Category Archives: stock market

Bartometer

educational newsletters, market timing, stock market, Stock trading

April 10, 2021

Hello Everyone,

The stock markets continue to rise over the last month with the Value sector leading the way. The energy, financial, airlines, cruise ship sector and more have followed right along the last few months as well. Over the short term the Value sector still looks good going forward with the recovery of the economy and the realization that the Covid 19 virus will soon subside. I still like the growth sector involving technology over the longer term, but the sector that should outperform shorter term as the economy is recovering is the value sector. On the Bartometer at the end of last year I thought the S&P 500 would hit 4200-4400. As of Friday the S&P was 4094. My AIQ Trading Expert and my other technical computer algorithms are still at a BUY-HOLD signal. Remember that this market is very overvalued and is selling at 24 times earnings, and is currently 21% overvalued based on earnings and interest rates.. Earnings growth has to be great for this market to continue higher.

Interest rates have climbed to the 1.7% level on the 10-year government bond. Bonds, in general, have fallen this year from 0-to 13%, with Floating rate bonds actually rising 2% in 2021. Floating rate bonds and variable interest rate bonds both pay a higher rate as interest rates rise. The interest rate rise over the short term should be more subdued based on Federal Chairman Reserve Powell’s testimony that he is dovish on interest rate rises. I believe over the longer term with the deficit continuing to rise that the market will push interest rates higher. I also believe that inflationary pressures will also push the need for interest rates to rise over the next year or two. Allocations for bonds in your portfolio should be more concentrated in shorter duration, and in the floating rate bond sector/ Treasury inflation-protected Strips or TIPS. Please call me to strategize your portfolio holistically.

Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until April 09, 2021.

Dow Jones +10.97%
S&P 500 +10.0%
EQUAL WEIGHTED S&P 500 +14%
NASDAQ Aggressive growth +7.58%
Large Cap Value +9.68%
I Shares Russell 2000 ETF (IWM) Small cap +13.34%
Midcap stock funds +14.0%
International Index (MSCI – EAFE ex USA +9%
International Emerging Markets +3.6%
Financial stocks +13%
Energy stocks +28%
Healthcare Stocks +.9% Moderate Mutual Fund Investment Grade Bonds (AAA) Long duration +5.1%
High Yield Merrill Lynch High Yield Index +1.4% Floating Rate Bond Funds +1.7%
Short Term Bond +.0%
Multi sector bond funds +.3% Gold -8.43% Long Term 20 year Bond fund -12% 10 year Bond Yield 1.62%

Classicalprinciples.com and Robert Genetskis Excerpts

Market Outlook

Stocks turned in a mixed performance this past week. The Nasdaq and QQQs had the biggest gains while the S&P500 and Dow rose to new all-time highs. In contrast, small-cap stocks fell ½%. Weekly moves show stocks rotating into and out of different areas, while the overall market trend continues to be positive.

The main force behind the upward move is a highly expansive Fed policy. Monetary stimulus creates a surplus of liquidity for stocks and ignited gains in business activity. This week’s sharp reversal in longer-term interest rates provided another spark for sending prices higher

The Biden Administration tried to discourage investors by proposing more destructive policies. Investors were not discouraged. Cautious statements by some Democrats are viewed as a possible barrier to the more these destructive policy proposals. The Fed continues to add kindling to the inflationary fire and promises it will continue to do so. Although longer-term interest rates moved lower this past week, implied inflation expectations remain high. The implied inflation expectation is currently 2.3%. It is measured by subtracting the inflation-adjusted 10-year T-bond yield from the actual 10-year T-bond yield.

Although core inflation rates remain very low, the bond market expects higher inflation. The market is more reliable. As for stocks, the gains in the S&P500 move the index to 21% above fundamental value.

Stocks are overextended and the risks of a reversal, or at least a leveling off, are rising. In spite of the heightened risks and the likelihood for some temporary setback, ongoing monetary stimulus has the potential to continue to drive stock prices higher.

