Category Archives: indexes

Please Take a Moment to Locate the Nearest Exit (Part I)

educational newsletters, indexes, jay kaeppel, market timing, stock market, Stock trading

Well that sounds like a pretty alarming headline, doesn’t it?  But before you actually take a moment to locate the nearest exit please note the important difference between the words “Please locate the nearest exit” and “Oh My God, it’s the top, sell everything!!!”

You see the difference, right?  Good.  Let’s continue.  First, a true confession – I am not all that great at “market timing”, i.e., consistently buying at the bottom and/or selling at the top (I console myself with the knowledge that neither is anyone else).  On the other hand, I am reasonably good at identifying trends and at recognizing risk.  Fortunately, as it turns out, this can be a pretty useful skill.

So, while I may not be good at market timing, I can still make certain reasonable predictions.  Like for example, “at some point this bull market will run out of steam and now is as good a time as any to start making plans about how one will deal with this inevitable eventuality – whenever it may come”.  (Again, please notice the crucial difference between that sentence and “Oh My God, it’s the top, sell everything!!”)

First the Good News

The trend in the stock market is bullish.  Duh.  Is anyone surprised by that statement?  Again, we are talking subtleties here.  We are not talking about predictions, forecasts, projected scenarios, implications of current action for the future, etc.  We are just talking about pure trend-following and looking at the market as it is today.  Figure 1 displays the S&P 500 Index monthly since 1971 and Figure 2 displays four major indexes (Dow, S&P 500, Nasdaq 100, Russell 2000) versus their respective 200-day moving averages.

Figure 1 – S&P 500 Monthly  (Courtesy AIQ TradingExpert)

Figure 2 – Dow, S&P 500, Nasdaq 100, Russell 2000 w respective 200-day moving average (Courtesy AIQ TradingExpert)

It is impossible to look at the current status of “things” displayed in Figures 1 and 2 and state “we are in a bear market”.  The trend – at the moment – is “Up”.  The truth is that in the long run many investors would benefit from ignoring all of the day to day “predictions, forecasts, projected scenarios, implications of current action for the future, etc.” that emanates from financial news and just sticking to the rudimentary analysis just applied to Figures 1 and 2. 

In short, stop worrying and learn to love the trend. Still, no trend lasts forever, which is kind of the point of this article.

So now let’s talk about the “Bad News”.  But before we do, I want to point out the following:  the time to actually worry and/or do something regarding the Bad News will be when the price action in Figure 2 changes for the worse.  Let me spell it out as clearly and as realistically as possible. 

If (or should I say when?) the major U.S. stock indexes break below their respective 200-day moving averages (and especially if those moving average start to roll over and trend down):

*It could be a whipsaw that will be followed by another rally (sorry folks, but for the record I did mention that I am not that good at market timing and that I was going to speak as realistically as possible – and a whipsaw is always a realistic possibility when it comes to trend-following)

*It could be the beginning of a significant decline in the stock market (think -30% or possibly even much more)

So, the proper response to reading the impending discussion of the Bad News is not “I should do something”.  The proper response is “I need to resolve myself to doing something when the time comes that something truly needs to be done.”

You see the difference, right?  Good.  Let’s continue.

The Bad News

The first piece of Bad News is that stocks are overvalued.  Now that fact hardly scares anybody anymore – which actually is understandable since the stock market has technically been overvalued for some time now AND has not been officially “undervalued” since the early 1980’s.  Also, valuation is NOT a timing tool, only a perspective tool.  So high valuation levels a re pretty easy to ignore at this point.

Still, here is some “perspective” to consider:

*Recession => Economic equivalent of jumping out the window

*P/E Ratio => What floor you are on at the time you jump

Therefore:

*A high P/E ratio DOES NOT tell you WHEN a bear market will occur

*A high P/E ratio DOES WARN you that when the next bear market does occur it will be one of the painful kind (i.e., don’t say you were not warned)

Figure 3 displays the Shiller P/E Ratio plus (in red numbers) the magnitude of the bear market that followed important peaks in the Shiller P/E Ratio. 

Figure 3 – Shiller P/E Ratio Peaks (with subsequent bear market declines in red); (Courtesy: https://www.multpl.com/shiller-pe)

Repeating now: Figure 3 does not tell us that a bear market is imminent.  It does however, strongly suggest that whenever the next bear market does unfold, it will be, ahem, significant in nature.  To drive this point home, a brief history:

1929: P/E peak followed by -89% Dow decline in 3 years

1937: P/E peak followed by -49% Dow decline in 7 months(!?)

