In the late 1980’s, Japan seemed destined to “rule the financial world”. But when it comes to the financial markets – things don’t always pan out as they appear destined to. The Nikkei Index topped out in late 1989, didn’t bottom out until February 2009 and has yet to return to its 1989 peak.
But it sure is trying. This past week the Nikkei reached its highest level 1991. So, hooray for the Japanese. Back here in the US of A there may be a slightly different take. For as we will discuss in a moment, what is good for Japanese stocks is (apparently) bad for US bonds.
Ticker EWJ
As our proxy for Japanese stocks we will use ticker EWJ (iShares Japan). In Figure 1 you can the monthly action since the ETF started trading in 1996.
Since 1996 EWJ has broken in the $60 a share range on 5 previous occasions, only to be rebuffed. You can see the latest upward thrust at the far right. Will this be the time it breaks through? It beats me and in fact that is not really the focus of this article. The real question posed here is “what about U.S. treasury bonds?” Huh? Consider Figure 2.
The top clip of Figure 2 displays a weekly chart of EWJ with a 5-week and 30-week moving average drawn. The bottom clip displays a weekly chart of ticker TLT – the iShares ETF that tracks the long-term U.S. treasury bond.
Note that – using highly technical terms – when one “zigs”, the other “zags.”
The thing to note is the inverse correlation between the two – i.e., when Japanese stocks advance, US treasuries tend to decline and vice versa. For the record (and for you fellow numbers geeks out there) the correlation coefficient in the last 2 years is -0.45 (1 means they trade exactly the same, -1 means they trade exactly inversely).
For my purposes:
*EWJ 5-week MA < EWJ 3-week MA = BULLISH for US treasuries
*EWJ 5-week MA > EWJ 3-week MA = BEARISH for US treasuries
Any real merit to this?
*The blue line in Figure 3 displays the cumulative $ +(-) achieved by holding a long position in t-bond futures ($1,000 a point) when the EWJ indicator is BULLISH (for U.S. bonds)
*The orange line in Figure 3 displays the cumulative $ +(-) achieved by holding a long position in t-bond futures ($1,000 a point) when the EWJ indicator is BEARISH (for U.S. bonds)
Figure 3 – $ + (-) for Treasury Bond Futures when EWJ indicator is BULLISH for bonds (blue) or BEARISH for bonds (orange)
Summary
Bond investors might keep a close eye on Japanese stocks for a while. If the latest thrust higher follows through and becomes the move that finally breaks out to the upside, the implication would appear to be negative for U.S. long-term treasury bonds. On the flip side, if Japanese stocks fail once again to break through and reverse to the downside, then things might look a whole lot better for the 30-year US treasury.
Jay Kaeppel
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.
To put this piece in context please refer to Part I here.
Part I detailed the Good News (the stock market is still very much in a bullish trend and may very well continue to be for some time) and touched on one piece of Bad News (the market is overvalued on a long-term valuation basis).
The Next Piece of Bad News: The “Early Lull”
In my book, Seasonal Stock Market Trends, I wrote about something called the Decennial Pattern, that highlights the action of the stock market in a “typical” decade.
The Four Parts of the “Typical Decade” are:
The Early Lull: Market often struggles in first 2.5 years of a decade
The Mid-Decade Rally: Market typically rallies in the middle of a decade – particularly between Oct 1 Year “4” and Mar 31 Year “6”
The 7-8 Decline: Market often experiences a sharp decline somewhere in the Year “7” to Year “8” period
The Late Rally: Market often rallies strongly into the end of the decade.
We are now in the “Early Lull” period. This in no way “guarantees” trouble in the stock market in the next two years. But it does offer a strong “suggestion”, particularly when we focus only on decades since 1900 that started with an Election Year (which is where we are now) – 1900, 1920, 1940, 1960, 1980, 2000.
As you can see in Figures 5 and 6, each of these 6 2.5-year decade opening periods witnessed a market decline – -14% on average and -63% cumulative. Once again, no guarantee that 2020 into mid 2022 will show weakness, but….. the warning sign is there
Figure 5 – Dow price performance first 2.5 years of decades that open with a Presidential Election Year (1900-present)
Figure 6 – Cumulative Dow price performance first 2.5 years of decades that open with a Presidential Election Year (1900-present)
Summary
Repeating now: the trend of the stock market is presently “Up”.
Therefore:
*The most prudent thing to do today is to avoid all of the “news generated” worry and angst and enjoy the trend.
*The second most prudent thing to do is to acknowledge that this up trend will NOT last forever, and to prepare – at least mentally – for what you will do when that eventuality transpires, i.e., take a moment to locate the nearest exit.
Stay tuned for Part III
Jay Kaeppel
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 does not represent 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.
As the primary currency recognized around the globe, the U.S. Dollar is pretty important. And the trend of the dollar is pretty important also. While a strong dollar is good in terms of attracting capital to U.S. shores, it makes it more difficult for U.S. firms that export goods. One might argue that a “steady” dollar is generally preferable to a very strong or very weak dollar.
Speaking of the trend of the dollar, a lot of things move inversely to the dollar. In fact, one can typically argue that as long as the dollar is strong, certain “assets” will struggle to make major advances. These include – commodities in general, metals specifically, foreign currencies (obviously) and international bonds (strongly).
Let’s first take a look at the state of the dollar.
Ticker UUP
For our purposes we will use the ETF ticker UUP ( Invesco DB US Dollar Index Bullish Fund) to track the U.S. Dollar. Figure 1 displays a monthly chart and suggests that UUP just ran into – and reversed at least for now – in a significant zone of resistance.
Which way will things go? It beats me. But I for one will be keeping a close eye on UUP versus the resistance levels highlighted in Figures 1 and 2. So will traders of numerous other securities.