Stock Valuation: S&P 500 21% Overvalued
Economic Fundamentals: Positive
Monetary Policy; Highly Expansive
.
Source: Classical Principles.com

S & P 500

The market weighted S&P 500 which weights the largest companies like Apple, Microsoft, Google and more. This index is up 10% in 2021. 500 of the largest stocks in the USA are in this index. If you look to thchart above you will see an ASCENDING CHANNEL. An ascending channel is Bullish and if it breaks out above the top of the channel it can signal a Continuation of the move higher. Many times the market will top out at the top of the channel, right where it is now. If it breaks down below the channel then it can signal a possible trend change. There is a definite channel trend here HIGHER. But could have a short term setback here.

The indicator below the price chart is the MACD, or momentum indicator has turned to the upside, See the pink line breaking out of the blue line, another Bullish signal

The bottom indicator is SD-SK Stochastics is now above the 88 line and clearing shows an overbought situation in the stock market. Even though the market indicators are BULLISH, and 21% overvalued, we have to be wondering when all of this upside will stop. I thought 4200 to 4400 on the S&P 500. That is a 2-7% move from here. It can go higher than that, we will see. Earnings are coming out and if they show a clear cut blowout in earnings then the market should continue higher, but we have to keep aware of the overvalued nature of the market.

Chart Source: AIQsystems.com

Support levels

S&P 500 4040, 3919, 3870, 3655.
NASDAQ 13,611, 13,472, 13012.
Dow Jones 33280, 29280
These may be safer areas to get into the equity markets on support levels slowly on the accumulation areas.

THE BOTTOM LINE:

The market continues to look ok albeit very overvalued based on earnings and interest rates. I still think the market could reach my 4200-4400 or higher before the end of the year or higher and the economy should be higher than where we are today. I am worried that interest rates over the next year or so will be higher than 2% on the ten-year bond. Markets usually have a more serious correction if the 10-year bond goes above 2.75% to 3%. We are far from that point. I still like Value stocks for the short term and growth for the mid to long term as growth stocks is where the real growth in the economy should be. The NASDAQ stocks have underperformed for the year but, if you are longer-term investors then have a mix of growth and Value stocks or funds. I have been suggesting a higher percentage of small and midcap value and growth funds over the last 5 months and now the smaller stocks are overvalued and a reduction of smaller stocks may be in order. In addition, the Price to Earnings in the market is over 24 times earnings, this indicates a much-overvalued market. If you are within a year of retirement you may want to take some profits if you made money and wait for a better entry. It all depends on your goals and risk tolerance.

Best to all of you,

Joe Bartosiewicz, CFP®
Investment Advisor Representative

Securities and advisory services offered through SagePoint Financial, Inc. (SPF), member FINRA/SIPC. SPF is separately owned and other entities and/or marketing names, products or services referenced here are independent of SPF. 800-552-3319 20 East Thomas Road Ste 2000 Phoenix AZ 85012

If you have any questions, please call me at 860-940-7020.
Joe Bartosiewicz, CFP®
92 High Street
Thomaston, CT 06787 and
7501 East MCDowell RD #2172 Scottsdale, AZ 85257

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.

The Bartometer

educational newsletters, indexes, market timing, stock market

November 14, 2020

Hello Everyone,

Well, the election is over and and if Trump doesn’t win the contested vote then Biden is President. My biggest concern going forward is the race in Georgia that could switch the control of the senate to the Democrats enabling them unchecked control in the government. If this happens, and Democrats get rid of the filibuster rule there could be volatily in the stock and bond markets because: It could increase taxes on corporations, raise capital gains taxes and estate taxes by reducing the couple estate tax exclusion from $11 million to $3.5 milllion.

If the Democrats don’t win then there will be gridlock, and gridlock meaning that many of the tax increases may not pass. We will see what happens on January 5th 2021. Currently my Technical Analysis computer is still on a Buy-Hold as of about a week to 2 weeks ago, but it changes daily.

The increases in the Covid 19 virus is again causing Governors in many states to restrict access to non-essential business. This will reduce earnings of many corporations but increase the earnings of technology companies that are benefitting by people using their goods and services from home. Once a safe and effective vaccine is created by either Pfizer or Moderna, and when people feel safe to travel/use the goods and services of non essential companies will they prevail. then the Value stocks, eg., the cruise lines, airlines, resorts, restaurants, retail, manufacturing, telecommunications and more should rise. Until that time, the market will be volatile.