1965: P/E peak followed by 17 years of sideways price action with a -40% Dow decline along the way

2000: P/E peak followed by -83% Nasdaq 100 decline in 2 years

2007: P/E peak followed by -54% Dow decline in 17 months

Following next peak: ??

As you can see, history suggests that the next bear market – whenever it may come – will quite likely be severe.  There is actually another associated problem to consider.  Drawdowns are one thing – some investors are resolved to never try to time anything and are thus resigned to the fact that they will have to “ride ‘em out” once in awhile.  OK fine – strap yourself in and, um, enjoy the ride. But another problem associated with high valuation levels is the potential (likelihood?) for going an exceedingly long period of time without making any money at all.  Most investors have pretty much forgotten – or have never experienced – what this is like.

Figure 4 displays three such historical periods – the first associated with the 1929 peak, the second with the 1965 peak and the third with the 2000 peak. 

Figure 4 – Long sideways periods often follow high P/E ratios

*From 1927 to 1949: the stock market went sideways for 22 years.  Some random guy in 1947 – “Hey Honey, remember that money we put to work in the stock market back in 1927? Great News! We’re back to breakeven! (I can’t speak for anyone else, but personally I would prefer to avoid having THAT conversation.)

*From 1965 to 1982: the stock market went sideways.  While this is technically a 0% return over 17 years (with drawdows of -20%, -30% and -40% interspersed along the way – just to make it less boring), it was actually worse than that. Because of high inflation during this period, purchasing power declined a fairly shocking -75%. So that money you “put to work” in that S&P 500 Index fund in 1965, 17 years later had only 25% as much purchasing power (but hey, this couldn’t possibly happen again, right!?).

*From 2000 to 2012: the stock market went sideways.  With the market presently at much higher all-time highs most investors have forgotten all about this.  Still, it is interesting to note that from 8/31/2000 through 1/31/2020 (19 years and 5 months), the average annual compounded total return for the Vanguard S&P 500 Index fund (ticker VFINX) was just +5.75%.  Not exactly a stellar rate of return for almost 20 years of a “ride ’em out” in an S&P 500 Index fund approach).

The Point: When valuations are high, future long-term returns tend to be subpar – and YES, valuations are currently high.

You have been warned.

Stay tuned for Part II…

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.

The Bartometer

educational newsletters, indexes, market timing, stock market, technical indicator, Uncategorized

January 14, 2020

Hello Everyone,

Market Recap:

Last year was an excellent year for the markets in general, with the markets appreciating 19-38%, depending on the indexes. One of the best sectors was the large growth sector with stocks like Apple Computer going up 88% and Microsoft up 56% over the last year. That is why the NASDAQ went up 38% This year; the market is doing the same thing with Apple +5%, Microsoft +3%, Alphabet +6%, Facebook +6%, and Amazon +3%.

When stocks are so large, and they go up a significant amount, they skew the market averages and make people think the markets are doing very well when in fact, the small and midcap stock indexes are down .5% -1.6%.

The participation of this current rally is VERY NARROW, meaning just a small number of large stocks are pushing this market higher and when the markets are climbing on only a few stocks then either the small and midcap stocks have to catch up or the large growth and technology stocks have to fade.

On my December Bartometer, I thought the market would rally towards the rest of the year and I thought the FIRST level of resistance would be 3280 on the S&P 500. Friday, the S&P 500 hit 3281 intraday high and closed at 3265. Even though I am still Bullish longer term, I think the markets require some healthy pullback… Going up without a correction is not suitable for the markets especially when people are now throwing money at the market. It’s called FOMO, or the Fear of Missing Out. This sort of panic to throw money at the index funds shows me that psychologically people think the markets will continue to rise. That scares me a little.

The rise might continue and I am still relatively bullish as I think the S&P could hit 3400 later in the year, but I am worried that one of the only sectors that are moving is the large-cap technology sector. At this point, if you are in or nearing retirement and have more than 65% of your money in equities, you may want to scale back your equity exposure to below that amount. Remember the old saying; you don’t make it until you take it.

An excerpt from Fundamental Economist Dr. Robert Genetski: from Classical Principles.com:


Another week of good news and another week of record-high prices for the major stock indexes. Technology remains the most robust sector with both the Nasdaq and Nasdaq 100 gaining more than a percent. The S&P500 and Dow were up ½%. Small caps continue to languish.

Trump’s strategy in dealing with Iran increases the odds of his reelection. Iran looks even less competent for failing to protect Soleimani, having more than 50 people trampled to death at his funeral, and then possibly shooting down their civilian airplane.

With central banks around the world, creating liquidity, any correction in the bull market should be limited. Stay bullish on stocks.

Some of the INDEXES of the markets both equities and interest rates are below.

