Category Archives: jay kaeppel

Whither Apple?

OK, first off a true confession.  I hate it when some wise acre analyst acts like they are so smart and that everyone else is an idiot.  Its offensive and off-putting – not to mention arrogant.  And still in this case, all I can say is “Hi, my name is Jay.”

A lot of attention has been paid lately to the fact that AAPL is essentially swallowing up the whole world in terms of market capitalization.  As you can see in Figure 1, no single S&P 500 Index stock has ever had a higher market cap relative to the market cap of the entire Russell 2000 small-cap index. 

Figure 1 – Largest S&P 500 Index stock as a % of entire Russell 200 Index (Courtesy Sentimentrader.com)

So of course, the easiest thing in the world to do is to be an offensive, off-putting and arrogant wise acre and say “Well, this can’t last.”  There, I said it.  With the caveat that I have no idea how far AAPL can run “before the deluge”, as a student of (more) market history (than I care to admit) I cannot ignore this gnawing feeling that this eventually “ends badly.”  Of course, I have been wrong plenty of times before and maybe things (Offensive, Off-Putting and Arrogant Trigger Warning!) “really will be different this time around.”  To get a sense of why I bring this all up, please keep reading.

In Figure 1 we also see some previous instances of a stock becoming “really large” in terms of market cap.  Let’s take a closer look at these instances.

IBM – 1979

Figure 2 – IBM (Courtesy AIQ TradingExpert)

MSFT – 1999

Figure 3 – MSFT (Courtesy AIQ TradingExpert)

XOM – 2008

Figure 4 – XOM (Courtesy AIQ TradingExpert)

AAPL – 2012

Figure 5 – AAPL (Courtesy AIQ TradingExpert)

AAPL – 2020

Figure 6 – AAPL (Courtesy AIQ TradingExpert)

Summary

Small sample size? Yes.

Could AAPL continue to run to much higher levels? Absolutely

Do I still have that offensive, off-putting and slightly arrogant gut feeling that somewhere along the way AAPL takes a huge whack?

Sorry.  It’s just my nature.

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.

The Rally in “Stuff” Rolls On

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). 

Figure 3 – The metals components of the Stuff Index (Courtesy AIQ TradingExpert)

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.

Figure 4 – Four commodity ETFs weekly (Courtesy AIQ TradingExpert)

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.

Figure 5 – Four commodity ETFs daily (Courtesy AIQ TradingExpert)

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

See also Jay’s “A Strategy You Probably Haven’t Considered” Video

See also Video – The Long-Term…Now More Important Than Ever

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.

When “Perfection” Meets “The Real World”

In this article I wrote about a signal called “Bull Market Thrust”.  The upshot is that since 1991 it has identified 8 “bullish periods”.  The start and end dates of those periods – and the price performance of several indexes during each period – appear in Figure 1.

Figure 1 – “Bull Market Thrust” bullish periods

One key thing to note is that – focusing solely on the Nasdaq 100 Index – 100% of the “bullish periods” witnessed a gain, i.e., “perfection.”  The average gain was +40%.

So that looks pretty good and pretty darned encouraging going forward since there was a new buy signal on June 8th of this year.  And indeed, if history is a guide the outlook for the Nasdaq (and the stock market as a whole) is favorable in the next year.  But there is one thing to keep in mind….

Jay’s Trading Maxim #33: When you have actual money on the line, the chasm between theory and reality can be a mile wide.

The bottom line is that even during “bullish periods” the market fluctuates.  And if one is focused on “news” there is plenty of opportunity to feel angst no matter how strong the market “should be.”  So, in an effort to “mange expectations”, the charts below display the price action of the Nasdaq 100 during each “bullish period” displayed in Figure 1.

Nasdaq 100 during “Bullish Periods” based on Bull Market Thrust signals

*All charts below are (Courtesy AIQ TradingExpert)

*Each chart displays one of the “Bullish Periods” from Figure 1. 