We are now in a seasonally strong time for the stock markets, but with the overhang of the senate election in Georgia, and the increase in Covid 19 coupled with the upcoming Flu season, caution is still somewhat appropriate. For people who are more Cautious in general, but over the next 1-2 years I still think the market could go higher even though the market is about 6% overvalued mostly because of the technology stocks. When the pandemic is even close to nearing its conclusion, the Value sector should continue its rise. So, small, mid and large value stocks could be the bigger winner, and if we get a selloff because of Covid 19, I will be buying those sectors.

Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until Novemeber 14, 2020. These are passive indexes.

Dow Jones +5.1%
S&P 500 +12.2%
EQUAL WEIGHTED S&P 500 +3.1%
NASDAQ Aggressive growth +29%
Large Cap Value -3.0%
I Shares Russell 2000 ETF (IWM) Small cap +5.2%
Midcap stock funds -4.66
International Index (MSCI – EAFE ex USA +2%
Financial stocks -10%
Energy stocks -36%
Healthcare Stocks +11%

Moderate Mutual Fund Investment Grade Bonds (AAA) Long duration +6.5%
igh Yield Merrill Lynch High Yield Index +1.9%

Floating Rate Bond Funds -.60%
Short Term Bond +1.6%
Mutli sector bond funds +2.3%

I do expect potential major volatility over the next few months if the Republicans lose the Senate.

Classicalprinicples.com and Robert Genetskis Excerpts

Market Outlook

Stocks were mixed this past week. The previously out-of-favor small caps rose 3%-4%, when the Nasdaq and QQQs fell 2%-3%. The Dow and S&P500 gained 1%-2%. I expect stocks to continue to consolidate within the range of the past five months. Biden’s choice of advisors is interesting. His Chief of Staff was the one in charge of fighting Ebola. He admitted they had made every mistake imaginable in that fight. Another medical advisor says the country should lock down for 4-6 weeks and can simply pay workers and businesses for lost income. Just what Biden needs… another advisor with no concept of economics feeding him mush. It’s important to pay attention to Biden’s advisors. Their ideas can provide a clue to just how crazy things can get. Hopefully, cooler heads will prevent the chaos that would result from such complete nonsense.

A Look Back

The latest weekly data show the labor market continues to improve in spite of Covid. Initial unemployment claims fell to 709,000 in the first week of this month. This is down about 140,000 from the previous month. For the final week in October, the insured unemployment rate fell to 4.6%, down from 7.5% from the previous month. The number of people receiving insured unemployment payments fell to 6.8 million. There were close to 11 million a month ago.

What to expect this coming week

Look for the economic numbers to continue to show the economy performing well. Tuesday’s report for manufacturing in October should be a strong one. Business surveys show manufacturing production increasing dramatically in October. Hence, the Fed’s manufacturing number should be up substantially.

Source: Classical Principles.com

S&P 500 Chart Source: AIQsystems.com

The S&P 500 is above. As you can see my computer models gave a BUY signal on 10/30/20 and another one a couple days later. Another Bullish sign is when it broke above the middle of the W pattern. This is BULLISH unless it breaks down below that breakout. Now it has to breakout from the old high of 3648. If it does with conviction volume watch the 3750 area for some resistance. But it has to breakout from 3648 with a lot of volume first.

We are now in a bullish seasonal pattern for the market. One year from now I think the economy will do much better than it is now and the markets should be higher as well.

MACD or Momentum is still Bullish as the pink line has broken out of the blue line showing positive momentum.

Support levels on the S&P 500 area are 3546, 3392-3405, 3306 and 3244. 3143 is 200 Day Moving average
NASDAQ Support, 11621, 11300-11360, 11062. Resistance is 12075
These may be safer areas to get into the equity markets on support levels slowly on the accumulation areas.

THE BOTTOM LINE:

The market has rebounded nicely over the last month mainly because of earnings of companies beating expectations. The NASDAQ has done the best this year and should continue to do well IF the market continues higher. Now that the vaccine is a reality the value stocks should start to rise. You may want to call me to review everything including your 401(k) to determine the best allocation going forward. I like the USA market better than the international market.

