Category Archives: ETFS

Lines in the Sand; The Bonds, REIT and MLP Edition

April 30, 2018ETFS, indexes, jay kaeppeladmin

Last week I wrote an article purporting to highlight significant levels of support and resistance across a variety of financial markets. Well, it turns out there are more.

More Notes on “Lines”

I certainly look at the markets more from the “technical” side than the “fundamental” side (not even a conscious choice really – I just never really had much success buying things based on fundamentals. That doesn’t mean I think fundamentals are useless or that they don’t “work” – they just didn’t work for me).

Once I settled on the technical side of things, I started reading books about technical analysis. All the classics. I learned about chart patterns and trend lines. By definition, a trend line is a line drawn on a price chart that connects two or more successive lows or highs.

And then I got to work looking through charts and applying everything that I thought I had learned. And like a lot of “newbie” technicians – and a surprising number of seasoned ones – I typically ended up drawing “lines on charts” that would resemble something like what you see in Figure 1.

Figure 1 – “Important” trend lines (or not?) (Courtesy AIQ TradingExpert)

For a technical analyst this is sort of the equivalent of “throwing up” on a chart (and the real pisser was that back in the day a fresh updated booklet of charts would show up in the mail each week – so you had to “throw up’ all over all the charts again and redraw every #$^& “important” line!!).

At some point I realized that perhaps every “important” line that I was drawing on a multitude of charts was perhaps maybe not so “important” after all. This revelation led me to establish the following maxim (as much to force me to “fight the urge” as anything:

Jay’s Trading Maxim #18: If you draw enough lines on a bar chart, price will eventually hit one or more of them.

(See also JayOnTheMarkets.com: The Line(s) in the Sand for Everything)

True Confession Time

There are certain dirty little secrets that no respectable technician should ever utter. But just to “get a little crazy” (OK, at last by my standards – which are quite low, apparently) I’m going to put it down in print:

I hate trend lines

There, I said it. Now for the record, up sloping and down sloping trend lines are a perfectly viable trading tool if used properly. I personally know plenty of people trading successfully using trend lines drawn on a price chart. Sadly, I’m just not one of them.

So remember the lesson I learned the hard way – “There is no defense for user error.”

The full truth is that I have nothing against trend lines, and yes I understand that there are “objective” methods out there detailing the “correct” method for choosing which two points to connect to draw a proper trend line (DeMark, Magee, I think Pring to name a few). But I somehow seem to have failed that lesson.

One Line I Do Like

I still draw slanting trend lines from time to time. But the only lines I really like are lines that are drawn horizontally across a bar chart – i.e., “support” and “resistance” lines. A multiple top or a multiple bottom marks a level where the bulls or the bears made a run and could not break through. Now that’s an “important” price level. If that price level ultimately holds it means the charge failed and that a significant reversal is imminent. If it ultimately fails to hold it means a breakout and a possible new charge to ever further new highs or lows as the case may be (for the record, it could also mean that a false breakout followed by a whipsaw is about to occur. But, hey, that’s the price of admission).

I also like horizontal lines because even if very single horizontal line does not prove to be useful as a trading tool, it can still serve a purpose as a “perspective tool”. Rather than explaining that theory let’s just “go to the charts.”

More “Lines in the Sand”

Figure 2 displays an index of bond and income related ETFs that I created. Roughly half of the ETFs have a higher correlation to treasury bonds and the other half to the S&P 500 Index (i.e., CWB – convertible bonds, JNK – high yield corporate, PFF – preferred stock and XLU – utilities all react to interest rates but are more correlated to the stock market than to treasury bonds).

Figure 2 – Bond and Income Related ETF Index (Courtesy AIQ TradingExpert)

This monthly chart clearly illustrates the struggle going on in the interest rate related sector. Interest rates mostly bottomed out in 2013 and have been grinding sideways to higher since. As you can see, interest rate related securities have been trapped in a sort of large trading range for years. Eventually, if the long-term trend in rates turns higher this chart should be expected to break through the lower (support) line Figure 2.

