In the late 1980’s, Japan seemed destined to “rule the financial world”. But when it comes to the financial markets – things don’t always pan out as they appear destined to. The Nikkei Index topped out in late 1989, didn’t bottom out until February 2009 and has yet to return to its 1989 peak.
But it sure is trying. This past week the Nikkei reached its highest level 1991. So, hooray for the Japanese. Back here in the US of A there may be a slightly different take. For as we will discuss in a moment, what is good for Japanese stocks is (apparently) bad for US bonds.
Ticker EWJ
As our proxy for Japanese stocks we will use ticker EWJ (iShares Japan). In Figure 1 you can the monthly action since the ETF started trading in 1996.
Since 1996 EWJ has broken in the $60 a share range on 5 previous occasions, only to be rebuffed. You can see the latest upward thrust at the far right. Will this be the time it breaks through? It beats me and in fact that is not really the focus of this article. The real question posed here is “what about U.S. treasury bonds?” Huh? Consider Figure 2.
The top clip of Figure 2 displays a weekly chart of EWJ with a 5-week and 30-week moving average drawn. The bottom clip displays a weekly chart of ticker TLT – the iShares ETF that tracks the long-term U.S. treasury bond.
Note that – using highly technical terms – when one “zigs”, the other “zags.”
The thing to note is the inverse correlation between the two – i.e., when Japanese stocks advance, US treasuries tend to decline and vice versa. For the record (and for you fellow numbers geeks out there) the correlation coefficient in the last 2 years is -0.45 (1 means they trade exactly the same, -1 means they trade exactly inversely).
For my purposes:
*EWJ 5-week MA < EWJ 3-week MA = BULLISH for US treasuries
*EWJ 5-week MA > EWJ 3-week MA = BEARISH for US treasuries
Any real merit to this?
*The blue line in Figure 3 displays the cumulative $ +(-) achieved by holding a long position in t-bond futures ($1,000 a point) when the EWJ indicator is BULLISH (for U.S. bonds)
*The orange line in Figure 3 displays the cumulative $ +(-) achieved by holding a long position in t-bond futures ($1,000 a point) when the EWJ indicator is BEARISH (for U.S. bonds)
Figure 3 – $ + (-) for Treasury Bond Futures when EWJ indicator is BULLISH for bonds (blue) or BEARISH for bonds (orange)
Summary
Bond investors might keep a close eye on Japanese stocks for a while. If the latest thrust higher follows through and becomes the move that finally breaks out to the upside, the implication would appear to be negative for U.S. long-term treasury bonds. On the flip side, if Japanese stocks fail once again to break through and reverse to the downside, then things might look a whole lot better for the 30-year US treasury.
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented represents the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
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).
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.
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.
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
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.
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
SECURITIES AND ADVISORY SERVICES OFFERED THROUGH SAGE POINT FINANCIAL INC., MEMBER FINRA/SIPC, AND SEC-REGISTERED INVESTMENT ADVISOR.
Charts provided by AIQ Systems:
Technical Analysis is based on a study of historical price movements and past trend patterns. There is no assurance that these market changes or trends can or will be duplicated shortly. It logically follows that historical precedent does not guarantee future results. Conclusions expressed in the Technical Analysis section are personal opinions: and may not be construed as recommendations to buy or sell anything.
Disclaimer: The views expressed are not necessarily the view of Sage Point Financial, Inc. and should not be interpreted directly or indirectly as an offer to buy or sell any securities mentioned herein. Securities and Advisory services offered through Sage Point Financial Inc., Member FINRA/SIPC, and 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.
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
The 2020 COVID-19 Virus has adversely affected the entire world, and this will go down as one of the most volatile years in the stock and bond market in generations and even more volatile than the 2008 Bear Market.
CURRENT MARKET CONDITIONS:
This reason is that the declines came over eight days and not like the 2007-2009 decline which took a year and one half. The great recession of 2008 was a humanmade financial problem and this is a virus where very few are working. In the Recession of 2008, people were at least going to work and going out and spending money to support the economy. Now we are all destined to stay in the house unless we have an essential business. But the U.S. Government is doing everything it can to give grants and forgivable loans so that the economy doesn’t totally crash. That is better than in 2008. It is still serial to be confined to your house or go for a walk.
When we get our statement of our investments from our 401(k) s or from these accounts, you will see pretty large drops in values in the investment account and you will wonder if this is all worth it to stay in it or are we all destined just to make 1-3% in a savings account or a 3% fixed annuity with me. Right now getting 3% with no fees looks pretty good.
If you believe that good stocks and funds from successful growing businesses do well over the long term and this sell-off in the markets are BUYING opportunities over the next few months you may want to dollar cost average into the markets. If you believe that this COVID-19 virus will soon be over within months and that 1 to 3 years from now the markets will be higher than they are now is it worth holding on OR Buying more when markets are lower? The question is if you are buying or investing for the next 1-20 years. Do you like suitable stock and bond investments that are cheap now or more expensive? If your answer is yes, than you may want to average into the markets over the next few months as it is down during this pandemic.
MARKET RECAP:
On my last 3 Bartometers I was getting and got Very Cautious about the stock and bond markets, but did I expect this? Not really. I said if the NASDAQ broke 9200, I will get very Cautious but a 25 to 35% decline I did not expect. The markets had rallied 20%+ from the low hit a couple of weeks ago but still, the markets are down 17-20% into 2020. Are we in a recession now? I’d say yes, but it is forced because of COVID-19, but it will be one just because of the number of people laid off.
In the following pages are discussions of the long term of the markets, what do in a Bear market and my technicals of the markets going forward. But above I would like to say that even though American Capitalism is under fire, and also though the market got hurt as well as our portfolios, we will rise to the COVID-19 challenge like any other war or attack on the United States of America going back to the Revolutionary War to WW1, WW2, and all the other wars we had in our history. This country and its citizens will find a vaccine to this virus and I believe in my heart that 1 to 2 years from now this market should be nicely higher. Dollar-cost averaging currently buying a lower priced shares of good companies should, with no guarantees expressed or implied, be a good deal higher over the next few years. What do you think? 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.
Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until April 7, 2020. These are passive indexes. *Dow Jones -20% S&P 500 -17% NASDAQ Aggressive growth -9% I Shares Russell 2000 ETF (IWM) Small cap -31% Midcap stock funds -29% International Index (MSCI – EAFE ex USA -22% Investment Grade Bond -4% High Yield Bond -13% Government bond +4% The average Moderate Fund is down -16% this year fully invested as a 65% in stocks and 35% in bonds and nothing in the money market.
WANT TO SHOW YOU THE YEAR BY YEAR RETURNS OF THE S&P 500 TOTAL RETURNS BY YEAR
WHAT HAPPENED TO THE MARKETS DURING THE PANDEMIC AND SPANISH FLU IN 1917-1918:
The stock market today is looking a lot like it did a century ago, and if Great Hill Capital’s Thomas Hayes’s interpretation of the trendlines is on point, the bottom could be approaching.
“Just as the market started discounting the worst-case scenario in 1917,” he wrote, “it was already discounting a recovery months before the worst-case scenario occurred in 1918.”
What was going on in 1917? The Spanish Flu was just starting to bubble up, with the deadliest month of the whole pandemic not hitting until October 1918 — by then, as you can see from this chart, the Dow Jones Industrial Average DJIA, -1.68% had already begun to heal.
Hayes then posted this chart of the modern-day market plunge, noting that the nasty drawdowns amid the early stages of both pandemics were virtually the same.
More than 51 million people died globally in the Spanish Flu Pandemic, and the market rebounded more than 80% in the following two years from its bottom to top. This is no guarantee the market will rally that much or at all, but the USA is now better equipped to handle a massive Pandemic then in 1918 to 1919. Also, many companies are internet companies that could do well as people shop and do business over the internet; in addition, it is much more diversified and global than it was in 1918. For these reasons and more, I believe that the long term is more promising now for a recovery over the next 1 to 2 years.
