Category Archives: ETFS

U.S. Stocks Lead, World Lags

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

The Trend, the Trend, the Trend

educational newsletters, ETFS, jay kaeppel, market timing, trading strategy

In real estate, it’s “Location, Location, Location.” In the financial markets it’s “the Trend, the Trend, the Trend.”  There is a great deal of certainty about what will happen next in stocks, bonds and gold.  But the key to successfully navigating these turbulent times starts not with predicting the future but rather with identifying the current trend in the here and now and going from there.  So let’s take a look at, well, what else, the trends.

I have certain trend-following models that I follow to help me to determine which way to be leaning in the markets.  Like any trend-following method they are far from perfect (my stock market model for example, suffered not one but two significant whipsaws in the last year+).  But for me there is no expectation that they will be perfect.  The only goal is to catch most of the upside during major bull markets, and miss much of the downside during major bear markets.
Stocks
For stocks I look at the 10-month and 21-month moving averages for the S&P 500 Index and use the following rules:
*A sell signal occurs when the S&P 500 closes 2 consecutive months below its 21-month moving average AND is also below its 10-month moving average
*Following a sell signal a new buy signal occurs when the S&P 500 registers a monthly close above its 10-month moving average
stock-trend
Figure 1 – Stock Market trend-following signals (Courtesy AIQ TradingExpert)
This method avoided much of the 1973-1974, 2000-2002 and 2008 bear market destruction.  That’s the good news.  The bad news is that it sold at the end of September 2015 and at the end of February 2016 – both just prior to powerful upside reversals (like I said, trend-following models ain’t perfect).
The most recent signal was a buy signal on 3/31/2016.  
So the trend for stocks is presently BULLISH
Bonds
I have written several posts about this in the past.  My favorite bond timing indicator is Japanese stocks.  No seriously.  They have a string tendency to trade inversely to the 30-yr US t-bond.  I track ticker EWJ and watch the 5-week and 30-week moving averages.  Because Japanese stocks and t-bonds trade inversely I use the following rules:
*A buy signal for bonds occurs when the 5-week moving average for EWJ drops below the 30-week moving average for EWJ
*A sell signal for bonds occurs when the 5-week moving average for EWJ rises above the 30-week moving average for EWJ
The most recent signal was a sell signal for t-bonds on 6/10/2016
So the trend for bonds is presently BEARISH
bond-trend
Figure 2 – Bond trend-following signals(Courtesy AIQ TradingExpert)
Gold
For gold I use two moving averages on a weekly chart for something I refer to as Jay’s Anti-Gold Index.  Rather than go into a long explanation I will link to the original article on the topic and offer a short explanation.  In AIQ TradingExpert I created a ticker comprised of 4 other tickers (GLL, RYSDX, SPX and YCS) which all trade in a negatively correlated manner to the price of gold (er, usually).
One moving average I call the “FrontWeighted36DayMA” (“FrontWeightedMA” for short.  The calculations are based on someone else’s work – unfortunately I cannot recall the person’s name so cannot give proper credit.  Hopefully Karma will work and somewhere that person will  Have a Nice Day without really knowing why.  The calculations are a bit long-winded so the AIQ TradingExpert code appears at the end of this article.
The other is the 55-week exponential moving average.
(CAVEAT: Because some of these tickers did not exist until 2006 trading signals began on 12/31/1996, so yes, it is by my standards a relatively short test period for a long -term moving average method.  To put it another way, don’t bet the ranch on  gold basedon this one indicator)
The trading rules are as follows:
*When the FrontWeightedMA closes a week BELOW the 55-week MA then a BUY signal for gold occurs.
*When the FrontWeightedMA closes a week ABOVE the 55-week MA then a BUY signal for gold occurs.
gold-signals-3
Figure 3 – Gold Trading Signals (Courtesy AIQ TradingExpert)
The most recent signal was a buy signal on 3/18/16.
So the trend for gold is presently BULLISH.
Summary
These indicators represent “my opinion as to where the markets are headed next” (because the truth is I don’t know).  There are objective, mechanical measures of where things stand today.  Nothing more, nothing less.
Also, none these indicators falls into the “World Beater” or “You Can’t Lose in Investing” categories.  But then again they are not really designed to (BTW if you do posses methods that do fit into either of the aforementioned categories, I would love to hear from you – off the record, of course).  What they do achieve is to offer a decent frame of reference during times of doubt.
And that is one of the most powerful tools any investor can possess.
So in sum, the current trend (at least according to what you’ve seen here) for stocks and gold is bullish and the current trend for bonds is bearish.
How long any of these trends will remain in place is anyone’s guess.  So enjoy them while they last.