*Each chart contains one or more red boxes highlighting a period of “market trouble”

THE POINT: the key thing to ponder is how easily it would be to allow yourself to get “shaken out” if you were focused on what the “news of the day” is telling you, rather than what the market itself is telling you.

Figure 2 – NDX: 1/29/91 – 2/28/93

Figure 3 – NDX: 6/5/2003-6/4/2004

Figure 4 – NDX: 3/23/2009-3/1/2011

Figure 5 – NDX: 7/7/2011-7/6/2012

Figure 6 – NDX: 7/9/13-7/15/2014

Figure 7 – NDX: 2/26/2016-11/17/2017

Figure 8 – NDX: 1/8/2019-1/17/2020

Figure 9 – 6/8/2020-?

The bottom line is that:

*Sometimes the market “took off” after the signal

*Sometime the market sold off shortly after the signal (see 2011 signal)

*In every case there was a drawdown of some significant somewhere along the way

The purpose of paying attention to things like “Bull Market Thrust” buy signals is not to “pick bottoms with uncanny accuracy.” 

In the real word, the purpose is to help strengthen our resolve in riding the exceptional opportunities.

See also Jay Kaeppel Interview in July 2020 issue of Technical Analysis of Stocks and Commodities magazine

See also Jay’s “A Strategy You Probably Haven’t Considered” Video

See also Video – The Long-Term…Now More Important Than Ever

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.

How to Know When to Worry About Inflation

Inflation was a big deal – back in the late 70’s and early 80’s.  Since then it has been the subject of a whole lot of “the boy crying wolf” scenarios.  Take a look at Figure 1.  The red line displays the 12-month rate-of-change in the Consumer Price Index (i.e., the annual rate of inflation) since 1913.

Figure 1 – The Consumer Price Index (1913-2020)

Things to note, focusing on 1930 forward to the present:

*In the 1930’s we had deflation (actually much worse than inflation as the economy essentially spirals lower and slower) with the CPI reaching almost -10%

*There were peaks in the 15% range in the late 1940’s and late 70’s/early 80’s

*As you can see in the black box to the right hand side, inflation has been less than 5% annually for most of the last 35 years

As a result, most investors have been conditioned to not fret too much about inflation.  And any time spent actually worrying about inflation in the past several decades has been a waste of good anxiety.

But nothing lasts forever.  Especially in the financial markets, where things tend to move in a cyclical nature over long periods of time.  To illustrate this point with a random, yet related example, consider Figure 2 which displays the yield on 30-year treasury bonds since 1942.

Figure 2 – 30-year treasury bond yield (1942-2020) (Courtesy: www.StockCharts.com)

Since the early 1980’s, investors have been nicely rewarded for holding bonds – especially long-term bonds.  But from the mid 1950’s into 1980 the experience was much different (rising yields equate to lower bond prices).  Presumably someday rates will rise again and an entire generation of bond investors will have no idea what is happening to their investments (see hereherehere and here).  But for now, we are focusing on inflation.

How to Know When to Worry About Inflation

I’ll give you three things to follow. 

#1. Gold

In a recent paper co-authored by legendary trader Paul Tudor Jones (see here) the authors laid out the case for higher inflation in the years ahead and suggested gold bullion could reach $2,400 an ounce.  Is this a possibility?  Absolutely. 

Figure 3 displays from 2005 through 2012:

*ticker GLD (an ETF that tracks the price of gold bullion)

*my own index called ANTIGLD3 (components highlighted on right) with a Front Weighted Moving Average and a 55-week exponential moving average)

The ANTIGLD3 Index is a contrarian trend-following tool, i.e., when this index is in a downtrend it is bullish for gold and vice versa.

Figure 3 – Ticker GLD versus Jay’s ANTIGLD3 Index (2005-2012) (Courtesy AIQ TradingExpert)

Figure 4 displays the same tickers from 2012 into 2020

Figure 4 – Ticker GLD versus Jay’s ANTIGLD3 Index (2012-2020) (Courtesy AIQ TradingExpert)

The key thing to note in Figure 4 is that after several years of whipsaws the two trend-following indicators applied to ANTIGLD3 are in a clear downtrend (since this is a contrarian index that means it is purportedly bullish for gold). 