There is one caveat; the Commodity index is right near its low of 2009, where it found it at a 29-year support level. If that breaks through that level, then we can go into a deeper recession for a more extended period. The market rebound depends on how quickly the government fixes this problem and people go back to work. I am optimistic over the next two years; but understand a recession should happen at least for a few quarters. I think the Recession should be relatively short term.
Since this graph was made a week ago, look at the next page and it is up to date. COMPARE the next graph to the Pandemic of 1918 and it is starting to look more like it. There is no guarantee expressed or implied, but look at the Pandemic and then the updated Dow on the next page.
The Dow Jones is above. This is the Daily Chart. As you can see, the decline of the Dow Jones Average was relatively very quick. Current is sitting at 22653 right BELOW THE 50% Fibonacci retracement level. A normal BEAR market usually tops on a countertrend rally right at a 50% or 61.8% Fibonacci level and declines or puts in a short top. So if this is true in this case there could be resistance at 23,901 or 25,236 area. There is also some resistance at the 200 day moving average at 26,660 and sloping downward. My AIQ models gave a BUY on 3/24/2020, but only a short term Buy not a longer term Weekly Buy. So even though the market is somewhat short term Bullish, there could be a short term top at 23,901, 25,236 or the 26,660 areas.
Momentum is good but can change quickly on the downside after earnings come out that will be bad. A buy signal is giving when the lavender line crosses blue line and Sell signal when it does it on the downside
One thing I don’t like is the On Balance Volume Line. Notice as the market is going up it is going up on low relative volume. This is somewhat negative. Over all I think the market should be higher when this is all done and when there is a vaccine and people go on living their normal lives it should be better. This market will be volatile. The market may continue on the upside but over the short term I think the rally is limited to the levels I said above on the Fibonacci levels and the 200 day moving average. In addition, the market may not like the earnings numbers over the next couple of weeks and the market could drop again towards 20000 or below again.
Key investor Points to remember in a Bear Market:
Stay calm and keep a long-term perspective.
Maintain a balanced and broadly diversified portfolio.
Balance equity portfolios with a mix of dividend-paying companies and growth stocks.
Choose funds with a strong history of weathering market declines.
Use high-quality bonds to help offset equity volatility.
Advisors can help investors navigate periods of market volatility
THE BOTTOM LINE:
The market has had its worst decline in 10 years. It has recovered about 35% of the loss over the last week. It is not a time to sell during this decline in my opinion but for some of you it would a great time to start to nibble in your mutual funds on setbacks because the COV19 virus should be controlled over the next year and if you look at all of the virus pandemics we have had, it has been a good time to Buy if your goals are longer term. It is not a time to throw caution to the wind but call me to make selective dollar-cost average buys. In addition, when EARNINGS come out in the next 2 weeks the stock market could go back down again. Remember you buy when there is blood in the streets. Bonds should be more in the investment-grade or short- term investment grade side. If you are a long-term investor and have 20 years+ towards retirement use sell-offs to add through dollar-cost averaging. Diversification is essential but portfolios should be somewhat safer.
Best to all of you,
Joe Bartosiewicz, CFP® Investment Advisor Representative 5 Colby Way Avon, CT 06001 860-940-7020 or 860-404-0408
SECURITIES AND ADVISORY SERVICES OFFERED THROUGH SAGE POINT FINANCIAL INC., MEMBER FINRA/SIPC, AND SEC-REGISTERED INVESTMENT ADVISOR.
Charts provided by AIQ Systems:
Technical Analysis is based on a study of historical price movements and past trend patterns. There is no assurance that these market changes or trends can or will be duplicated shortly. It logically follows that historical precedent does not guarantee future results. Conclusions expressed in the Technical Analysis section are personal opinions: and may not be construed as recommendations to buy or sell anything.
Disclaimer: The views expressed are not necessarily the view of Sage Point Financial, Inc. and should not be interpreted directly or indirectly as an offer to buy or sell any securities mentioned herein. Securities and Advisory services offered through Sage Point Financial Inc., Member FINRA/SIPC, and 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.
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
In a few recent articles (for example here) I suggested that one day we would look back on this period as a terrific buying opportunity for energy related issues. At the same time, I still have yet to become comfortable “pulling the trigger”. Thank goodness for small favors.
Anyway, the overall sentiment still holds. Energy is dirt cheap as are shares of most energy related stocks/ETFs etc. Again, that doesn’t necessarily mean that now is the exact moment to “load up”. To say that there is a wee bit of uncertainty regarding the future would be about the greatest understatement one could presently make. Still, it is important to plan ahead and to be prepared when the time comes. So, what follows should be considered “food for thought” and not “an immediate call to action.”
A Few Things Energy
Ticker TAN
According to conventional wisdom, the future is “green”. I’ll be candid – I am all for green energy, as long as when I flip the switch the lights come on AND when I look at my energy bill I don’t faint. So, let’s start with a “green” play.
Turth be told, ticker TAN (Invesco Solar Energy ETF) has never been much of a performer. Still, its in the solar business which people keep telling me is “the future.” In reality the primary thing it has going for it is that it hasn’t completely cratered to the same degree as just about every other stock in the energy sector. As you can see in Figure 1, TAN actually bottomed out at $12.60 in 2012 and – despite a near 50% decline during the recent panic – is presently trading around $26 a share. Not necessarily a screaming buy signal, but a nice relative performance as we will see in a moment.
In a sure “Sign of the Times”, the Good News is that gasoline prices are at their lowest levels in year, while the Bad News is that we don’t have anywhere to drive to except the grocery store. Figure 2 displays the chart for ticker UGA – the United States Gasoline Fund, and ETF that tracks the price of gasoline.
While attempting to “pick a bottom” is a fool’s errand, the primary point is that it is not that hard to envision the price of this ETF being significantly higher at some point in the years ahead. Whether an investor has the fortitude to weather whatever the short-term uncertainty and the patience to see how the long-term plays out are the primary issues associated with contemplating this ticker at the moment.
Ticker XLE is a play on the broad (mostly fossil fuel related) energy sector. As you can see in Figure 3, XLE has plunged to price levels not since 2004. In addition, it presently yields roughly 8.8%. That being said, an investor has to realistically expect that dividend payments in the hard-hit energy sector will see some significant cuts as things play out in the months ahead.
With an oil price war in full swing, not to mention a sharp decline in demand for the foreseeable future due to the coronavirus pandemic, the fundamentals for this sector are unlikely to improve soon. Nevertheless, the reality is that – at least for the time being – the world runs on crude oil. As a result, the current price range may one day be looked back upon as a once-in-a-generation buying opportunity.
OK, let’s throw in one obscure, totally speculative – yet fundamentally intriguing – thought for consideration. Ticker PAGP (Plains GP Holdings, L.P.). Here is what they do (straight from their website):
“Plains engages in the transportation, storage, terminalling, and marketing of crude oil and refined products, as well as in the storage of natural gas, and the processing, transportation, fractionation, storage, and marketing of natural gas liquids.
Assets include:
*17,965 miles of active crude oil and NGL pipelines and gathering systems (emphasis mine as these things will continue to function as long as crude and NG need to be moved – which they do)
*50 barges and 20 transport tugs
*109 million barrels of storage capacity
*1,600+ trucks and trailers
*9,100 rail cars”
The bottom line is that as long as crude oil and natural gas needs to be moved, PAGP has a niche in which to operate. For the record, at $6.35 a share the stock’s present dividend comes to a yield of 22.7%. Certainly, the prospect of a significant dividend cut is a Signiant risk associated with this stock. But for the moment anyway the price is near an all-time low and the dividend yield is attractive.
As allows, DO NOT look upon what I have written as “recommendations.” Particularly in the current environment. They are simply “food for thought.”
Given current fundamentals:
*An ongoing oil price war (making drilling and refining unprofitable for many companies)
*An economy on shutdown (which cripples demand)
*An existential struggle between “green” energy and “traditional” fossil fuel-based sources (which creates uncertainty about future expectations)
All combine to make the energy sector a giant question mark at the present time. But if the old adage that the time to buy is when there is “blood in the streets”, than investors might be well served in the long run to start thinking now about how much capital they might be willing to commit to energy, and what type of catalyst might prompt them to actually “take the plunge.”
