Category Archives: market timing

Where We Are

back testing, educational newsletters, jay kaeppel, market timing,

One of the best pieces of advice I ever got was this: “Don’t tell the market what it’s supposed to do, let the market tell you what you’re supposed to do.”

That is profound.  And it really makes me wish I could remember the name of the guy who said it.  Sorry dude.  Anyway, whoever and wherever you are, thank you Sir.

Think about it for a moment.  Consider all the “forecasts”, “predictions” and “guides” to “what is next for the stock market” that you have heard during the time that you’ve followed the financial markets.  Now consider how many of those actually turned out to be correct.  Chances are the percentage is fairly low.

So how do you “let the market tell you what to do?”  Well, like everything else, there are lots of different ways to do it.  Let’s consider a small sampling.

Basic Trend-Following

Figure 1 displays the Dow Industrials, the Nasdaq 100, the S&P 500 and the Russell 2000 clockwise form the upper left.  Each displays a 200-day moving average and an overhead resistance point.

1

Figure 1 – Dow/NDX/SPX/RUT (Courtesy AIQ TradingExpert)

The goal is to move back above the resistance points and extend the bull market.  But the real key is for them to remain in an “uptrend”, i.e.,:

*Price above 200-day MA = GOOD

*Price below 200-day MA = BAD

Here is the tricky part.  As you can see, a simple cross of the 200-day moving average for any index may or may not be a harbinger of trouble.  That is, there is nothing “magic” about any moving average.  In a perfect world we would state that: “A warning sign occurs when the majority of indexes drop below their respective 200-day moving average.”

Yet in both October 2018 and May 2019 all four indexes dropped below their MA’s and still the world did not fall apart, and we did not plunge into a major bear market.  And as we sit, all four indexes are now back above their MA’s.  So, what’s the moral of the story?  Simple – two things:

  1. The fact remains that major bear markets (i.e., the 1 to 3 year -30% or more variety) unfold with all the major averages below their 200-day moving averages.  So, it is important to continue to pay attention.
  2. Whipsaws are a fact of life when it comes to moving averages.

The problem then is that #2 causes a lot of investors to forget or simply dismiss #1.

Here is my advice: Don’t be one of those people.  While a drop below a specific moving average by most or all the indexes may not mean “SELL EVERYTHING” now, it will ultimately mean “SEEK SHELTER” eventually as the next major bear market unfolds.  That is not a “prediction”, that is simply math.

The Bellwethers

I have written in the past about several tickers that I like to track for “clues” about the overall market.  Once again, nothing “magic” about these tickers, but they do have a history of topping out before the major averages prior to bear markets.  So, what are they saying?  See Figure 2.

2

Figure 2 – SMH/Dow Transports/ZIV/BID (Courtesy AIQ TradingExpert)

The bellwethers don’t look great overall.

SMH (semiconductor ETF): Experienced a false breakout to new highs in April, then plunged.  Typically, not a good sign, but it has stabilized for now and is now back above its 200-day MA.

Dow Transports: On a “classic” technical analysis basis, this is an “ugly chart.” Major overhead resistance, not even an attempt to test that resistance since the top last September and price currently below the 200-day MA.

ZIV (inverse VIX ETF): Well below it’s all-time high (albeit well above its key support level), slightly above it’s 200-day MA and sort of seems to be trapped in a range.  Doesn’t necessarily scream “SELL”, but the point is it is not suggesting bullish things for the market at the moment.

BID (Sotheby’s – which holds high-end auctions): Just ugly until a buyout offer just appeared.  Looks like this bellwether will be going away.

No one should take any action based solely on the action of these bellwethers.  But the main thing to note is that these “key” (at least in my market-addled mind) things is that they are intended to be a “look behind the curtain”:

*If the bellwethers are exuding strength overall = GOOD

*If the bellwethers are not exuding strength overall = BAD (or at least not “GOOD”)

A Longer-Term Trend-Following Method

In this article I detailed a longer-term trend-following method that was inspired by an article written by famed investor and Forbes columnist Ken Fisher.  The gist is that a top is not formed until the S&P 500 Index goes three calendar months without making a new high.  It made a new high in May, so the earliest this method could trigger an “alert” would be the end of August (assuming the S&P 500 Index does NOT trade above it’s May high in the interim.