Best to all of you,

Joe Bartosiewicz, CFP®
Investment Advisor Representative

92 High Street
Thomaston, CT 06787
860-940-7020

Securities and advisory services offered through SagePoint Financial, Inc. (SPF), member FINRA/SIPC. SPF is separately owned and other entities and/or marketing names, products or services referenced here are independent of SPF. 800-552-3319 20 East Thomas Road Ste 2000 Phoenix AZ 85012

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.



Good Companies, Troubled Stocks and Potential Opportunity

EDS, jay kaeppel, stock market, Stock trading, technical indicator

Truth be told I am not much of a “stock picker”. Oh, I can pick ‘em alright just like anyone else.  They just to don’t go the right way as often as I’d like.  I also believe that the way to maximize profitability is to follow a momentum type approach that identifies stocks that are performing well and buying them when they breakout to the upside (ala O’Neil, Minervini, Zanger, etc.) and then riding them as long as they continue to perform.  Unfortunately, I’m just not very good at it. 

Back when I started out, there was such a thing as a “long-term investor.”  People would try to find good companies selling at a decent price and they would buy them and hold them for, well, the long-term.  Crazy talk, right? As I have already stated, I am not claiming that that is a better approach. I am just pointing out that it was “a thing.”

An Indicator

There is an indicator (I will call it VFAA, which is short for vixfixaverageave, which – lets face it – is a terrible name) that I follow that was developed as an extension of Larry William’s VixFix Indicator.  There is nothing magic about it.  Its purpose is to identify when price has reached an exceptionally oversold level and “may” be due to rally.  The code for this indicator appears later.

For the record, I DO NOT systematically use this indicator in the manner I am about to describe, nor am I recommending that you do.  Still, it seems to have some potential value, so what follows is merely an illustration for informational purposes only.

The Rules

*We will look at a monthly bar chart for a given stock

*A “buy signal” occurs when VFAA reaches or exceeds 80 and then turns down for one month

*A “sell (or exit) signal” occurs when VFAA subsequently rises by at least 0.25 from a monthly closing low

Seeing as how this is based solely on monthly closes it obviously this is not going to be a “precision market timing tool.”

Some “Good Companies” with “Troubled Stocks”

So now let’s apply this VFAA indicator to some actual stocks.  Again, I AM NOT recommending that anyone use this approach mechanically.  The real goal is merely to try to identify situations where a stock has been washed out, reversed and MAY be ready to run for a while.

Ticker BA

Figure 1 displays a monthly chart for Boeing (BA) with VFAA at the bottom.  The numbers on the chart represent the hypothetical + (-) % achieved by applying the rules above (although once again, to be clear I am not necessarily suggesting anyone use it exactly this way). 

Figure 1 – Ticker BA with VFAA (Courtesy AIQ TradingExpert)

From March 2019 into March 2020 BA declined -80%.  It has since bounced around and VFAA has soared to 110.88.  VFAA has yet to rollover on a month-end basis, so nothing to do here except exhibit – what’s that word again – oh right, “patience.”

Ticker GD

Figure 2 displays a monthly chart for General Dynamics (GD) with VFAA at the bottom. 

Figure 2 – Ticker GD with VFAA (Courtesy AIQ TradingExpert)

Are these “world-beating numbers”?  Not really.  But in terms of helping to identify potential opportunities, not so bad. VFAA gave a “buy signal” for GD at the end of July. So far, not so good as the stock is down about -6%.

Ticker WFC

Figure 3 displays a monthly chart for Wells Fargo (WFC) with VFAA at the bottom. 

Figure 3 – Ticker WFC with VFAA (Courtesy AIQ TradingExpert)

There are not many “signals” but the ones that occurred have been useful. Between 2018 and 2020 WFC declined -65%.  It has since bounced around and VFAA has soared to 102.44.  VFAA has yet to rollover on a month-end basis. But at some point it will, and a potential opportunity may arise.