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented does not represent the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
OK, so this particular piece clearly does NOT qualify as “timely”. Hey, they can’t all be “time critical, table-pounding, you must act now” missives. In any event, as part of a larger project regarding trends and seasonality in the market, I figured something out – we “quantitative analyst types” refer to this as “progress.”
So here goes.
The Month of October in the Stock Market
The month of October in the stock market is something of a paradox. Many investors refer to it as “Crash Month” – which is understandable given the action in 1929, 1978, 1979, 1987, 1997, 2008 and 2018. Yet others refer to it as the “Bear Killer” month since a number of bear market declines have bottomed out and/r reversed during October. Further complicating matters is that October has showed:
*A gain 61% of the time
*An average monthly gain of +0.95%
*A median monthly gain of +1.18%
Figure 1 displays the monthly price return for the S&P 500 Index during every October starting in 1945.
Figure 1 – S&P 500 Index October Monthly % +(-)
Figure 2 displays the cumulative % price gain achieved by holding the S&P 500 Index ONLY during the month of October every year starting in 1945.
Figure 2 – S&P 500 Index Cumulative October % +(-)
So, you see the paradox. To simply sit out the market every October means giving up a fair amount of return over time (not to mention the logistical and tax implications of “selling everything” on Sep 30 and buying back in on Oct 31). At the same time, October can be a helluva scary place to be from time to time.
One Possible Solution – The Decennial Pattern
In my book “Seasonal Stock Market Trends” I have a section that talks about the action of the stock market across the average decade. The first year (ex., 2010) is Year “0”, the second year (ex., 2011) is Year “1”, etc.
In a nutshell, there tends to be:
The Early Lull: Often there is weakness starting in Year “0” into mid Year “2”
The Mid-Decade Rally: Particularly strong during late Year “4” into early Year “6”
The 7-8-9 Decline: Often there is a significant pullback somewhere in the during Years “7” or “8” or “9”
The Late Rally: Decades often end with great strength
Figures 3 and 4 display this pattern over the past two decades.
Figure 3 – Decennial Pattern: 2010-2019
Figure 4 – Decennial Pattern: 2000-2009
Focusing on October
So now let’s look at October performance based on the Year of the Decade. The results appear in Figure 5. To be clear, Year 0 cumulates the October % +(-) for the S&P 500 Index during 1950, 1960, 1970, etc. Year 9 cumulates the October % +(-) for the S&P 500 index during 1949, 1959, 1969, 1979, etc.
Figure 5 – October S&P 500 Index cumulative % +(-) by Year of Decade
What we see is that – apparently – much of the “7-8-9 Decline” takes place in October, as Years “7” and “8” of the decade are the only ones that show a net loss for October.
Let’s highlight this another way. Figure 6 displays the cumulative % return for the S&P 500 Index during October during all years EXCEPT those ending “7” or “8” versus the cumulative % return for the S&P 500 Index during October during ONLY years ending in “7” or “8”.
Figure 6 – S&P 500 cumulative October % +(-); Years 7 and 8 of decade versus All Other Years of Decade
For the record:
*October during Years “7” and “8” lost -39%
*October during all other Years gained +196%
Summary
So, does this mean that October is now “green-lighted” as bullish until 2027? Not necessarily. As always, that pesky “past performance is no guarantee of future results” phrase looms large.
But for an investor looking to maximize long-term profits while also attempting to avoid potential pain along the way, the October 7-8 pattern is something to file away for future reference.
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented does not represent the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
I haven’t written a lot lately. Mostly I guess because there doesn’t seem to be a lot new to say. As you can see in Figure 1, the major market indexes are in an uptrend. All 4 (Dow, S&P 500, Russell 2000 and Nasdaq 100) are above their respective 200-day MA’s and all but Russell 2000 have made new all-time highs.
As you can see in Figure 2, my market “bellwethers” are still slightly mixed. Semiconductors are above their 200-day MA and have broken out to a new high, Transports and the Value Line Index (a broad measure of the stock market) are holding above their 200-day MA’s but are well off all-time highs, and the inverse VIX ETF ticker ZIV is in a downtrend (ideally it should trend higher with the overall stock market).
As you can see in Figure 3, Gold, Bonds and the U.S. Dollar are still holding in uptrends above their respective 200-day MA’s (although all have backed off of recent highs) and crude oil is sort of “nowhere”.
Figure 3 – Gold, Bonds, U.S. Dollar and Crude Oil (Courtesy AIQ TradingExpert)
Like I said, nothing has really changed. So, at this point the real battle is that age-old conundrum of “Patience versus Complacency”. When the overall trend is clearly “Up” typically the best thing to do is essentially “nothing” (assuming you are already invested in the market). At the same time, the danger of extrapolating the current “good times” ad infinitum into the future always lurks nearby.
What we don’t want to see is:
*The major market averages breaking back down below their 200-day MA’s.
What we would like to see is:
*The Transports and the Value Line Index break out to new highs (this would be bullish confirmation rather the current potentially bearish divergence)
The Importance of New Highs in the Value Line Index
One development that would provide bullish confirmation for the stock market would be if the Value Line Geometric Index were to rally to a new 12-month high. It tends to be a bullish sign when this index reaches a new 12-month high after not having done so for at least 12-months.
Figure 4 displays the cumulative growth for the index for all trading days within 18 months of the first 12-month new high after at least 12-months without one.
Figure 4 – Cumulative growth for Value Line Geometric Index within 18-months of a new 12-month high
Figure 5 displays the cumulative growth for the index for all other trading days.
Figure 5 – Cumulative growth for Value Line Geometric Index during all other trading days
In Figure 4 we see that a bullish development (the first 12-month new high in at least 12 months) is typically followed by more bullish developments. In Figure 5 we see that all other trading days essentially amount to nothing.
Figure 6 displays the Value Line Geometric Index with the relevant new highs highlighted.
The trend at this very moment is “Up.” So sit back, relax and enjoy the ride. Just don’t ever forget that the ride WILL NOT last forever. If the Value Line Geometric Index (and also the Russell 2000 and the Dow Transports) joins the party then history suggests the party will be extended. If they don’t, the party may end sooner than expected.
So pay 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 does not represent the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
As the primary currency recognized around the globe, the U.S. Dollar is pretty important. And the trend of the dollar is pretty important also. While a strong dollar is good in terms of attracting capital to U.S. shores, it makes it more difficult for U.S. firms that export goods. One might argue that a “steady” dollar is generally preferable to a very strong or very weak dollar.
Speaking of the trend of the dollar, a lot of things move inversely to the dollar. In fact, one can typically argue that as long as the dollar is strong, certain “assets” will struggle to make major advances. These include – commodities in general, metals specifically, foreign currencies (obviously) and international bonds (strongly).
Let’s first take a look at the state of the dollar.
Ticker UUP
For our purposes we will use the ETF ticker UUP ( Invesco DB US Dollar Index Bullish Fund) to track the U.S. Dollar. Figure 1 displays a monthly chart and suggests that UUP just ran into – and reversed at least for now – in a significant zone of resistance.
Which way will things go? It beats me. But I for one will be keeping a close eye on UUP versus the resistance levels highlighted in Figures 1 and 2. So will traders of numerous other securities.
Inverse to the Buck
Figure 4 displays the 4-year weekly correlation for 5 ETFs to ticker UUP (a correlation of 1000 means they trade exactly the same a UUP and a correlation of -1000 means they trade exactly inversely to UUP).
In the following charts, note the inverse relationship between the dollar (UUP on the bottom) and the security in the top chart. When the dollar goes way down they tend to go way up – and vice versa.
Note also that in the last year several of these securities went up at the same time the dollar did. This is a historical anomaly and should not be expected to continue indefinitely.
Figure 8 – Ticker BWX (SPDR Bloomberg Barclays International Treasury Bond) vs. UUP (Courtesy AIQ TradingExpert )
Figure 9 – Ticker IBND (SPDR Bloomberg Barclays International Corporate Bond) vs. UUP (Courtesy AIQ TradingExpert )
Figure 10 – Ticker FXE (Invesco CurrencyShares Euro Currency Trust) vs UUP (Courtesy AIQ TradingExpert )
Summary
If the dollar fails to break out of it’s recent resistance area and actually begins to decline then commodities, currencies, metals and international stocks and bonds will gain a favorable headwind. How it all actually plays out, however, remains to be seen.
