Category Archives: educational newsletters

With Retailers, it’s ‘When’ Not ‘What’

educational newsletters, jay kaeppel, seasonal
I’ve been seeing a number of panicked missives lately regarding the retailing sector.  They typically go something like this:
“Despite new highs for most of the major market indexes, the retailing sector has been struggling – and in some cases hit hard – therefore it is clearly (paraphrasing here) THE END OF THE WORLD AS WE KNOW IT, AHHHHHHHHHHHHH……………………..”
Or something along those lines.  And the truth is that they may be right.  But as it turns out, with the retailing sector it is typically more a question of “when” and not “what” (or even WTF
Recent Results
The concerns alluded to above are understandable given recent results in certain segments of the retailing sector. Figure 1 displays the stock price action for four major retailers.  It isn’t pretty.
(click to enlarge)
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Figure 1 – Major retailers taking a hit (Chart courtesy AIQ TradingExpert)
So if major retailers are performing poorly one can certainly see why someone might extrapolate this to conclude that the economy is not firing on all cylinders and that the recent rally to new highs by the major averages is just a mirage.  And again, that opinion may ultimately prove to be correct this time around.
But before swearing off of retailing stocks, consider the following.
Retailers – When not What
For our test we will use monthly total return data for the Fidelity Select Retailing sector fund (ticker FSRPX).  Figure 2 displays the growth of $1,000 invested in FSRPX only during the months of:
*February, March, April, May, November, December
2
Figure 2 – Growth of $1,000 invested in ticker FSRPX only during the “favorable” months since 1986
For the record:
*An initial $1,000 grew to $50,274, or +4,927% (this test does not include any interest earned during the months out of FSRPX).
*# of years showing a net gain = 27
*# of years showing a net loss = 4
*Average UP year = +17.0%
*Average DOWN year = (-3.4%)
*Maximum UP Year = +50.0% (1990)
*Maximum DOWN Year = (-5.9%) (1994)
The Year-by-Year Results appear in Figure 3
Year % +(-)
1986 26.2
1987 15.8
1988 12.2
1989 16.9
1990 50.0
1991 45.5
1992 8.0
1993 4.6
1994 (5.9)
1995 3.0
1996 26.1
1997 18.1
1998 45.7
1999 4.0
2000 1.8
2001 12.5
2002 (0.1)
2003 18.5
2004 11.3
2005 10.3
2006 0.1
2007 (2.8)
2008 (4.7)
2009 44.9
2010 24.5
2011 4.6
2012 10.8
2013 16.6
2014 11.5
2015 6.1
2016 9.2
Figure 3 – Year-by-Year Results for  “Favorable” Months since 1986
The Rest of the Year
If for some reason you had decided to skip the months above and hold FSRPX only during all of the other months of the year, your results appear in Figure 4.4
Figure 4 – Growth of $1,000 invested in ticker FSRPX only during the “unfavorable” months since 1986
For the record:
*An initial $1,000 grew to $1,037, or +3.7% (this test does not include any interest earned during the months out of FSRPX).
Summary
Is the retailing sector guaranteed to generate a gain during our “favorable” months in 2017?  Not at all.  Still, given that retailing is presently beaten down a bit and the fact that the worst full year loss during the favorable months was -5.9%, it may be time to think about taking a look (although – as always, and for the record – I am not “recommending” retailing stocks, only pointing out the historical trends).
Still, as the old saying goes, the results below are what we “quantitative types” refer to as “statistically significant”.
*Favorable months since 1986 = +4,927%
*Unfavorable months since 1986 = +3.7%
 Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client. http://jayonthemarkets.com/
 

MatchMaking a seasonal Energy play

back testing, educational newsletters, ETFS, jay kaeppel, matchmaker, seasonal
If you follow jay Kaeppel’s posts in this blog, you’ll know that he’s the master of research on all things seasonal. This past week he posted a seasonal article on energy using FSESX – Fidelity Select Energy Services. Previously he had noted the bullish tendency for ticker FSESX during the months of February, March and April.  In his follow up piece, he added one more “favorable” month and then also looked at a 6-month “unfavorable” period. The article is included at the end of this post so you can see the results.

