val([close],11) > val([close],12).
Up13 if val([close],12) > val([close],13).
Up14 if val([close],13) > val([close],14).
Up15 if val([close],14) > val([close],15).
Up16 if val([close],15) > val([close],16).
Up17 if val([close],16) > val([close],17).
Up18 if val([close],17) > val([close],18).
Up19 if val([close],18) > val([close],19).
Up20 if val([close],19) > val([close],20).
UpCount is (Up1+ Up2+Up3+Up4+Up5+Up6+Up7+Up8+Up9+Up10+Up11+Up12+Up13+Up14+Up15+Up16+Up17+Up18+Up19+Up20)-10.
You can also download the EDS file for this at this link http://aiqsystems.com/Its_Soon_or_Never_for_Bonds.EDS