So keep an eye on the buck. Alot is riding on it – whichever way it goes.
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
As usual, you can pretty much see whatever you want to see in today’s stock market. Consider the major indexes in Figure 1, displayed along with their respective 200-day moving averages.
If you “want to” be bullish, you can focus on the fact that all 4 of these major indexes are presently above their respective 200-day moving averages. This essentially defines an “uptrend”; hence you can make a bullish argument.
If you want to be “bearish”, you can focus on the “choppy” nature of the market’s performance and the fact that very little headway has been made since the highs in early 2018. This “looks like” a classic “topping pattern” (i.e., a lot of “churning”), hence you can make a bearish argument.
To add more intrigue, consider the 4 “market bellwethers” displayed in Figure 2.
(NOTE: Previously I had Sotheby’s Holdings – ticker BID – as one my bellwethers. As they are being bought out, I have replaced it with the Value Line Arithmetic Index, which has a history of topping and bottoming prior to the major indexes)
The action here is much more mixed and muddled.
*SMH – for any “early warning” sign keep a close eye on the semiconductors. If they breakout to a new high they could lead the overall market higher. If they breakdown from a double top the market will likely be spooked.
*TRAN – The Dow Transports topped out over a year ago and have been flopping around aimlessly in a narrowing range. Not exactly a bullish sign, but deemed OK as long as price holds above the 200-day moving average.
*ZIV – Inverse VIX is presently below it’s 200-day moving average, so this one qualifies as “bearish” at the moment.
*VAL-I – The Value Line Index is comprised of 1,675 stocks and gives each stock equal weight, so is a good measure of the “overall” market. It presently sits right at its 200-day moving average, however – as you can see in Figure 3 – it is presently telling a different story than the S&P 500 Index.
Figure 3 – S&P 500 trending slightly higher, Value Line unweighted index trending lower (Courtesy AIQ TradingExpert)
The Bottom Line
OK, now here is where a skilled market analyst would launch into an argument regarding which side will actually “win”, accompanied by roughly 5 to 50 “compelling charts” that “clearly show” why the analysts’ said opinion was sure to work out correctly. Alas, there is no one here like that.
If the question is, “will the stock market break out to the upside and run to sharply higher new highs or will it break down without breaking out to new highs?”, I sadly must default to my standard answer of, “It beats me.”
Here is what I can tell you though. Instead of relying on “somebody’s opinion or prediction” a much better bet is to formulate and follow an investment plan that spells out:
*What you will (and will not) invest in?
*How much capital you will allocate to each position?
*How much risk you are willing to take with each position?
*What will cause you to exit with a profit?
*What will cause you to exit with a loss?
*Will you have some overarching “trigger” to cause you to reduce overall exposure?
*And so on and so forth
If you have specific answers for the questions above (you DO have specific answers, don’t you?) then the correct thing to do is to go ahead and follow your plan and ignore the myriad prognostications that attempt to sway you one way or the other.
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
Suddenly everyone is once again singing the praises of long-term treasuries. And on the face of it, why not? With interest rates seemingly headed to negative whatever, a pure play on interest rates (with “no credit risk” – which I still find ironic since t-bonds are issued by essentially the most heavily indebted entity in history – the U.S. government) stands to perform pretty darn well.
EDITORS NOTE: We combined Jay's 2 articles on Beating the Bond Market into one article. Later in the article Jay uses AIQ TradingExpert Matchmaker tool to reveal that convertible bonds and high yield corporates have a much higher correlation to the stock market than they do to the long-term treasury.
But is it really the best play?
Long-Term Treasuries vs. “Others”
Because a later test will use the Bloomberg Barclays Convertible Bond Index, and because that index starts in 1986 and because I want to compare “apples” to “apples”, Figure 1 displays the growth of $1,000 since 1986 using monthly total return data for the Bloomberg Barclays Treasury Long Index.
Figure 1 – Growth of $1,000 in Long-Term Treasuries (1987-2019)
For the record:
Ave. 12 mo %
+8.2%
Std. Deviation
+9.0%
Max Drawdown
(-15.9%)
$1,000 becomes
$12,583
Figure 2 – Bloomberg Barclays Treasury Long Index (Jan 1987-Jul 2019)
Not bad, apparently – if your focus is return and you don’t mind some volatility and you have no fear of interest rates ever rising again.
A Broader Approach
Now let’s consider an approach that puts 25% into the four bond indexes below and rebalances every Jan. 1:
*Bloomberg Barclay’s Convertible Bond Index
*Bloomberg Barclays High Yield Very Liquid Index
*Bloomberg Barclays Treasury Long Index
*Bloomberg Barclay’s Intermediate Index
Figure 3 displays the growth of this “index” versus buying and holding long-term treasuries.
Figure 3 – Growth of $1,000 invested in 4-Bond Indexes and rebalanced annually; 1987-2019
Ave. 12 mo %
+8.0%
Std. Deviation
+6.8%
Max Drawdown
(-14.8%)
$1,000 becomes
$11,774
Figure 4 – 4-Bond Index Results; 1987-2019
As you can see, the 4-index approach:
*Is less volatile in nature (6.8% standard deviation versus 9.0% for long bonds)
*Had a slightly lower maximum drawdown
*And has generated almost as much gain as long-term treasuries alone (it actually had a slight lead over long-term treasuries prior to the rare +10% spurt in long treasuries in August 2019)
To get a better sense of the comparison, Figure 5 overlays Figures 1 and 3.
Figure 5 – Long Treasuries vs. 4-Bond Index
As you can see in Figure 5, in light of a long-term bull market for bonds, at times long-term treasuries have led and at other times they have trailed our 4-Bond Index. After the huge August 2019 spike for long-term treasuries, they are back in the lead. But for now, the point is that the 4-Bond Index performs roughly as well with a great deal less volatility.
To emphasize this (in a possibly slightly confusing kind of way), Figure 6 shows the drawdowns for long treasuries in blue and drawdowns for the 4-Bond Index in orange. While the orange line did have one severe “spike” down (during the financial panic of 2008), clearly when trouble hits the bond market, long-term treasuries tend to decline more than the 4-Bond Index.
Figure 6 – % Drawdowns for Long-term treasuries (blue) versus 4-Bond Index (orange); 1987-2019
Summary
Long-term treasuries are the “purest interest rate play” available. If rates fall then long-term treasuries will typically outperform most other types of bonds. On the flip side, if interest rates rise long-term treasuries will typically underperform most other types of bonds.
Is this 4-index approach the “be all, end all” of bond investing? Is it even superior to the simpler approach of just holding long-term bonds?
Not necessarily. But there appears to be a better way to use these four indexes – which I will get to below
So, all-in-all the 4-bond index seems like a “nice alternative” to holding long-term treasuries. But the title of these articles says “Beating the Bond Market” and not “Interesting Alternatives that do Just about as Well as Long-Term Treasuries” (which – let’s face it – would NOT be a very compelling title). So, let’s dig a little deeper. In order to dig a little deeper, we must first “go off on a little tangent.”
Bonds versus Stocks
In a nutshell, individual convertible bonds and high yield corporate bonds are tied to the fortunes of the companies that issue them. This also means that as an asset class, their performance is tied to the economy and the business environment in general. If times are tough for corporations it only makes sense that convertible bonds and high yield bonds will also have a tougher time of it. As such it is important to note that convertible bonds and high yield corporates have a much higher correlation to the stock market than they do to the long-term treasury.
In Figures 1 and 2 we use the following ETF tickers:
CWB – as a proxy for convertible bonds
HYG – As a proxy for high-yield corporates
TLT – As a proxy for long-term treasuries
IEI – As a proxy for short-term treasuries
SPX – As a proxy for the overall stock market
BND – As a proxy for the overall bond market
As you can see in Figure 1, convertible bonds (CWB) and high-yield corporates (HYG) have a much higher correlation to the stock market (SPX) than to the bond market (BND).