So, is it off to the races for gold?  I can’t say for sure. But it appears to be trying. Also note that gold can rally significantly in price for reasons other than inflation (see 2005-2011 rally)

I have positions in gold and gold stocks but not huge ones.  For whatever reason, so far, I am “not feeling it.”  As you will see in a moment, some inflation trend-following “things” that I watch have yet to confirm that inflation is an imminent threat at this exact moment.

But I am holding my positions just in case gold itself is the actual “leading indicator” in this story.

#2. The Aussie Dollar versus its 24-month moving average

I covered this in detail here so will not get too in-depth here.  But you can get the gist of it pretty simply from Figure 5. The top chart is ticker FXA with a 24-month exponential moving average and the bottom chart is ticker GSG which tracks the Goldman Sachs Commodity Index.

Figure 5 – Ticker FXA (top) and ticker GSG (bottom) (Courtesy AIQ TradingExpert)

Long story short, commodities – or “hard assets”, are typically a good place to be during a period of sharply rising and/or high inflation – perform better when FXA is in an uptrend (i.e., above the 24-month EMA) than when below.  As of early July FXA has just moved above its 24-month EMA.  For the record, I usually only consider this at month-end.  So, check back after 7/31. 

If FXA establishes an uptrend, the likelihood of higher prices for commodities – including gold – rises. Thus, an uptrend for FXA would be another potential warning sign of impending inflation.

#3. TIPs versus Long-Term Treasuries

TIPs bonds are Treasury Inflation Protected securities, i.e., the principal can rise as inflation (based on the Consumer Price Index) rises (see here).  In other words, a TIP bond can gain value as inflation rises. Long-term treasuries on the other hand are the securities most likely to get hurt by a rise in inflation (as the rate of return is fixed once you buy the bond and a rise in inflation can reduce the future value and/or purchasing power of that fixed return). 

So, in a low inflationary period we typically see TIPs fall relative to long-term treasuries and during rising inflation we would expect to see TIPS rise relative to long-term bonds. 

Figure 6 displays the chart of ticker TIP relative to ticker TLT on a weekly basis (with a 200-wekk moving average) from www.StockCharts.com.

Figure 6 – Ticker TIP relative to ticker TLT (weekly) still trending lower (Courtesy: www.StockCharts.com)

The bottom line: While gold itself is attempting to breakout to the upside and the Aussie Dollar is trying to establish an uptrend, the TIP:TLT relationship is not presently indicating any meaningful inflationary concerns. 

Summary

Inflation has been low for about 35 years.  But as they say, “don’t go to sleep on it.” 

If you want to be objectively prepared, keep an eye on:

*Gold bullion (in an uptrend, confirmed by a downtrend in my “anti-gold index”)

*The Aussie Dollar (No trend at the moment, but trying to establish an uptrend)

*Ticker TIP versus ticker TLT (Nowhere close to an uptrend right now)

So one up, one down and one sideways.  But pay close attention going forward.

If and when all three establish uptrends, the game we’ve all been playing for several decades will likely change dramatically.

See also Jay Kaeppel Interview in July 2020 issue of Technical Analysis of Stocks and Commodities magazine

See also Jay’s “A Strategy You Probably Haven’t Considered” Video

See also Video – The Long-Term…Now More Important Than Ever

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.

Financials – Danger or Opportunity? Or Both?

To say that there is has been and remains a great deal of angst in the financial markets is a bit of an understatement. This is especially true when it comes to the financial sector.  The financial sector has a fairly high correlation to treasury yields (ticker FSRBX – Fidelity Select Banking Portfolio has a 0.52 correlation to ticker TNX – which tracks 10-year treasury yields).  As yields have plummeted so has the financial sector.  During the recent decline, FSRBX plunged -51% from its December 2019 peak.  With little expectation of higher rates anytime soon a lot of investors are understandably wary of diving into this sector.