Still focusing on interest rate related sectors, Figure 3 displays a monthly index comprised of 3 REITs. Talk about a market sector trapped in a range.

Figure 3 – REIT Index; Monthly (Courtesy AIQ TradingExpert)

For what it is worth, Figure 4 displays a weekly chart of the same index with an indicator I call Vixfixaverage (code for this indicator appears at the end of the article). Typically, when this indicator exceeds 60 and then tops out, a decent rally often ensues (one word of warning, there is also often some further downside before that rally ensues to caution is in order).

Figure 4 – REIT Index; Weekly (Courtesy AIQ TradingExpert)

Speaking of oversold “things”, Figure 5 displays an index of Master Limited Partnerships (MLP’s). As you can see in Figure 5, a) divergences between price and the 4-month RSI are often followed by significant rallies, and b) a new such divergence has just been established. Does this mean that MLP’s are destined to rally higher? Not necessarily, but given the information in Figure 5 and the fact that everybody hates MLP’s right now, it’s something to think about.

Figure 5 – MLP Index (Courtesy AIQ TradingExpert)

AIQ TradingExpert Code for Vixfixaverage

hivalclose is hival([close],22).

vixfix is (((hivalclose-[low])/hivalclose)*100)+50.

vixfixaverage is Expavg(vixfix,3).

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.

What to Watch in Energies

April 20, 2018commodities, educational newsletters, ETFS, jay kaeppeladmin

With crude oil hitting its highest level since November of 2014, the energy sector is suddenly drawing a lot of interest. But there are few caveats that investors might want to keep in mind before getting too far ahead of themselves.

(BTW: If you enjoy reading JayOnTheMarkets.com – heck, even if you hate reading JayOnTheMarkets.com – please tell others and encourage them to stop by, “Like” an article, link an article, etc.. Thanks, The Management)

Energy Seasonality

Figure 1 (from www.Sentimentrader.com, which is quickly becoming one of my favorite sites) displays the annual seasonal calendar for ticker XLE – the SPDR Energy ETF. While it should be pointed out that it certainly is not like every year plays out like this chart, the primary point is that the “meat” part of year of from the end of January through the end of April is nearing the end of the line.Figure 1 – XLE Seasonality (Courtesy: www.Sentimentrader.com)

XLE Overhead Resistance

XLE has had a terrific month of April, rallying over 14% since the low on 4/2. And while it has been an impressive show of momentum, a look at the “bigger picture” points to some key levels of potential resistance just ahead.

Figure 2 is a monthly bar chart of XLE with two significant resistance levels drawn (at roughly $78.25 and $80.50). XLE has failed twice previously at roughly $78.40 – in December 2016 and again in January of 2018.Figure 2 – XLE Monthly with overhead resistance (Courtesy ProfitSource by HUBB)

On the plus side, XLE is clearly trending higher at the moment and there is still another 6.4% and 9.4% of upside potential between the current price and the resistance levels drawn in Figure 2. So short-term upside potential remains.

The only real “warning” I am raising is to pay attention to “what happens (if and) when we get there” (“there” being the $78.25-$80.50 range).

Jay’s Energy ETF Index

I created and follow an index of all manner of energy related ETFs (it combines traditional fossil fuel related ETFs with alternative energy source ETFs). A monthly chart with a significant resistance level drawn appears in Figure 3.Figure 3 – Jay’s Energy ETF Index (Courtesy AIQ TradingExpert)

Figure 4 “zooms in” on Figure 3 using a daily bar chart of my Energy ETF Index. As you can see, as nice as the latest rally has been, there is a “day of reckoning” looming out there somewhere if the energy sectors keeps going and retests this significant level.

Figure 4 – Jay’s Energy ETF Index; Daily (Courtesy AIQ TradingExpert)

For the record this index is comprised of:

GEX – Alternative Energy

KOL – Coal

LIT – Lithium

NLR – Nuclear

OIH – Oil Service

TAN – Solar

UGA – Gasoline

UHN – Heating Oil

UNG – Natural Gas

URA – Uranium

USO – Crude Oil

XLE – Energy Sector

Summary

Some might interpret this piece as a bearish to neutral word of warning related to the energy sector. In reality I am pretty agnostic when it comes to energy and (sadly) can’t offer you a “prediction” that would do you any good.