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 Bartometer June 9, 2019

chart patterns, educational newsletters, expert system, indexes, market timing,

Hello Everyone,


The major stock indexes fell about 5% in May and rebounded most of the loss in June so far in one week. Source: CNBC.com

CURRENT EVENTS INFLUENCING MARKET MOVEMENT:

Stocks fell because of the Chinese and the 5% Mexican tariff announcement. There will probably be a positive announcement on the Mexican tariff front as tariffs will hurt our economy and the auto industry. In a positive development, Fed officials said they would be open to reducing interest rates if the tariffs weaken the economy. The current interest rate on the ten-year bond has dropped from 3.2% on the ten-year bond to about 2.10% now just in roughly six months. The affordability of buying a new house has gotten much better.

Trump will do what he can to shore up the economy, and if the markets fall, he is keenly aware of stemming any significant decline in the stock market as he wants to be reelected. The jobs report was a little weaker than was expected; that is why the Fed may reduce interest rates to keep the economy on an upward trajectory consistent with a 2-3% per year growth in the GDP. Overall, I am still positive on the economy unless full tariffs are enacted on the Mexican and the Chinese economies.

If they are expanded to the 25% fully enacted, I will be getting more cautious on the economy and the stock markets.

INTEREST RATE SCENARIO

The Federal funds rate is about 50 basis points or half of 1% higher than the two and five year Treasury Notes and has historically indicated that a recession is looming. The next few months will indicate whether the economy will soften. At this point, I don’t think it will decline as much as to go into recession, but there are still risks. Trump will determine what will happen to the economy. If the tariff situation is resolved, then I think the economy will still be in a growth phase, but if the tariffs are not resolved and get worse, the risks of a recession will increase dramatically.

MARKET RECAP:

Last month on my May 5th Bartometer I said that if the S&P 500 closes below 2,886 I will get VERY CAUTIOUS and It did. After that, it proceeded to 2,740 a drop OF 5%, AND my computer models gave a BUY signal ON 6/5/19, the big up day at 2,800, and it rallied to an intraday high of 2,885.85 and closed at 2875. Even though we are on the BUY-HOLD signal, I would like the S&P 500 to break out of 2886, preferably the 2,893 level and stay there for 2 to 3 days for me to believe the rally can approach the old highs of 2,954. See the charts for an explanation.

Index Averages

Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until June 7, 2019.

*Dow Jones +12.50%
S&P 500 +15.60%
NASDAQ Aggressive growth +17.50%
I Shares Russell 2000 ETF (IWM) Small cap +12.97%
International Index (MSCI – EAFE ex USA) +9.97%
Moderate Mutual Fund +8.20%
Investment Grade Bonds (AAA) +7.03% +2.64%
High Yield Merrill Lynch High Yield Index +7.39% +4.26%
Floating Rate Bond Index +4.90% +2.60%
Fixed Bond Yields (10 year) +2.10% Yield 2.63%

The average Moderate Fund is up 8.2% this year fully invested as a 60% in stocks and 40% in bonds.

If interest rates are peaking and look to be flattening or declining over the next year then investment grade or multisector bonds technically might be better than floating rate bonds. But diversification is important.

The S&P 500

Source: AIQ Systems

The S&P is above. Last month AIQ gave a SELL signal on April 18th but I went to a VERY CAUTIOUS the close below 2,886. The S&P dropped 5% after it closed below 2,886.

My models went to a BUY signal at 2,800 on 6/05/2019 the S&P now we are right back up to 2,875. Where do we go from here? If the 2,893 level can be broken on the Upside which I think it can and stay there for 2-3 days , then the S&P should approach its old high of 2,954 it hit on May 1, 2019. Notice the graph below the S&P. This chart is the SK-SD stochastics, it is breaking out on the upside and it shows the market is oversold and could continue to rally.

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 a 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 2865, 2811, 2740, and 2683 areas. These might be BUY areas.
  • Support levels on the NASDAQ are 7704, 7414, 7291, and 7171.
  • On the Dow Jones support is at 25,943, 25739, 25,538 and 25,376. These may be safer areas to get into the equity markets on support levels slowly.
  • RESISTANCE LEVEL ON THE S&P 500 IS 2885. If there is a favorable tariff settlement, the market should rise short term.


THE BOTTOM LINE:


The S&P 500 is right at the point where it needs to break out of 2,893. I am still Moderately Bullish on the market and think it will break out. My computer technical models are on a short term buy signal, so do I think the S&P will breakout above 2,954, the old high it hit on May 1, 2019? We will see, but if it approaches that level, it will be imperative to watch the 2,954 level to see if it turns down. I will be watching that level to see if it is a breakout. If it cannot, then I would become Cautious again.


