Category Archives: educational newsletters

The Bartometer

November 14, 2020

Hello Everyone,

Well, the election is over and and if Trump doesn’t win the contested vote then Biden is President. My biggest concern going forward is the race in Georgia that could switch the control of the senate to the Democrats enabling them unchecked control in the government. If this happens, and Democrats get rid of the filibuster rule there could be volatily in the stock and bond markets because: It could increase taxes on corporations, raise capital gains taxes and estate taxes by reducing the couple estate tax exclusion from $11 million to $3.5 milllion.

If the Democrats don’t win then there will be gridlock, and gridlock meaning that many of the tax increases may not pass. We will see what happens on January 5th 2021. Currently my Technical Analysis computer is still on a Buy-Hold as of about a week to 2 weeks ago, but it changes daily.

The increases in the Covid 19 virus is again causing Governors in many states to restrict access to non-essential business. This will reduce earnings of many corporations but increase the earnings of technology companies that are benefitting by people using their goods and services from home. Once a safe and effective vaccine is created by either Pfizer or Moderna, and when people feel safe to travel/use the goods and services of non essential companies will they prevail. then the Value stocks, eg., the cruise lines, airlines, resorts, restaurants, retail, manufacturing, telecommunications and more should rise. Until that time, the market will be volatile.

We are now in a seasonally strong time for the stock markets, but with the overhang of the senate election in Georgia, and the increase in Covid 19 coupled with the upcoming Flu season, caution is still somewhat appropriate. For people who are more Cautious in general, but over the next 1-2 years I still think the market could go higher even though the market is about 6% overvalued mostly because of the technology stocks. When the pandemic is even close to nearing its conclusion, the Value sector should continue its rise. So, small, mid and large value stocks could be the bigger winner, and if we get a selloff because of Covid 19, I will be buying those sectors.

Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until Novemeber 14, 2020. These are passive indexes.

Dow Jones +5.1%
S&P 500 +12.2%
EQUAL WEIGHTED S&P 500 +3.1%
NASDAQ Aggressive growth +29%
Large Cap Value -3.0%
I Shares Russell 2000 ETF (IWM) Small cap +5.2%
Midcap stock funds -4.66
International Index (MSCI – EAFE ex USA +2%
Financial stocks -10%
Energy stocks -36%
Healthcare Stocks +11%

Moderate Mutual Fund Investment Grade Bonds (AAA) Long duration +6.5%
igh Yield Merrill Lynch High Yield Index +1.9%

Floating Rate Bond Funds -.60%
Short Term Bond +1.6%
Mutli sector bond funds +2.3%

I do expect potential major volatility over the next few months if the Republicans lose the Senate.

Classicalprinicples.com and Robert Genetskis Excerpts

Market Outlook

Stocks were mixed this past week. The previously out-of-favor small caps rose 3%-4%, when the Nasdaq and QQQs fell 2%-3%. The Dow and S&P500 gained 1%-2%. I expect stocks to continue to consolidate within the range of the past five months. Biden’s choice of advisors is interesting. His Chief of Staff was the one in charge of fighting Ebola. He admitted they had made every mistake imaginable in that fight. Another medical advisor says the country should lock down for 4-6 weeks and can simply pay workers and businesses for lost income. Just what Biden needs… another advisor with no concept of economics feeding him mush. It’s important to pay attention to Biden’s advisors. Their ideas can provide a clue to just how crazy things can get. Hopefully, cooler heads will prevent the chaos that would result from such complete nonsense.

A Look Back

The latest weekly data show the labor market continues to improve in spite of Covid. Initial unemployment claims fell to 709,000 in the first week of this month. This is down about 140,000 from the previous month. For the final week in October, the insured unemployment rate fell to 4.6%, down from 7.5% from the previous month. The number of people receiving insured unemployment payments fell to 6.8 million. There were close to 11 million a month ago.

What to expect this coming week

Look for the economic numbers to continue to show the economy performing well. Tuesday’s report for manufacturing in October should be a strong one. Business surveys show manufacturing production increasing dramatically in October. Hence, the Fed’s manufacturing number should be up substantially.

Source: Classical Principles.com

S&P 500 Chart Source: AIQsystems.com

The S&P 500 is above. As you can see my computer models gave a BUY signal on 10/30/20 and another one a couple days later. Another Bullish sign is when it broke above the middle of the W pattern. This is BULLISH unless it breaks down below that breakout. Now it has to breakout from the old high of 3648. If it does with conviction volume watch the 3750 area for some resistance. But it has to breakout from 3648 with a lot of volume first.