But I will be watching closely to see what happens to XLE and my own index if and when the key resistance levels are tested – especially if that test occurs after the end of the most favorable February through April period.

Commodity related assets – such as energy, especially fossil fuels – appear “due” for a favorable move relative to stocks. If and when these key resistance levels are pierced we could see an “off to the races” situation unfold.

Until then, be careful about “bumping your head.”

Jay Kaeppel

Yes, the U.S. Dollar is at a Critical Juncture

April 13, 2018commodities, educational newsletters, ETFS, FOREX, jay kaeppeladmin

If you have read any of my pieces lately you are already aware that as it relates to the financial markets a lot of things are presently at a critical juncture (including my sanity, but I digress). Today let’s add the U.S. Dollar to that seemingly ever longer list of financial areas that appear to be at a crossroads. And this one has some large implications simply because a lot of other markets are affected at least to some extent by what happens in the dollar.

Figure 1 displays the Spot U.S. Dollar on a monthly basis.

Figure 1 – U.S. Dollar Monthly (Courtesy ProfitSource by HUBB)

The reality is that there is no one definitive price at which to draw a “definitive” line in the sand. So I arbitrarily picked two. There is nothing “magical” about these two lines and a move above or below either does not technically “prove” anything. Still, as far as this range goes, a lot of previous price moves have “gone here to die” so to speak.

Now this is the point in the article where a skilled analyst would explain in painstaking detail why the dollar is absolutely, positively destined to move higher (or lower) from here. Sorry, folks I honestly don’t know. But there are two things I do know which might still prove useful:

1) For every prognosticator out there pounding the table that the dollar is sure to move higher there is another (equally slightly crazed) prognosticator averring that the dollar is destined to decline. And the key thing to note is that they both can make a pretty compelling case.

2) A lot rides on which way the dollar goes from here, because there is no shortage of markets that react – at least in part – to the movements of the U.S. dollar. This means that alot of trading opportunities will be affected/created by the next big move from the dollar.

A few examples appear in Figure 2 below which displays the inverse nature of the correlation between the U.S. Dollar (using ticker UUP as a proxy) and the market in question (for the record, a figure of 1000 means the market moves exactly like the dollar and a figure of -1000 means the market moves exactly inversely to the dollar).

Figure 2 – Correlations to U.S. Dollar (Courtesy AIQ TradingExpert)

Now the fact that foreign currencies (ticker FXE – which tracks the Euro) move inversely to the U.S. Dollar is fairly obvious. But note that on this list are:

*Foreign Bonds and U.S. Bonds (BWX and TLT)

*Precious Metals (GLD and SLV)

*Commodities (like coffee, soybeans and crude oil)

*Broad Commodity Indexes (DBC and GSG)

This encompasses a pretty darn wide swath of the trading world. And every single one of them will be influenced to some extent by which way the dollar goes from here.

As you can see in Figures 3 through 6 (click to enlarge any of the charts), what happens to the U.S. Dollar can matter a lot to what happens in these markets.

Figure 3 – Dollar vs. Euro (Courtesy AIQ TradingExpert)

Figure 4 – Dollar vs. Bonds (Courtesy AIQ TradingExpert)

Figure 5 – Dollar vs. Metals (Courtesy AIQ TradingExpert)

Figure 6 – Dollar vs. Commodity Indexes (Courtesy AIQ TradingExpert)

Summary

So the bottom line is that I do not know which way the dollar goes from here. But I do know that whichever way it goes a lot of “things” will likely go “the other way.” And everything listed in Figure 2 represents a lot of trading opportunities.

This represents a good time to invoke:

Jay’s Trading Maxim #17: (with credit given to George and Tom at Optionetics back in the day): Investing success involves two “simple” steps. #1) Spot opportunity. #2) Exploit opportunity. Everything you do as a trader or investor falls into one of these two categories.

A bunch of opportunities may soon be spotted (assuming the dollar actually ever does get around to deciding which way it wants to go…).