As you can see in Figure 2, long-term treasuries (TLT) and intermediate-term treasuries (IEI) have a much higher correlation to the bond market (BND) than to the stock market (SPX).
Figure 2 – 4-Bond Index Components correlation to Vanguard Total Bond Market ETF (Courtesy AIQ TradingExpert)
A Slight Detour
Figure 3 displays the cumulative price change for the S&P 500 Index during the months of November through April starting in 1949 (+8,881%)
Figure 3 – Cumulative % price gain for S&P 500 Index during November through April (+8,881%); 1949-2019
Figure 4 displays the cumulative price change for the S&P 500 Index during the months of June through October starting in 1949 (+91%)
Figure 4 – Cumulative % price gain for S&P 500 Index during June through October (+91%); 1949-2019
The Theory: Parts 1 and 2
Part 1: The stock market performs better during November through April than during May through October
Part 2: Convertible bonds and high-grade corporate bonds are more highly correlated to stocks than long and intermediate-term treasuries
Therefore, we can hypothesize that over time convertible and high-yield bonds will perform better during November through April and that long and intermediate-term treasuries will perform better during May through October.
Jay’s Seasonal Bond System
During the months of November through April we will hold:
*Bloomberg Barclay’s Convertible Bond Index
*Bloomberg Barclays High Yield Very Liquid Index
During the months of May through October we will hold:
*Bloomberg Barclays Treasury Long Index
*Bloomberg Barclay’s Intermediate Index
(NOTE: While this article constitutes a “hypothetical test” and not a trading recommendation, just to cover the bases, an investor could emulate this strategy by holding tickers CWB and HYG (or ticker JNK) November through April and tickers TLT and IEI May through October.)
Figure 5 displays the growth of $1,000 invested using this Seasonal System (blue line) versus simply splitting money 25% into each index and then rebalancing on January 1st of each year (orange line).
Figure 5 – Growth of $1,000 invested using Jay’s Seasonal System versus Buying-and-Holding and rebalancing (1986-2019)
Figure 6 displays some comparative performance figures.
Measure
SeasonalSystem
4 Indexes Buy/Hold/Rebalance
Average 12 month % +(-)
+11.9%
+8.0%
Std. Deviation %
8.7%
6.8%
Ave/StdDev
1.37
1.18
Max Drawdown%
(-9.2%)
(-14.8%)
$1,000 becomes
$38,289
$11,774
Figure 6 – Seasonal Strategy versus Buy/Hold/Rebalance
From 12/31/1986 through 8/31/2019 the Seasonal System gained +3,729% versus +1,077% (3.46 times as much) as the buy/hold and rebalance method.
Summary
The Seasonal Bond System has certain unique risks. Most notably if the stock market tanks between November 1 and April 30, this system has no “standard” bond positions to potentially offset some of the stock market related decline that convertible and high yield bonds would likely experience. Likewise, if interest rates rise between April 30 and October 31st, this strategy is almost certain to lose value during that period as it holds only interest-rate sensitive treasuries during that time.
The caveats above aside, the fact remains that over the past 3+ decades this hypothetical portfolio gained almost 3.5 times that of a buy-and-hold approach.
Question: Is this any way to trade the bond market?
Answer: Well, it’s one way….
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 “barbell” approach to bond investing typically involves buying a long-term bond fund or ETF and a short-term bond fund or ETF. The idea is that the long-term component provides the upside potential while the short-term component dampens overall volatility and “smooths” the equity curve. This article is not intended to examine the relative pros and cons of this approach. The purpose is to consider an alternative for the years ahead.
The Current Situation
Interest rates bottomed out several years ago and rose significantly from mid-2016 into late 2018. Just when everyone (OK, roughly defined as “at least myself”) assumed that “rates were about to establish an uptrend” – rates topped in late 2018 and have fallen off since. Figure 1 displays ticker TYX (the 30-year treasury yield x 10) so you can see for yourself.
In terms of the bigger picture, rates have showed a historical tendency to move in 30-year waves. If that tendency persists then rates should begin to rise off the lows in recent years in a more meaningful way. See Figure 2.Figure 2 – 60-year wave in interest rates (Courtesy: www.mcoscillator.com)
Will this happen? No one can say for sure. Here is what we do know: If rates decline, long-term treasuries will perform well (as long-term bonds react inversely to the trend in yields) and if rates rise then long-term bond holders stand to get hurt.
So here is an alternative idea for consideration – a bond “barbell” that includes:
*Long-term treasuries (example: ticker VUSTX)
*Floating rate bonds (example: ticker FFRAX)
Just as treasuries rise when rates fall and vice versa, floating rate bonds tend to rise when rates rise and to fall when rates fall, i.e., (and please excuse the use of the following technical terms) when one “zigs” the other “zags”. For the record, VUSTX and FFRAX have a monthly correlation of -0.29, meaning they have an inverse correlation.
Figure 3 displays the growth of $1,000 invested separately in VUSTX and FFRAX since FFRAX started trading in 2000. As you can see the two funds have “unique” equity curves.
Figure 3 – Growth of $1,00 invested in VUSTX and FFRAX separately
Now let’s assume that every year on December 31st we split the money 50/50 between long-term treasuries and floating rate bonds. This combined equity curve appears in Figure 4.
Figure 4 – Growth of $1,000 50/50 VUSTX/FFRAX; rebalanced annually
Since 2000, long-treasuries have made the most money. This is because interest rates declined significantly for most of that period. If interest rise in the future, long-term treasuries will be expected to perform much more poorly. However, floating rate bonds should prosper in such an environment.
Figure 5 displays some relevant facts and figures.
Figure 5 – Relevant performance Figures
The key things to note in Figure 5 are:
*The worst 12-month period for VUSTX was -13.5% and the worst 12-month period for FFRAX was -17.1%. However, when the two funds are traded together the worst 12-month period was just -5.0%.
*The maximum drawdown for VUSTX was -16.7% and the maximum drawdown for FFRAX was -18.2%. However, when the two funds are traded together the worst 12-month period was just -8.6%.
Summary
The “portfolio” discussed herein is NOT a recommendation, it is merely “food for thought”. If nothing else, combining two sectors of the “bond world” that are very different (one reacts well to falling rates and the other reacts well to rising rates) certainly appears to reduce the overall volatility.
My opinion is that interest rates will rise in the years ahead and that long-term bonds are a dangerous place to be. While my default belief is that investors should avoid long-term bonds during a rising rate environment, the test conducted here suggests that there might be ways for holders of long-term bonds to mitigate some of their interest rate risk without selling their long-term bonds.
Like I said, food for thought.
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
2018 witnessed something of a “fake out” in the bond market. After bottoming out in mid-2016 interest rates finally started to “breakout” to new multi-year highs in mid to late 2018. Then just as suddenly, rates dropped back down.
Figure 1 displays the tendency of interest rates to move in 60-year waves – 30 years up, 30 years down. The history in this chart suggests that the next major move in interest rates should be higher.Figure 1 – 60-year wave in interest rates (Courtesy: www.mcoscillator.com)
A Way to Track the Long-Term Trend in Rates
Ticker TNX is an index that tracks the yield on 10-year treasury notes (x10). Figure 2 displays this index with a 120-month exponential moving average overlaid. Think of it essentially as a smoothed 10-year average.
Figure 2 – Ticker TNX with 120-month EMA (Courtesy AIQ TradingExpert)
Interpretation is pretty darn simple. If the month-end value for TNX is:
*Above the 120mo EMA then the trend in rates is UP (i.e., bearish for bonds)
*Below the 120mo EMA then the trend in rates is DOWN (i.e., bullish for bonds)
Figure 3 displays 10-year yields since 1900 with the 120mo EMA overlaid. As you can see, rates tend to move in long-term waves.
Figure 3 – 10-year yield since 1900 with 120-month exponential moving average
Two key things to note:
*This simple measure does a good job of identifying the major trend in interest rates
*It will NEVER pick the top or bottom in rates AND it WILL get whipsawed from time to time (ala 2018).