Best to all of you,

Joe Bartosiewicz, CFP®
Investment Advisor Representative

5 Colby Way
Avon, CT 06001
860-940-7020 or 860-404-0408


Contact information:
SECURITIES AND ADVISORY SERVICES OFFERED THROUGH SAGE POINT FINANCIAL INC., MEMBER FINRA/SIPC, AND SEC-REGISTERED INVESTMENT ADVISOR.

Charts provided by AIQ Systems:

Technical Analysis is based on a study of historical price movements and past trend patterns. There is no assurance that these market changes or trends can or will be duplicated shortly. It logically follows that historical precedent does not guarantee future results. Conclusions expressed in the Technical Analysis section are personal opinions: and may not be construed as recommendations to buy or sell anything.


Disclaimer: The views expressed are not necessarily the view of Sage Point Financial, Inc. and should not be interpreted directly or indirectly as an offer to buy or sell any securities mentioned herein. Securities and Advisory services offered through Sage Point Financial Inc., Member FINRA/SIPC, and 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 indifferent 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.


Just how much influence a President has on the stock market

chart patterns, indexes, market timing

I often wondered just how much influence a President has on the stock market and found this interesting chart from Macrotrends. 

In the first 21 months from their inauguration you can see the top 10 performing Presidents. Who would have thought Gerald Ford would be so far up the list. Of course geopolitical events and prior President and Congress actions also take time to percolate into the market. 

Obama came into office soon after the 2008 financial crisis unemployment near 9% in 2009 and Ford after the oil crisis and Nixon. There are of course many other influencing factors, but a good rule of thumb In economic terms, the first year or so of any administration is just a carryover from the previous administration.

Probably the most significant contributor for the last decade has been the Federal Reserve chairs who have kept short-term rates low, while driving longer-term rates down by buying up $4.5 trillion of US government bonds and mortgage-backed securities. Lower returns has driven many investors into riskier assets like Stocks and this has helped fuel the stock market run that began in March 2009 and continues today. 

Economics aside, the current correction, and yes we are still in corrective territory can be seen in this SPX monthly chart. The Fibonacci retracement drawn from the low of the February 2018 correction to the recent high shows we’re at or past the 38.2% level. The next significant level is at 50% level of around 2729.

NASDAQ dive

indexes, market timing, portfolio management, Stock trading
Working on some slides for a seminar last week, it was apparent that breadth indicators on the NASDAQ signaled a divergence from the price action of the market.
Looking specifically at AD Ind and HI/LO, although other breadth measures told the same tale.

The AD indicator explained

The Advance/Decline Indicator is an exponentially weighted average of the net advancing versus declining issues. With this indicator, the direction of the trend is of importance and not the actual value of the indicator. When the indicator is increasing, advances are outweighing declines, and when it is decreasing, there are more declining is­sues than advancing.
The  Advance/Decline Indicator is a breadth indicator very similar to the Advance/Decline Line.  However, this indicator tends to be more sensitive and at times will signal a move earlier than the Advance/Decline Line.
The breadth was telling us something was amiss from last week. Take a look at this chart of the NASDAQ clearly a divergence was in place before the downturn.
Today’s (10-10-18) 316 point drop in the NASDAQ a 4% drop and nearly 9% drop from the high is close to the 10% corrective point and some buyers may come in over the next few days and keep the decline in check or not.
The markets are down between 6 and 10% in 5 days. Keeping good stops is a must in your portfolio to protect you from the worst of this. Using trailing stops between 7 and 10 % on stocks that are moving and protective stops 5 to 7 % below initial investment for example can easily reduce your losses in these volatile markets.

When It All Becomes Too Obvious

educational newsletters, ETFS, indexes, jay kaeppel, market timing

Investors who pay close attention to the financial markets by and large spend a fair amount of time being “perplexed.”  If you take all the “news” related to the markets and combine that with all the day-to-day and week-to-week gyrations of the markets, there often seems to be no rhyme or reason for what goes on (hence the reason I generally advocate a slightly less hyper, more trend-driven approach).