The source is Morningstar.com up until January 10th, 2020.


Dow Jones +1.1%
S&P 500 +1.2%
NASDAQ Aggressive growth +2.7%
I Shares Russell 2000 ETF (IWM) Small cap – .47 of 1%
Midcap stock funds -.48 of 1%
International Index (MSCI – EAFE ex USA 1.0% Moderate Mutual Fund Investment Grade Bonds (AAA) Long duration +.56 of 1%
High Yield Merrill Lynch High Yield Index +.46 of 1%
Short Term Bond +.22 of 1%
Fixed Bond Yields (10 year) +1.8.% Yield
The average Moderate Fund is up .62 of 1% this year fully invested as a 65% in stocks and 35% in bonds and nothing in the money market.

Interest rates look stable going forward over the next 6 months

The Dow Jones Average is above. This index for the 5 largest stocks are Boeing, Apple, United healthcare, Goldman Sachs and Home Depot. They are the mix of American industry, but only contain 30 stocks. Even though the Dow is rising,

Look to the 3 graphs below the chart. You will see the horizontal blue line. When that is over 88 as it is, it shows that the market is OVERBOUGHT. Then when the green line falls below the green line you see the market selling off. It is there again, so be careful. The second graph shows Money flow/ Volume Accumulation. When this goes negative like it is below zero or the horizontal line, it shows that there is some distribution or selling pressure.

The last graph shows the Advance decline line. This is the number of stocks going up compared to the number of stocks going down on a running total. As you can see the Dow Jones is going up, but the Advance/decline is going DOWN. This means only a few stocks are going up. If this doesn’t change, the market could be ready for a little decline There is trend-line support at 28400 if it drops there. But unless the indicators change for the better, the market may fall and correct somewhat.

The NASDAQ is above. As you can see the NASDAQ is going up and is at the upper part of channel with-overbought and oversold indicators like the SK-SD stochastic indicators (the first graph) are very overbought. When the horizontal blue line is above 88 where the indicators are currently the market is overbought. Many times, when this indicator is above 88 you will see some sort of a correction or a give back.

See the last three times this indicator hit this level and crossed below it, the market fell. The NASDAQ can fall to the 8900 level where the bold trend line is above and still be bullish. It’s when we break that dark blue trend-line, then I will get very Cautious. Right now, the NASDAQ is overbought, and there are only a few stocks pushing this market higher. The third graph is the Advance decline Line. Notice, as the NASDAQ is going higher, it is going higher on a few stocks, that is why the Advance Decline Line is falling.

What is the Advance-Decline Line?

The advance/decline line (A/D) is a technical indicator that plots the difference between the number of advancing and declining stocks daily. The indicator is cumulative, with a positive number being added to the prior number, or if the number is negative, it is subtracted from the prior number.

The A/D line is used to show market sentiment, as it tells traders whether more stocks are rising or falling. It is used to confirm price trends in major indexes, and can also warn of reversals when divergence occurs.

The on-balance volume (OBV) is a technical analysis indicator intended to relate price and volume in the stock market. OBV is based on a cumulative total volume.[1] Money flow is calculated by averaging the high, low and closing prices, and multiplying by the daily volume. Comparing that result with the number for the previous day tells traders whether money flow was positive or negative for the current day. Positive money flow indicates that prices are likely to move higher, while negative money flow suggests prices are about to fall.

Source: Investopedia

A Support or support level is the level at which buyers tend to purchase or into a stock or index. It refers to the stock share price that a company or index should hold and start to rise. When the price of the stock falls towards its support level, the support level holds and is confirmed, or the stock continues to decline, and the support level must change.

  • Support levels on the S&P 500 area are 3248, 3217 area MAJOR Trend line support, 3182, 3119, and 3088. These might be BUY areas.
  • Support levels on the NASDAQ are 8900, 8655, and 8474.
  • On the Dow Jones support is at 28,420, 28245, 26093 (200-day moving average) and 27764
  • These may be safer areas to get into the equity markets on support levels slowly.
  • RESISTANCE LEVEL ON THE S&P 500 3280.

THE BOTTOM LINE:

The market is somewhat overbought and at FAIR VALUE. There are now some cracks in the dam showing as explained above, but my computer systems are still at a Hold for the market direction. I expected the S&P to hit 3280, it did last week and sold off very quickly to the 2165 area. The markets are rallying on large-cap growth and technology stocks and watching the other smaller to midcap companies decline. Either we start to see the small and midcap stocks begin to rally, or the market could begin to decline. The S&P could hit 3280 to 3400 later in the year. Earnings could potentially grow 6 to 7% or more this year and that is why there is the possibility that the S&P 500 could reach 3280 to 3400+ in 2020, a much smaller rise in the stock market than in 2019 but hopefully, a decent return, with obviously no guarantees expressed or implied.

