Category Archives: educational newsletters

Watch This Indicator

October 17, 2018EDS, educational newsletters, ETFS, indexes, jay kaeppel, technical indicatoradmin

So, the big question on every investor’s mind is “What Comes Next?” Since this is not an advisory service (and given the fact that I am not too good at predicting the future anyway) I have avoided commenting on “the state of the markets” lately. That being said, I do have a few “thoughts”:

*The major averages (as of this exact moment) are still mostly above their longer-term moving averages (200-day, 10-month, 40-week, and so on and so forth). So, on a trend-following basis the trend is still “up”.

Figure 1 – The Major Index (Courtesy AIQ TradingExpert)

*We are in the most favorable 15 months of the 48-month election cycle (though off to a pretty awful start obviously) which beings Oct.1 of the mid-term year and ends Dec. 31st of the pre-election year.

*Investors should be prepared for some volatility as bottoms following sharp drops usually take at least a little while to form and typically are choppy affairs. One day the market is up big and everyone breathes a sigh of relief and then the next day the market tanks. And so on and so forth.

An Indicator to Watch

At the outset let me state that there are no “magical” indicators. Still, there are some that typically are pretty useful. One that I follow I refer to as Nasdaq HiLoMA. It works as follows:

A = Nasdaq daily new highs

B = Nasdaq daily new lows

C = (A / (A+B)) * 100

D = 10-day moving average of C

C can range from 0% to 100%. D is simply a 10-day average of C.

Nasdaq HiLoMA = D

Interpretation: When Nasdaq HiLoMA drops below 20 the market is “oversold”.

Note that the sentence above says “the market is oversold” and NOT “BUY NOW AGGRESSIVELY WITH EVERY PENNY YOU HAVE.” This is an important distinction because – like most indicators – while this one may often give useful signals, it will occasionally give a completely false signal (i.e., the market will continue to decline significantly).

A couple of “finer points”:

*Look for the indicator to bottom out before considering it to be “bullish”.

*A rise back above 20 is often a sign that the decline is over (but, importantly, not always). Sometimes there may be another retest of recent lows and sometimes a bear market just re-exerts itself)

*If the 200-day moving average for the Dow or S&P 500 is currently trending lower be careful about using these signals. Signals are typically more useful if the 200-day moving average for these indexes is rising or at least drifting sideways rather than clearly trending lower (ala 2008).

Figures 2 through 8 displays the S&P 500 Index with the Nasdaq HiLoMA indicator. Click to enlarge any chart.

Figure 2 – SPX with Jay’s Nasdaq HiLoMA ending 2006 (Courtesy AIQ TradingExpert)

Figure 3 – SPX with Jay’s Nasdaq HiLoMA ending 2008 (Courtesy AIQ TradingExpert)

Figure 4 – SPX with Jay’s Nasdaq HiLoMA ending 2010 (Courtesy AIQ TradingExpert)

Figure 5 – SPX with Jay’s Nasdaq HiLoMA ending 2012 (Courtesy AIQ TradingExpert)

Figure 6 – SPX with Jay’s Nasdaq HiLoMA ending 2014 (Courtesy AIQ TradingExpert)

Figure 7 – SPX with Jay’s Nasdaq HiLoMA ending 2016 (Courtesy AIQ TradingExpert)

Figure 8 – SPX with Jay’s Nasdaq HiLoMA ending 2018 (Courtesy AIQ TradingExpert)

Summary

The stock market is in a favorable seasonal period and is oversold. As long as the former remains true, react accordingly (with proper risk controls in place of course).

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 (Potential) Bullish Case for Bonds

September 29, 2018educational newsletters, ETFS, indexes, jay kaeppel, seasonaladmin

OK, first the bad news. In terms of the long-term, we are probably in the midst of a rising interest rate environment. Consider the information contained in Figure 1 from McClellan Financial Publications.

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Figure 1 – The 60-year cycle in interest rates (Courtesy: www.mscoscillator.com)

Though no cycle is ever perfect, it is only logical to look at Figure 1 and come away thinking that rates will rise in the years (and possibly decades) ahead. And one should plan accordingly, i.e.:

*Eschew large holdings of long-term bonds. Remember that a bond with a “duration” -Google that term as it relates to bonds please – of 15 implies that if interest rates rise 1 full percentage point then that bond will lose roughly 15% of principal. Ouch.

*Stick to short to intermediate term bonds (which will reinvest at higher rates more quickly than long-term bonds as rates rise) and possibly some exposure to floating rate bonds.