Inverse to the Buck
Figure 4 displays the 4-year weekly correlation for 5 ETFs to ticker UUP (a correlation of 1000 means they trade exactly the same a UUP and a correlation of -1000 means they trade exactly inversely to UUP).
In the following charts, note the inverse relationship between the dollar (UUP on the bottom) and the security in the top chart. When the dollar goes way down they tend to go way up – and vice versa.
Note also that in the last year several of these securities went up at the same time the dollar did. This is a historical anomaly and should not be expected to continue indefinitely.
Figure 8 – Ticker BWX (SPDR Bloomberg Barclays International Treasury Bond) vs. UUP (Courtesy AIQ TradingExpert )
Figure 9 – Ticker IBND (SPDR Bloomberg Barclays International Corporate Bond) vs. UUP (Courtesy AIQ TradingExpert )
Figure 10 – Ticker FXE (Invesco CurrencyShares Euro Currency Trust) vs UUP (Courtesy AIQ TradingExpert )
Summary
If the dollar fails to break out of it’s recent resistance area and actually begins to decline then commodities, currencies, metals and international stocks and bonds will gain a favorable headwind. How it all actually plays out, however, remains to be seen.
So keep an eye on the buck. Alot is riding on it – whichever way it goes.
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.
Technology is what it’s all about these days. Technology (primarily) runs on semiconductors. If the semiconductor business is good, business is good. OK, that’s about as large a degree of oversimplification as I can manage. But while it may be overstated, there is definitely a certain amount of truth to it.
So, it can pay to keep an eye on the semiconductor sector. The simplest way to do that is to follow ticker SMH. Keeping with the mode of oversimplifying things, in a nutshell, if SMH is not acting terribly that’s typically a good thing. So where do all things SMH stand now? Let’s take a look.
Ticker SMH
As with all things market-related (among other things), beauty is in the eye of the beholder. A quick glance at Figure 1 argues that SMH is inarguably in a strong uptrend, well above its 200-day moving average
A glance at Figure 2 suggests that SMH has just completed 5 waves up and may be due for a decline.
Figure 2 – SMH with potentially bearish Elliott Wave count (Courtesy ProfitSource by HUBB)
And Figure 3 highlights a very obvious bearish divergence between SMH weekly price action and the 3-period RSI indicator – i.e., SMH keeps moving incrementally higher while RSI3 reaches slightly lower highs each time. Speaking anecdotally, this setup seems to presage at least a short-term decline maybe 70% of the time. Of course, the degree of decline varies also.
So, what does it all mean? First off, I am not going to make any predictions (if you knew my record on “predictions” you would thing that that is a good thing). I am simply going to point out that one way or the other SMH may be about to give us some important information.
Scenario 1 – SMH breaks out to the upside and stays there: If SMH breaks through the upside and runs, the odds are very high that the overall stock market will run with it.
Course of action: Play for a bullish run by the overall market into the end of the year.
Scenario 2 -SMH breaks out briefly to the upside but then falls back below the recent highs: This would be at least a short-term bearish sign. Failed breakouts are typically a bad sign and the security in question often behaves badly after disappointing bullish investors. In this case, if it happens to SMH it could follow through to the overall market.
Course of action: If this happens, you might consider “playing some defense” (hedging, raising some cash, etc.) . Failed breakouts often make the market a little “cranky” (and cranky is one of my fields of expertise).
Scenario 3: SMH fails to breakout and suffers an intermediate-term decline. If I were to fixate only on the bearish RSI3 divergence I showed earlier in Figure 3, this would seem like the most likely result.
Course of action: If SMH sells off without breaking above recent resistance, keep an eye on SMH price via its 200-day moving average. Simple interpretation goes like this: If SMH sells off but holds or regains it’s 200-day moving average then the bullish case can quickly be re-established; If SMH sells off and holds below its 200-day moving average, that should be considered a bearish sign for the overall market.
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.
Tuesday our intraday snapshot revealed groups were strong still, but the Expert System showed weakness in stocks – we can profit while markets are still open.
We downloaded the snapshot midway through the trading day, ran our reports and right off noticed the AI Expert Rating system on stocks showed far more down ratings than up. The groups were still strongly up.
This video shows what we saw mid morning 9-10-19
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The major stock indexes fell about 5% in May and rebounded most of the loss in June so far in one week. Source: CNBC.com
CURRENT EVENTS INFLUENCING MARKET MOVEMENT:
Stocks fell because of the Chinese and the 5% Mexican tariff announcement. There will probably be a positive announcement on the Mexican tariff front as tariffs will hurt our economy and the auto industry. In a positive development, Fed officials said they would be open to reducing interest rates if the tariffs weaken the economy. The current interest rate on the ten-year bond has dropped from 3.2% on the ten-year bond to about 2.10% now just in roughly six months. The affordability of buying a new house has gotten much better.
Trump will do what he can to shore up the economy, and if the markets fall, he is keenly aware of stemming any significant decline in the stock market as he wants to be reelected. The jobs report was a little weaker than was expected; that is why the Fed may reduce interest rates to keep the economy on an upward trajectory consistent with a 2-3% per year growth in the GDP. Overall, I am still positive on the economy unless full tariffs are enacted on the Mexican and the Chinese economies.
If they are expanded to the 25% fully enacted, I will be getting more cautious on the economy and the stock markets.
INTEREST RATE SCENARIO
The Federal funds rate is about 50 basis points or half of 1% higher than the two and five year Treasury Notes and has historically indicated that a recession is looming. The next few months will indicate whether the economy will soften. At this point, I don’t think it will decline as much as to go into recession, but there are still risks. Trump will determine what will happen to the economy. If the tariff situation is resolved, then I think the economy will still be in a growth phase, but if the tariffs are not resolved and get worse, the risks of a recession will increase dramatically.
