Category Archives: educational newsletters

Trend or Countertrend? Why Not Both?

January 12, 2018EDS, educational newsletters, jay kaeppel, trading strategyadmin

First the brutal disclaimers: What follows is NOT a trading “system.” It is merely an “idea.” Even more brutally, I can’t even claim that it “works”. All the testing I have done so far is more anecdotal. Also to an extremely huge degree, the actual entry trigger and exit trigger that trader might choose to use will have – as always – at least as much if not more impact on overall trading results as the actual “alert” signal detailed below.

Got that? OK, then let’s proceed.

The Debate

The ongoing debate in trading is always – trend-following or countertrend? Which is the way to go? There are (conservatively) at least a bazillion and one ways to argue one way or the other. Figure 1 displays ticker TXN with upper and lower “Acceleration Bands” (code for AIQ TradingExpert appears after disclaimer at end of article) drawn.

Figure 1 – Ticker TXN with Acceleration Bands (Courtesy AIQ TradingExpert)

Want to start a debate? Ask this question: Is it better to buy when price hits the upper band or the lower band? Sometimes price hits the upper band and just keeps going. Sometimes it hits the upper band and the move peters out and reverses fairly quickly.

Going with the trend can lead to some big winning trades along the way, but typically involves a lot of whipsaws as well. Trading countertrend can lead to some great, quick profits – expect of course for when the initial trend never quite reverses and quick losses accrue instead.

What to do, what to do?

So the “idea” I mentioned at the outset generally goes like this:

*In an uptrend (which we will define in a moment)

*Wait for price to hit the Upper Band

*Then wait for a pullback

*Then wait for the uptrend to reassert itself

Got that? OK, me neither exactly. So let’s try to define things a little more clearly.

1. As long as the closing price remains above the 200-day moving average, we will call that an “uptrend”

2. Within an uptrend wait for the high of a trading day to reach or exceed the Upper Acceleration Band.

3. Following #2, wait for the 4-day RSI to drop to 32 or lower with the following caveats:

*If price touches the Lower Acceleration Band OR closes below the 200-day moving average

*Then the setup is invalidated

This is the “Setup”. For sake of example I will add an entry trigger as follows:

4. Following a valid #3 Alert Signal, buy when price exceeds the previous day’s high

I am going to purposely NOT add an exit trigger – just so that no one decides to “try it out” without at least giving it some thought on their own.

So Figure 2 shows the “Alerts” and “Entry Triggers” for the chart in Figure 1.

Figure 2 – Ticker TXN with Example “Entry Triggers” (Courtesy AIQ TradingExpert)

So Figure 3 shows the “Alerts” and “Entry Triggers” for ticker EBAY

Figure 3 – Ticker EBAY with Example “Entry Triggers” (Courtesy AIQ TradingExpert)

So Figure 4 shows the “Alerts” and “Entry Triggers” for ticker CSCO

Figure 4 – Ticker CSCO with Example “Entry Triggers” (Courtesy AIQ TradingExpert)

So are these signals any good? Well, like a lot of trading methods, some look pretty good and others do not. As I also mentioned earlier, a lot depends on the method or methods you use to exit each trade.

Summary

The reality is that there is a chance that the “idea” contained herein is just no darn good.

But also remember that there are other “trend filters” (besides the 200-day moving average), there are other “bands” (besides Acceleration Bands”), there are other oversold indicators (besides 4-day RSI) and there are other entry and exit triggers.

As such, this piece is essentially for people who are willing to do a little digging on their own and, a) become comfortable (or not) with the idea, and b) develop some position sizing, stop-loss and profit-taking criteria.

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.

Acceleration Bands Code for AIQ Expert Design Studio EDS

a is ([high]-[low]).

b is ([high]+[low])/2.

c is (a / b).

d is (c*2).

e is (1+d).

f is (1-d).

g is ([high]*e).

h is ([low]*f).

AccelUB is Simpleavg(g, 20).