As Mutual funds are not for everyone, we went in search of alternative tickers that could closely match FSESX in performance characteristics. Using AIQ Matchmaker we compared the price action of FSESX against our universe of stocks and ETFs looking for a match.

Matchmaker uses Spearman Rank Correlation analysis to identify a close match to FSESX. The closer the result to 1000, the higher the correlation. Anything over 950 is a very close match. Here’s the results.
Figure 1. MatchMaker correlation for last 4 years – FSESX vs stocks and ETFs
The ETF IEZ – iShares Oil and Equipment & Services showed a very high correlation over the 4 years we tested. OIH – Oil Service Holders, another ETF, also showed high correlation.
Here’s an AIQ overlay chart of recent daily price action comparing FSESX vs IEZ.
 
Figure 2. Recent daily price action comparing FSESX vs IEZ.
IEZ appears to be a good surrogate for FSESX at least over the last 4 years.
We also wanted a visual of the seasonal pattern in action. Fortunately we have a tool still in development at AIQ that’s just right for this. Basically it provides a price comparison of ‘x’ numbers of years of the same ticker overlaid on each other.
Here’s 3 of the last 4 years on IEZ, the average of the years displayed is in black. We highlighted the Feb, Mar, Apr and Dec in yellow. We could have included more years but for illustration purposes it was easier to show the 3 years (the chart gets busy with too many lines on it!)
 
Figure 3 – IEZ seasonal chart (beta) for 3 years with average.
The Feb, Mar, Apr period has a definite bullish tendency, the Dec period does Ok too. You’ll notice the tendency for IEZ to fall sharply in January. Conclusion? IEZ is a reasonable surrogate for FSESX if you’re contemplating this seasonal move.
_________________________________________________________
The article this follow up is based upon is by Jay Kaeppel and is included below. Jay is Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro client. http://jayonthemarkets.com/

When to Feel ‘Energetic’ (or NOT)