VFAA Formula

Below is the code for VFAA

VixFix is an indicator developed many years ago by Larry Williams which essentially compares the latest low to the highest close in the latest 22 periods (then divides the difference by the highest close in the latest 22 periods).  I then multiply this result by 100 and add 50 to get VixFix.

*Next is a 3-period exponential average of VixFix

*Then VFAA is arrived at by calculating a 7-period exponential average of the previous result (essentially, we are “double-smoothing” VixFix)

Are we having fun yet?  See code below:

hivalclose is hival([close],22).

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

vixfixaverage is Expavg(vixfix,3).

vixfixaverageave is Expavg(vixfixaverage,7).

VFAA = vixfixaverageave

EDITORS NOTE: The AIQ Expert Design Studio code for the indicator is available to download from here. Save this file to your /wintes32/EDS Strategies folder https://aiqeducation.com/VFAA.EDS

Summary

One thing to note is that VFAA “signals” on a monthly chart don’t come around very often.  So, you can’t really sit around and wait for a signal to form on your “favorite company”.  You have to look for opportunity wherever it might exist.

One last time let me reiterate that I am not suggesting using VFAA as a standalone systematic approach to investing. But when a signal does occur – especially when applied to quality companies that have recently been “whacked”, it can help to identify a potential opportunity.

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.

Quick Market update video

expert rating, expert system, market timing, stock market, technical indicator, Uncategorized

The Expert System in TradingExpert Pro gave a 1 – 99 down signal on the Dow Jones on 8-27-20. The market internals based on the advancing vs declining issue in the New York market continue to diverge from the market price action.

The phase indicator used to confirm Expert Ratings turned down on 8-31-20. We usually look for a phase confirmation of an Expert Rating to occur within 3 days of the rating.

The changes made in the constituents of the Dow 30 effective 8-31-20

  • Salesforce.com replaced Exxon Mobil, Amgen replacedd Pfizer and Honeywell replaced Raytheon Technologies.
  • The changes were due to Apple’s 4-for-1 stock split, which significantly reduced the indexes exposure to the information technology sector.
  • The Dow 30 is a price weighted index.

Dow 30 MACD picture – Dotcom vs Covid

indexes, market timing, stock market, technical indicator

You may have seen some of the articles out there analyzing the skewed nature of the current market rally. As Joe Bartosiewicz in his August 8 Bartometer pointed out:

“The Top 15 Stocks in the S&P 500 account in Market Value 35% of the entire S&P 500 stock market. The Bottom 420 Stocks in the S&P 500 account in Market Value 33.8% of the entire S&P 500 stock market. This means that 15 stocks are controlling the entire S&P 500..”

The Dow Jones 30 index uses a price weighted criteria as part of it’s calculation, and also includes Apple; AAPL has more than doubled in price in under 5 months.

Given that there appears to be only a small basket of stocks leading this rally, we had a look back at the last time tech related stocks were driving the market higher; the dotcom bubble that ran through the 90s into the early 00s.

Monthly DJIA and MACD – left through 3/2002 – right through 10/2002

The first chart is a monthly of the Dow 30 with MACD indicator comparing the market 03/29//2002 as the dotcom bubble rolled over vs 7 months later. Students of divergence analysis, will tell you that MACD in late March 2002 clearly showed prices should be much lower still despite the @33 % rally from the September 2001 low. By late October 2002 the market had fallen again by @33%. At that time the market was close to @40% lower than the high at the start of 2000.


Monthly DJIA and MACD – left through 3/2002 – right through 8/2020

The second chart is a monthly of the Dow 30 on the right through 8/10/20 vs the rally peak of 03/29/2002. The current market has had a @50% rally from the low at the end of March 2020. The original correction was @37% from high to low, slightly bigger than the dotcom correction. The MACD, similar to 2002, is strongly diverging.

The decline in 2002, after the rally, took prices lower than the the prior bottom. If a similar pattern happens this time and the decline is @40% from the high of 29568, the Dow would at the 17700 level.

Houston, We Have a Parabola

educational newsletters, indexes, jay kaeppel, stock market

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.