That is “The Big Picture”.

In the meantime, there is a potential bullish case to be for bonds in the shorter-term. The “quick and dirty” guide to “where are bonds headed next” appears in the monthly and weekly charts of ticker TLT (iShares 20+ years treasury bond ETF). Note the key support and resistance levels drawn on these charts.

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Figure 2 – Monthly TLT with support and resistance (Courtesy ProfitSource by HUBB)

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Figure 3 – Weekly TLT with support and resistance (Courtesy ProfitSource by HUBB)

There is nothing magic about these lines, but a break above resistance suggests a bull move, a break below support suggests a bear move, and anything in between suggests a trading range affair.

Now let’s look at some potentially positive influences. Figure 4 displays a screen from the excellent site www.sentimentrader.com that shows that sentiment regarding the long treasury bond is rock bottom low. As a contrarian sign this is typically considered to be bullish.

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Figure 4 – 30-year treasury investor sentiment is extremely low (Courtesy Sentimentrader.com)

Figure 5 – also from www.sentimentrader.com – suggests that bonds may be entering a “bullish” seasonal period between now and at least late-November (and possibly as long as late January 2019).

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Figure 5 – 30-year treasury seasonality (Courtesy Sentimentrader.com)

Figure 6 displays the 30-year treasury bond yield (multiplied by 10 for some reason). While rates have risen 27% from the low (from 2.51% to 3.18%), they still remain below the long-term 120-month exponential moving average.

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Figure 6 – Long-term treasury bond yields versus 120-month moving average (Courtesy AIQ TradingExpert)

Finally, two systems that I developed that deems the bond trend bullish or bearish based on the movements of 1) metals, and 2) Japanese stocks turned bullish recently. The bond market has fallen since these bullish signal were flashed – possibly as a result of the anticipated rate hike from the Fed. Now that that hike is out of the way we should keep a close eye on bonds for a potential advance in the months ahead.

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Figure 7 – Bonds tend to move inversely to Japanese stocks; Ticker EWJ 5-week average is below 30-week average, i.e., potentially bullish for bonds (Courtesy AIQ TradingExpert)

Summary

It’s a little confusing here.

a) The “long-term” outlook for bonds is very “iffy”, so bond “investors” should continue to be cautious – as detailed above.

b) On the other hand, there appears to be a chance that bonds are setting up for a rally in the near-term.

c) But, in one final twist, remember that if TLT takes out its recent support level, all bullish bets are off.

Are we having fun yet?

Jay Kaeppel

New Highs, Check…Now What?

September 25, 2018educational newsletters, ETFS, indexes, jay kaeppel, stock market, Stock tradingadmin

Let’s open with Jay’s Trading Maxim #7.

Jay’s Trading Maxim #7: Being able to identify the trend today is worth more than 1,000 predictions of what the trend will be in the future.

Yes trend-following is boring. And no, trend-following never does get you in near the bottom nor out at the top. But the reality is that if you remain long when the trend appears to be up (for our purposes here let’s define this roughly as the majority of major market averages holding above their long-term moving averages) and play defense (i.e., raise cash, hedge, etc.) when the trend appears to be down (i.e., the majority of major market averages are below their long-term moving averages), chances are you will do pretty well for yourself. And you may find yourself sleeping pretty well at night as well along the way.

To put it more succinctly:

*THE FOREST = Long-term trend

*THE TREES = All the crap that everyone tells you “may” affect the long-term trend at some point in the future

Human nature is a tricky thing. While we should clearly be focused on THE FOREST the reality is that most investors focus that majority of their attention on all those pesky trees. Part of the reason for this is that some trees can offer clues. It’s a question of identifying a few “key trees” and then ignoring the rest of the noise.

A New High

With the Dow Industrials rallying to a new high virtually all the major averages have now reached a new high at least within the last month. And as you can see in Figure 1 all are well above their respective 200-day moving average. Long story short the trend is “UP”.

(click to enlarge)Figure 1 – U.S. Major Market Indexes in Uptrends (Courtesy AIQ TradingExpert)

Now What? The Good News

As strong as the market has been of late it should be noted that we are about to enter the most favorable seasonal portion of the 48-month election cycle. This period begins at the close of September 2018 and extends through the end of December 2019.

Figure 2 displays the growth of $1,000 invested in the Dow Industrials only during this 15-month period every 4 years. Figure 3 displays the actual % +(-) for each of these periods. Note that since 1934-35, the Dow has showed a gain 20 out of 21 times during this period.