AccelLB is Simpleavg(h, 20).

The Biotech-Gold Stock Connection

January 3, 2018educational newsletters, jay kaeppel, Mutual fundsadmin

At first blush there might not seem to be much to connect biotech stocks and gold stocks.

One type of company hires people to engage in high tech biomedical engineering in order to develop potentially life-saving – or at least, life altering – medical breakthroughs…

…while the other hires people to (essentially) dig holes in the ground and mine stuff (granted, valuable stuff, but stuff mined out of the ground nevertheless).

But there is one other connection – stocks of both categories are quite volatile. And that alone may be enough to create a potential opportunity.

The BioGold Index

I created an “index” (such as it is) that combines Fidelity Select Biotech (FBIOX) and Fidelity Select Gold (FSAGX). The index appears in Figure 1. Like every other index in the world this index fluctuates up and down.

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

The RSI32 Index

The RSI32 Index is simply a 2-day average of the standard 3-day RSI Index. The code for AIQ TradingExpert EDS is below:

Define days3 5.

U3 is [close]-val([close],1).

D3 is val([close],1)-[close].

AvgU3 is ExpAvg(iff(U3>0,U3,0),days3).

AvgD3 is ExpAvg(iff(D3>=0,D3,0),days3).

RSI3 is 100-(100/(1+(AvgU3/AvgD3))).

RSI32 is simpleavg(RSI3,2).

The RSI32 Index for the BioGold Index appears on the monthly bar chart in Figure 2.

Figure 2 – The BioGold Index with RSI32 (drop to 33 or below = BUY) (Courtesy AIQ TradingExpert)

The BioGold “System”

The BioGold System works as follows:

*When the monthly RSI32 Index drops to 33 or lower, buy BOTH FBIOX and FSAGX

*After a “Buy Signal” then when the monthly RSI32 rises to 64 or higher, sell BOTH FBIOX and FSAGX

For testing purposes we will use monthly total return data for both FBIOX and FSAGX from the PEP Database from Callan Associates.

The Results

Figure 3 displays the results of the buy signals generated using the rules above (assumes that both FBIOX and FSAGX are bought after monthly RSI32 drops to 33 or lower and are held until monthly RSI32 rises to 64 or higher.

Buy Signal	Sell Signal	FBIOX+FSAGX % +(-)
4/30/1992	12/31/1992	+14.4%
2/26/1993	4/30/1993	+14.7%
4/29/1994	9/30/1994	+7.2%
12/30/1994	4/28/1995	+9.8%
4/30/1997	9/30/1997	+18.4%
11/28/1997	4/30/1998	+10.4%
6/30/1998	12/31/1998	+16.1%
3/30/2001	6/29/2001	+22.7%
7/31/2002	12/31/2002	+18.1%
7/30/2004	10/29/2004	+11.2%
3/31/2005	7/29/2005	+10.2%
4/30/2008	7/31/2008	+9.4%
9/30/2008	6/30/2009	+3.8%
5/31/2012	9/28/2012	+20.0%
2/28/2013	2/28/2014	+28.6%
8/31/2015	4/29/2016	+22.2%
12/30/2016	2/28/2017	+13.2%
	Average %	+14.7%
	Median %	+14.4%
	Std. Deviation %	6.4%
	Max % +(-)	+28.6%
	Min % +(-)	+3.8%

Figure 3 – Trade-by-Trade Results

For the record, the “System” has been in FBIOX and FSAGX only 28% of the time (88 months) and out of the market 72% of the time (223 months).

Figure 4 displays the trades in recent years.

Figure 4 – BioGold System trades; 2012-2017 (Courtesy AIQ TradingExpert)

*The Good News is that all 17 signals since 1992 showed a profit, with an average gain if +14.7%.

*The Bad News is that, a) 17 trades in 25 years is a pretty small number of trades and, b) there are some not insignificant drawdowns along the way (-22.8% in 1998 and -22.4% in 2008, -14.1% in 2013 and -13.6% in 2016).