MARKET RECAP:
Last month on my May 5th Bartometer I said that if the S&P 500 closes below 2,886 I will get VERY CAUTIOUS and It did. After that, it proceeded to 2,740 a drop OF 5%, AND my computer models gave a BUY signal ON 6/5/19, the big up day at 2,800, and it rallied to an intraday high of 2,885.85 and closed at 2875. Even though we are on the BUY-HOLD signal, I would like the S&P 500 to break out of 2886, preferably the 2,893 level and stay there for 2 to 3 days for me to believe the rally can approach the old highs of 2,954. See the charts for an explanation.
Index Averages
Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until June 7, 2019.
*Dow Jones +12.50% S&P 500 +15.60% NASDAQ Aggressive growth +17.50% I Shares Russell 2000 ETF (IWM) Small cap +12.97% International Index (MSCI – EAFE ex USA) +9.97% Moderate Mutual Fund +8.20% Investment Grade Bonds (AAA) +7.03% +2.64% High Yield Merrill Lynch High Yield Index +7.39% +4.26% Floating Rate Bond Index +4.90% +2.60% Fixed Bond Yields (10 year) +2.10% Yield 2.63%
The average Moderate Fund is up 8.2% this year fully invested as a 60% in stocks and 40% in bonds.
If interest rates are peaking and look to be flattening or declining over the next year then investment grade or multisector bonds technically might be better than floating rate bonds. But diversification is important.
The S&P 500
Source: AIQ Systems
The S&P is above. Last month AIQ gave a SELL signal on April 18th but I went to a VERY CAUTIOUS the close below 2,886. The S&P dropped 5% after it closed below 2,886.
My models went to a BUY signal at 2,800 on 6/05/2019 the S&P now we are right back up to 2,875. Where do we go from here? If the 2,893 level can be broken on the Upside which I think it can and stay there for 2-3 days , then the S&P should approach its old high of 2,954 it hit on May 1, 2019. Notice the graph below the S&P. This chart is the SK-SD stochastics, it is breaking out on the upside and it shows the market is oversold and could continue to rally.
Source: Investopedia
*A Support or support level is the level at which buyers tend to purchase or into a stock or index. It refers to the stock share price that a company or index should hold and start to rise. When a price of the stock falls towards its support level, the support level holds and is confirmed, or the stock continues to decline, and the support level must change.
Support levels on the S&P 500 area are 2865, 2811, 2740, and 2683 areas. These might be BUY areas.
Support levels on the NASDAQ are 7704, 7414, 7291, and 7171.
On the Dow Jones support is at 25,943, 25739, 25,538 and 25,376. These may be safer areas to get into the equity markets on support levels slowly.
RESISTANCE LEVEL ON THE S&P 500 IS 2885. If there is a favorable tariff settlement, the market should rise short term.
THE BOTTOM LINE:
The S&P 500 is right at the point where it needs to break out of 2,893. I am still Moderately Bullish on the market and think it will break out. My computer technical models are on a short term buy signal, so do I think the S&P will breakout above 2,954, the old high it hit on May 1, 2019? We will see, but if it approaches that level, it will be imperative to watch the 2,954 level to see if it turns down. I will be watching that level to see if it is a breakout. If it cannot, then I would become Cautious again.
Best to all of you,
Joe Bartosiewicz, CFP® Investment Advisor Representative
5 Colby Way Avon, CT 06001 860-940-7020 or 860-404-0408
Contact information: SECURITIES AND ADVISORY SERVICES OFFERED THROUGH SAGE POINT FINANCIAL INC., MEMBER FINRA/SIPC, AND SEC-REGISTERED INVESTMENT ADVISOR.
Charts provided by AIQ Systems:
Technical Analysis is based on a study of historical price movements and past trend patterns. There is no assurance that these market changes or trends can or will be duplicated shortly. It logically follows that historical precedent does not guarantee future results. Conclusions expressed in the Technical Analysis section are personal opinions: and may not be construed as recommendations to buy or sell anything.
Disclaimer: The views expressed are not necessarily the view of Sage Point Financial, Inc. and should not be interpreted directly or indirectly as an offer to buy or sell any securities mentioned herein. Securities and Advisory services offered through Sage Point Financial Inc., Member FINRA/SIPC, and SEC-registered investment advisor. Past performance cannot guarantee future results. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Please note that individual situations can vary. Therefore, the information presented in this letter should only be relied upon when coordinated with individual professional advice. *There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values. It is our goal to help investors by identifying changing market conditions. However, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the market. The price of commodities is subject to substantial price fluctuations of short periods and may be affected by unpredictable international monetary and political policies. The market for commodities is widely unregulated, and concentrated investing may lead to Sector investing may involve a greater degree of risk than investments with broader diversification. Indexes cannot be invested indirectly, are unmanaged, and do not incur management fees, costs, and expenses. Dow Jones Industrial Average: A weighted price average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. S&P 500: The S&P 500 is an unmanaged indexed comprised of 500 widely held securities considered to be representative of the stock market in general. NASDAQ: the NASDAQ Composite Index is an unmanaged, market-weighted index of all over the counter common stocks traded on the National Association of Securities Dealers Automated Quotation System (IWM) I Shares Russell 2000 ETF: Which tracks the Russell 2000 index: which measures the performance of the small capitalization sector of the U.S. equity market. A Moderate Mutual Fund risk mutual has approximately 50-70% of its portfolio in different equities, from growth, income stocks, international and emerging markets stocks to 30-50% of its portfolio indifferent categories of bonds and cash. It seeks capital appreciation with a low to moderate level of current income. The Merrill Lynch High Yield Master Index: A broad-based measure of the performance of non-investment grade US Bonds MSCI EAFE: the MSCI EAFE Index (Morgan Stanley Capital International Europe, Australia, and Far East Index) is a widely recognized benchmark of non-US markets. It is an unmanaged index composed of a sample of companies’ representative of the market structure of 20 European and Pacific Basin countries and includes reinvestment of all dividends. Investment grade bond index: The S&P 500 Investment-grade corporate bond index, a sub-index of the S&P 500 Bond Index, seeks to measure the performance of the US corporate debt issued by constituents in the S&P 500 with an investment grade rating. The S&P 500 Bond index is designed to be a corporate-bond counterpart to the S&P 500, which is widely regarded as the best single gauge of large cap US equities. Floating Rate Bond Index is a rule-based, market-value weighted index engineered to measure the performance and characteristics of floating rate coupon U.S. Treasuries which have a maturity greater than 12 months.