*Rates were in a continuous uptrend from 1950 to mid-1985 and were in a downtrend form 1985 until the 2018 whipsaw.
*As you can see in Figure 2, it would not take much of a rise in rates to flip the indicator back to an “uptrend”.
With those thoughts in mind, Figure 4 displays the cumulative up or down movement in 10-year yields when, a) rates are in an uptrend (blue) versus when rates are in a downtrend (orange).
Figure 4 – Cumulative move in 10-year yields if interest rate trend is UP (blue) or DOWN (orange)
You can see the large rise in rates from the 1950’s into the 1980’s in the blue line as well as the long-term decline in rates since that time in the orange line. You can also see the recent whipsaw at the far right of the blue line.
Summary
Where do rates go from here? It beats me. As long as the 10-year yield holds below its long-term average I for one will give the bond bull the benefit of the doubt. But when the day comes that 10-year yields move decisively above their long-term average it will be essential for bond investors to alter their thinking from the mindset of the past 30+ years, as in that environment, long-term bonds will be a difficult place to be.
And that won’t be easy, as old habits die hard.
Figure 5 is from this article from BetterBuyandHold.com and displays the project returns for short, intermediate and long term bonds if rates were to reverse the decline in rates since 1982.Figure 5 – Projected total return for short, intermediate and long-term treasuries if rates reverse decline in rate of past 30+ years (Courtesy: BetterBuyandHold.com)
When rates finally do establish a new rising trend, short-tern and intermediate term bonds will be the place to be. When that day will come is anyone’s guess. But the 10-year yield/120mo EMA method at least we have an objective way to identify the trend shortly after the fact.
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.
Sometimes it’s good to go back to the basics. So here goes.
Trading success comes from a “reality based” approach. It is NOT about “all the money I am going to make!” It IS about “formulating a plan” (see the questions below) AND “doing the right thing over and over and over again” (no matter how uncomfortable or unsexy those “things” may be).
Steps to Trading Success
Trading success comes from:
A) Having answers to the questions below
B) Remembering the answers through all of the inevitable ups and downs
What vehicles will you trade?
Will it be stocks, ETFs, mutual funds, futures, options, or something else? If you plan to trade futures or options understand that you will need a different account and/or approval from your brokerage firm. Likewise, note that you will need to learn about the unique quirks of futures and options BEFORE you start trading.
How much money will you commit to your trading account?
Whatever that amount is be sure to put the entire amount into your account. DO NOT make the mistake of saying “I only have x$’s but I am going to trade it as if it were y$’s. One good drawdown and you will pull the plug.
How much money will you commit to a single trade/position?
We are NOT talking here about how much of a loss you are willing to endure. We are simply talking about how much you will omit to the enter the trade. If you put 10% of your capital into a given stock or ETF that doesn’t mean you are going to risk the entire amount. This question has more to do with determining how diversified you will be.
How much money will you risk on a given trade/position?
Think in terms of percentages. I will risk 1%, 2%, 5%, 10%, whatever. There is no magic, or correct, number. But think of it this way – “if I experience 5 consecutive losing trades how much will my account be down?” If you can’t handle that number then you need to reduce your risk per trade.
How many different positions will I hold at one time? What is my maximum?
Buying and holding a portfolio stocks is different than actively trading. For active traders, holding a lot of positions at one time can be taxing – much more so than you might expect going in. Don’t learn this lesson the hard way.
Do you understand the mechanics of entering trading orders?
The vast majority of trading orders are placed on-line. Each brokerage firm has their own websites/platforms and each has their unique characteristics. “Paper trading” an be a disaster if you come away thinking you “have the touch” when it comes to making money. However, when it comes to learning the in’s and out’s of order placement BEFORE you actually start trading, it an be invaluable.
(Think of trading as sky diving and paper trading as watching virtual sky diving on your laptop. You get the idea, but the actual experience is significantly different).
What will cause me to enter a trade?
There are roughly a bazillion and one ways to trigger a “buy signal”. Some are great, some are awful, but the majority are somewhere sort of in the middle. Too many traders spend too much time looking for “that one great method”: of triggering signals. The truth is that if you allocate capital wisely, manage your risk (more to follow) the actual method you use to signal trades is just one more piece of the puzzle – NOT the be all, end all.
How will I enter a trade?
This sounds like the same question as the one above, but it is different. For an active trader, a buy signal may occur but he or she may wait for “the right time” to actually enter the market. For example, if an “oversold” indicator triggers a “buy” signal, a trader may wait until there is some sort of price confirmation (i.e., a high above the previous trading day, a close above a given moving average, etc.) rather than risking “trying to catch a falling safe.”
What will cause me to exit a trade with a loss?
The obvious one is a loss that reaches the maximum amount you are willing to risk per trade as established earlier. But there can be other factors. In some cases, if the criteria that caused you to enter the trade in the first place no longer is valid, it can make sense to “pull the plug” and move on to another opportunity. A simple example: you buy because price moves above a given moving average. Price then drops back below that moving average without reaching your “maximum loss” threshold.
What will cause you to exit a trade with a profit?
This one is easy to take for granted. Too many traders think, “Oh, once I get a decent profit I’ll just go ahead and take it.” But a lot depends on the type of methodology that you are using. If you are using a short-term trading system that looks for short-term “pops” in the market, then it might male sense to think in terms of setting “profit targets” and getting out while the getting is good. On the other hand, if you are using a trend-following method you will likely need to maintain the discipline to “let your profits run” in order to generate the big winning trades that virtually all trend-following methods need in order to offset all of the smaller loses that virtually all trend-following methods experience.
The problem comes when a short-term trader decides to “let it ride” or when a trend follower starts “cutting his or her profit short” by taking small profits.
Different Types of Trading Require a Different Mindset
Putting money into a mutual fund or a portfolio of stocks is far different than trading futures or even options. While you can be “hands on” with funds or stocks it is not necessarily a requirement (I still hold a mutual fund that I bought during the Reagan administration). With futures or options, you MUST be – and must be prepared to be – hands on.
Also, big percentage swings in equity are more a way of life in futures and options. I like options because they give you the ability to risk relatively small amounts of capital on any variety of opportunities – bullish, bearish, neutral, hedging and so forth.
I also like futures, but it does require a different level of emotional and financial commitment than most other forms of trading. Many years ago, I wrote about the following “Litmus Test for Futures Traders”. It goes like this:
To tell if you are prepared emotionally and financially to trade futures doe the following.
1. Got to your bank on a windy day.
2. Withdraw a minimum of $10,000 in cash
3. Go outside and start throwing your money up into the air until it all blows away
4. Go home and get back to your routine like nothing ever happened.
If you can pass this test then you are fully prepared to trade futures. If you cannot pass this test it simply means that you need to go into it with your eyes wide open regarding the potential risks (with the knowledge that something similar to what was just described can happen at any time).
Summary
In a perfect world a trader will have well thought out and detailed answers to all of the questions posed above BEFORE they risk their first dollar.
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,
One of my (admittedly, potentially foolish) beliefs is that commodities will outperform stocks again someday. Possibly someday starting soon (roughly defined as anywhere from today to a year from today) and that the shift will be dramatic and last for a period of 3 to 8 years.
And no, I don’t think I could be any more vague. But I haven’t really “taken the plunge” (i.e., shifted money from the stock market into commodities in any meaningful way) yet. But I am keeping a close eye on things. Rather than rattled off another 1,000 words to explain, I will simply refer you to Figure 1 that tracks the ratio of the S&P Commodity Index to the S&P 500 Index.
History suggests that “the worm will (eventually) turn.”
Sugar
Let’s focus on one commodity for now. Sadly, it’s one of my favorites (ranks right up there with coffee). Sugar. As you can see in Figures 2 and 3, sugar has a history of contracting in price over a period of time and then alternately – and please excuse my use of the following overly technical terms – “swooping” or “soaring”.Figure 2 – Sugar 1970-1998 (Courtesy ProfitSource by HUBB)
Sugar can be traded either in the futures market (each full one-point movement in price equates to $1,120 in contract value). An alternative for “normal people” is ticker CANE which is the Teucrium Sugar ETF which trades like shares of stock. See Figure 4.Figure 4 – ETF Ticker CANE (Courtesy AIQ TradingExpert)
As you can see, sugar has been “contracting” in price of late. Does this mean it is reading to “swoop” or “soar”? Possibly. But for those who want to play the bullish side, it is probably a bit too soon to dive in.