Still, for what it is worth the monthly equity curve appears in Figure 5.

Figure 5 – Growth of $1,000 invested using the “BioGold System”; 12/31/1991-12/29/2017

For the record, the “System” has been in FBIOX and FSAGX only 28% of the time (88 months) and out of the market 72% of the time (223 months).

For the record, the “System” has been in FBIOX and FSAGX only 28% of the time (88 months) and out of the market 72% of the time (223 months). No interest is assumed to be earned while out of the market in the test above.

If we invest in short-term treasuries (1-3 yr.) while not in the stock market we get the results shown in Figure 6.

In Figure 6:

*The blue line represents the growth of $1,000 achieved by holding FBIOX and FSAGX when the BioGold System is on a “buy signal” and 1-3 yr. treasuries the rest of the time.

*The red line represents the growth of $1,000 achieved by buying and holding both FBIOX and FSAGX and then rebalancing at the end of each year.

The “System” grew to $19,863 and the “split” grew to $12,844.

Figure 6 – Growth of $1,000 using BioGold System plus 1-3 yr. treasuries when out of stocks (blue) versus buying and holding FBIOX and FSAGX and rebalancing each year (red);12/31/1991-12/29/2017

Summary

So is the “BioGold System” really a viable investment idea? That’s not for me to say. The per trade returns are pretty good but there aren’t a whole lot of trades and if history is a guide an investor would likely have to ride some significant drawdowns in order to reap the gains.

Still, market-beating performance is market-beating performance, so who knows?

Jay Kaeppel Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro client.

Bitcoin May Rise Another 20-fold, But First….

December 13, 2017educational newsletters, jay kaeppeladmin

First off, for the record I am an “Old Dog” and Bitcoin is a “New Trick”. That creates a problem right there. The truth is also that can’t honestly say that I fully understand what Bitcoin actually is or how it actually works (which technically means I am in pretty good company with a lot of people who are actually trading it, but I digress). And as a “grizzled veteran” (of the markets) there is a part of me that instinctively wants to dismissively shout “bubble” and sneeringly walk away. It’s not like it hasn’t been seen before – tulip bulbs, the Nifty 50, silver, technology/dot.com stocks, interest only mortgages and so on.

Most of you know the drill:

*Some form of “investment” catches lightning in a bottle

*The investment world (for lack of a more professional phrase) “wet’s itself”

*Price soars beyond all rational levels

You know, sort of like what you see in Figure 1…

Figure 1 – Bitcoin price (Bitcoin.com)

…And then it all ultimately plummets painfully to earth.

Well, at least temporarily. I mean sure tulip bubbles never ascended the heights again, but a lot of the Nifty 50 went on to still be major companies even after their stock cratered. The same for a lot of the major dot.com era companies. Silver is still trading as a serious commodity and real estate seems to have rebounded.

In sum: Is Bitcoin forming a price “bubble”? It’s hard to look at Figure 1 and not think so. Of course, even if it is the questions no one can answer for sure are “When” and “from what level”?

The other question is “if it is a bubble and the bubble bursts, will crypto currencies go the way of tulip bulbs (as an investment) or is there a future for them in the long run?”

A Recent Bubble History Lesson

In the late 90’s into 2000 a bubble formed in tech stocks. And the bubble burst and it was ugly. And many “hot” companies folded and vanished. But not all of them and certainly not the major players. And certainly not the industry as a whole. Like I said before I don’t truly understand Bitcoin and crypto currencies. So I can’t say for sure if they are a “craze” – like tulip bulbs in the 1600’s during “Tulipmania” or something more viable and sustainable – like technology stocks. To understand why this distinction matters, consider the stocks listed in Figure 2.

Figure 2 – Dot.com bubble stocks that survived and thrived

As you can see in Figure 2 through 7 each of these stocks experienced a “bubble” and a “crash”. Interestingly, the companies themselves ultimately rebounded and thrived.