Figure 2 – Growth of $1,000 invested in Dow Industrials ONLY during 15 bullish months (mid-term through pre-election year) within 48-month election cycle.

Start Date	End Date	Dow % +(-)
9/30/1934	12/31/1935	+55.6%
9/30/1938	12/31/1939	+6.2%
9/30/1942	12/31/1943	+24.5%
9/30/1946	12/31/1947	+5.1%
9/30/1950	12/31/1951	+18.9%
9/30/1954	12/31/1955	+35.5%
9/30/1958	12/31/1959	+27.7%
9/30/1962	12/31/1963	+31.8%
9/30/1966	12/31/1967	+16.9%
9/30/1970	12/31/1971	+17.0%
9/30/1974	12/31/1975	+40.2%
9/30/1978	12/31/1979	(-3.1%)
9/30/1982	12/31/1983	+40.4%
9/30/1986	12/31/1987	+9.7%
9/30/1990	12/31/1991	+29.2%
9/30/1994	12/31/1995	+33.1%
9/30/1998	12/31/1999	+46.6%
9/30/2002	12/31/2003	+37.7%
9/30/2006	12/31/2007	+13.6%
9/30/2010	12/31/2011	+13.0%
9/30/2014	12/31/2015	+2.2%

Figure 3 – 15 bullish months (mid-term through pre-election year) within 48-month election cycle

Now What? The Worrisome Trees

While the major averages are setting records a lot of other “things” are not. My own cluster of “market bellwethers” appear in Figure 4. Among them the Dow Transportation Index is the only one remotely close to a new high, having broken out to the upside last week. In the meantime, the semiconductors (ticker SMH), the inverse VIX index ETF (ticker ZIV) and Sotheby’s (ticker BID) continue to meander/flounder. This is by no means a “run for the hills” signal. But the point is that at some point I would like to see some confirmation from these tickers that often (though obviously not always) presage trouble in the stock market when they fail to confirm bullish action in the major averages.

(click to enlarge)Figure 4 – Jay’s 4 Bellwethers (SMH/TRAN/ZIV/BID) (Courtesy AIQ TradingExpert)

Another source of potential concern is the action of, well, the rest of the darn World. Figure 5 displays my own regional indexes – Americas, Europe, Asia/Pacific and Middle East. They all look awful.

(click to enlarge)Figure 5 – 4 World Regional Indexes (Courtesy AIQ TradingExpert)

Now the big question is “will the rest of the world’s stock markets start acting better, or will the U.S. market start acting worse?” Sadly, I can’t answer that question. The key point I do want to make though is that this dichotomy of performance – i.e., U.S market soaring, rest of the world sinking – is unlikely to be sustainable for very long.

Summary

It is hard to envision the market relentlessly higher with no serious corrections over the next 15 months. And “yes”, those bellwether and world region indexes trees are “troublesome”.

Still the trend at the moment is inarguably “Up” and we about to enter one of the most seasonally favorable periods for the stock market.

So, my advice is simple:

1) Decide now what defensive actions you will take if the market does start to breakdown

2) Resolve to actually take those actions if the need arises

3) Enjoy the ride as long as it lasts.

Jay Kaeppel

Attention Wild-Eyed Speculators

September 7, 2018educational newsletters, ETFS, jay kaeppel, technical indicatoradmin

Most people are familiar with ADHD, manic-depressive disorder, depression and schizophrenia. But one common affliction within our trading community that gets almost no attention is WESS. That stands for “Wild-Eyed Speculation Syndrome”. And it’s more common than you think (“Hi, my name is Jay”).

The exact symptoms vary, but generally speaking they go something like this:

*A person gets up in the morning with a hankering to make a trade

*Said person then finds “some reason” to make some trade in something

*If the person happens to make money on that trade then the affliction is reinforced by virtue of IGTS (“I’ve Got the Touch Syndrome”, which is one of the occasional side effects of WESS)

*If the person loses money on the trade the side effects can vary but may include: angry outbursts, kicking oneself in the head (typically figuratively), vows to either stop the behavior or at least do it better, and so on.

*The most common side effect of WESS is a declining trading account balance (which not coincidentally is how this disorder is most commonly diagnosed).

For those suffering from WESS – with the caveat/disclosure that I am not a medical professional (although I have found that ibuprofen really clears up a lot of stuff, but I digress) – I am here to help.