But much like with the energy sector, the old adage that the time to buy is when there is “blood in the streets”, should give one pause before they turn their back completely on the financial sector.  For the time being I am keeping my eye on a little-known indicator called “Vixfixaverageave” (yes, I agree it is a really bad name).  The calculations for this indicator appear at the end of this article.  The reason I am watching it right now is that it recently reached a very oversold level that has helped to highlight some useful buying opportunities for financials in the past.

Ticker FSRBX

Figure 1 displays a monthly chart for FSRBX in the top clip and the Vixfixaverageave indicator in the bottom clip.  Note that the indicator rose above 72 at the end of April 2020.  As you can see there have been four previous occasions when this indicator, a) exceeded 72 and then b) reversed lower for one month.  For arguments sake we will call that a buy signal.

Figure 1 – Ticker FSRBX with indicator Vixfixaverageave (Courtesy AIQ TradingExpert)

Figure 2 displays the 1 to 5 year % + (-) for FSRBX following the four previous signals.  As you can see, they all proved to be exceptional buying opportunities.

Figure 2 – FSRBX returns 1 to 5 years after signal

Now for the disappointing news: if you are thinking that all we have to do is wait for this indicator to finally top out and that big profits are “guaranteed” to roll in, you are making a mistake.  As they say, “past performance is no guarantee of future results.”  (Sorry, I don’t make the rules).  So, when the Vixfixaverageave monthly reading for FSRBX does finally roll over, the proper course of action would be to:

*Decide if you really want to act based on the signal

*Decide how much capital you are willing to commit

*Decide how much of that capital you are actually willing to risk – i.e. will you stop out if a loss exceeds x%, or do you plan to simply hold it for 1 to 5 years regardless?

Summary

There are a million and one ways to trigger an entry signal.  The one discussed herein is just one more.  What really separates the winners from the losers is the answers to the three questions just posed.

Vixfixaverageave Calculations 

EDITTORS NOTE: The code sections can be copied and pasted into AIQ EDS or you can download the indicator code in an EDS file from here and save it to your /wintes32/EDS Strategies folder.

This indicator is based on another indicator called VixFix which was developed many years ago by Larry Williams.

hivalclose is hival([close],22).  <<<<<The high closing price in that last 22 periods

vixfix is (((hivalclose-[low])/hivalclose)*100)+50. <<<(highest closing price in last 22 periods minus current period low) divided by highest closing price in last 22 periods (then multiplied by 100 and 50 added to arrive at vixfix value)

vixfixaverage is Expavg(vixfix,3). <<< 3-period exponential average of vixfix

vixfixaverageave is Expavg(vixfixaverage,7). <<<7-period exponential average of vixfixaverage

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.

The Ultimate Ugly Contrarian Play

They always say you should buy when there is “blood in the street.”  They also say, “buy them when nobody wants them.”  So, let’s consider today what could be the most unloved, bombed out, everybody hates it “thing” in the world – coal.

Ugh, just the mention of the word coal elicits a recoiling response.  “Dirty energy!”  “Climate change inducing filth!” “Ban coal!”.  And so and so forth.  And maybe they have a point.  But “they” also say “facts are stubborn things” (OK, for the record, I think it’s a different “they” who says that but never mind about that right now).

So here is a stubborn fact: coal supplies about a quarter of the world’s primary energy and two-fifths of its electricity.  As I write, two of the fastest growing economies (at least they were as of a few months ago) – China and India – are not only heavily reliant upon coal for energy, but are still building more and more coal-fired plants.  Now I am making no comment on whether this is a good thing or a bad thing but the point is, it most definitely is a “thing.”

So however one feels about coal, the reality is that it is not going to go away anytime soon.  Does this mean it will “soar in value” anytime soon – or even ever for that matter?  Not necessarily.  But as an unloved commodity it’s sure is hard to beat coal.  And as “they” (they sure are a bunch of know it all’s they?) say, “opportunity is where you find it.” 