The average “crash” was -87% and the average post-crash advance (so far) is about 16,000%.

Figure 3 – Apple (Courtesy AIQ TradingExpert)

Figure 4 – Amazon (CourtesyAIQ TradingExpert)

Figure 5 – Microsoft (Courtesy AIQ TradingExpert)

Figure 6 – Nvidia (Courtesy AIQ TradingExpert)

Figure 7 – Priceline (Courtesy AIQ TradingExpert)

Summary

The only thing we can say for sure is that some people will make a great deal of money from Bitcoin/crypto currencies and others will likely get wiped out. The danger is obvious: whenever you have a lot of investors “chasing” something – especially something that many of them don’t even understand – it is a recipe for trouble.

That being said, in my (market addled) mind the real “long-term” question is, will crypto currencies still be “a thing” after the bottom falls out? If Bitcoin is a bubble, then if history is a guide we can look or a decline in price somewhere in the 80% to 99% range after the top is ultimately made.

From there, if history is also a guide then depending on whether or not crypto currencies prove to be a viable thing, we can expect them to either:

a) Vanish altogether

b) Rise 15-20 fold from the bottom

So here is my Bitcoin/crypto currency investing guide:

*It is OK to pile in and buy Bitcoin in hopes of getting rich (as long as you do not “bet the ranch”, invest only a small portion of your capital and acknowledge that a 100% loss is absolutely a possibility and that you are willing and able to accept that risk).

*It is also OK to sneer and shout “bubble” and not invest. But if and when the bottom drops out and prices crater remember to peruse the wreckage. There just might be an opportunity there (remember, Priceline lost -99% when the dot.com bubble burst, then gained 32,000%).

In any event, hold on tight people, this is NOT going to be a smooth ride.

Jay Kaeppel Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro client.

A Simple Indicator for Traders

October 6, 2017EDS, educational newsletters, jay kaeppel, technical indicatoradmin

First the Bad News: There are no “magic bullets” when it comes to trading. There are people in this industry who have literally tested somewhere in the range of six bazillion “indicators” – give or take (“Hi. My name is Jay”). Every trend following indicator looks like a gold mine when it latches onto a huge trend and rides it (but not so much when it starts getting whipsawed). And every overbought/oversold indicator looks like a gift from heaven from time to time when it somehow manages to peak (or valley) and then reverses right at a high (or low). And then the next time the thing gets oversold the security in question just keeps plunging and the previously “amazingly accurate” indicator just gets more and more oversold.

Bottom line: what I am about to discuss is likely no better or worse than a lot of other indicators. And it is no holy grail. Still, I kinda like it – or whatever that is worth.

EDITORS NOTE an AIQ EDS file for this indicator with the 3 step rules outlined can be downloaded from here you will need to copy or save this file into your wintes32/eds strategies folder. Alternatively the code is available at the end of this article for copying and pasting into a new EDS file.

UpDays20

I call this indicator UpDays20 and I stole, er, learned it originally from Tom McClellan of McLellan Financial Publications. My calculation may be slightly different because I wanted an indicator that can go both positive and negative. For a given security look at its trading gains and losses over the latest 20 trading days.

UPDays20 = (Total # of Up days over the last 20 trading days) – 10

So if 10 of the last 20 trading days showed a gain then UpDays20 would read exactly 0.

If only 6 of the last 20 trading days showed a gain then UpDays20 would read -4

You get the idea (and proving once again that it “doesn’t have to be rocket science”). As a “trading method” it is always advised that this indicator – like most all other indicators – NOT be used as a standalone approach to trading. That being said, the way I follow this indicator is as follows.

Step 1) UpDays20 drops to at least -2

Step 2) UpDays20 rises 2 points from a low

Step 3) The security in question then rises above its high for the previous 2 trading days

It is preferable to follow this setup hen the security in question is above its 200-day moving average, but that is up to the trader to decide (the danger to using this with a security below its 200-day moving average is that it might just be in the middle of a freefall. The upside is that counter trend rallies can be fast and furious – even if sometimes short-lived).