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, 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

Where We Are (and One Thing to Watch For)

commodities, educational newsletters, ETFS, indexes, jay kaeppel

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.

Figure 1 – 4 Major Market Indexes (Courtesy AIQ TradingExpert)

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).

Figure 2 – Jay’s 4 Market “Bellwethers” (Courtesy AIQ TradingExpert)

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.

Figure 6 – Value Line Geometric Index (Courtesy AIQ TradingExpert)

Summary

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.

Keep a Close Eye on the U.S. Dollar

chart patterns, ETFS, indexes, jay kaeppel

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.

Figure 1 – UUP Monthly (Courtesy ProfitSource by HUBB)

Figure 2 displays a weekly chart which suggests the possibility that UUP has completed a 5-wave advance.

Figure 2 – UUP Weekly (Courtesy ProfitSource by HUBB)

Figure 3 displays a daily chart and paints a more potentially bullish picture, looking for a 5th Wave up.

Figure 3 – UUP Daily (Courtesy ProfitSource by HUBB)

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).

Figure 4 – 4-Year Correlation to ticker UUP (Courtesy AIQ TradingExpert)

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 5 – Ticker DBC (Invesco DB Commodity Index Tracking Fund) vs. UUP (Courtesy  AIQ TradingExpert )

Figure 6 – Ticker SLV (iShares Silver Trust) vs. UUP (Courtesy  AIQ TradingExpert )

Figure 7 – Ticker GLD (SPDR Gold Shares) vs. UUP (Courtesy 
AIQ TradingExpert )

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.

The Big Canary in the Coal Mine…

chart patterns, indexes, jay kaeppel, stock market

Technology is what it’s all about these days.  Technology (primarily) runs on semiconductors.  If the semiconductor business is good, business is good.  OK, that’s about as large a degree of oversimplification as I can manage.  But while it may be overstated, there is definitely a certain amount of truth to it.

So, it can pay to keep an eye on the semiconductor sector.  The simplest way to do that is to follow ticker SMH.  Keeping with the mode of oversimplifying things, in a nutshell, if SMH is not acting terribly that’s typically a good thing.  So where do all things SMH stand now?  Let’s take a look.

Ticker SMH

As with all things market-related (among other things), beauty is in the eye of the beholder.  A quick glance at Figure 1 argues that SMH is inarguably in a strong uptrend, well above its 200-day moving average

Figure 1 – SMH in an uptrend (Courtesy AIQ TradingExpert)

A glance at Figure 2 suggests that SMH has just completed 5 waves up and may be due for a decline.

Figure 2 – SMH with potentially bearish Elliott Wave count (Courtesy ProfitSource by HUBB)

And Figure 3 highlights a very obvious bearish divergence between SMH weekly price action and the 3-period RSI indicator – i.e., SMH keeps moving incrementally higher while RSI3 reaches slightly lower highs each time.  Speaking anecdotally, this setup seems to presage at least a short-term decline maybe 70% of the time.  Of course, the degree of decline varies also.

Figure 3 – SMH with 3-period RSI bearish divergence (Courtesy AIQ TradingExpert)

So, what does it all mean?  First off, I am not going to make any predictions (if you knew my record on “predictions” you would thing that that is a good thing).  I am simply going to point out that one way or the other SMH may be about to give us some important information.

Scenario 1 – SMH breaks out to the upside and stays there: If SMH breaks through the upside and runs, the odds are very high that the overall stock market will run with it.

Course of action: Play for a bullish run by the overall market into the end of the year.

Scenario 2 -SMH breaks out briefly to the upside but then falls back below the recent highs: This would be at least a short-term bearish sign.  Failed breakouts are typically a bad sign and the security in question often behaves badly after disappointing bullish investors.  In this case, if it happens to SMH it could follow through to the overall market.

Course of action: If this happens, you might consider “playing some defense” (hedging, raising some cash, etc.) . Failed breakouts often make the market a little “cranky” (and cranky is one of my fields of expertise).

Scenario 3: SMH fails to breakout and suffers an intermediate-term decline.  If I were to fixate only on the bearish RSI3 divergence I showed earlier in Figure 3, this would seem like the most likely result. 

Course of action: If SMH sells off without breaking above recent resistance, keep an eye on SMH price via its 200-day moving average.  Simple interpretation goes like this: If SMH sells off but holds or regains it’s 200-day moving average then the bullish case can quickly be re-established; If SMH sells off and holds below its 200-day moving average, that should be considered a bearish sign for the overall market.

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.