Seasonality in Sugar
Figure 5 displays the annual seasonal trend in sugar. It should be noted that you should NOT expect every year to follow this trend. It is a display of previous historical tendencies and NOT a roadmap.Figure 5 – Sugar Annual Seasonal Trend (Courtesy Sentimentrader.com)
Still, the primary point is captured nicely in:
Jay’s Trading Maxim #92: One of the keys to long term success is committing capital where the probabilities are (or a least appear to be) in your favor.
February through April is NOT that time for anyone looking to play the long side of sugar.
Figure 6 displays the cumulative results achieved by holding long one sugar futures contract ONLY during the months of February through April every year starting in 1970.
Figure 6 – Cumulative $+(-) holding long sugar futures Feb, Mar, Apr every year since 1970
Some things to note regarding sugar Feb through Apr:
*UP 18 times
*DOWN 31 times
*Average gain = +$2,201
*Average loss = (-$3,377)
*Largest gain = +$6,630 (1974)
*Largest loss = (-$18,424) (1975)
Summary
The point IS NOT to argue that sugar is doomed to plunge between now and the end of April, nor even to argue that it cannot rally strongly between now and then – because it can.
The point IS to merely point out that the odds do not presently favor the bulls, which means – well, see Trading Maxim #92 above.
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
A lot of eyes are firmly fixed on Utilities at the moment. And for good reason. As you can see in Figure 1, the Dow Jones Utilities Average is presently facing a key resistance level. If it breaks out above the likelihood of a good seasonal rally (more in a moment) increases significantly.
One concern may be the fact that a 5-wave Elliott Wave advance appears to possibly have about run its course (according to the algorithmically drawn wave count from ProfitSource by HUBB which I use). See Figure 2.
For what it is worth, the March through July timeframe is “typically” favorable for utilities. Figure 3 displays the growth of $1,000 invested in the Fidelity Select Sector Utilities fund (ticker FSUTX) ONLY during the months of March through July each year starting in 1982.
Figure 3 – Growth of $1,000 invested in ticker FSUTX Mar-Jul every year (1982-2018)
For the record:
*# times UP = 29 (78%)
*# times DOWN = 8 (22%)
*Average UP = +9.3%
*Average DOWN = (-5.8%)
*Largest UP = +21.1% (1989)
*Largest DOWN = (-25.8%) (2002)
*Solid performance but obviously by no means nowhere close to “a sure thing”.
*It should be noted that several of the “Down” years occurred when the S&P 500 was already in a pretty clearly established downtrend (2001, 2002 and 2008), i.e., below its 10-month moving average. See Figure 4.
Figure 4 – S&P Index w/10-month moving average (Courtesy AIQ TradingExpert)
Summary
Utilities are flirting with new all-time highs and March through July is a “seasonally bullish” period for utilities. Does that mean “happy days are here again, and we should all be piling into utilities? Yeah, isn’t that always the thing about the markets? There is rarely a 100% clear indication for anything.
As always, my “prediction” about what will happen next in utilities is irrelevant and I am NOT pounding the table urging you to pile in. But I can tell you what I am watching closely at the moment:
*The S&P 500 Index is flirting right around its 10-month moving average (roughly 2,752 on the S&P 500 Index). If it starts to break down from there then perhaps 2019 may not pan out so well for utilities.
*The Dow Jones Utility Average is facing a serious test of resistance and may run out of steam (according to Elliott Wave).
*But a breakout to the upside could well clear the decks for utilities to be a market leader for the next several months
Focus people, focus.
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
In this article I highlighted the fact that platinum tends to be a consistent performer during the months of January and February combined. 2019 held serve as platinum futures registered their 23rd Jan-Feb gain in the last 24 years. The Platinum ETF (ticker PPLT) registered a two month gain of +9.6%. See Figure 1.
Figure 2 displays the updated hypothetical growth of equity achieved by holding long 1 platinum futures contract during January and February every year starting in 1979.
Figure 2 – Platinum futures $ +(-) during Jan-Feb; 1979-2019
Since most investors will never trade platinum futures, Figure 3 displays the growth of $1,000 invested in ticker PPLT only during Jan and Feb since 2011.
Figure 3 – Cumulative % growth of $1,000 invested in ticker PPLT ONLY during Jan. and Feb.; 2011-2019
Figure 4 – Yearly % +(-) for PPLT during Jan-Feb
Going Forward
So platinum was great, but what have you done for me lately? For what it is worth, historically two sectors that “should” be doing well in the March-April period are energies and grains (please remember that seasonal trends DO NOT always work every year). As you can see in Figure 5, energies have been rallying since late December (though lots of consternation regarding crude oil remains a constant).
Figure 5 – Ticker DBE (Energies) – so far so good; (Courtesy ProfitSource by HUBB)
Grains have been a bust so far (their “favorable seasonal period” typically begins in late January-early February – no dice this time around). Where too from here? One of two scenarios: either this is just going to be an off year for grains, or right now will be looked back upon as a buying opportunity. Only time will tell.
Figure 6 – Ticker DBA (Agricultural) – so far NOT so good; (Courtesy ProfitSource by HUBB)
And of course, don’t forget that the stock market tends to do pretty well March through May….
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
It’s January. It’s cold. And the ground in the Midwest is frozen (and getting more frozen by the moment I might #$%^ add). So of course, it is time to thinking about planting corn!
Wait, what!?
Well, yes as it turns out just about everyone involved in the agricultural industry has questions (doubts?) about corn planting in the spring and the eventual crop harvested in fall. And the big questions are, “How will planting go?” and “how much corn will be produced?” As it relates to corm the whole supply/demand thing you learned about way back when hinges on the ultimate answers to those two questions.
In a nutshell, there is “doubt.” No surprise really as there is absolutely not a single corn seed planted anywhere in the Midwest at this moment. So, who knows for sure?
One thing we do know for sure is that a lot of people are aware of this phenomenon in corn and feel compelled to “hedge their bets”, typically on an annual basis. Figure 1 displays an annual seasonal chart for corn futures from www.sentimentrader.com.Figure 1 – Annual Seasonal trend for Corn (Courtesy Sentimentrader.com)
As you can see, price strength is typical in the first 4 to 5 months of the year. This should not be surprising because – as I described above – doubt about supply causes buying pressure (typically).
So for traders the real question is “should I be buying corn in anticipation of buying pressure?” The answer is “definitely, maybe!” Let’s take a closer look.
*Corn is presently in a fairly prolonged consolidation/compression range
*Previous consolidation/compression ranges have been followed by some significant advances
Despite this, one should not necessarily assume that corn is about to burst higher in price. So let’s look at things from a more technical/tactical trading point of view.
How to Play Corn
*The “purest’ play is corn futures. However, corn futures are not for most people. In Figure 2, corn is trading at “350”, which equates to $3.50 a bushel in corn futures parlance. Here is what you need to know:
If one were to buy a corn futures contract at $3.50 a bushel, a move to $4.50 a bushel would generate a gain of +$5,000 and a move to $2.50 a bushel would generate a loss of -$5,000.
In sum, a great way to make a lot of money if you are right and a great way to lose a lot of money if you are wrong. There is an alternative for the “average” investor.
*Ticker CORN is the Teucrium Corn ETF which allows investors to trade corn like they would trade shares of stock. Figure 3 displays a daily chart for ticker CORN.
Figure 3 – Ticker CORN with a significant resistance level around $16.53 (Courtesy AIQ TradingExpert)
Note that I have drawn a horizontal line $16.53, which connect the January 2018 low and the December 2018 high. As with any line that one might arbitrarily draw on a bar chart, there is nothing “magic” about this price level. But it does represent a potential line in the sand that be utilized in the following “highly complex” manner:
*CORN above $16.53 = (Possibly) Good
*CORN below $16.53 = Bad
The Choices
So what’s an investor to do? As always, there are choices.