Jay Kaeppel

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

Seasonal Bonds Strategy using TMF

educational newsletters, ETFS, jay kaeppel, seasonal

Recently Jay Kaeppel of Jay On The Markets posted an update on the Seasonal Bonds Strategy using TMF. The gist of the strategy is straightforward,  “Long TMF on the last 5 day of each month” 

 I’ve posted the article below. 

 Here’s a seasonal chart of the last 3 years with the average of the 3 years (black line). I colored the last 5 trading days of the average line in yellow to see what Jay was referring to. 8 of the 12 months were positive, 2 flat and 2 negative. Looks pretty good. At the bottom of the page you can see the returns this strategy yields.

 BTW this Chart type, known as a seasonality chart will be included in the next AIQ TradingExpert Pro release this fall (OK marketing bit over) 



On 3/15/15 I wrote about an even more aggressive strategy using triple-leveraged ticker TMF that tracks long-term t-bonds using leverage of 3-to-1.
So of course the bond market rewarded my “brilliance” with a swift kick in the you know where in the months of March and April 2015 and especially in August 2015.
This would typically be enough to cause many people to go, “Well that guy’s and idiot” and to move on.  But fortunately in this case, the market is a marathon and not a sprint.
Update
Figure 1 displays the results generated by:
*Holding long 1 t-bond futures contract ONLY for the last 5 days of each month since 12/30/1983
*Holding long 1 t-bond futures contract during all other days since 12/30/19831
Figure 1 – Long 1 t-bond futures contract ONLY during last 5 trading days of month (blue) versus long 1 t-bond futures contract on all other days  (red); 12/31/1983-8/12/2016
The results sort of speak for themselves.
After I wrote about my aggressive TMF strategy, TMF (of course) got hit very hard (as triple leveraged ETFs will do from time to time, hence the use of the words “aggressive” and “risky”), in March 2015 (-4.5%), April 2015 (-5.3%) and especially in August 2015 (-11.5%).
Still, as you can see in Figure 2, things have rebounded nicely since (hmmm, maybe I should be worried).2
Figure 2– Growth of $1,000 Long ETF ticker TMF ONLY during last 5 trading days of month (blue) versus long TMF all other days; (red); 12/9/2009-8/12/2016
So far the “Long TMF on the last 5 day of each month” strategy is up +31.8% for the year in 2016.
Year Last 5 TDM Long TMF
2009* +12.9%
2010 +33.4%
2011 +15.2%
2012 +35.7%
2013 +6.7%
2014 +45.7%
2015 +6.8%
2016** +31.8%
*-Starting 4/16/2009 when TMF started trading
**-Through 8/12/2016
Summary
So did this odd little strategy “weather the storm” and “take the market’s best shot” in 2015 and now it is “smooth sailing”?  Probably not.  Make no mistake – this is a strategy that entails a great deal of risk.  Still, for aggressive traders looking for an “edge”, it might be worth a closer look.
Jay Kaeppel