Again, there is nothing magic about these particular steps. They are simply designed to do the following:

1) Identify an oversold condition

2) Wait for some of the selling pressure to abate

3) Wait for the security to show some sign of reversing to the upside

Like just about every other indicator/method, sometimes it is uncannily accurate and sometimes it is embarrassingly wrong (hence the reason experienced traders understand that capital allocation and risk management are far more important than the actually method you use to enter trades).

In this previous article (in Figures 3 and 4) I wrote about using this indicator with ticker TLT. Figure 1 and 2 display the “buy” signals generated using the rules above for tickers IYT and GLD.

Figure 1 – UpDays20 “Buy” Alerts for ticker IYT (Courtesy AIQ TradingExpert)

Figure 2 – UpDays20 “Buy” Alerts for ticker GLD (Courtesy AIQ TradingExpert)

Are these signals good or bad? That is in the eye of the beholder and not for me to say. One big unanswered question is “when do you exit”? That is beyond the scope of this “idea” article – however, “sell some at the first good profit and then use a trailing stop” looks like a decent approach to consider) but would have a profound effect on any actual trading results.

Some of the signals displayed in Figures 1 and 2 are obviously great, others are maybe not so hot. Interestingly, some of the signals in Figure 1 and 2 that don’t look to timely at first blush actually offered a profitable opportunity to a trader who was inclined to take a quick profit. Again, how you allocate capital and when you exit with a profit and when you exit with a loss would likely have as much impact on results as the raw “buy” signals themselves.

Summary

No one should go out and start trying to trade tomorrow based on UpDays20. No claim is being made that the steps detailed herein will result in profits nor even that this is a good way to trade.

But, hey, it’s one way.

Jay Kaeppel Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro client.

! UpDays20 – I call this indicator UpDays20. For a given security look at its trading gains and losses over the latest 20 trading days.

! UPDays20 = (Total # of Up days over the last 20 trading days) – 10

! So if 10 of the last 20 trading days showed a gain then UpDays20 would read exactly 0.

! If only 6 of the last 20 trading days showed a gain then UpDays20 would read -4

Upday if [close]>val([close],1).

totalupdayslast20days is CountOf(upday,20).

updayindicator is totalupdayslast20days – 10.

! How to follow this indicator

! Step 1) UpDays20 drops to at least -2

! Step 2) UpDays20 rises 2 points from a low

! Step 3) The security in question then rises above its high for the previous 2 trading days

UpDays20rises2points if updayindicator>valresult(updayindicator,1) and valresult(updayindicator,1)>valresult(updayindicator,2).

updays20atminus2orlower if valresult(updayindicator,2)<=-2.

closesabovehighof2priordays if [close]>val([high],1) and [close]>val([high],2).

Upsignal if UpDays20rises2points and updays20atminus2orlower and closesabovehighof2priordays.

The Gathering Storm

September 7, 2017educational newsletters, indexes, jay kaeppel, market timingadmin

First the Good News:

*The market averages are still in an up trend

*The Fed has yet to “remove the punch bowl”

Figure 1 – Major Averages still in Up Trends (Courtesy AIQ TradingExpert)

Figure 2 – Fed Quantitative Easing propels the stock market (Courtesy RealInvestmentAdvice.com)

Now the bad news

Market Bellwethers Flashing Warnings

In this article I wrote about four tickers I follow for signs of early warnings of trouble. At the moment, all four are flashing warnings.

Figure 3 – Bellwethers flashing potential warnings (Courtesy AIQ TradingExpert)

Stocks are Extremely Overvalued

Something important to note: valuation indicators are NOT good timing indicators. The overall market can be over or undervalued for years. However, overvalued valuation readings are extremely reliable at telling us what will come next once the top is in (whenever that may be). Figure 4 displays the Schiller CAPE model which measures adjusted P/E ratio.