AIQ explore list is a powerful and very fast method to view many charts quickly. In this video Steve explores daily and weekly charts simultaneously looking for MACD divergences and double top and bottoms.
The “barbell” approach to bond investing typically involves buying a long-term bond fund or ETF and a short-term bond fund or ETF. The idea is that the long-term component provides the upside potential while the short-term component dampens overall volatility and “smooths” the equity curve. This article is not intended to examine the relative pros and cons of this approach. The purpose is to consider an alternative for the years ahead.
The Current Situation
Interest rates bottomed out several years ago and rose significantly from mid-2016 into late 2018. Just when everyone (OK, roughly defined as “at least myself”) assumed that “rates were about to establish an uptrend” – rates topped in late 2018 and have fallen off since. Figure 1 displays ticker TYX (the 30-year treasury yield x 10) so you can see for yourself.
In terms of the bigger picture, rates have showed a historical tendency to move in 30-year waves. If that tendency persists then rates should begin to rise off the lows in recent years in a more meaningful way. See Figure 2.Figure 2 – 60-year wave in interest rates (Courtesy: www.mcoscillator.com)
Will this happen? No one can say for sure. Here is what we do know: If rates decline, long-term treasuries will perform well (as long-term bonds react inversely to the trend in yields) and if rates rise then long-term bond holders stand to get hurt.
So here is an alternative idea for consideration – a bond “barbell” that includes:
*Long-term treasuries (example: ticker VUSTX)
*Floating rate bonds (example: ticker FFRAX)
Just as treasuries rise when rates fall and vice versa, floating rate bonds tend to rise when rates rise and to fall when rates fall, i.e., (and please excuse the use of the following technical terms) when one “zigs” the other “zags”. For the record, VUSTX and FFRAX have a monthly correlation of -0.29, meaning they have an inverse correlation.
Figure 3 displays the growth of $1,000 invested separately in VUSTX and FFRAX since FFRAX started trading in 2000. As you can see the two funds have “unique” equity curves.
Figure 3 – Growth of $1,00 invested in VUSTX and FFRAX separately
Now let’s assume that every year on December 31st we split the money 50/50 between long-term treasuries and floating rate bonds. This combined equity curve appears in Figure 4.
Figure 4 – Growth of $1,000 50/50 VUSTX/FFRAX; rebalanced annually
Since 2000, long-treasuries have made the most money. This is because interest rates declined significantly for most of that period. If interest rise in the future, long-term treasuries will be expected to perform much more poorly. However, floating rate bonds should prosper in such an environment.
Figure 5 displays some relevant facts and figures.
Figure 5 – Relevant performance Figures
The key things to note in Figure 5 are:
*The worst 12-month period for VUSTX was -13.5% and the worst 12-month period for FFRAX was -17.1%. However, when the two funds are traded together the worst 12-month period was just -5.0%.
*The maximum drawdown for VUSTX was -16.7% and the maximum drawdown for FFRAX was -18.2%. However, when the two funds are traded together the worst 12-month period was just -8.6%.
Summary
The “portfolio” discussed herein is NOT a recommendation, it is merely “food for thought”. If nothing else, combining two sectors of the “bond world” that are very different (one reacts well to falling rates and the other reacts well to rising rates) certainly appears to reduce the overall volatility.
My opinion is that interest rates will rise in the years ahead and that long-term bonds are a dangerous place to be. While my default belief is that investors should avoid long-term bonds during a rising rate environment, the test conducted here suggests that there might be ways for holders of long-term bonds to mitigate some of their interest rate risk without selling their long-term bonds.
Like I said, food for thought.
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.
Stephen Hill is President of AIQ Systems. For the past 15 years he has been involved in all aspects of AIQ Systems, from support and sales to programming and education. Steve is a frequent speaker at events in the U.S. and Europe, talking on subjects as diverse as Portfolio Simulation Techniques, Advanced Chart Pattern Analysis and Trading System Design.
Chart pattern analysis, often thought of as part science part art is a key element in many traders decision process. Common patterns like double tops and bottoms are somewhat self-fulfilling, given that most of us can see these patterns occurring. Measures of what consititues a double top or bottom in good analytical terms we’ll save for another article. In this this article we are focussing on two of my favorite chart patterns; Flags and Pennants
Flags and Pennants are Consolidation or Continuation Patterns
These patterns break out in the direction of the previous trend, confirming the existing trend, suggesting that investors are considering whether the market is overbought or oversold but ultimately deciding to confirm the existing trend. Flags and pennants are of two types, bullish or bearish
Flags and pennants are generally considered continuation patterns as they breakout in the prevailing trend direction. They represent a brief pause especially after a steep run up in an active ticker. They are a fairly common and useful for short term trading.
Bullish Flags – formation
Lower tops and lower bottoms bounded by two parallel trendlines with pattern slanting against the prevailing trend are considered bull flags (figure 1).
Figure 1. Bullish flag pattern
Bearish Flags – formation
Higher tops and higher bottoms bounded by two parallel trendlines with pattern slanting against the prevailing trend are considered bear flags. (figure 2).