Hedging Risk Away with Ticker TZA

educational newsletters, ETFS, jay kaeppel, trading strategy
It pains me to say that I don’t know where the stock market is going next.  You would think that after being in the markets for so long and following a bunch of indicators and systems etc., that by now I would have developed some ability to divine what is coming next.
Alas, I have not.
But I do know three things:
*My trend-following stuff is bullish so I need to give the bullish case the benefit of the doubt (no matter how nervous or cynical I may be).
*Based on a variety of indicators the market is certainly getting overbought
*Based on the calendar, some caution may be in order
So, a thought today for those who might be wishing to hedge away some of their market risk.
Ticker TZA
Ticker TZA is not necessarily one of my favorites.  It is an ETF that tracks 3 times the inverse of the Russell 2000 small-cap index. In other words, if ticker RUT falls 1% today then TZA should rise 3%.  There are two primary concerns to keep in mind before considering buying shares of TZA are:
*The shares are extremely volatile
*The shares have experienced a serious downside bias – even when RUT is headed sideways (See Figure 1).
1
Figure 1 – Ticker TZA (black bars) versus Ticker RUT (Russell 2000) (Courtesy AIQ TradingExpert)
So if you are going to buy TZA you’d better pick your spots. As I discussed here we are entering an “interesting” time for the market.  So let’s explore the possibility of buying a call option on ticker TZA as a hedge against a potential market decline.
Call Option on TZA
Remember, TZA should increase in value if the Russell 2000 declines.  Therefore, a call option on TZA should also increase in value if the Russell 2000 declines.
As you can see in Figure 2, the “implied volatility” (which generally tells you whether there is a lot of time premium built into the price of the options for a given security) for options on TZA is near the low end of the historical range.  This tells us that there is relatively little time premium built into TZA options, therefore they are “cheap”.
2
Figure 2 – Implied option volatility for options on TA near the low end of the historical range (Courtesy www.OptionsAnalysis.com)
Next I ran the “Percent to Double” routine in www.OptionsAnalysis.com (see output in Figure 3.  The phrase “percent to double” tells us what percentage the underlying stock must rise in order for the call option to double in price.
3
Figure 3 – Percent to Double routine suggests buying Sep30 TZA call which will double in price if TZA rises 12.56% (i.e., if RUT declines by roughly -4.19%) (Courtesy www.OptionsAnalysis.com)
Figures 4 and 5 display the particulars and risk curves for buying 10 TZA Sep 30 calls.
4
Figure 4 – TZA Sep30 details (Courtesy www.OptionsAnalysis.com
5
Figure 5 – TZA Sep30 risk curves (Courtesy www.OptionsAnalysis.com)
A few things to note:
*The cost to buy 10 is $2,550.
*TZA is trading at $30.25/share.
*The breakeven price for this trade is $32.25 (if TZA is below $32.25 at expiration and we still hold this position then we will lose -$2,250)
*There are 50 days left until September expiration
*The trade has unlimited profit potential
Regarding potential, in Figure 6 we see that if TZA rallies back to its June low of $33.77 this trade will generate a profit of between $1,500 and $2,400 depending on how soon  that price is reached
6
Figure 6 – A potential 1st profit target for TZA hedge (Courtesy www.OptionsAnalysis.com)
Summary
Is this a good trade?  I can’t say for sure that it is.  In fact, the only way this trade makes money is if the broader market suffers a hit, so a good part of me would prefer to see this trade “not work out”.
But the point of all of this is simply to point out that it is possible to hedge against a significant market decline by buying call options on an inverse leveraged ETF.
Mr. Market, you take it from here.
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client

For Every Season, a Sector Fund Portfolio

ETFS, jay kaeppel, Mutual funds, seasonal
In this article dated 1/28/16 I wrote about a simple two-fund portfolio that had somehow managed to make money from the end of January to the end of April, 27 years in a row.  OK, make that 28 years in a row.
The portfolio was 50% invested in retail stocks (via ticker FSRPX) and energy services stocks (via ticker FSESX).  As you can see in Table 1 below, FSRPX underperformed most of the major averages but FSESX far outperformed.  As a result, the 50/50 FSRPX/FSESX portfolio gained +12.8% from the end of January to the end of April.
1a
Figure 1 – Jay’s 2-Fund Portfolio versus Major Market Indexes
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Figure 2 – Tickers FSESX and FSRPX; end of January through April (Courtesy AIQ TradingExpert)
This year’s gain (+12.8%) exceeded the historical average (+10.3%) and historical median (+10.1%).  So chalk one up for the good guys.
Moving on to May
In case you missed it, I also wrote recently about a “May portfolio” here. This portfolio is a bit more defensive in nature and consists of 25% in each of the four funds listed below:
FDFAX – Fidelity Select Consumer Staples
FSHCX – Fidelity Select Health Care Services
FSPHX – Fidelity Select Health Care
FGOVX – Fidelity Government Income Fund
This portfolio has showed a gain during the month of May in 22 of the past 27 years (or 81% of the time).
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client