If you are looking for a market sector with some serious seasonal trends, look no further than the energy sector. Previously I had noted the bullish tendency for ticker FSESX during the months of February, March and April.  In this piece, we will add one more “favorable” month and then also look at a 6-month “unfavorable” period.
For the record, the information that follows is not being recommended as a standalone strategy.  It is presented simply to make you aware of certain long-term trends that have been very persistently bullish (or bearish as the case may be) in the energy sector.
4 Favorable Months
*The four “favorable” months for our test are February, March, April and December
Figure 1 displays the growth of $1,000 invested in ticker FSESX only during these four months every year since 1986 versus simply buying-and-holding ticker FSESX.
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Figure 1 – Growth of $1,000 invested in FSESX only during Feb, Mar, Apr, Dec every year since 1986
Starting in 1986, an initial $1,000 investment grew to $76,019 (or +7,500%) versus $10,237 (or 923%) using a buy-and-hold strategy.
6 Unfavorable Months
The six “Unfavorable” months are June, July, August, September, October and November.
First the “positive” news:
*This 6-month period has managed to show a gain 14 times in 31 years – so by no means should you consider this period a “sure thing” loser
*During 4 separate years – 1997, 2003, 2004 and 2010 – the “unfavorable” months registered a cumulative gain in excess of +30%.
Doesn’t sound all that “unfavorable” so far does it?  But here’s the catch: Despite the occasional 30%or more gain, it is fair to refer to this 6-month period as “unfavorable” as the cumulative long-term results of buying and holding FSESX during these months has been nothing short of devastating.
Figure 2 displays the growth of $1,000 invested in ticker FSESX only between the end of May and the end of November every year starting in 1986.
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Figure 2 – Growth of $1,000 invested in FSESX only during June through November every year since 1986
Starting in 1986, an initial $1,000 investment declined to just $82, or a cumulative loss of -91.8%
Figure 3 displays some comparative data between favorable and unfavorable periods as well as using a Buy-and-Hold strategy.
Measure Buy-and-Hold 4 Favorable Months 6 Unfavorable Months
Average Annual % +(-) 12.8 16.5 (-4.2)
Median Annual % +(-) 8.7 15.5 (-1.8)
Standard Deviation 33.4 20.1 24.6
# Years UP 18 26 14
# Years DOWN 13 5 17
Worst Year (-55.4) 2008 (-7.6) 1994 (-62.8) 2008
$1,000 becomes $10,237 $76,019 $82
Cumulative % +(-) +923% +7,500% (-92%)
Figure 3 – Comparative Results
Figure 4 displays the year-to-year results for a Buy-and-Hold approach versus holding only during the 4 “favorable” months or the “Unfavorable” 6 months.
Year All 12 months % +(-) 4 Favorable % +(-) 6 Unfavorable % +(-)
1986 (8.9) (5.2) (9.2)
1987 (20.7) 22.9 (40.1)
1988 (4.2) 22.8 (16.3)
1989 50.3 27.1 16.2
1990 8.7 4.9 (11.2)
1991 (19.9) 4.1 (25.0)
1992 4.9 (1.6) (1.3)
1993 16.4 24.5 (10.7)
1994 (0.5) (7.6) 3.1
1995 40.0 33.7 2.0
1996 45.9 22.5 20.8
1997 43.9 (4.9) 32.9
1998 (41.4) 26.5 (50.5)
1999 80.9 74.1 7.5
2000 51.7 77.6 (21.1)
2001 (22.4) 20.8 (32.4)
2002 2.2 26.2 (18.0)
2003 13.1 15.5 (16.0)
2004 26.2 1.2 30.2
2005 47.4 4.8 34.0
2006 (9.1) (4.1) (1.8)
2007 58.3 25.6 16.7
2008 (55.4) 10.5 (62.8)
2009 60.4 24.5 9.6
2010 31.7 21.6 33.7
2011 (18.5) 3.1 (16.8)
2012 (3.9) 0.7 9.6
2013 14.1 0.3 11.5
2014 (19.5) 7.2 (26.7)
2015 (19.7) 2.9 (17.9)
2016 44.2 28.4 20.1
Figure 4 – Yearly % +(-) for Buy-and-Hold versus 4 Favorable Months versus 6 Unfavorable Months
Summary
There is no guarantee from year-to-year results of buying and holding ticker FSESX during the “Favorable 4” months will show a gain and/or outperform the “Unfavorable 6” months. And there is by no means any guarantee that the “Unfavorable 6” will show a loss during any given year (note that 2016 saw the Unfavorable 6 generate a cumulative gain of +20.1%!).  So just remember that we are talking about some very long-term  trends here.
Still, most investors can discern the difference between:
*Favorable 4 months gain = +7,500%
*Unfavorable 6 months loss = (-92%)
This type of difference is what we “quantitative types” refer to as “statistically significant.”

Out With The Old (Part 1)

educational newsletters, ETFS, jay kaeppel, stock market, trading strategy
Before moving on to 2017 I want to revisit a couple of “old” ideas I wrote about recently.
One 9/23/16 I wrote this article detailing a very aggressive bond trading strategy.  The model detailed essentially combined two other models that I have used for a number of years – one a “timing” model, the other  a “seasonal” model.  If either model is bullish then ticker TMF (a triple leveraged long-term treasury bond fund) is held.
As shown in Figure 1, the first model turns:
*Bullish for Bonds when the 5-week moving average for ticker EWJ drops below the 30-week moving average for ticker EWJ
*Bearish for Bonds when the 5-week moving average for ticker EWJ rises above the 30-week moving average for ticker EWJ
1a
Figure 1 – Bond Bull and Bear signals using ticker EWJ (Courtesy AIQ TradingExpert)
The second model simply holds bonds during the last 5 trading days of each month
The rules for Jay’s Very Risky Bond Model (JVRBM) are as follows:
Bullish for TMF if:
*Ticker EWJ 5-week MA < Ticker EWJ 30-week MA, OR
*Today is one of the last 5 trading days of the month
Bearish for TMF if:
*EWJ 5-week MA > EWJ 30-week MA AND today IS NOT one of the last 5 trading days of the month
Figure 2 displays the growth of $1,000 invested in TMF if the bullish conditions above apply since 4/16/2009 (when TMF started trading).
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Figure 2 – Growth  of $1,000 invested in ticker TMF when JVRBM is Bullish (4/16/2009-12/30/2016)
Figure 3 displays the growth of $1,000 invested in TMF is the bearish conditions above apply since 4/16/2009 (when TMF started trading).
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Figure 3 – Growth  of $1,000 invested in ticker TMF when JVRBM is Bearish (4/16/2009-12/30/2016)
For the record:
*During the Bullish periods in 2016 ticker TMF gained +72%
*During the Bearish periods in 2016 ticker TMF lost -43%
Figure 4 displays the growth of  $1,000 invested in ticker TMF during the Bullish versus Bearish periods in 2016.
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Figure 4 – Growth of $1,000 invested in TMF during Bullish versus Bearish periods (12/31/2015-12/31/2016)
All in all not a bad year (Just don’t forget high degree of risk).
Summary
Make no mistake, this is a trading method that entails a great deal of risk.  One can reasonably ask if a long position in a triple leveraged fund of any kind is really a good idea.
But, hey, the phrase “high risk, high reward” exists for a reason.
Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client. http://jayonthemarkets.com/