We are now in a bullish seasonal pattern for the market. One year from now I think the economy will do much better than it is now and the markets should be higher as well.

MACD or Momentum is still Bullish as the pink line has broken out of the blue line showing positive momentum.

Support levels on the S&P 500 area are 3546, 3392-3405, 3306 and 3244. 3143 is 200 Day Moving average
NASDAQ Support, 11621, 11300-11360, 11062. Resistance is 12075
These may be safer areas to get into the equity markets on support levels slowly on the accumulation areas.

THE BOTTOM LINE:

The market has rebounded nicely over the last month mainly because of earnings of companies beating expectations. The NASDAQ has done the best this year and should continue to do well IF the market continues higher. Now that the vaccine is a reality the value stocks should start to rise. You may want to call me to review everything including your 401(k) to determine the best allocation going forward. I like the USA market better than the international market.

Best to all of you,

Joe Bartosiewicz, CFP®
Investment Advisor Representative

92 High Street
Thomaston, CT 06787
860-940-7020

Securities and advisory services offered through SagePoint Financial, Inc. (SPF), member FINRA/SIPC. SPF is separately owned and other entities and/or marketing names, products or services referenced here are independent of SPF. 800-552-3319 20 East Thomas Road Ste 2000 Phoenix AZ 85012

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, an 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 in different 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.



Good for Japan, Bad for US (Bonds)?

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. 

Figure 1- Ticker EWJ monthly (Courtesy AIQ TradingExpert)

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.”

Figure 2 – EWJ vs. TLT (Courtesy AIQ TradingExpert)

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.

Looking for Ideas “Off the Beaten Path”

For the record, I am an avowed “trend-follower.”  But I also know that no trend lasts forever.  So, while I have gotten pretty good at “riding along”, I do – like most people – like to “look ahead” since I do know that the landscape will forever be changing.

So, with the caveat that none of what follows should be considered a “call to action”, only as a “call to pay attention”, let’s venture out “into the weeds.”

AIROIL

Here is an ugly pairing – airline stocks and traditional energy stocks – yikes!  In Figure 1 you see an index that I created and followed call AIROIL comprised of three airline stocks and five “Big Oil” stocks.  During the pandemic meltdown this index fell to a level not seen since 2007 before “bouncing”. 

Editors Note: 

Jay's AIROIL Index is built using the AIQ Data Manager by creating a list andcreating a group ticker (in this case AIROIL).  Stocks are inserted under the ticker and the index is then computed using  Compute Group/Sector indices. 

Figure 1 – Jay’s AIROIL Index (Courtesy AIQ TradingExpert)

In the bottom clip you see an indicator I call VFAA.  Note that when VFAA tops out and rolls over, meaningful advances in the index tend to follow.  In addition, VFAA is at a high level seen only once before in 2009. Following that reversal, the index rose almost 500% over the next 9 years.

So, is now a great time to pile into airlines and big oil?  One would have to be a pretty hard-core contrarian to pound the table on this one.  The airlines are in terrible shape due to the pandemic and vast uncertainty remains regarding when things might improve.  And “Big Oil” is about as unloved as any sector has ever been. 

So, am I suggesting anyone “load up” on airlines and oil?  Nope.  What I am saying is that I am watching this closely and that if and when VFAA “rolls over” I may look to commit some money to these sectors on a longer-term contrarian basis.

International/Commodities/Value

Also known of late as “the barking dogs”.  If you have had money committed to any or all of these asset classes in recent years you are shaking your head right about now.  These areas have VASTLY underperformed a simple “buy-and-hold the S&P 500 Index” approach for a number of years.

Is this state of affairs going to change anytime soon?  Regarding “anytime soon” – it beats me.  However, I am on the record as arguing that at some point this WILL change.  History makes one thing very clear – no asset class has a permanent edge.  So, given that the S&P 500 Index has beaten these above mentioned by such a wide margin for such a long time (roughly a decade or more) I am confident that one day in the next x years, the “worm will turn.”

Figure 2 displays an index that I created and follow that tracks an international ETF, a commodity ETF and a value ETF.  The VFAA indicator appears in the bottom clip. 

