For the record, I am now – and have for some time been – a “reluctant bull.”  I can look at a dozen different things – including the fact that they economy still shows no signs of the robustness that would typically justify the run that the stock market has enjoyed in recent years – and make an argument that the stock market is way overdue to run out of steam.

But the timeless, well-worn phrase, “The Trend is Your Friend” didn’t become a timeless, well-worn phrase for nothing. 

And so I continue to “ride the ride”.  But as I have mentioned more frequently of late, I am keeping a close eye on the exit.  Given my present “bad attitude” I tend to focus on and point out a lot more potentially bearish developments than bullish.  But what the heck, I might as well let the sun shine through on occasion.  So this time out, let’s highlight one development that suggests that “The End Is (Not Necessarily) Near!”
This is one of the things that has prompted me to “sit tight” and not listen to “those voices in my head” (No not those voices, the other ones…..), despite the fact that a meaningful correction could begin at any moment.

The Bullish Outside Month
Just as it takes a lot of “thrust” to get a rocket off of the ground, a large thrust upward in the stock market can be a sign that a particular rally is in the early stages rather than the late stages.  

So here is a pattern to consider:

A) This month’s low is less than or equal to last month’s low
B) This month’s close is greater than last month’s high
That’s it.  In Figure 1 we see the S&P 500 monthly bar chart from 1996 to the present with these “Bullish Outside Months” highlighted in green.  The first one occurred in October 1998 and launched the final surge in great bull market of the 1990’s (or as most of us above a certain age refer to it – “The Good Old Days”).

The most recent signal occurred at the end of February of this year.  This was only the 19th signal since 1970.  The action of the S&P 500 index following previous signals – looking out 3 months, 6 months and 12 months after each signal – appears in Figure 2.

As you can see, on a 3-month, 6-month and 12-month basis, the S&P 500 has been higher at least 77% of the time following previous signals.  Which creates something on a conundrum.

Summary
In my mind’s eye the stock market is ridiculously overbought and “due” for a good solid “whack” sometime between now and the end of September.  But this particular indicator suggests that that “whack” may not come. So for now my own primary investment strategy remains to play the long side of the market unless and until the major averages (Dow, SPX, Nasdaq 100 and Russell 2000) drop below their respective 200-day moving averages.  Fairly boring yes, but it pays to mind:

Jay’s Trading Maxim #72: Boring and effective is much better than exciting and AAAAAHHHHHH!!

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

Watching Weekly Dow Momentum
The stock market – like the Energizer Bunny – just keeps chugging along, with the Dow, the S&P 500 and the Nasdaq 100 all touching new highs in the last week (the Russell 2000 small-cap index is another story, and may ultimately serve as the “canary in the coal mine”, but for now “majority rules”).  So for now, disciplined trend-followers (“Hi my name is Jay – although it is a little difficult to speak at the moment as my teeth remain tightly clenched”) have done well to avoid all of the “Sell in May” warnings from all of those so called experts (“Um, hi my name is Jay?”).   But there is one sign that I think investors should follow that has historically proven useful during the middle months of mid-term election years.  

I first wrote about this on 5/6/2014 in an article titled “A Warning Sign to Watch“.  For full details I suggest you read that article, but for now let me give you the gist.

-Between May and October of mid-term election years, a warning sign occurs when the MACD Oscillator (many traders refer to it as the MACD Histogram) drops into negative territory.

For the record, the MACD Oscillator was below 0 during early May, but was in a rising trend along with the Dow itself.  The Oscillator returned to positive territory on 5/23 and remains there still.  So let me sum up my advice as succinctly as possible:

*KEEP AN EYE ON THE WEEKLY MACD OSCILLATOR FOR THE DOW JONES INDUSTRIALS AVERAGE. 

If it drops into negative territory be prepared to take defensive action.
If you have even the most basic charting software, checking the status of the weekly Dow MACD Oscillator after the close each week will take up approximately 12 seconds of your time.  Per the 5/6/14 article, if history is any guide, the 12 seconds a week time investment may prove to be very useful.