So focus here, people, focus…

Jay Kaeppel

Biotech + Gold (Updated)

March 13, 2018EDS, ETFS, indexes, jay kaeppel, Mutual fundsadmin

In this article I wrote about an index I follow that combines the biotech sector with the gold stock sector. I also wrote about “one way” to trade that index. This article builds on that piece and adds a new “rule” to create more trading opportunities.

The BIOGOLD Index

Figure 1 displays the index that I created using AIQ TradingExpert. It combines ticker FBIOX (Fidelity Select Biotech) with ticker FSAGX (Fidelity Select Gold).

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

Also included in the lower clip is an indicator referred to as RSI32, which is the 2-day average of the standard 3-day RSI.

The Old System

In the original article I tested an approach that works as follows using monthly data:

*When the RSI32 drops to 32 or below, buy BOTH FBIOX and FSAGX

*After a buy signal, sell both funds when RSI32 rises to 64 or higher

For results, please see the original article.

The New System

The “new rules” are as follows:

A “buy signal” occurs when either:

*The RSI32 drops to 32 or below

*The RSI32 drops below 50 (but not as low as 32) and then reverses to the upside for one month

After either of the buy signals above occurs, buy BOTH FBIOX and FSAGX

*After a buy signal, sell both funds when RSI32 rises to 64 or higher

Figure 2 displays the BIOGOLD Index with various buy and sell signals marked.

Figure 2 – Jay’s BIOGOLD Index with RSI32 signals (Courtesy AIQ TradingExpert)

To test results we will:

*Assume that after a buy signal both FBIOX and FSAGX are bought in equal amounts

*We will assume that both funds are held until RSI32 reaches 64 or higher (i.e., there is no stop-loss provision in this test)

For testing purposes we will not assume any interest earned while out of the market, in order to highlight only the performance during active buy signals. Figure 3 displays the hypothetical growth of $1,000 (using monthly total return data) using the “system”.

Figure 3 – Hypothetical Growth of $1,000 using Jay’s BIOGOLD System (1986-present)

Summary

For the record, I am not “recommending” that anyone go out and initiate trading biotech and gold based on what I have written here. Before trading using any approach it is essential for a trader to do their own homework and carefully consider all of the pro’s and con’s associated with any specific approach. For example, while the trade-by-trade results for the above look reasonably good, it should be noted that there have been 4 separate drawdown’s in excess of -19% along the way, including a maximum drawdown of -37% in 2008. In considering any approach to trading it is essential to first think long and hard about how well one would “weather the storms”, BEFORE focusing on potential profitability.

To put it more succinctly is the simple phrase “Don’t cross the river if you can’t swim the tide.”

Jay Kaeppel

Trend Following in One Minute a Month

February 23, 2018chart patterns, ETFS, jay kaeppeladmin

In the article linked below, investor and Forbes columnist Kenneth Fisher writes about what to look for at a market top (How to Tell a Bull Market from a Bear Market Blip). One piece of advice that I have heard him offer before is to wait at least 3 months after a top in price to worry about whether or not we are in a bear market. That is good advice and provided the impetus for a simple trend-following model I follow based on that “wait 3 months” idea.

First, a few key points:

*Trend-following is NOT about picking tops and bottoms or timing the market with “uncanny accuracy”. So don’t expect any trend-following system to do so.

*The primary edge in any trend-following method is simply missing as much of the major soul – and capital – crushing bear markets as possible, with the understanding that you will miss some of the upside during bull markets.

The Good News:

*Starting in November 1970 this system has beaten a buy and hold strategy

*This system requires no math. There are no moving averages, etc. Anyone can look at a monthly S&P 500 bar chart and generate the signals. And it literally takes less than 1 minute per month to update.

The Bad News:

*Every trend-following method known to man experiences whipsaws, i.e., a sell signal followed by a buy signal at a higher price. This system is no exception.

*Due to said whipsaws this system has significantly underperformed the S&P 500 buy-and-hold since the low in early 2009.

For what it’s worth, my educated guess is that following the next prolonged bear market, that will change. But there are no guarantees.