Figure 2 – Jay’s INTCOMVAL Index (Courtesy AIQ TradingExpert)

Now if history is a guide, then the recent “rollover” by VFAA suggests that this particular grouping of asset classes should perform well in the coming years.  Two things to note:

1. There is no guarantee

2. There is absolutely no sign yet that “the turn” – relative to the S&P 500 – is occurring

Figure 3, 4 and 5 are “relative strength” charts from www.StockCharts.com.  They DO NOT display the price of any security; they display the performance of the first ETF list compared to the second ETF listed.  So, Figure 3 displays the performance of ticker EFA (iShares MSCI EAFE ETF which tracks a broad index of stocks from around the globe, excluding the U.S.) relative to the S&P 500 Index.

When the bars are trending lower it means EFA is underperforming SPY and vice versa.  The trend in Figure 3 is fairly obvious – international stocks continue to lose ground to U.S. large-cap stocks. 

Figure 3 – Ticker EFA relative to ticker SPY (Courtesy: www.StockCharts.com)

If your goal is to pick a bottom, have at it.  As for me, I am waiting for some “signs of life” in international stocks relative to U.S. stocks before doing anything.

Figure 4 displays ticker DBC (a commodity-based ETF) versus SPY and Figure 5 displays ticker VTV (Vanguard Value ETF) versus ticker VUG (Vanguard Growth ETF). Both tell the same tale as Figure 3 – unless you are an avowed bottom-picker there is no actionable intelligence.  Still, both these trends are now extremely overdone, so a significant opportunity may be forming. 

Figure 4 – Ticker DBC relative to ticker SPY (Courtesy: www.StockCharts.com)

Figure 5 – Ticker VTV relative to ticker VUG (Courtesy: www.StockCharts.com)

Summary

Two key points as succinctly as possible:

*Nothing is happening at the moment with everything displayed above…

*…But something will (at least in my market-addled opinion) – so pay close attention.

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.

The RS4r: Tracking Relative Strength In Four Dimensions

Relative strength has more information embedded within it than meets the eye. Here is a way to identify and compress several dimensions of relative strength into one single scalable value, the RS4r, which allows you to compare and then rank securities for robustness across timeframes and shifting market conditions…

The importable AIQ EDS file based on James Garofallou’s article in
Stocks & Commodities magazine September 2020 issue, “The RS4r: Tracking Relative Strength In Four Dimensions,” can be obtained on request via email to info@TradersEdgeSystems.com. The code is also available here:

! The RS4r: Tracking Relative Strength in Four Dimensions
! Author: James Garofallou, PhD, TASC Sept 2020
! Coded by: Richard Denning, 7/18/2020

!INPUTS
C is [close].
len1 is 10.
len2 is 15.
NumIndx is 4.
BuyLvl is 80.

!FORMULAS
SPYc is TickerUDF("SPY",C).      !SP500
QQQc is TickerUDF("QQQ",C).     !NASDAQ100
MDYc is TickerUDF("MDY",C).     !SP400
IWMc is TickerUDF("IWM",C).      !Russel2000

RS1spy is C/SPYc.
RS1qqq is C/QQQc.
RS1mdy is C/MDYc.
RS1iwm is C/IWMc.

FastSPY is Expavg(RS1spy,len1).
MedSPY is Simpleavg(FastSPY,7).
SlowSPY is Simpleavg(FastSPY,15).
VSlowSPY is Simpleavg(SlowSPY,30).

FastQQQ is Expavg(RS1qqq,Len1).
MedQQQ is Simpleavg(FastQQQ,7).
SlowQQQ is Simpleavg(FastQQQ,15).
VSlowQQQ is Simpleavg(SlowQQQ,30).

FastMDY is Expavg(RS1mdy,Len1).
MedMDY is Simpleavg(FastMDY,7).
SlowMDY is Simpleavg(FastMDY,15).
VSlowMDY is Simpleavg(SlowMDY,30).

FastIWM is Expavg(RS1iwm,Len1).
MedIWM is Simpleavg(FastIWM,7).
SlowIWM is Simpleavg(FastIWM,15).
VSlowIWM is Simpleavg(SlowIWM,30).

Tier1spy is iff(FastSPY>=MedSPY and MedSPY>=SlowSPY and SlowSPY>=VslowSPY,10,0).
Tier1qqq is iff(FastQQQ>=MedQQQ and MedQQQ>=SlowQQQ and SlowQQQ>=VslowQQQ,10,0).
Tier1mdy is iff(FastMDY>=MedMDY and MedMDY>=SlowMDY and SlowMDY>=VslowMDY,10,0).
Tier1iwm is iff(FastIWM>=MedIWM and MedIWM>=SlowIWM and SlowIWM>=VslowIWM,10,0).