If you find yourself suffering from Symptom #1 above:

The most effective step is to go back to bed until the urge passes. If this doesn’t work or is not possible (for instance, if you have one of those pesky “jobs” – you know, that 8-hour a day activity that gets in the way of your trading), repeat these two mantras as many times as necessary:

Mantra 1: “I must employ some reasonably objective, repeatable criteria to find a trade with some actual potential”

Mantra 2: “I will risk no more than 2% of my trading capital” on any WESS induced trade (and just as importantly, you must fend off the voice on the other shoulder shouting “But this is the BIG ONE!!”)

Repeat these mantras as many times as necessary to avoid betting the ranch on some random idea that you “read about on the internet, so it must be true.”

Regarding Mantra 1

There are a million and one ways to find a trade. There is no one best way. But just to give you the idea I will mention one way and highlight a current setup. IMPORTANT: That being said, and as always, I DO NOT make recommendations on this blog. The particular setup I will highlight may work out beautifully, or it may be a complete bust. So DO NOT rush out and make a trade based on this just because you read it – you know – on the internet.

The Divergence

Lots of trades get made based on “divergence”. In this case we are talking about the divergence between price and a given indicator – or even better, series of indicators. There is nothing magic about divergence, and like a lot of things, sometimes it works and sometimes it doesn’t. But the reason it is a viable consideration is that when an indicator flashes a bullish divergence versus price it alerts us to a potential – nothing more, nothing less – shift in momentum.

Let’s look at ticker GDX – an ETF that tracks an index of gold mining stocks. In Figure1 1 through 4 below we see:

*GDX price making a lower low

*A given indicator NOT confirming that new low (i.e., a positive divergence)

Figure 1 – GDX and MACD (Courtesy AIQ TradingExpert)

Figure 2 – GDX and 3-day RSI (Courtesy AIQ TradingExpert)

Figure 3 – GDX and TRIX (Courtesy AIQ TradingExpert)

Figure 4 – GDX and William’s Ultimate Oscillator (Courtesy AIQ TradingExpert)

So, do the divergences that appear in Figures 1 through 4 justify a trade? Well, here is where the aforementioned affliction comes into play.

Average Trader: “Maybe, maybe not. In either case I am not entirely sure that trying to pick a bottom in gold stocks based solely on indicator divergences is a good idea”

WESS Sufferer: “Absofreakinglutely!! Let’s do this!!”

You see the problem.

So, let’s assume that a WESS Sufferer likes what he or she sees in Figures 1 through 4. The good news is that we have met the minimum criteria for Mantra #1 above – we have employed some reasonably objective, repeatable criteria (i.e., a bullish divergence between price and a number of variable indicators) to spot a potential opportunity.

Now we must follow Mantra #2 of risking no more than 2% of my trading capital. Let’s assume our WESS Sufferer has a $25,000 trading account. So he or she can risk a maximum of $500 ($25,000 x 2%).

In Figure 5 we see a potential support area for GDX at around $16.40 a share.

Figure 5 – Ticker GDX with support at $16.40 (Courtesy AIQ TradingExpert)

So, one possibility would be to buy 300 shares of GDX at $17.84 and place a stop loss order below the “line in the sand” at say $16.34 a share. So if the stop is hit, the trade would lose -$450, or -1.8% of our trading capital (17.84 – 16.34 = -1.50 x 300 shares = -$450).

Summary

Does any of the above fit in the category of “A Good Idea”. That’s the thing about trading – and most things in life for that matter – it’s all in the eye of the beholder. Remember, the above is NOT a “recommendation”, only an “example.”

The real key thing to note is that we went from being just a random WESS Sufferer to a WESS Sufferer with a Plan – one that has something other than just an “urge” to find a trade, AND (most importantly) a mechanism for limiting any damage that might be done if things don’t pan out.

And if that doesn’t work, well, there’s always ibuprofen.

Jay Kaeppel

When It All Becomes Too Obvious

August 8, 2018educational newsletters, ETFS, indexes, jay kaeppel, market timingadmin

Investors who pay close attention to the financial markets by and large spend a fair amount of time being “perplexed.” If you take all the “news” related to the markets and combine that with all the day-to-day and week-to-week gyrations of the markets, there often seems to be no rhyme or reason for what goes on (hence the reason I generally advocate a slightly less hyper, more trend-driven approach).

But sometimes it all seems to come crystal clear. In the most recent fortnight most of the major market averages (with the Dow and S&P 500 being the primary exceptions) have touched or at least teased new highs. Facebook got crushed and the market didn’t tank. Tesla struggled mightily before bursting back into the bright sunlight – and the market didn’t tank. In fact, all kinds of things have happened and still the major U.S. averages march relentlessly higher backed by a strong economy, reasonably moderate inflation and higher, yet by no means high interest rates.