U.S. Stocks Lead, World Lags (Part II)

educational newsletters, ETFS, group and sector, jay kaeppel, stock market

In my last piece I note that the U.S. stock market presently stands alone in terms of recent performance. While virtually every major U.S. stock market average has run to new highs in the last several weeks, not one other individual country has really even come close. While this might induce spontaneous chants of “USA, USA”, the truth is that this may not necessarily be a good thing.
This current disconnect will likely be resolved in one of two ways:

A) The USA will drag the rest of the world screaming and kicking to enjoy in our newfound prosperity (assuming of course that we finally stumble upon that actual newfound prosperity that the stock market is telling us we should be celebrating).
B) The USA fails to pull up the rest of the world and the US stock market gets “dragged down” with the rest of the world’s bourses.
This is the part in the article where a skilled market analyst would offer up a clear and concise opinion of what will happen next and why. And if one happens to stop by the office in the next few minutes or so I will ask him or her what they think. All I know is that at the moment the US stock market is in an uptrend and that the majority of the rest of the world’s stock markets are fair to middling at best (with many looking much worse).
Until something changes I will stick to the US market, thank you very much.
A Little “Worldly” Perspective
What follows is essentially the world (stock markets) in pictures. The purpose is simply to provide you with some perspective regarding the state of the markets around the globe.
The key thing to note is:
*Figure 1 shows U.S. stocks making new highs
*Figures 2 through 6 show the rest of the world’s stock markets lagging far behind
Click Figures 1 through 6 to enlarge
1
Figure 1 – U.S. Stocks soaring to new highs (Courtesy AIQ TradingExpert )
2
Figure 2 – My Own Index of Single Country ETFs; -17% below 2014 high (Courtesy AIQ TradingExpert )
Editor’s note: information on creating your own index of ETFs or any other tickers in TradingExpert can be found here http://www.aiqsystems.com/Feb06%20OBM.pdf on page 5, titled Ability to Create Industry Groups for Your Special Trading Needs….
In Figures 3 through 6 note that the overall “stock market malaise” is not limited to one portion of our earth, but rather stretches pretty far East, West, North, South and pretty much all points in between.
3
Figure 3 – Middle East Stocks; -40% below 2007 high (Courtesy AIQ TradingExpert )
4
Figure 4 – European Stocks; -36% below 2007 high (Courtesy AIQ TradingExpert )
5
Figure 5 – Asia-Pacific Stocks;-17% below 2014 high (Courtesy AIQ TradingExpert )
6
Figure 6 – North/South America Stocks; -22% below 2011 high (Courtesy AIQ TradingExpert )
Wishing you (please choose any or all of the following that are applicable):
*Merry Christmas
*Happy New Year
*Happy Holidays
*Joy
*Peace on Earth
*[Some other phrase that you do not find offensive here]

 

Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro ( AIQ Systems) client. http://jayonthemarkets.com/