Tier2spy is iff(FastSPY>=MedSPY and MedSPY>=SlowSPY and SlowSPY<VslowSPY,9,0).
Tier2qqq is iff(FastQQQ>=MedQQQ and MedQQQ>=SlowQQQ and SlowQQQ<VslowQQQ,9,0).
Tier2mdy is iff(FastMDY>=MedMDY and MedMDY>=SlowMDY and SlowMDY<VslowMDY,9,0).
Tier2iwm is iff(FastIWM>=MedIWM and MedIWM>=SlowIWM and SlowIWM<VslowIWM,9,0).

Tier3spy is iff(FastSPY<MedSPY and MedSPY>=SlowSPY and SlowSPY>=VslowSPY,9,0).
Tier3qqq is iff(FastQQQ<MedQQQ and MedQQQ>=SlowQQQ and SlowQQQ>=VslowQQQ,9,0).
Tier3mdy is iff(FastMDY<MedMDY and MedMDY>=SlowMDY and SlowMDY>=VslowMDY,9,0).
Tier3iwm is iff(FastIWM<MedIWM and MedIWM>=SlowIWM and SlowIWM>=VslowIWM,9,0).

Tier4spy is iff(FastSPY<MedSPY and MedSPY>=SlowSPY and SlowSPY<VslowSPY,5,0).
Tier4qqq is iff(FastQQQ<MedQQQ and MedQQQ>=SlowQQQ and SlowQQQ<VslowQQQ,5,0).
Tier4mdy is iff(FastMDY<MedMDY and MedMDY>=SlowMDY and SlowMDY<VslowMDY,5,0).
Tier4iwm is iff(FastIWM<MedIWM and MedIWM>=SlowIWM and SlowIWM<VslowIWM,5,0).

RS2spy is Tier1spy + Tier2spy + Tier3spy + Tier4spy.
RS2qqq is Tier1qqq + Tier2qqq + Tier3qqq + Tier4qqq.
RS2mdy is Tier1mdy + Tier2mdy + Tier3mdy + Tier4mdy.
RS2iwm is Tier1iwm + Tier2iwm + Tier3iwm + Tier4iwm.


RS3x is  (RS2spy+RS2qqq+RS2mdy+RS2iwm).

RS4 is (RS3x/NumIndx)*10.
RS4osc is simpleavg(RS4,3).
mvSig is simpleavg(RS4osc,5).
RS4r is round(RS4).

mvRS4 is expavg(RS4r,4).
RS4up is iff(RS4r >= 80 or RS4r > mvRS4,1,0).

X is iff(RS4 >= 80,1,0).
R5 is iff(RS4up =1,round(simpleavg(X,len2)*100),0).

Buy if R5 >= BuyLvl.
ExitBuy if R5 < BuyLvl.

ShowValues if 1.

Code for the RS4r is included in the EDS file. I also coded a system that uses the RS4r (R5). I used four independent ETFs as indexes rather than the 11 mutual funds that the author used. I used SPY, QQQQ, MDY, and IWM. The trading system buys (long only) when the R5 >= 80 and exits the long position when RS4r < 80. The summary EDS backtest report for trading this system on the Nasdaq 100 stocks (commission & slippage not subtracted) is shown in Figure 13 and a sample trade on DISH with the R5 indicator is shown in Figure 12.

Sample Chart

FIGURE 12: AIQ. Chart of DISH with R5 indicator and sample trade using R5 indicator >= 80 to buy.

Sample Chart

FIGURE 13: AIQ. Summary EDS backtest report for the R5 system that trades the Nasdaq 100 stocks over the last 4 years.

—Richard Denning
info@TradersEdgeSystems.com
for AIQ Systems

The Calm Before the Bond Storm?

The bond market was very quiet in the 3rd quarter.  Figure 1 displays ticker IEF (7-10 year treasuries ETF) in the to clip and ticker AGG (Aggregate Bond Index ETF) in the bottom clip. 

Figure 1 – Tickers IEF and AGG in narrow ranges (Courtesy AIQ TradingExpert)

Essentially the entire bond market has been flat since early June.  The market seems to be assuming that “the Fed will take of everything” and keep interest rates low and stable for the foreseeable future so…..ZZZZZZZZ.

But this type of activity often breeds complacency.  I am not making any predictions here but I do want to raise a question that investors might wish to ponder, i.e., “what would be more shocking that a spike in interest rates?”  OK, yes, I realize it is 2020 and it is pretty much hard to be shocked by anything anymore.  But still, on a relative basis how many investors are even thinking about the potential risk of higher interest rates at the moment?