Looking for a Reversal in T-Bonds
As I write, t-bonds are in the middle of a nasty short-term sell off.  But there is hope.  As I wrote about on 4/8/14 in an article titled “A Simple Signal for Bond Traders”, a short-term bullish setup may be forming at the moment.  In a nutshell:

*When the 25-day moving average for ticker EWJ is below the 150-day moving average for ticker EWJ (long story short, t-bonds tend to trade inversely to Japanese stocks – go figure), then
*Wait for the 10-day CCI (Commodity Channel Index) for ticker TLT to drop below -100 and then turn up for one day.

Once that occurs a trader might consider buying the call option with at least 40 days left until expiration and the highest gamma among call options for that expiration.

In Figure 2 you can see that this setup is presently “locked and loaded” and will be triggered when the 10-day CCI for ticker TLT reverses back to the upside.

Traders should always remember that there is never any guarantee that the next signal will generate a profit, and should always have some sort of stop-loss or risk limiting planin place at the time that any new trade is entered.

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

FIGURE 6: AIQ DATA MANAGER. Use the AIQ Data Manager to set the RS tickers to the AIQALL list.

FIGURE 7: AIQ DATA MANAGER. Use the AIQ Data Manager to compute the group & sector indexes for the AIQALL list.

!A Trading Method for the Long Haul
!Author: Donald W. Pendergast Jr., TASC Bonus Issue 2014
!Coded by: Richard Denning 3/10/14
!www.TradersEdgeSystems.com
!INPUTS:
trendLen is 200.
rsiLen is 2.
minAvgVolume is 10000.
volaLen is 21.
relStrLen is 80.
minVolaRatio is 0.5.
rsSPXmin is 1.0.
rsGroupmin is 1.0.
trailBars is 2.
rsiBuyLvl is 5.
rsiExitLvl is 95.
exitLen is 18.
C is [close].
H is [high].
L is [low].
PD is {position days}.
!LONG TERM MOVING AVERAGE:
emaLT is expavg(C,trendLen).
emaST is expavg(L,exitLen).
!RSI WILDER
!To convert Wilder Averaging to Exponential Averaging use this formula:
!ExponentialPeriods = 2 * WilderPeriod - 1.
U is C-valresult(C,1).
D is valresult(C,1)-C.
rsiLen1 is 2 * rsiLen - 1.
AvgU is ExpAvg(iff(U>0,U,0),rsiLen1).
AvgD is ExpAvg(iff(D>=0,D,0),rsiLen1).
rsi is 100-(100/(1+(AvgU/AvgD))).
!VOLATILITY
price1 is H.
price2 is L.
ratio is price1 / price2.
dp is Ln(ratio).
dpsqr is Ln(ratio) * Ln(ratio).
totdpsqr is sum(dpsqr,volaLen).
sumdp is sum(dp,volaLen).
sumdpsqr is sumdp * sumdp.
sumdpave is sumdpsqr / volaLen.
diff is totdpsqr - sumdpave.
!!use 252 for daily, or 52 for weekly below
factor is 252 / (volaLen-1).
result is sqrt(diff * factor).
vola  is result * 100 .  
volaAvg is expavg(vola,volaLen).
volaSPXavg is tickerUDF("SPX",volaAvg).
volaRatio is volaSPXavg/volaAvg.
!AVERAGE VOLUME
avgVolume is expavg([volume],50).
!RELATIVE STRENGTH
roc is C / valresult(C,relStrLen).
rocSPX is tickerUDF("SPX",roc).
rocGroup is tickerUDF(rsticker(),roc).
groupSymbol is tickerUDF(rsticker(),symbol()).
groupName is tickerUDF(rsticker(),description()).
rsSPX is roc / rocSPX.
rsGroup is rocGroup / rocSPX.
!SCREENING RULES
VolumeRule if avgVolume > minAvgVolume.
TrendRule if C > emaLT.
VolaRule if volaRatio > minVolaRatio and simpleavg(H-L,10) > simpleavg(H-L,200).
RelStrRule if rsSPX > rsSPXmin and rsGroup > rsGroupmin.
PullbackRule if rsi < rsiBuyLvl.
EnoughData if hasdatafor(trendLen+10) > trendLen.
!FundamentalRule if [eps]>[eps est].
Screen if EnoughData
and TrendRule
and VolaRule
and RelStrRule
and PullbackRule
!and FundamentalRule
and VolumeRule.
EntryTrigger if C > lowresult(H,2,1).
Buy if valrule(Screen,1) and EntryTrigger.
Exit if (C < lowresult(L,trailBars,1)) 
or 
(valrule(C > emaST,1) and C < emaST)
or
rsi > rsiExitLvl.
ShowValues if EnoughData.