Figure 4 – Schiller Adjusted PE (Courtesy: Schiller Data Library)

1901: Dow -37% in 32 months

1929: Dow -89% in 3 years

1932: Dow -49% in 13 months

1965: Dow sideways to 40% lower for 17 years

2000: Nasdaq 100 -87%

2007: Dow -55% in 17 months

2017: ??

When will the exact top form? Don’t know

What will likely follow? Don’t Ask

The Decennial Pattern

As I wrote about here and as you can see in Figures 5 and 6, the Year 7 into Year 8 period has historically witnesses significant market weakness. That does not mean that that is what will happen this time around. But it is reason for caution.

Figure 5 – Stock Market Decennial Pattern (Courtesy: OptionStrategist.com)

Figure 6 – Trouble in Late Year “7” (Courtesy: OptionStrategist.com)

Figure 7 from Tom McLellan illustrates this phenomenon even more clearly.

Figure 7 – Trouble in Late Year “7” (Courtesy: www.mclellanoscillator.com)

September

What a crummy time for September to roll around. Figure 8 displays the fact that the Dow has lost -80% during the month of September since 1897.

Figure 8 – Dow has lost -80% during September since 1897

Figure 9 displays the fact that since 1955 most of the “September Nasty” has occurred in that last 10 trading days of the month (after the close on 9/15 this year)

Figure 9 – Dow in September; 1st 3 days (blue); Last 10 days (green); in between (red); 1955-2016

Investor Complacency

Despite the fact that:

*We have experienced one of the longest bull markets in history

*Stock prices are extremely overvalued on an objective historical basis

*A number of warning signs are flashing

The investment world seems relatively untroubled (in the interest of full disclosure I have done only limited selling so far myself – more on this in a moment).

Figure 10 displays the AAII investor cash allocation reading from earlier this year. Low cash levels tend to signal complacency (and impending market trouble) while high cash levels tend to occur near market bottoms.

Figure 10 – AAII Investor Cash % is low (Courtesy: American Association of Individual Investors)

Figure 11 displays the amount of assets in the Rydex suite of “bearish” funds from earlier this year. As you can see, investors were not too concerned about the prospects for a bear market – a potential contrarian signal.

Figure 11 – Rydex Bearish Funds Assets low (Courtesy: The Lyons Share)

Figure 12 shows the level of margin debt versus stock prices. Historically when margin debt peaks and begins to decline the stock market suffers significantly. There is no way to predict when margin debt will top out and roll over but it did recently reach a new all-time high. Could it go higher? Absolutely. But if it rolls over – then look out below.

Figure 12 – If Margin Debt peaks trouble may follow (Courtesy: dshort.com)

Figure 13 displays the stock market versus the number of “Hindenburg Omens” (a measure of “churning” in the stock market) that have occurred in the most recent 6-month period. Another warning sign is flashing.

Figure 13 – Hindenburg Omen flashing a warning (Courtesy: SentimentTrader.com)

Summary

Does any of the above guarantee that a significant stock market decline is imminent? The correct answer is “No.” The major market indexes all remain above their long-term moving averages. This can be considered the very definition of a bull market.

I personally have seen lots of warning signs flash along the way over the years. And I have found that it is important to pay attention to these and to “prepare for the worst” – i.e., to plan an exit/hedging strategy “just in case.” But trying to pick the exact top is an excellent way to end up looking stupid. Trust me on this one.

So here is my summary:

*I do not possess the ability to “call the top” nor to “predict what will happen next” in the stock market

*I do possess a reasonably good ability to identify the trend “right now”

*I also possess the ability to recognize gathering storms clouds (and, yes, they are forming) and the ability to formulate an “emergency plan” as well as the wherewithal to follow the plan “should this be an actual (market) emergency.”

The current level of market valuation – and the history of the stock market following previous similar such readings – suggests that the next bear market will surprise many investors by its severity.

The clouds are gathering. Please plan accordingly.

Jay Kaeppel Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro client.