Could it Happen?

The Bond Market VIX (ticker MOVE) recently fell to its lowest level ever (before spiking sharply higher on 10/5/20).  As you can see in Figure 2 this type of “quietness” often precedes a significant move in the bond market.  For the record, low readings in MOVE can be followed by large up moves in price as easily as large down moves in price.  So, a low MOVE reading is not “bearish” per se, but rather merely suggests that we are experiencing the “calm before the storm.”

Figure 2 – Bond Market VIX hit an all-time low (Courtesy Sentimentrader.com)

So why is my “Spidey sense” tingling?  Figure 3 displays the yield on 30-year treasuries (ticker TYX) on the bottom and an indicator I refer to as VFAA on the bottom (the calculation appears at the end of this piece).  VFAA is a derivative on a Larry William’s indicator he calls VixFix.

Figure 3 – 30-year treasury yields with VFAA suggesting a potential bottoming area (Courtesy AIQ TradingExpert)

As you can see in Figure 3, peaks in the VFAA indicator often occur near intermediate term lows in bond yields (reminder: bond prices move inversely to yield, so a bottom in interest rates indicates a top in bond prices).  As you can also see on the far-right hand side, the stage clearly appears to be set for “the next go round.”

Why does this matter?  If interest rates do rise in the months ahead bond prices – particularly long-term bond prices can get hit hard.  To illustrate the potential risks, Figure 4 displays the action of treasury security ETFs of various maturity during a 5-month rise in rates back in 2016.

Figure 4 – Bond ETF action during rate rise in 2016

Summary

It is possible for long and short-term bonds to “de-couple”.  In other words, the possibilities are:

*Short-term rates remain stable (as the Fed keeps pumping) while long-term rates rise (as inflation fears arise as a result of all the Fed pumping)

*Short-term rates remain stable while long-term rates plummet (if the economy appears to be weakening).  This would result in gains for long-term bonds only

*None of the above

The bottom line: Bonds have fallen asleep – but DO NOT fall asleep on bonds. 

VFAA Formula

Below is the code for VFAA

VixFix is an indicator developed many years ago by Larry Williams which essentially compares the latest low to the highest close in the latest 22 periods (then divides the difference by the highest close in the latest 22 periods).  I then multiply this result by 100 and add 50 to get VixFix.

*Next is a 3-period exponential average of VixFix

*Then VFAA is arrived at by calculating a 7-period exponential average of the previous result (essentially, we are “double-smoothing” VixFix)

Are we having fun yet?  See code below:

hivalclose is hival([close],22).

vixfix is (((hivalclose-[low])/hivalclose)*100)+50.

vixfixaverage is Expavg(vixfix,3).

vixfixaverageave is Expavg(vixfixaverage,7).

VFAA = vixfixaverageave

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.

Whither Apple?

OK, first off a true confession.  I hate it when some wise acre analyst acts like they are so smart and that everyone else is an idiot.  Its offensive and off-putting – not to mention arrogant.  And still in this case, all I can say is “Hi, my name is Jay.”

A lot of attention has been paid lately to the fact that AAPL is essentially swallowing up the whole world in terms of market capitalization.  As you can see in Figure 1, no single S&P 500 Index stock has ever had a higher market cap relative to the market cap of the entire Russell 2000 small-cap index. 

Figure 1 – Largest S&P 500 Index stock as a % of entire Russell 200 Index (Courtesy Sentimentrader.com)

So of course, the easiest thing in the world to do is to be an offensive, off-putting and arrogant wise acre and say “Well, this can’t last.”  There, I said it.  With the caveat that I have no idea how far AAPL can run “before the deluge”, as a student of (more) market history (than I care to admit) I cannot ignore this gnawing feeling that this eventually “ends badly.”  Of course, I have been wrong plenty of times before and maybe things (Offensive, Off-Putting and Arrogant Trigger Warning!) “really will be different this time around.”  To get a sense of why I bring this all up, please keep reading.

In Figure 1 we also see some previous instances of a stock becoming “really large” in terms of market cap.  Let’s take a closer look at these instances.

IBM – 1979

Figure 2 – IBM (Courtesy AIQ TradingExpert)

MSFT – 1999

Figure 3 – MSFT (Courtesy AIQ TradingExpert)

XOM – 2008

Figure 4 – XOM (Courtesy AIQ TradingExpert)

AAPL – 2012

Figure 5 – AAPL (Courtesy AIQ TradingExpert)

AAPL – 2020

Figure 6 – AAPL (Courtesy AIQ TradingExpert)

Summary

Small sample size? Yes.