But sometimes it all seems to come crystal clear.  In the most recent fortnight most of the major market averages (with the Dow and S&P 500 being the primary exceptions) have touched or at least teased new highs.  Facebook got crushed and the market didn’t tank.  Tesla struggled mightily before bursting back into the bright sunlight – and the market didn’t tank.  In fact, all kinds of things have happened and still the major U.S. averages march relentlessly higher backed by a strong economy, reasonably moderate inflation and higher, yet by no means high interest rates.

At this point, it appears “obvious” that there is no end in sight to the Great Bull Market.  A number of momentum studies I have read lately seem to all confirm that the U.S. market will continue to march higher to significantly higher new highs.

And the fact that it is so “obvious” scares the $%^& out of me.  Don’t misunderstand.  This is not about to devolve into a hysterical “Sell Everything!” screed.  The trend is bullish therefore so am I.  But the “what could possibly go wrong” antennae still pop up from time to time.  So here are some random views regarding all things stock market.

The Major Averages

Figure 1 displays 4 major U.S. market averages.  All are in uptrends above their respective 200-day moving averages and all are close to all-time highs.  The big question is “what happens when they get there?”  Do they all break through effortlessly?  Or do we get a “struggle?”

(click to enlarge)

1

Figure 1 – The Major U.S. Averages; clearly in up trends, but… (Courtesy AIQ TradingExpert)

Figure 2 displays my own 4 market “bellwethers”, including the semiconductors (SMH), Dow Transports (TRAN), Inverse VIX ETF (ZIV) and Sotheby’s Holdings (BID).  At the moment, none of these are actively “confirming” new highs and they each have a clear “line in the sand” resistance level overhead.  So, for the moment they presently pose something of a minor warning sign.

(click to enlarge)

2Figure 2 – Jay’s Market “Bellwethers”; stuck in “nowhere” (Courtesy AIQ TradingExpert)

While the U.S. economy and stock market appear to be hitting on all cylinders, the rest of the world is sort of “chugging along.”  Figure 3 displays 4 “Geographic Groups” that I follow – The Americas, Asia/Pacific, Europe and Middle East.  The good news is that each group is presently holding above it’s respective 21-month moving average.  So technically, the trend is “Up.”  But the bad news is that each group has some significant overhead resistance, so the current uptrend is by no means of the “rip roaring” variety.

(click to enlarge)

3

Figure 3 – Major Geographic Groups; Hanging onto uptrends but serious overhead resistance (Courtesy AIQ TradingExpert)

The VIX Index

Traders have been pretty much conditioned in recent years to assume that the VIX Index – which measures volatility and by extension, “fear” – is and will remain low as the market chugs higher.  And that may prove to be true.  But when everything gets to “obvious” (i.e., the U.S. market is “clearly” heading higher) and things get too quiet (VIX dropped below 11% for the 1st time in 3 months) it can pay to “expect the unexpected.”

Figure 4 is from www.sentimentrader.com and displays those instances in the past when the VIX Index fell below 11% for the first time in 3 months.  Historically, VIX makes some kind of an up move in the 2 to 3 months following such occurrences.

(click to enlarge)

4

Figure 4 – VIX Index performance after VIX Index drops below 11% for 1st time in 3 months (Courtesy Sentimentrader.com)

Things may or may not play out “like usual” this time around, however, given that…

*The U.S. averages are “obviously” heading higher

*The market bellwethers are so far not confirming

*The rest of the worlds stock markets are nowhere near as strong

*VIX has a history of “spiking”, especially during the seasonally unfavorable months of August and September

…It might make sense to consider a long volatility play (NOTE: Long volatility plays using ticker VXX have a long history of not panning out as ticker VXX is essentially built to go to zero – for more information on VXX and the effects of “contango” please see www.Google.com.  Long VXX trades are best considered).

One example appears in Figures 5 and 6.  This trade involves:

*Buying 5 Oct VXX 31 calls @ $2.74

*Selling 4 Oct VXX 36 calls @ $1.82

(click to enlarge)

5Figure 5 – VXX example trade particulars (Courtesy www.OptionsAnalysis.com)

(click to enlarge)

6

Figure 6 – VXX example trade risk curves (Courtesy www.OptionsAnalysis.com)

The maximum risk is $642 if VXX fails to get above the breakeven price of $32.28 by October 19th.  On the other hand, if something completely not “obvious” happens and volatility does in fact spike, the trade has significant upside potential.

(NOTE: As always, please remember that this is an “example” of a speculative contrarian trade, and NOT a “recommendation.”  If the stock market rallies – as it “obviously” seems to want to do, this trade will likely lose money.)

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.