Ticker KOL is an ETF that invests in coal industry related companies.  And what a dog it has been.  Figure 1 displays a monthly chart of price action.  Since peaking in June 2008 at $60.80 a share, it now stands at a measly $6.29 a share, a cool -89.6% below its peak.  And like a lot of things it has been in a freefall of late.

Figure 1 – Ticker KOL Monthly chart (Courtesy AIQ TradingExpert)

So, is this a great time to buy KOL?  That’s not for me to say.  But for argument’s sake, Figure 2 displays a weekly chart of KOL with an indicator I call Vixfixaverageave (I know, I know), which is a version of an indicator developed a number of years ago by Larry Williams (Indicator code is at the end of the article).

Figure 2 – KOL weekly chart with Vixfixaverageave indicator (Courtesy AIQ TradingExpert)

Note that Vixfixaverageave is presently above 90 on the weekly chart.  This level has been reached twice before – once in 2008 and once in 2016.  Following these two previous instances, once the indicator actually peaked and ticked lower for one week, KOL enjoyed some pretty spectacular moves. 

To wit:

*Following the 12/19/08 Vixfixaverageave peak and reversal KOL advanced +252% over the next 27.5 months

*Following the 2/19/16 Vixfixaverageave peak and reversal KOL advanced +182% over the next 23.5 months

When will Vixfixaverageave peak and reverse on the weekly KOL chart?  There is no way to know.  One must just wait for it to happen.  And will it be time to buy KOL when this happens?  Again, that is not for me to say.  None of this is meant to imply that the bottom for KOL is an hand nor that a massive rally is imminent.

Still, if there is anything at all to contrarian investing, its hard to envision anything more contrarian that KOL.

Vixfixaverageave Calculations

hivalclose is hival([close],22).  <<<<<The high closing price in that last 22 periods

vixfix is (((hivalclose-[low])/hivalclose)*100)+50. <<<(highest closing price in last 22 periods minus current period low) divided by highest closing price in last 22 periods (then multiplied by 100 and 50 added to arrive at vixfix value)

vixfixaverage is Expavg(vixfix,3). <<< 3-period exponential average of vixfix

vixfixaverageave is Expavg(vixfixaverage,7). <<<7-period exponential average of vixfixaverage

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.

Thoughts on the Energy Sector (just in case we ever leave our homes again)

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.

Figure 1 – Ticker TAN (Courtesy AIQ TradingExpert)

Ticker UGA

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.

Figure 2 – Ticker UGA (Courtesy AIQ TradingExpert)

Ticker XLE

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.

Figure 3 – XLE (Courtesy ProfitSource by HUBB)

Ticker PAGP

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.

Figure 4 – Ticker PAGP (Courtesy ProfitSource by HUBB)

Summary

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.

Houston, We Have a Parabola

Everybody likes it when an asset that they hold goes up in price.  In fact, the more the better.  But only to a point as it turns out.  When price gets carried away to the upside – we trader types typically refer to it as a “going parabolic”, i.e., a situation when prices are essentially rising straight up – it almost invariably ends very badly.  We have seen a couple of examples recently.

Palladium

Palladium is a metal that according to Bloomberg’s “About 85% of palladium ends up in the exhaust systems in cars, where it helps turn toxic pollutants into less-harmful carbon dioxide and water vapor. It is also used in electronics, dentistry, medicine, hydrogen purification, chemical applications, groundwater treatment, and jewelry. Palladium is a key component of fuel cells, which react hydrogen with oxygen to produce electricity, heat, and water.”

And it was pretty hot stuff for some time.  At least until it wasn’t.  As a proxy we will look at the ETF ticker symbol PALL, which attempts to track the price of palladium. 

*From January 2016 into January 2018, PALL rose +139%

*In the next 7 months it declined by -26%

*And then the fun really began – Between August 2018 and February 2020 PALL rose +245%, with a +110% gain occurring in the final 5+ months of the advance

What a time it was.  Until it wasn’t anymore.