Could AAPL continue to run to much higher levels? Absolutely

Do I still have that offensive, off-putting and slightly arrogant gut feeling that somewhere along the way AAPL takes a huge whack?

Sorry.  It’s just my nature.

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.

The Rally in “Stuff” Rolls On

In this article, dated 7/10/2020, I noted that my “Stuff” Index was coming on strong and that its performance may be a “shot across the bow” that some changes may be coming to the financial markets.  Since then, the trend has accelerated.

STUFF vs. FANG vs. QQQ

Figure 1 displays the performance of STUFF components since 7/10

Figure 2 displays the performance of FANG components since 7/10

Figure 1 – Price performance of Jay’s STUFF Index components since 7/10

Figure 2 – Price performance of FANG stocks since 7/10

For the record, the “high-flying” Nasdaq 100 Index (using ticker QQQ as a proxy investment) is up +4.0% during the same time.

Is this a trend – or a blip?  Unfortunately, I can’t answer that question. But it certainly appears that there is something afoot in “Stuff”, particularly the metals.  Figure 3 displays the weekly charts for ETFs tracking Silver, Gold, Palladium and Platinum (clockwise from upper left). 

Figure 3 – The metals components of the Stuff Index (Courtesy AIQ TradingExpert)

When it comes bull markets in metals, the typical pattern historically goes something like this:

*Gold leads the way (check)

*Eventually silver comes on strong and often ends up outperforming gold (check)

*The other metals rise significantly “under the radar” as everyone focus on – literally in this case, ironically – the “shiny objects” (gold and silver)

Again, while I had inklings that a bull market in metals was forming (and have held positions in them for several years, and still hold them), I certainly did not “predict” the recent explosion in gold and silver prices. 

Two things to note:

*Gold and silver are obviously very “overbought”, so buying a large position here entails significant risk

*Still it should be noted that both SLV and PPLT would have to double in price from their current levels just to get back to their previous all-time highs of 2011

So, don’t be surprised if “Stuff” enjoys a continued resurgence.  Note in Figure 4 that a number of commodity related ETFs are way, way beaten down and could have a lot of upside potential if a resurgence actually does unfold.

Figure 4 – Four commodity ETFs weekly (Courtesy AIQ TradingExpert)

What is interesting – and almost not visible to the naked eye – is the action in the lower right hand corner of these four charts. To highlight what is “hiding in plain sight”, Figure 5 “zooms in” on the recent action of same four tickers as Figure 4, but in a daily price format rather than a monthly price format.

Figure 5 – Four commodity ETFs daily (Courtesy AIQ TradingExpert)

Despite the ugly pictures painted in Figure 4, it is interesting to note in Figure 5 that all four of these commodity related ETFs have rallied sharply of late.  There is of course, no guarantee this will continue.  But if the rally in “Stuff” – currently led by metals – spreads to the commodity sector as a whole, another glance in Figures 3 and 4 reveals a lot of potential upside opportunity.

Time will tell.  In the meantime, keep an eye on the “shiny objects” (gold and silver) for clues as to whether or not the rally in “Stuff” has staying power.

See also Jay Kaeppel Interviewin July 2020 issue of Technical Analysis of Stocks and Commodities magazine

See also Jay’s “A Strategy You Probably Haven’t Considered” Video

See also Video – The Long-Term…Now More Important Than Ever

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.

When “Perfection” Meets “The Real World”

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

*All charts below are (Courtesy AIQ TradingExpert)

*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

See also Jay’s “A Strategy You Probably Haven’t Considered” Video

See also Video – The Long-Term…Now More Important Than Ever

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.

How to Know When to Worry About Inflation

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 hereherehere 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.

Figure 5 – Ticker FXA (top) and ticker GSG (bottom) (Courtesy AIQ TradingExpert)

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

See also Jay’s “A Strategy You Probably Haven’t Considered” Video

See also Video – The Long-Term…Now More Important Than Ever

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.

The Bartometer

May 8, 2020

Hello Everyone,

I hope all of you are keeping healthy in this pandemic. Some of you may have had the COVID-19 virus or have a family member who may have contracted it, but for the most part as a whole, we are working together to get through this and doing okay.

