The importable AIQ EDS file based on Vitali Apirine’s article in the August, 2020 issue of Stocks & Commodities magazine, “The Compare Price Momentum Oscillator (CPMO),” can be obtained on request via email to info@TradersEdgeSystems.com.
… Here is a way you can compare at a glance the momentum of two different market indexes or securities in the same chart. It could also be used to help generate trading signals. In this first part of a three-part series, we’ll look at comparing index momentums…
The code is also available here:
!Author: Vitali Aprine, TASC August 2020
!Coded by: Richard Denning, 6/20/20
!www.TradersEdgeSystems.com
!Custom smoothing multiplier: 2 / time period
!PMO line: 20-period custom EMA of (10 × 35-period
!custom EMA of ((Today’s price – Yesterday’s price) /
!Yesterday’s price × 100))
!PMO signal line: 10-period EMA of the PMO line
Len1 is 20.
Len2 is 35.
Len3 is 10.
Ticker1 is “QQQ”.
Ticker2 is “SPY”.
C is [close].
C1 is valresult(C,1).
RC1 is (C/C1*100)-100.
custSmoLen1 is Len1 – 1.
custSmoLen2 is Len2 – 1.
CustEma is 10*expavg(RC1,custSmoLen2).
PMO is expavg(CustEma,custSmoLen1).
PMOsig is expavg(PMO,Len3).
Ticker1C is tickerUDF(Ticker1,C).
RC1ticker1 is (Ticker1C/valresult(Ticker1C,1)*100)-100.
CustEmaTicker1 is 10*expavg(RC1ticker1,custSmoLen2).
PMOticker1 is expavg(CustEmaTicker1,custSmoLen1).
Ticker2C is tickerUDF(Ticker2,C).
RC1ticker2 is (Ticker2C/valresult(Ticker2C,1)*100)-100.
CustEmaTicker2 is 10*expavg(RC1ticker2,custSmoLen2).
PMOticker2 is expavg(CustEmaTicker2,custSmoLen1).
CPMO is PMOTicker1 – PMOTicker2.
List if hasdatafor(1000) >= 900.
I coded the indicator described by the author. Figure 10 shows the indicator (QQQ,SPY,20,35) on chart of IWM. When the white line is above the red line on the CPMO indicator, this indicates that the QQQ is stronger than the SPY. Generally, it is considered bullish when the QQQ is leading in strength.
FIGURE 10: AIQ. The CPMO indicator is shown on a chart of IWM with parameters (QQQ,SPY,20,35).
Market volatility has stabilized some. 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.
In this article I wrote about a signal called “Bull Market Thrust”. The upshot is that since 1991 it has identified 8 “bullish periods”. The start and end dates of those periods – and the price performance of several indexes during each period – appear in Figure 1.
Figure 1 – “Bull Market Thrust” bullish periods
One key thing to note is that – focusing solely on the Nasdaq 100 Index – 100% of the “bullish periods” witnessed a gain, i.e., “perfection.” The average gain was +40%.
So that looks pretty good and pretty darned encouraging going forward since there was a new buy signal on June 8th of this year. And indeed, if history is a guide the outlook for the Nasdaq (and the stock market as a whole) is favorable in the next year. But there is one thing to keep in mind….
Jay’s Trading Maxim #33: When you have actual money on the line, the chasm between theory and reality can be a mile wide.
The bottom line is that even during “bullish periods” the market fluctuates. And if one is focused on “news” there is plenty of opportunity to feel angst no matter how strong the market “should be.” So, in an effort to “mange expectations”, the charts below display the price action of the Nasdaq 100 during each “bullish period” displayed in Figure 1.
Nasdaq 100 during “Bullish Periods” based on Bull Market Thrust signals
*Each chart displays one of the “Bullish Periods” from Figure 1.
*Each chart contains one or more red boxes highlighting a period of “market trouble”
THE POINT: the key thing to ponder is how easily it would be to allow yourself to get “shaken out” if you were focused on what the “news of the day” is telling you, rather than what the market itself is telling you.
Figure 2 – NDX: 1/29/91 – 2/28/93
Figure 3 – NDX: 6/5/2003-6/4/2004
Figure 4 – NDX: 3/23/2009-3/1/2011
Figure 5 – NDX: 7/7/2011-7/6/2012
Figure 6 – NDX: 7/9/13-7/15/2014
Figure 7 – NDX: 2/26/2016-11/17/2017
Figure 8 – NDX: 1/8/2019-1/17/2020
Figure 9 – 6/8/2020-?
The bottom line is that:
*Sometimes the market “took off” after the signal
*Sometime the market sold off shortly after the signal (see 2011 signal)
*In every case there was a drawdown of some significant somewhere along the way
The purpose of paying attention to things like “Bull Market Thrust” buy signals is not to “pick bottoms with uncanny accuracy.”
In the real word, the purpose is to help strengthen our resolve in riding the exceptional opportunities.
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.
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.