Since peaking at $273.16 a share on 2/27/2020, PALL plunged -50% in just 12 trading days.  To put it another way, it gave back an entire year’s worth of gains in just 12 trading days.

Was there any way to see this coming?  Maybe. In Figure 1 we see a monthly chart with an indicator called “RSI32” in the bottom clip.  This indicator is derived by taking the 2-month average of the standard 3-month Relative Strength Index (RSI). 

Figure 1 – PALL with RSI32 (Courtesy AIQ TradingExpert)

Notice that historically when the RSI32 indicator gets above 96, trouble tends to follow pretty quickly.  See Figure 2

Figure 2 – PALL: Peaks in RSI32 and the subsequent maximum drawdown (Courtesy AIQ TradingExpert)

T-Bonds

During the panic sell-off in the stock market in recent weeks, treasury bonds became very popular as a “safe haven” as investors piled out of stocks and into the “safety” of U.S. Treasuries.  What too many investors appeared to forget in their haste was that long-term treasury can be extremely volatile (for the record, short and intermediate term treasuries are much less volatile than long-term bonds and are much better suited to act as a safe haven).  Likewise – just an opinion – buying a 30-year bond paying 1% per year is not entirely unlike buying a stock index fund when the market P/E Ratio is over 30 – there just isn’t a lot of underlying value there. So you are essentially betting on a continuation of the current trend and NOT on the ultimate realization of the underlying value – because there really isn’t any.

Anyway, Figure 3 displays a monthly chart of ticker TLT – an ETF that tracks the long-term treasury – with the RSI32 indicator in the bottom clip. 

Figure 3 – TLT with RSI32 (Courtesy AIQ TradingExpert)

Bond price movement is typically not as extreme and volatile as Palladium, so for bonds a RSI32 reading above 80 typically indicates that potential trouble may lie ahead. 

As of the close of 3/17/20, TLT was almost -15% off of its high in just 6 trading days. We’ll see where it goes from here.

Tesla (Ticker TSLA)

Anytime you see what is essentially a manufacturing company – no matter how “hot”, “hip”, or “cool” the product they build – go up 200% in 2 months’ time, the proper response is NOT giddy delight.  The proper response is:

*If you DO own the stock, either set a trailing stop or take some profits immediately and set a trailing stop for the rest

*If you DO NOT own the stock, DO NOT allow yourself to get sucked in

Take TSLA in Figure 4 for instance. By February 2020 TSLA was up almost 200% in 2 months and almost 450% in 8 months.  The RSI32 indicator was above 96 – a stark warning sign. 

19 trading days after making its closing high, TSLA is down -59%.

Figure 4 – TSLA with RSI32 (Courtesy AIQ TradingExpert)

Summary

Simply remember this.  Parabolic price moves are:

*Exciting while they are unfolding

*Disastrous when they end

Typically, the security in question gives back months – or in some case, years – worth of gains in a shockingly short period of time.

Beware the parabola.

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.

March and April to the Rescue?

Well that got ugly quick.  For the record, if you have been in the markets for any length of time you have seen this kind of action plenty of times.  An index, or stock, or commodity or whatever, trends and trends and trend steadily and relentlessly higher over a period of time.  And just when it seems like its going to last forever – BAM.  It gives back all or much of its recent rally gains very quickly.  Welcome to the exciting world of investing.

I make no claims of “calling the top” – because I never have actually (correctly) called one and I don’t expect that I ever will.  But having written Part I and Part II of articles titled “Please Take a Moment to Locate the Nearest Exit” in the last week, I was probably one of the least surprised people at what transpired in the stock market in the last few sessions. 