Figure 2. Bearish flag pattern
Elements of bullish flags
A rapid and steep price rise of around 20% from bottom of the pole to top.
Decreasing volume during the formation of the flag.
Breakout occurs to the upside with resumption of increase volume levels
Flags length excluding the pole classic should be around 10 days, can be less but not more than 20 days.
Figure 3. Whole Foods Market, Inc (WFMI) bullish flag
Bulkowski noted that the high and tight flag performed best. (source Encyclodpedia of Chart Patterns by Thomas Bulkowski). 2Some 25% of the patterns are horizontal notes Markos Katsanos. (source Measuring Flags & Pennants: Technical Analysis of Stocks and Commodities vol 23 no 4)bullish flag breakout on increased volume note the pole length is 20% + of the price action and the diminishing volume on the flag.
Elements of bearish flags
A rapid and steep price decline of around 20% from top of the pole to bottom.
Decreasing volume during the formation of the flag.
Breakout occurs to the downside with resumption of increase volume levels.
Flag length excluding the pole should be around 10 days, can be less but not more than 20 days.
Figure 4 shows MNST classic bearish flag breakout on increased volume note the pole length is 20% + of the price action and the diminishing volume on the flag.
Bullish Pennants – formation
Pennants look very much like symmetrical triangles, on the end of a pole, typically they are smaller in size and duration (figure 5).
Bearish Pennants – formation
An upside down bullish pennant, the triangle is at the bottom of the pole. (figure 6).
Elements of bullish pennants
A rapid and steep price rise of around 20% from bottom of the pole to top.
Decreasing volume during the formation of the pennant.
Pennants look like symmetrical triangles on a pole, price action is converging.
Diminishing volume as pennant forms.
Breakout to the upside with re- sumption of volume levels.
Pennant length excluding the pole should be around 10 days, can be less but not more than 20 days.Figure 7 shows CDW classic bullish pennant breakout on increased volume
A rapid and steep price drop of around 20% from top of the pole to bottom.
Decreasing volume during the formation of the pennant.
Pennants look like symmetrical triangles on a pole, price action is converging.
Diminishing volume as pennant forms.
Breakout to the downside with resumption of volume levels.
Pennant length excluding the pole should be around 10 days, can be less but not more than 20 days.
How do you trade flags and pennants?
Katsanos study of Flags and pennants revealed that the average breakout was 45% over an average period of 11 days. Bulkowski noted a 63% average gain. to trade these breakouts, set tight stops at low of day before breakout and use trailing stops once breakout occurs.
Target prices are more difficult to predict as these are continuation patterns, but after 11 days you are beyond the average move in days.
AIQ tip
Once a breakout occurs, use AIQ space on right of the chart (rtalerts only) and advance 11 days into the future. Draw a trendline parallel to the pole trend from the breakout point.
One of my (admittedly, potentially foolish) beliefs is that commodities will outperform stocks again someday. Possibly someday starting soon (roughly defined as anywhere from today to a year from today) and that the shift will be dramatic and last for a period of 3 to 8 years.
And no, I don’t think I could be any more vague. But I haven’t really “taken the plunge” (i.e., shifted money from the stock market into commodities in any meaningful way) yet. But I am keeping a close eye on things. Rather than rattled off another 1,000 words to explain, I will simply refer you to Figure 1 that tracks the ratio of the S&P Commodity Index to the S&P 500 Index.
History suggests that “the worm will (eventually) turn.”
Sugar
Let’s focus on one commodity for now. Sadly, it’s one of my favorites (ranks right up there with coffee). Sugar. As you can see in Figures 2 and 3, sugar has a history of contracting in price over a period of time and then alternately – and please excuse my use of the following overly technical terms – “swooping” or “soaring”.Figure 2 – Sugar 1970-1998 (Courtesy ProfitSource by HUBB)
Sugar can be traded either in the futures market (each full one-point movement in price equates to $1,120 in contract value). An alternative for “normal people” is ticker CANE which is the Teucrium Sugar ETF which trades like shares of stock. See Figure 4.Figure 4 – ETF Ticker CANE (Courtesy AIQ TradingExpert)
As you can see, sugar has been “contracting” in price of late. Does this mean it is reading to “swoop” or “soar”? Possibly. But for those who want to play the bullish side, it is probably a bit too soon to dive in.
Seasonality in Sugar
Figure 5 displays the annual seasonal trend in sugar. It should be noted that you should NOT expect every year to follow this trend. It is a display of previous historical tendencies and NOT a roadmap.Figure 5 – Sugar Annual Seasonal Trend (Courtesy Sentimentrader.com)
Still, the primary point is captured nicely in:
Jay’s Trading Maxim #92: One of the keys to long term success is committing capital where the probabilities are (or a least appear to be) in your favor.
February through April is NOT that time for anyone looking to play the long side of sugar.
Figure 6 displays the cumulative results achieved by holding long one sugar futures contract ONLY during the months of February through April every year starting in 1970.
Figure 6 – Cumulative $+(-) holding long sugar futures Feb, Mar, Apr every year since 1970
Some things to note regarding sugar Feb through Apr:
*UP 18 times
*DOWN 31 times
*Average gain = +$2,201
*Average loss = (-$3,377)
*Largest gain = +$6,630 (1974)
*Largest loss = (-$18,424) (1975)
Summary
The point IS NOT to argue that sugar is doomed to plunge between now and the end of April, nor even to argue that it cannot rally strongly between now and then – because it can.
The point IS to merely point out that the odds do not presently favor the bulls, which means – well, see Trading Maxim #92 above.
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.
In this article I highlighted the fact that platinum tends to be a consistent performer during the months of January and February combined. 2019 held serve as platinum futures registered their 23rd Jan-Feb gain in the last 24 years. The Platinum ETF (ticker PPLT) registered a two month gain of +9.6%. See Figure 1.