RECAP:

Last month I illustrated the previous time we have a virus that was similar to the Coronavirus, and that was the Spanish Flu back in 1918. It was a horrible time where more than 51 million and some estimates are up to 100 million people died. More than 675,000 people died from the Spanish flu in the U.S. It infected more than 50 million people worldwide and was a disaster. There was very little anyone could do during that time, and there was little medicinal relief. The Spanish Flu is called the most significant
medical holocaust in history. And yet the stock markets in this country fell 34% from the beginning of the flu to the lowest part in the stock market. A year later, it went up 80% approximately from its low to its high. Am I saying this will happen again? No, I’m not planning on it, but if the world recovered from a 50 million person loss and a massive pandemic it had when the world population was much smaller, then we should recover and move beyond this as well.

Over the last month, the stock and bond markets, especially the NASDAQ, have soared with the NASDAQ now up 1.66% for the year. The reason is that with most people confined to their homes, stocks like Amazon, Google, Netflix, Facebook, Microsoft, Zoom, DocuSign, and more are being used, contributing to their earnings and revenues dramatically. Stocks like Airlines, cruise ships, restaurants, manufacturing, and many more are not doing well. That is why you will see below that the sectors in terms of which areas are declining and which are growing are very different.

CURRENT TRENDS:

The growth sector has done relatively well, but only a few large companies have contributed. These few large companies are why the Equal Weighted S&P 500 is -16.2% but the regular S&P is down 9%. I continue to like the large tech and health care companies, the NASDAQ is nearing the end of its game, and it is not much below its high it hit in February. The Midcaps are down 18-23% this year, and particular issues have more of a potential move upward, in my opinion. A year or two out from this point, I think this sector and the markets should be nicely higher. Can it go down from here into the fall and winter if we have a second wave down? Absolutely, but it is an excellent time to add money to your equity side in a diversified portfolio over the next 6 months. Many people are doubling up their contributions on a monthly basis. If you are more than five years before retirement, you may want to think about doing something similar. If stocks are cheap then isn’t it smart to buy when they are reasonably priced if over the long term the market should be higher?

Have we gone down this much over the last 50 years? Yes, many times. Has it recovered each time? Yes. Because capitalism works and good companies over the long term make money, we are all in this together.

Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until May 8, 2020. These are passive indexes.
Dow Jones -14.0%
S&P 500 -9.0%
EQUAL WEIGHTED S&P 500 -16.1%
NASDAQ Aggressive growth +1.66%
I Shares Russell 2000 ETF (IWM) Small cap -20%
Midcap stock funds -18-23%
International Index (MSCI – EAFE ex USA -19.0%
Financial stocks -27%
Energy stocks -34%
Healthcare Stocks -.50%

Moderate Mutual Fund Investment Grade Bonds (AAA) Long duration -8.5%
High Yield Merrill Lynch High Yield Index -9.4% Floating Rate Bond Funds -7.3%
Short Term Bond -3.52%
Fixed Bond Yields (10 year) .68% Yield
As you see above, the only index doing well is Large tech. You should have this sector, but most everything else is starting to recover.

Classicalprinicples.com and Robert Genetskis Excerpts:

After soaring a week ago, stock prices turned mixed. The Nasdaq and Nasdaq 100 were up 1% and 4%, while the S&P 500 and Dow fell 1%, and small caps were down 2% to 4%.

The economic collapse in April has led forecasters to revise downward estimates of the decline in output, employment, and profits. Last week I expected the economy would begin to recover in May. It will. Unfortunately, ongoing restrictions from Governors and the stimulus bill will limit the initial stage of the recovery. Due to these current restrictions, means the economy will not show signs of a meaningful recovery until June at the earliest.

As a result, the financial damage to the economy in terms of lost output, jobs, wages and salaries, profits and debt will continue for another month

While several technology companies are holding up well, non-tech companies are suffering. And few companies are willing to guide earnings.

The 800-pound gorilla continues to be the outlook for the virus. Containing the spread of the virus remains a crucial problem.

Some countries and states succeed without a lockdown, while others are less successful. Due to the differing results, it raises the near-term uncertainties over how quickly the economy can recover. If setbacks occur, stocks will be vulnerable.

Despite a 15%+ unemployment rate in April and probably higher in May, the stock prices continue to anticipate better times and a recovery in the markets. I am optimistic longer term for the stock markets, although the short term could be more volatile.