Of course the question on everyone’s lips – as always in this type of panic or near panic situation – is, “where to from here?”  And folks if I knew the answer, I swear I would tell you.  But like everyone else, I can only assess the situation, formulate a plan of action – or inaction, as the case may be – and act accordingly.  But some random thoughts:

*Long periods of relative calm followed by extreme drops are more often than not followed by periods of volatility.  So, look for a sharp rebound for at least a few days followed by another downdraft and so on and so forth, until either:

a) The market bottoms out and resumes an uptrend

b) The major indexes (think Dow, S&P 500, Nasdaq 100, Russell 2000) drop below their 200-day moving averages.  As of the close on 2/25 both the Dow and the Russell 2000 were below their 200-day moving average.  That would set up another a) or b) scenario.

If the major indexes break below their long-term moving averages it will either:

a) End up being a whipsaw – i.e., the market reverses quickly to the upside

b) Or will be a sign of more serious trouble

The main point is that you should be paying close attention in the days and weeks ahead to the indexes in Figure 1.

Figure 1 – Major indexes with 200-day moving averages (Courtesy AIQ TradingExpert)

One Possible Bullish Hope

One reason for potential optimism is that the two-month period of March and April has historically been one of the more favorable two-month periods on an annual basis.  Figure 2 displays the cumulative price gain achieved by the S&P 500 Index ONLY during March and April every year since 1945.  The long-term trend is unmistakable, but year-to-year results can of course, vary greatly.

Figure 2 – S&P 500 cumulative price gain March-April ONLY (1945-2019)

For the record:

S&P 500 March-AprilResult
Number of times UP55 (73%)
Number of times DOWN20 (27%)
Average UP%+5.0%
Average DOWN%(-3.4%)

Figure 3 – Facts and Figures

Will March and April bail us out?  Here’s hoping.

As an aside, this strategy is having a great week so far.

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.

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

To put this piece in context please refer to Part I here.

Part I detailed the Good News (the stock market is still very much in a bullish trend and may very well continue to be for some time) and touched on one piece of Bad News (the market is overvalued on a long-term valuation basis).

The Next Piece of Bad News: The “Early Lull”

In my book, Seasonal Stock Market Trends, I wrote about something called the Decennial Pattern, that highlights the action of the stock market in a “typical” decade. 

The Four Parts of the “Typical Decade” are:

The Early Lull: Market often struggles in first 2.5 years of a decade

The Mid-Decade Rally: Market typically rallies in the middle of a decade – particularly between Oct 1 Year “4” and Mar 31 Year “6”

The 7-8 Decline: Market often experiences a sharp decline somewhere in the Year “7” to Year “8” period

The Late Rally: Market often rallies strongly into the end of the decade.

Figure 1 – 1980-1989 (Courtesy AIQ TradingExpert)

Figure 2 – 1990-1999 (Courtesy AIQ TradingExpert)

Figure 3 – 2000-2009 (Courtesy AIQ TradingExpert)

Figure 4 – 2010-2019 (Courtesy AIQ TradingExpert)

We are now in the “Early Lull” period.  This in no way “guarantees” trouble in the stock market in the next two years.  But it does offer a strong “suggestion”, particularly when we focus only on decades since 1900 that started with an Election Year (which is where we are now) – 1900, 1920, 1940, 1960, 1980, 2000.

(See this article for a more detailed discussion)

As you can see in Figures 5 and 6, each of these 6 2.5-year decade opening periods witnessed a market decline – -14% on average and -63% cumulative.  Once again, no guarantee that 2020 into mid 2022 will show weakness, but….. the warning sign is there

Figure 5 – Dow price performance first 2.5 years of decades that open with a Presidential Election Year (1900-present)

Figure 6 – Cumulative Dow price performance first 2.5 years of decades that open with a Presidential Election Year (1900-present)

Summary

Repeating now: the trend of the stock market is presently “Up”. 

Therefore:

*The most prudent thing to do today is to avoid all of the “news generated” worry and angst and enjoy the trend. 

*The second most prudent thing to do is to acknowledge that this up trend will NOT last forever, and to prepare – at least mentally – for what you will do when that eventuality transpires, i.e., take a moment to locate the nearest exit.

Stay tuned for Part III

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.