Figure 2 displays the updated hypothetical growth of equity achieved by holding long 1 platinum futures contract during January and February every year starting in 1979.
Figure 2 – Platinum futures $ +(-) during Jan-Feb; 1979-2019
Since most investors will never trade platinum futures, Figure 3 displays the growth of $1,000 invested in ticker PPLT only during Jan and Feb since 2011.
Figure 3 – Cumulative % growth of $1,000 invested in ticker PPLT ONLY during Jan. and Feb.; 2011-2019
Figure 4 – Yearly % +(-) for PPLT during Jan-Feb
Going Forward
So platinum was great, but what have you done for me lately? For what it is worth, historically two sectors that “should” be doing well in the March-April period are energies and grains (please remember that seasonal trends DO NOT always work every year). As you can see in Figure 5, energies have been rallying since late December (though lots of consternation regarding crude oil remains a constant).
Figure 5 – Ticker DBE (Energies) – so far so good; (Courtesy ProfitSource by HUBB)
Grains have been a bust so far (their “favorable seasonal period” typically begins in late January-early February – no dice this time around). Where too from here? One of two scenarios: either this is just going to be an off year for grains, or right now will be looked back upon as a buying opportunity. Only time will tell.
Figure 6 – Ticker DBA (Agricultural) – so far NOT so good; (Courtesy ProfitSource by HUBB)
And of course, don’t forget that the stock market tends to do pretty well March through May….
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.
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).
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
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.
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.
This week it is the U.S. dollar and Gold taking their turns testing critical inflection points.
U.S. Dollar
As you can see in Figure 1, on a seasonal basis the dollar is moving into a traditionally weaker time of year.Figure 1 – U.S. Dollar seasonality (Courtesy Sentimentrader.com)
In Figure 2 you can see that traders have been and remain pretty optimistic. This is traditionally a bearish contrarian sign.Figure 2 – U.S. Dollar trade sentiment (Courtesy Sentimentrader.com)
In Figure 3 we see the “line in the sand” for ticker UUP – an ETF that tracks the U.S. Dollar. Unless and until UUP punches through to the upside there is significant potential downside risk.Figure 3 – U.S. Dollar w/resistance (Courtesy AIQ TradingExpert)
Gold
As you can see in Figure 4, on a seasonal basis the dollar is moving into a traditionally stronger time of year.Figure 4 – Gold seasonality (Courtesy Sentimentrader.com)
In Figure 5 you can see that traders have been and remain pretty pessimistic. This is traditionally a bullish contrarian sign.Figure 5 – Gold trader sentiment (Courtesy Sentimentrader.com)
In Figure 6 we see the “line(s) in the sand” for ticker GLD – an ETF that tracks gold bullion.
I would be hesitant about trying to “pick a bottom” as gold still looks pretty week. But if:
a) GLD does hold above the support area in Figure 6 and begins to perk up,
AND
b) Ticker UUP fails to break out to the upside
Things could look a lot better for gold very quickly.
Summary
As usual I am not actually making any “predictions” here or calling for any particular action. I mainly just want to encourage gold and/or dollar traders to be paying close attention in the days and weeks ahead, as the potential for a major reversal in both markets appears possible.
Likewise, if no reversal does take place – and if the dollar breaks out to the upside and gold breaks down, both markets may be “off to the races.”
So dollar and gold traders – take a deep breath; focus your attention; and prepare for action…one way or the other.
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.
Here’s a number for you – 88%. Since 1948, over any 10-year period the Dow has showed a gain 88% of the time. That’s a pretty good number. It also explains why we should give bull markets the benefit of the doubt (for the record, if you only hold the Dow between the end of October and the end of May every year you would have a showed a 10-year gain 98% of the time! But this article is not about seasonality per se, so that’s a topic for another day).
Of course, there is a lot of variability along the way, and if you Google “current signs of a bear market” you come up with 4,280,000 articles to peruse. So, few investors ever feel “contented”. We’re always waiting for the “other shoe to drop.”
Some Warning Signs to Look For
#1. Major Indexes
Figure 1 displays the four major average – Dow, S&P 500, Nasdaq 100 and Russell 2000 with their respective 200-day moving averages. In the last few days the Dow slipped a little below its 200-day average, the other three remain above.
(click to enlarge)Figure 1 – Four major market averages with 200-day moving averages (Courtesy AIQ TradingExpert)
Warning Sign to Watch For: If 3 or more of these averages drop below their 200-day moving average.
#2. Market Bellwethers
Figure 2 displays my four market “bellwhethers” – tickers SMH (semiconductors), TRAN (Dow Transports), ZIV (inverse VIX) and BID (Sotheby’s Holdings) with their respective 200-day moving averages. At the moment only ZIV is below it’s 200-day moving average but some of the others are close
(click to enlarge)Figure 2 – Four market bellwethers with 200-dqy moving averages (Courtesy AIQ TradingExpert)
Warning Sign to Watch For: If 3 or more of these averages drop below their 200-day moving average.
#3. S&P 500 Monthly Method
In this article I detailed a simple timing method using S&P 500 Index monthly closing prices. Figure 3 show the S&P 500 Index with it’s “trigger warning” price of 2,532.69 highlighted.
(click to enlarge)Figure 3 – S&P 500 Index Monthly Method Trigger Points (Courtesy AIQ TradingExpert)
Warning Sign to Watch For: If SPX closes below 2532.69 without first taking out the January high of 2872.87
#4. International Growth Stocks
When growth stocks around the world are performing well, things are good. When they top out, try to rebound and then fail, things are (typically) not so good. The last two major U.S. bear markets were presaged by a break in ticker VWIGX (Vanguard International Growth) as seen in Figure 4.