Choice #1 is flush this idea and forget all about corn.
Choice #2 is to buy now in hopes of an upside breakout, possibly with a stop-loss under the September 2018 low of $15.39.
Choice #3 is to wait for an upside breakout above $16.53 as confirmation that an actual bullish trend is forming.
Summary
I don’t make “recommendations” here at JOTM, so whether you prefer #1, #2 or #3 above is entirely up to you. The key points though are:
It appears that there may be an opportunity forming (higher seasonal corn prices based on perceptions of problematic weather for planting and a long consolidation/compression in price).
A trader considering this idea needs to make decisions regarding what to trade (futures or CORN ETF), when to actually get in (before the breakout or after) and where to place a stop-loss.
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.
Meanwhile, back in the bond market. Yes, the stock market has been the place for “action” recently. First a massive decline in short order followed immediately by a stunning advance. But many investors also look to the bond market in order to achieve their long-term goals. So, let’s try to put things in perspective a bit.
The Main Points
*Point A: Rates will likely work their way higher over time
There has historically been a roughly 60-year cycle in interest rates (See Figure 1). If this holds to form, odds are the next 30 years will not look anything like the last 30 years in the bond market, i.e., rates will likely work their way higher over time.
Figure 1 – 60-year cycle in rates suggest higher yields in years ahead (Source: mcoscillator.com)
*Point B: Investors should be wary of buying and holding long-term bonds
Figure 1 does not mean that rates will rise in a straight-line advance. But again, odds are that rates will rise over time, so as a result, investors should be wary of buying and holding long-term bonds (as they stand to get hurt the most if rates rise). That being said, in the short-term anything can happen, and long-term bonds may still be useful to shorter-term traders, BUT…
…Short to intermediate term bond funds are better now for investors than long-term bonds (if rates rise over time investors in short/intermediate term bonds can reinvest more quickly at higher rates, while long-term bond holders just lose principal).
Figure 2 – Affect of rising rates on bonds of various maturities (Source: AAII.com)
*Point C: It appears to be too soon to declare a confirmed “Bond Bear Market!!!”
Bond yields looked in 2018 like they were staging a major upside breakout – and then reversed back to the downside. So – Point A above not withstanding – it appears to be too soon to declare confirmed “Bond Bear Market!!!”
*Point D: Corporate bonds as a whole carry more risk than in years past
The risk associated with corporate bonds as an asset class are higher than in the past due to A) a higher rate of debt, and B) a large segment of the corporate bond market is now in the BBB or BBB- rating category. If they drop one grade they are no longer considered “investment grade” and many institutional holders will have no choice but to sell those bonds en masse. Which raises the age-old question, “too whom?”
For more on this topic see here, here and here.Figure 5 – Rising corporate debt (Source: Real Investment Advice)
*Point E:
On the brighter side, two bond market models that I follow are presently bullish. More about these in Part II.
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.
Crude oil and pretty much the entire energy sector has been crushed in recent months. This type of action sometimes causes investors to wonder if a buying opportunity may be forming.
The answer may well be, “Yes, but not just yet.”
Seasonality and Energy
Historically the energy sector shows strength during the February into May period. This is especially true if the November through January period is negative. Let’s take a closer look.
The Test
If Fidelity Select Energy (ticker FSENX) shows a loss during November through January then we will buy and hold FSENX from the end of January through the end of May. The cumulative growth of $1,000 appears in Figure 1 and the yearly results in Figure 2.
Figure 1 – Growth of $1,000 invested in FSENX ONLY during Feb-May ONLY IF Nov-Jan shows a loss
Figure 2 – % + (-) from holding FSENX during Feb-May ONLY IF Nov-Jan shows a loss
Figure 3 displays ticker XLE (an energy ETF that tracks loosely with FSENX). As you can see, at the moment the Nov-Jan return is down roughly -15%.
All of this suggests remaining patient and not trying to pick a bottom in the fickle energy sector. If, however, the energy sector shows a 3-month loss at the end of January, history suggests a buying opportunity may then be at end.
Summary
Paraphrasing here – “Patience, ah, people, patience”.
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
I don’t offer “investment advice” here at JOTM so I have not commented much on the recent action of the market lest someone thinks I am “predicting” what will happen next. Like most people, predicting the future is not one of my strengths. I do have some thoughts though (which my doctor says is a good thing).
The Big Picture
Instead of talking about “the markets”, let’s talk first about “investing”, since that is really the heart of the matter. “The markets” are simply a means to an end (i.e., accumulating wealth) which is accomplished by “investing”. So, let me just run this one past you and you can think about it for a moment and see if it makes sense.
Macro Suggestion
*30% invested on a buy-and-hold basis
*30% invested using trend-following methods
*30% invested using tactical strategies
*10% whatever
30% Buy-and-Hold: Avoid the mistake that I made way back when – of thinking that you should always be 100% in or 100% out of the market. No one gets timing right all the time. And being 100% on the wrong side is pretty awful. Put some portion of money into the market and leave it there. You know, for all those times the market goes up when you think it shouldn’t.
30% using trend-following methods: Let me just put this thought out there – one of the biggest keys to achieving long-term investment success in the stock market is avoiding some portion of those grueling 30% to 89% (1929-1932) declines that rip your investment soul from you body and make you never want to invest again. Adopt some sort of trend-following method (or methods) so that when it all hits the fan you have some portion of your money “not getting killed”.
30% invested using (several) tactical strategies: For some examples of tactical strategies see here, here, here and here. Not recommending these per se, but they do serve as decent examples.
10% whatever: Got a hankering to buy a speculative stock? Go ahead. Want to trade options? OK. Want to buy commodity ETFs or closed-end funds or day-trade QQQ? No problem. Just make sure you don’t devote more than 10% of your capital to your “wild side.”
When the market is soaring you will likely have at a minimum 60% to 90% of your capital invested in the market. And when it all goes south you will have at least 30% and probably more out of the market ready to reinvest when the worm turns.
Think about it.
The Current State of Affairs
What follows are strictly (highly conflicted) opinions. Overall sentiment seems to me to be very bearish – typically a bullish contrarian sign. However, a lot of people whose opinions I respect are among those that are bearish. So, it is not so easy to just “go the other way.” But here is how I see the current “conflict”.
From a “technical” standpoint, things look awful. Figures 1 and 2 show 4 major market averages and my 4 “bellwethers”. They all look terrible. Price breaking down below moving averages, moving average rolling over, and so on and so forth. From a trend-following perspective this is bearish, so it makes sense to be “playing defense” with a portion of your capital as discussed above.
(click any Figure to enlarge)
Figure 1 – Major market averages with 50-day and 200-day moving averages (Courtesy AIQ TradingExpert)
Figure 2 – Jay’s Market Bellwethers with 50-day and 200-day moving averages (Courtesy AIQ TradingExpert)
On the flip side, the market is getting extremely oversold by some measure and we are on the cusp of a pre-election year – which has been by far the best historical performing year within the election cycle.
Figure 3 displays a post by the esteemed Walter Murphy regarding an old Marty Zweig indicator. It looks at the 60-day average of the ratio of NYSE new highs to New Lows. Low readings typically have marked good buying opportunities.
Figure 3 – Marty Zweig Oversold Indicator (Source: Walter Murphy on Twitter)
Figure 4 displays the growth of $1,000 invested in the S&P 500 Index ONLY during pre-election years starting in 1927. Make no mistake, pre-election year gains are no “sure thing.” But the long-term track record is pretty good.
Figure 4 – Growth of $1,00 invested in S&P 500 Index ONLY during pre-election years (1927-present)
There is no guarantee that an oversold market won’t continue to decline. And seasonal trends are not guaranteed to work “the next time.” But when you get an oversold market heading into a favorable seasonal period, don’t close your eyes to the bullish potential.
Summary
Too many investors seem to think in absolute terms – i.e., I must be fully invested OR I must be out. This is (in my opinion) a mistake. It makes perfect sense to be playing some defense given the current price action. But try not to buy into the “doomsday” scenarios you might read about. And don’t be surprised (and remember to get back in) if the market surprises in 2019.
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,