OK, all the caveats in place, here goes.

Jay’s Monthly SPX Bar Chart Trend-Following System

*This system uses a monthly price bar chart for the S&P 500 (SPX) to generate trading signals.

*For the purposes of this method, no action is taken until the end of the month, even if a trend change is signaled earlier in the month.

*A buy signal occurs when during the current month, SPX exceeds its highest price for the previous 6 calendar months.

A sell signal occurs as follows:

a) SPX registers a month where the high for the month if above the high of the previous month. We will call this the “swing high”.

b) SPX then goes 3 consecutive monthly bars without exceeding the “swing high.” When this happens, note the lowest low price registered during those 3 months. We will call this price the “sell trigger price.”

c) An actual sell trigger occurs at the end of a month when SPX register a low that is below the “sell trigger price”, HOWEVER,

d) If SPX makes a new monthly high above the previous “swing high” BEFORE it registers a low below the “sell trigger price” the sell signal alert is aborted

Sounds complicated right? It’s not. Let’s illustrate on some charts.

In the charts that follow:

*An Up green arrow marks a buy signal

*A Down red arrow marks a sell signal

*A horizontal red line marks a “sell trigger price”.

Sometimes a sell trigger price is hit and is marked by a down red arrow as a sell signal. Other times a sell trigger price is aborted by SPX making a new high and negating the potential sell signal.

Figure 1 – SPX signals 1970-1979 (Courtesy AIQ TradingExpert)

Figure 2 – SPX signals 1980-1989 (Courtesy AIQ TradingExpert)

Figure 3 – SPX signals 1990-1999 (Courtesy AIQ TradingExpert)

Figure 4 – SPX signals 2000-2009 (Courtesy AIQ TradingExpert)

Figure 5 – SPX signals 2010-present (Courtesy AIQ TradingExpert)

To demonstrate results we will use monthly close price data for SPX. If the system is bullish then the system will hold SPX for that month. If the system is bearish we will assume interest is earned at an annual rate of 1% per year.

Figure 6 displays the results of the System versus Buy and Hold starting with $1,000 starting November 1970 through 1994 (roughly 24 years).

Figure 6 – Growth of $1,000 invested using System versus Buy-and-Hold; Nov-1970 through Dec-1994

Figure 7 displays the results of the System versus Buy and Hold starting with $1,000 starting at the end of 1994 through the most recent close.

Figure 7 – Growth of $1,000 invested using System versus Buy-and-Hold; Dec-1994 through Feb-2018

Figure 8 displays the growth of $1,000 generated by holding the S&P 500 Index ONLY when the trend-following system is bearish. In Figure 8 you will see exactly what I mentioned at the outset – that the key is simply to miss some of the more severe effects of bear markets along the way.

Figure 8 – Growth of $1,000 invested ONLY when trend-following model is Bearish; 1970-2018

Finally, Figure 9 displays trade-by-trade results (using month-end price data).

Figure 9 – Trade-by-trade results; Month end price data

Summary

So is this “The World Beater, Best Thing Since Sliced Bread” system? Not at all. If you had started using this system in real time in March of 2009 chances are by now you would have abandoned it and moved on to something else, as the whip saw signals in 2011-2012 and 2016 has the System performing worse than buy and hold over a 9 year period.

But here is the thing to remember. Chances are prolonged bear markets have not been eradicated, never to occur again. 100+ years of market history demonstrates that bear markets of 12 to 36 months in duration are simply “part of the game”. And it is riding these bear markets to the depths that try investors souls – and wipe out a lot of their net worth in the process.

Chances are when the next 12 to 36 month bear market rolls around – and it will – a trend-following method similar to the one detailed here may help you to “save your sorry assets” (so to speak).

Jay Kaeppel

AIQ TradingExpert Pro

World Leader in Intelligent Trading Software

Category Archives: ETFS

Lines in the Sand; The Bonds, REIT and MLP Edition

What to Watch in Energies

Yes, the U.S. Dollar is at a Critical Juncture

Biotech + Gold (Updated)

Trend Following in One Minute a Month