Dr. Genetski’s opinion is that every person and circumstance is different. There are no guarantees expressed or implied in any part of this correspondence.
Source: Classical Principles.com

DOW JONES

As you can see the Dow went down to the 18,300 level and has risen to the 50% Fibonacci Level at 23,901. In other words when markets decline, they tend to retrace much of the decline at the 23.8%, the 50% the 61.8% and the 78.6% level and stall and reverse. Notice at the 23901 level the Dow tended to hang around there for a couple of weeks and tried to go up to the next level at the 25236 level. This is the next level where the Dow Jones could stall if it keeps rising. The Dow Jones is made up of a lot of large industrial, and value stocks that have really not participating in the rally as much as the NASDAQ tech stocks seen on the next page. Watch for a trend line break of 23901 to confirm another down leg to the 22565 if it is on big volume. This is short term. Long term I am still positive over the next 2 years or so, when we get a vaccine and a treatment, and more herd immunity.

The SK-SD stochastics model. If it is above the 88 level like it is now the market is a little over bought and this means don’t buy now short term.
Volume over the last month or so the market has been rising on low volume. This means people are afraid to commit and there may not be a lot of conviction on the rally.

NASDAQ QQQ

The true Champ this year again has been the NASDAQ. These stocks include, Facebook, Amazon, Docusign, Paypal, Mcrosoft, Netflix, etc. All of the stocks that benefit by you and your businesses being home. This QQQ are the top 100 NASDAQ stocks and is now up 3% plus for the year while everything else in the normal world is down 16-38%. The QQQ is now getting a little OVERBOUGHT so I would not go out and buy a bunch of tech stocks here. In fact, the QQQ is approaching a pretty substantial resistance level. The first is a gap fill and could bring the QQQ to 230.55 and reverse or it could reach its old high of 237 and reverse. Longer term I think it will break through the old high, but we are now getting to a point I think the QQQ has gone up as far as it should. So watch the 230.55 to fill the gap and reverses or the old high of 237 area.

The SK-SD Stochastics is overbought just like it was in the Dow Jones.
The Momentum indicator gave a Buy signal at the blue arrow as it as the pink crossed the blue line, if it crosses the blue lien going down it is a SELL. This large tech area is still long term bullish, but short term I would take a few chips off the table as an index. The midcap, small cap and large cap value sector has a lot more to recover.

If the QQQ falls or closes below 216.8 or breaks the trend line I am getting Cautious to very Cautious.

SUPPORT LEVELS:

 Support levels on the S&P 500 area are 2882, 2796, 2649, and 2500. These might be accumulation levels, especially 2649, or 2500. 2936 and 3015 is resistance.
 Support levels on the NASDAQ are 9036, 8612, and 7856 Topping areas 9323 to 9573.
 On the Dow Jones support is at 23,901, 22,569, and 20912. Topping areas 25,236 and 27,077.
 These may be safer areas to get into the equity markets on support levels slowly on the accumulation areas.

THE BOTTOM LINE:

The market has rebounded nicely over the last month mainly on the NASDAQ tech stocks that benefit from people staying at home and using all of the tech companies to their benefits. This stay “at home” policy has increased demand for technology, and why the internet stocks have done so well. The other part of the markets from the financial to energy and other value stocks are still down from 18-33%. It is all about the growth sector that is benefiting the most. Over the long term, I am very bullish on the market, but over a short time, I can see a topping or sideways to down on the large growth companies as they are now reasonably priced. If the market continues to do well, I would expect the Midcaps to start to outperform. But there is a caveat. There are trend-line right below the markets, and if they are broken and close below those areas, then the markets could start a correction again. Trend-lines are essential to hold. If they don’t hold, then there could be a setback to support the levels stated above. I still like the USA market better than the international one.

Best to all of you,

Joe Bartosiewicz, CFP®
Investment Advisor Representative
5 Colby Way
Avon, CT 06001
860-940-7020 or 860-404-0408



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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.
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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 in different 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.

Money Flow; The Money Flow Index (MFI) is a momentum indicator that measures the flow of money into and out of a security over a specified period. It is related to the Relative Strength Index (RSI) but incorporates volume, whereas the RSI only considers SK-SD Stochastics. When an oversold stochastic moves up through its MA, a buy signal is produced. Furthermore, Lane recommends that the stochastic line be smoothed twice with three-period simple moving averages: SK is the three-period simple moving average of K, and SD is the three-period simple moving average of SK

Rising Wedge; A rising wedge is a technical indicator, suggesting a reversal pattern frequently seen in bear markets. This pattern shows up in charts when the price moves upward with pivot highs and lows converging toward a single point known as the apex