(click to enlarge)Figure 4 – Dow Jones Industrials Average (top) and previous warnings from ticker VWIGX (bottom)(Courtesy AIQ TradingExpert)
Warning Sign to Watch For: Technically this one is currently flashing a warning sign. That warning will remain active unless and until VWIGX takes out the January high of 33.19.
#5. The 10-Year minus 2-Year Yield Spread
This is one of the most misrepresented indicators, so I will state it as plainly as possible:
*A narrowing yield curve IS NOT a bearish sign for the stock market
*An actual inverted yield curve IS a bearish sign for the stock market
Figure 5 displays the latest 10-year minus 2-year spread. Yes, it has narrowed quite a bit. This has launched a bazillion and one erroneously frightening articles. But remember the rules above.
(click to enlarge)Figure 5 – 10-year treasury yield minus 2-year treasury yield (Courtesy: www.StockCharts.com)
Warning Sign to Watch For: If the 10-year yield minus the 2-year yield falls into negative territory it will flash a powerful warning sign for the stock market and the overall economy. Until then ignore all the hand-wringing about a “flattening” yield curve.
Summary
We are in a seasonally unfavorable period for the stock market and – as always – we are bombarded daily with a thousand and one reasons why the next bear market is imminent.
So my advice is to do the following:
1. Ignore it all and keep track of the items listed above
2. The more warning signs that appear – if any – the more defensive you should become
In the meantime, try to go ahead and enjoy your summer.
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.
The question posed in the title is essentially, “does the fate of the stock market hinge on the action of Sotheby’s Holdings” (ticker BID)? Sotheby’s is the oldest stock on the NYSE and is the only publicly traded investment opportunity in the art market. As the art market is highly sensitive to the overall economy it has been argued that BID is a potential stock market “bellwether”.
Still, the most obvious answer to the question posed above is of course “No.” Of course the performance of the whole stock market does not come down to the performance of one stock. That’s the obvious answer.
The more curious answer is arrived at by first looking at Figure 1. Figure 1 displays a monthly bar chart for BID in the top clip and the S&P 500 Index in the bottom clip. What is interesting is that historically when BID tops out, bad things tend to follow for the broader stock market.
In Figure 2 we can see how poor performance for BID presaged an extended period of sideways trading for the SPX. At the far right we can also see that BID is at something of a critical juncture. If it punches through to the upside and moves higher it could be something of an “All Clear” sign for the market. On the other hand, if BID fails here and forms a clear multiple top, well, history suggests that that might be an ominous sign for the broader market.
Other Bellwethers
BID is one of four market “bellwethers” that I like to monitor. The other 3 are SMH (semiconductor index), TRAN (Dow Transports) and ZIV (inverse VIX). You can see the status of each in Figure 3.
Figure 3 – Four stock market “Bellwethers” (Courtesy AIQ TradingExpert)
To sum up the current status of these bellwethers:
*All 4 (including ZIV as of the latest close) are above their respective 200-day moving average. So technically, they are all in “up trends.”
*All 4 are also threatening to create some sort of topping formation.
In sum, as long as all four of these bellwethers continue to trend higher, “Life is Good” in the stock market. At the same time, if some or all of these fail to break through and begin to top out, the broader market may experience more trouble.
Bottom line: Now is a good time to pay close attention to the stock market for “tells”.
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.
In the article linked below, investor and Forbes columnist Kenneth Fisher writes about what to look for at a market top (How to Tell a Bull Market from a Bear Market Blip). One piece of advice that I have heard him offer before is to wait at least 3 months after a top in price to worry about whether or not we are in a bear market. That is good advice and provided the impetus for a simple trend-following model I follow based on that “wait 3 months” idea.
First, a few key points:
*Trend-following is NOT about picking tops and bottoms or timing the market with “uncanny accuracy”. So don’t expect any trend-following system to do so.
*The primary edge in any trend-following method is simply missing as much of the major soul – and capital – crushing bear markets as possible, with the understanding that you will miss some of the upside during bull markets.
The Good News:
*Starting in November 1970 this system has beaten a buy and hold strategy
*This system requires no math. There are no moving averages, etc. Anyone can look at a monthly S&P 500 bar chart and generate the signals. And it literally takes less than 1 minute per month to update.
The Bad News:
*Every trend-following method known to man experiences whipsaws, i.e., a sell signal followed by a buy signal at a higher price. This system is no exception.
*Due to said whipsaws this system has significantly underperformed the S&P 500 buy-and-hold since the low in early 2009.
For what it’s worth, my educated guess is that following the next prolonged bear market, that will change. But there are no guarantees.
OK, all the caveats in place, here goes.
Jay’s Monthly SPX Bar Chart Trend-Following System
*This system uses a monthly price bar chart for the S&P 500 (SPX) to generate trading signals.
*For the purposes of this method, no action is taken until the end of the month, even if a trend change is signaled earlier in the month.
*A buy signal occurs when during the current month, SPX exceeds its highest price for the previous 6 calendar months.
A sell signal occurs as follows:
a) SPX registers a month where the high for the month if above the high of the previous month. We will call this the “swing high”.
b) SPX then goes 3 consecutive monthly bars without exceeding the “swing high.” When this happens, note the lowest low price registered during those 3 months. We will call this price the “sell trigger price.”
c) An actual sell trigger occurs at the end of a month when SPX register a low that is below the “sell trigger price”, HOWEVER,
d) If SPX makes a new monthly high above the previous “swing high” BEFORE it registers a low below the “sell trigger price” the sell signal alert is aborted
Sounds complicated right? It’s not. Let’s illustrate on some charts.
In the charts that follow:
*An Up green arrow marks a buy signal
*A Down red arrow marks a sell signal
*A horizontal red line marks a “sell trigger price”.
Sometimes a sell trigger price is hit and is marked by a down red arrow as a sell signal. Other times a sell trigger price is aborted by SPX making a new high and negating the potential sell signal.