Well, OK, maybe not.  But life here in the Good Old US of A may be affected profoundly.  Which of course, would ripple out and affect much of the rest of the world.  So maybe it’s not that outrageous.
In any event, it sure is a catchy title, no?  In truth this piece is not an immediate call to action, but rather one of those short “hey, you might want to keep your eye on this” type pieces.  I am writing about the U.S. Dollar.

There are pro’s and con’s to a strong U.S. Dollar and there are pro’s and con’s to a weak U.S. Dollar.  If you would like to know what they are please see the steps below:

Step 1) Go to your web browser.  Type www.google.com and press Enter
Step 2) Type “pros and cons of strong U.S. dollar” and press Enter.
Step 3) Browse among the approximately 308,000 or so links until you find your answer.
Step 4) Type “pros and cons of weak U.S. dollar” and press Enter.
Step 5) Repeat Step 3.

Since at least the end of the gold standard in 1971 the U.S. dollar has served as the world’s “reserve currency”.  (This basically means that if you could only hold one currency you would want to hold the dollar.)  This has become one of those things that most people take for granted and assume will go on forever.

Still, given that we are now the most indebted “We the People” in the history of the planet, perhaps we shouldn’t be surprised that there has been a lot of talk recently (granted mostly among intentionally frightening and mostly annoying infomercials) about how the days of enjoying “reserve currency” status are numbered, and how this will trigger a panic out of the dollar, which will lead to all kind of bad things like, well, see Step 4 above.

Will the Dollar Collapse?
For me to pretend that I have the slightest idea whether or not the U.S. dollar will someday collapse would be a joke, and not the  funny kind.  But as  a trader and investor my “thing” is not so much “what will happen” as it is “what could happen and what the heck do I plan to do about it if it does?”
Which leads me to the following distractions:

Jay’s Trading Maxim #235: It’s not so much how much you make when things go right, but how much you keep when thing goes wrong.

Jay’s Trading Maxim #236: If you take care of the losing trades, the winning trades will take care of themselves (OK, for the record, this is not mine, I just gave it number 236 so I could use it as a segue into…..)

Jay’s Trading Maxim #237: Successful traders worry less about “Kicked Ass” and more about “Ass Kicked”, if you get my drift.

So why am I bringing all of this up?  Take a look at Figure 1 which displays a monthly chart of continuous U.S. dollar futures.  While the history of U.S. dollar trends is all very interesting and I would love to recap it for you, I am going to opt for the “a picture is worth a thousand (likely incredibly boring) words” mantra and encourage you simply to glance at Figure 1 if you want to know where the dollar has been in the past. 
And when you do – here is the important part – note that the dollar is forming a narrowing triangle (is there another kind?) pattern.  In other words, starting with the high in 2006 the dollar has been fluctuating in an ever smaller range. 

We “market analyst types” refer to this as “coiling” action.  Now if you are like me chances are you just squirmed slightly when you read that last sentence.  Because we all know what happens when something stops coiling – that’s right, it “uncoils”.  And “uncoiling” is typically not a quiet affair.

So here is the bottom line.  At some point – and just for the record it might not be for several years – the U.S. dollar will break out of this triangle one way or the other.  And chances are it will move sharply in price from that point.  And whether it breaks out to the upside or the downside it will have significant implications for the quality of life here in the U.S.  If you don’t believe me, see the 308,000 links referenced in Step #3 above.

So make a note to check in on the dollar once in awhile.  Because one of these days something profoundly significant is going to happen.