At this point, it appears “obvious” that there is no end in sight to the Great Bull Market. A number of momentum studies I have read lately seem to all confirm that the U.S. market will continue to march higher to significantly higher new highs.

And the fact that it is so “obvious” scares the $%^& out of me. Don’t misunderstand. This is not about to devolve into a hysterical “Sell Everything!” screed. The trend is bullish therefore so am I. But the “what could possibly go wrong” antennae still pop up from time to time. So here are some random views regarding all things stock market.

The Major Averages

Figure 1 displays 4 major U.S. market averages. All are in uptrends above their respective 200-day moving averages and all are close to all-time highs. The big question is “what happens when they get there?” Do they all break through effortlessly? Or do we get a “struggle?”

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Figure 1 – The Major U.S. Averages; clearly in up trends, but… (Courtesy AIQ TradingExpert)

Figure 2 displays my own 4 market “bellwethers”, including the semiconductors (SMH), Dow Transports (TRAN), Inverse VIX ETF (ZIV) and Sotheby’s Holdings (BID). At the moment, none of these are actively “confirming” new highs and they each have a clear “line in the sand” resistance level overhead. So, for the moment they presently pose something of a minor warning sign.

(click to enlarge)

Figure 2 – Jay’s Market “Bellwethers”; stuck in “nowhere” (Courtesy AIQ TradingExpert)

While the U.S. economy and stock market appear to be hitting on all cylinders, the rest of the world is sort of “chugging along.” Figure 3 displays 4 “Geographic Groups” that I follow – The Americas, Asia/Pacific, Europe and Middle East. The good news is that each group is presently holding above it’s respective 21-month moving average. So technically, the trend is “Up.” But the bad news is that each group has some significant overhead resistance, so the current uptrend is by no means of the “rip roaring” variety.

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Figure 3 – Major Geographic Groups; Hanging onto uptrends but serious overhead resistance (Courtesy AIQ TradingExpert)

The VIX Index

Traders have been pretty much conditioned in recent years to assume that the VIX Index – which measures volatility and by extension, “fear” – is and will remain low as the market chugs higher. And that may prove to be true. But when everything gets to “obvious” (i.e., the U.S. market is “clearly” heading higher) and things get too quiet (VIX dropped below 11% for the 1st time in 3 months) it can pay to “expect the unexpected.”

Figure 4 is from www.sentimentrader.com and displays those instances in the past when the VIX Index fell below 11% for the first time in 3 months. Historically, VIX makes some kind of an up move in the 2 to 3 months following such occurrences.

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Figure 4 – VIX Index performance after VIX Index drops below 11% for 1st time in 3 months (Courtesy Sentimentrader.com)

Things may or may not play out “like usual” this time around, however, given that…

*The U.S. averages are “obviously” heading higher

*The market bellwethers are so far not confirming

*The rest of the worlds stock markets are nowhere near as strong

*VIX has a history of “spiking”, especially during the seasonally unfavorable months of August and September

…It might make sense to consider a long volatility play (NOTE: Long volatility plays using ticker VXX have a long history of not panning out as ticker VXX is essentially built to go to zero – for more information on VXX and the effects of “contango” please see www.Google.com. Long VXX trades are best considered).

One example appears in Figures 5 and 6. This trade involves:

*Buying 5 Oct VXX 31 calls @ $2.74

*Selling 4 Oct VXX 36 calls @ $1.82

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Figure 5 – VXX example trade particulars (Courtesy www.OptionsAnalysis.com)

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Figure 6 – VXX example trade risk curves (Courtesy www.OptionsAnalysis.com)

The maximum risk is $642 if VXX fails to get above the breakeven price of $32.28 by October 19th. On the other hand, if something completely not “obvious” happens and volatility does in fact spike, the trade has significant upside potential.

(NOTE: As always, please remember that this is an “example” of a speculative contrarian trade, and NOT a “recommendation.” If the stock market rallies – as it “obviously” seems to want to do, this trade will likely lose money.)

Jay Kaeppel

AIQ TradingExpert Pro

World Leader in Intelligent Trading Software

Category Archives: educational newsletters

Watch This Indicator

The (Potential) Bullish Case for Bonds

New Highs, Check…Now What?

Attention Wild-Eyed Speculators

When It All Becomes Too Obvious