To demonstrate results we will use monthly close price data for SPX. If the system is bullish then the system will hold SPX for that month. If the system is bearish we will assume interest is earned at an annual rate of 1% per year.
Figure 6 displays the results of the System versus Buy and Hold starting with $1,000 starting November 1970 through 1994 (roughly 24 years).
Figure 6 – Growth of $1,000 invested using System versus Buy-and-Hold; Nov-1970 through Dec-1994
Figure 7 displays the results of the System versus Buy and Hold starting with $1,000 starting at the end of 1994 through the most recent close.
Figure 7 – Growth of $1,000 invested using System versus Buy-and-Hold; Dec-1994 through Feb-2018
Figure 8 displays the growth of $1,000 generated by holding the S&P 500 Index ONLY when the trend-following system is bearish. In Figure 8 you will see exactly what I mentioned at the outset – that the key is simply to miss some of the more severe effects of bear markets along the way.
Figure 8 – Growth of $1,000 invested ONLY when trend-following model is Bearish; 1970-2018
Figure 9 – Trade-by-trade results; Month end price data
Summary
So is this “The World Beater, Best Thing Since Sliced Bread” system? Not at all. If you had started using this system in real time in March of 2009 chances are by now you would have abandoned it and moved on to something else, as the whip saw signals in 2011-2012 and 2016 has the System performing worse than buy and hold over a 9 year period.
But here is the thing to remember. Chances are prolonged bear markets have not been eradicated, never to occur again. 100+ years of market history demonstrates that bear markets of 12 to 36 months in duration are simply “part of the game”. And it is riding these bear markets to the depths that try investors souls – and wipe out a lot of their net worth in the process.
Chances are when the next 12 to 36 month bear market rolls around – and it will – a trend-following method similar to the one detailed here may help you to “save your sorry assets” (so to speak).
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.
In this article titled “World, Meet Resistance” – dated 12/21/2017 – I noted the fact that many single country ETFs and regional indexes were closing in on a serious level of potential resistance. I also laid out three potential scenarios. So what happened? A fourth scenario not among the three I wrote about (Which really pisses me off. But never mind about that right now).
As we will see in a moment what happened was:
*(Pretty much) Everything broke out above significant resistance
*Everything then reversed back below significant resistance.
World Markets in Motion
Figure 1 displays the index I follow which includes 33 single-country ETFs. As you can see, in January it broke out sharply above multi-year resistance. Just when it looked like the index was going to challenge the all-time high the markets reversed and then plunged back below the recently pierced resistance level.
(click to enlarge)
Figure 1 – Jay’s World Index broke out in January, fell back below resistance in February (Courtesy AIQ TradingExpert)
The same scenario holds true for the four regional indexes I follow – The Americas, Europe, Asia/Pacific and the Middle East – as seen in Figure 2.
Figure 2 – Jay’s Regional Index all broke above resistance, then failed (Courtesy AIQ TradingExpert)
So where to from here? Well I could lay out a list of potential scenarios. Of course if history is a guide what will follow will be a scenario I did not include (Which really pisses me off. But never mind about that right now).
So I will simply make a subjective observation based on many years of observation. The world markets may turn the tide again and propel themselves back to the upside. But historically, when a stock, commodity or index tries to pierce a significant resistance level and then fails to follow through, it typically takes some time to rebuild a base before another retest of that resistance level unfolds.
Here’s hoping I’m wrong
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.
If I were the type to make bold proclamations I would probably consider “taking my shot” right here and shout “This is the Top” and/or “The Market May Crash.” Unfortunately, on those occasions (well) in the past when I would make bold public predictions of what was about to happen in the financial markets I would almost invariably end up looking pretty stupid. So even if I did make a “bold proclamation” it wouldn’t necessarily mean that anyone should pay any attention.
Besides all that the last thing I want is for “the party to end”. Even if you do think the market is about to tank it’s a pretty crummy thing to have to root for. Even if you did manage to “call the top”, the ripple effect of the ramifications associated with a serious stock market decline can have pretty negative effect on just about everyone’s life.
So let’s put it this way: I am concerned – and prepared to act defensively if necessary – but still have money in the market and am still hoping for the best.
Reasons for Caution (Indexes)
Figure 1 displays four major indexes. The Dow keeps hitting new highs day after day while the others – at the moment – are failing to confirm. That doesn’t mean that they won’t in the days ahead. But the longer this trend persists the more negative the potential implications.
Figure 1 – Dow at new highs, small-caps, Nasdaq and S&P 500 not quite (Courtesy AIQ TradingExpert)
Reasons for Caution (Bellwethers)
Figure 2 displays 4 “bellwethers” that I follow which may give some early warning signs.
*SMH soared to a high in early June and has been floundering a bit since.
*Dow Transports tried to break out to the upside in July but failed miserably.
*XIV is comfortably in new high territory.
*BID tried to break out in July and then collapsed. It is presently about 12% off of its high.
In a nutshell – 3 of the 4 are presently flashing warning signs.
Reasons for Caution (Market Churn)
In this article I wrote about an indicator that I follow that can be useful in identify market “churn” – which can often be a precursor to market declines. Spikes above 100 by the blue line often signify impending market trouble
It should be noted that the indicators signals are often early and occasionally flat out wrong. Still, a churning market with the Dow making new highs has often served as a “classic” warning sign.
Figure 3 – JK HiLo Index (blue) versus Nasdaq Compsite / 20 (red); 12/31/2006-present
Summary
Again, and for the record, I do not possess the ability to “predict” the markets. But I have seen a few “warning signs” flash bright red at times in the past. As a general rule, it is best to at least pay attention – and maybe make a few “contingency plans” – you know, just in case.
Here’s hoping my gut is wrong – again.
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.