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

…and down will come, well just about everything, as far as I can tell.

OK, for the record maybe it should say “If the Dow Breaks.”  After all I am still firmly ensconced here at “Camp Bull.”  I would like to attribute this to disciplined nerves of steel, but it would be an understatement to say that that would be an overstatement.  The truth is my crystal ball broke a very long time ago (sadly I continued believing what it portended for a long time before I realized it was actually broken).  So I have long since held dual citizenship in “Camp Trend Follower”.

But I have got be honest…..I am feeling the urge to run like a sissy through the woods to “Camp Yikes”. 

The Overall Market
Defining the “overall” market is something of a crapshoot these days, as some of the “overall” market seems to be going one way and another part of the “overall” market seems to be going another way.  In Figure 1 we see the Dow, the S&P 500, the Nasdaq 100 and the Russell 2000.

In a nutshell, the “Generals” are still marching but the “Troops” are in retreat.  Now every market pundit seems to be offering up their opinion as to whether the “Generals” will ultimately lead the troops higher or the other way around.  With my crystal ball still out of order I must unfortunately go with my stock answer here of “it beats the heck out me.”  And “hey things are swell here at Camp Bull.”  But I have been around this business long enough to remember several instance where the “Troops” led the way (1984, 1987, 1990, 2000, 2008) and the “Generals” followed.  So we’ll see what we see.

OK, just in case that little segment was not foreboding enough, let’s get to the really “scary” part.

Sectors Suck in Summer (during Mid-term years)
One caveat before I even launch, the sample size of what I am about to detail is very small (6 calendar years each four years apart starting in 1990).  Also, that’s the good news.  As a “seasonalaholic” (“Hi, my name is Jay”) I am acutely aware of the following facts:

1. The market tends to perform better between the end of October and the third trading day of the following May than it does from the third trading day of May through the end of October (also known as “Where We Are Now.”)

2. This is a mid-term election year.

I also do a lot of work with sectors and sector funds as I have found that investing at the right sector at the right time is – all kidding aside – one heck of a great way to invest.
So I was curious as to which sectors tended to perform the best during the May to October period during mid-term election years.  Here is the short list:

Health Care.  Period.

Everything else.  Well on a buy in May and sell in October basis – let’s just say it isn’t pretty.  So here is the test I ran:

Tracking the growth of $1,000 invested in each Fidelity Select Sector fund only:
*Between the close of May trading day 3 and the end of September (for the record, October tends to be an OK month during mid-term election years – more on this topic in a future article) during each mid-term election year.

The results appear below in Figure 2.  If you are squimish you might want to brace yourself.

Figure 2 – Net %+(-) invested only between 3rd trading day of May and last trading day of September during mid-term election years (1990 , 1994, 1998, 2002, 2006, 2010, 2014)

Anyone notice a trend? To see just how bad things can be, once you are able to work yourself back up out of the fetus position, take a glance at Figure 3, which shows the three worst performers during the May-Sep mid-term year period – FSAIX (-71%), FSELX (-71%) and FSHOX (-79%).

Now I have an obvious flare for the obvious (which I think should be pretty obvious – also I tend to repeat myself) but I am not even going to comment on Figures 2 and 3.

The Good News
The one mistake you should not make based on looking at these numbers and charts is to assume that it is not possible to make money in sector funds between May and September of mid-term years.  It just requires something better than a buy and hold approach.  Several momentum systems and seasonal plays that I have developed over the years have still managed to show some pretty good gains historically “among the ruins” of midterm election summer months.

But if you’re gonna play, you’d better bring your “A” game.

Summary  
Repeating now – I am still in “Camp Bullish.”  And ideally I’d like to spend the summer.  There seems to be a lot of fear and loathing among the “crowd” that I follow regarding the stock market.  Typically that’s a good thing and suggests that the stock market just might surprise everyone this time around.  And I hope that it does.

But I will be keeping a pretty close eye on my “camp mates” in the days and week ahead. Any sign of “trouble” (i.e., Dow, S&P breaking below 200-day moving averages) and they are going to have to send a search party out to find me……

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