U.S. Stocks Lead, World Lags

educational newsletters, ETFS, jay kaeppel, stock market
In this seemingly ever more divided and ever more electronic age, “perspective” is not a word (or action) that gets mentioned (or employed) with as much frequency as it used to.  The default approach for a lot of things appears to be:
a) Decide ones opinion
b) Take to the internet to shout categorically that said opinion is the only possible “correct” opinion
c) Excoriate anyone who disagrees
Well, sure that is one approach.  But when it comes to investing it is fairly important to raise one’s head and take a look around every once in awhile.
Hey, how about now?
The U.S. Stock Market Post Election
Since the election in November the U.S. stock market has been on a quite a tear, with the major market averages breaking out to new all-time highs as seen in Figure 1.
1
Figure 1 – Major market U.S. averages breakout to new highs (Courtesy AIQ TradingExpert)
Now per a, b and c above, some will argue that this is a testament to the booming economy that #44 is leaving #45 while others will argue that it is a sign of new hope for the U.S. economy under a new adminstration.
My response: Whatever
Don’t get me wrong, I am all for a bull market.  I hung in there all year despite a lot of doubts mostly because my trend-following indicators just kept staying bullish.  And they remain thus.  But like I said before a little perspective can sometimes go a long way.
A New (Republican) Administration
The historical fact is that the last 3 Republican administrations that followed Democratic administrations (Nixon, Reagan, Bush 43) did not experience great “stock market joy” during their first two years in office.  Specifically, the first 21 months of the new four-year election cycle (i.e., starting on Dec. 31st of the election year through the end of September of the mid-term year) for each of these prior administrations witnessed a fair amount of “pain.”
Peruse Figures 2, 3 and 4 (which displays the % gain or loss for the Dow Jones Industrials Average for 21 months starting on December 31st of the election year) and see if you notice a trend.
2
Figure 2 – Dow % +(-); Dec-1968 thru Sep-1970 (Nixon – 1st 21 months)
3
Figure 3 – Dow % +(-); Dec-1980 thru Sep-1982 (Reagan – 1st 21 months)
4
Figure 4 – Dow % +(-); Dec-2000 thru Sep-2002 (Bush 43 – 1st 21 months)
The Good News is that there is no reason why this history has to repeat itself this time around.  The Bad News is….that it very well could.
The Current Euphoria
As I stated earlier, when it comes to bull markets, I vote “YES”.  I will take one anytime I can get it.  And I also try to avoid being one of those “know it all types” (in the interest of full disclosure I am actually more one of those “sneaky” types who tries to intimate that he actually does know it all by trying not to act like a know it all – which is technically probably worse.  But, hey, at least now you know) who routinely “talks down” a bull market (“Oh sure, things are great now but just you wait….” And so on).  That “just you wait” stuff gets really old after a short while.
So here we stand.  The major U.S. averages are bursting forth to new highs – so who am I to be a naysayer?  Still, there is that pesky “perceptive” thing I mentioned earlier.  Before getting too carried away with bullish euphoria please sear Figures 2, 3 and 4 above somewhere into the back of your brain – just in case.
Also note that the U.S. stock market is virtually alone in the world in terms of making new highs.  Figure 5 displays:
Ticker VTI – Vanguard Total (U.S.) Stock Market ETF
Ticker VEU – Vanguard All World ex-U.S. Stock Market ETF
To be clear, ticker VTI essentially covers the entire U.S. stock market.  Ticker VEU covers a broad array of major world stock  markets BUT does not include U.S. stocks.
5b
Figure 5 – U.S. Total Stock Market = New Highs; World Total Stock Market = NOT New Highs (Courtesy AIQ TradingExpert)
Note that the U.S. market has broken out strongly to new highs while the “whole world” of markets is nowhere close to doing so.  Certainly one can adopt the “What, me worry?” approach and argue that “the U.S. market will lead the other world markets to reach new highs.”  And maybe that will prove to be the case.
But as I will highlight soon – and as reflected by tickers VTI and VEU – the U.S. stock market looks great while virtually the rest of the markets around the globe look pretty not so great.  So please check back for Part II soon
In the meantime, enjoy the rally and the Holidays – I know I will.
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client