Bartometer March 8, 2020

educational newsletters, indexes, portfolio management, stock market, Uncategorized

Hello Everyone,

Over the last month the stock market has had one of its worst declines over the shortest periods of time in history. Not even did the 2008 declines beat the velocity of the declines we saw over the last month. In 2 days the NASDAQ fell over almost 11% because of the rightfully so, Corona Virus and its potential to not only kill people but mainly do disrupt the business process of selling and the supply lines to get product. Two things I do want to say is

1. You don’t base your long term financial goals based on a short term flu. 5 years from now this will be just another flu we had. People will have forgotten about it.

2. Over the last two months I have be saying to take profits as we were overvalued, I was getting Cautious with the Rising Wedge pattern and thought the S&P 500 would go to the 3280-3380 and top out. The S&P 500 topped at 3386 and fell through the trend lines to the 2900 area, down 13% from the 3380 level. As of this point I am still very Cautious, but looking for a bottom soon over the next 2 months.

This is why I do technical analysis. People can say that the Corona Virus did it, and it did contribute, but the market was positioning itself for a fall. I think the market will continue to be volatile and potentially fall more. With the outbreak just beginning the USA, the S&P should test the 2855 level it hit a week ago and either bounce from there but I feel it will probably break down below that and hit the 2600 to the 2750 level. There have only been less than 500 people who have gotten the tests. Once the US government opens the tests up to many more people there should be many many more people who have the virus. This will scare people to stop going out at restaurants, coffee shops, theatres, cruise ships, travel and more. It will take out a percentage out of the Gross Domestic Product, (GDP). It will probably cause the markets to fall another 5 to 10%+, but it will not kill Capitalism. It should only be a short term. Remember, if this is a flu where less than 1% of the people who contract it dies, then who are dying? The elderly and the sick who have immune problems. So protect yourself. Get the N95 masks on Amazon, get myricetin as a supplement people are recommending to build up your immune system. Talk to your doctor first. Call me to rearrange your portfolios with me and your 401(k). Remember too, this will pass, but I think we have more on the downside.

This is what’s happened over the last 20 years:

2000 Y2k is going to kill us all.

2001 Anthrax is going to kill us all.

2002 West Nile Virus is going to kill us all.

2003 SARS is going to kill us all.

2005 The Bird Flu is going to kill us all. 2008 The Great Recession is going to kill us all.

2010 BP Oil is going to kill us all.

2012 The Mayan Calendar is going to kill us all.

2013 North Korea is going to kill us all.

2014 Ebola is going to kill us all.

2015 Disney Measles and ISIS is going to kill us all.

2016 Zika virus is going to kill us all.

2020 Corona Virus is going to kill us all.

Now granted this is worse because it is a pandemic and it is worse than most of the others, not in life as we lose 30-60 thousand every year to the regular flu, but there is no vaccine yet, and it is creating FEAR. But mostly the FEAR is stopping people from spending money, this will cause the markets to fall. So FEAR is killing you. Protect yourself. Be smart. Use FEAR in the markets as an advantage. Over the last few months, go to the old Bartometers, I have been saying to take profits, the markets are too overbought, that we had a Rising Wedge formation that is a reversal pattern and I thought we could go down. Well now that that has happened, is the market a BUY yet? No, because I feel it will go down more, but it may bottom over the next month or two.

There may be buying opportunities that only come once every 10 years or so. With no guarantees, if the market goes below the 2855 level down to the 2600 level to the 2750 level you may want to call me for potential buying opportunities. Remember what Warren Buffet says, “ Buy when there is BLOOD in the STREETS” That’s when most make money over the long term, When Florida houses were plummeting in the 2008 recession, were there great BUYS? In the great recession, did stocks go so low that if you bought in early 2009 did you get unbelievable deals on stocks and funds? Yes… You make money in the bull markets by buying in the BEAR MARKETS. I am not saying to buy now but get your GREED hats on. You all need to contact me to discuss strategy now. Remember, can we go down more? YES and probably will. Can we go into a Recession because of this situation? Maybe and most likely, economists are giving it a 50-50% chance. Should you reduce equities more, possibly depending on your situation and how close you are to retirement? Last month I said to take money off the table because the markets were too high. Now it’s more of a shift between funds and change some of the bonds as if Oil keeps falling, you don’t want to have much in the High Yield Bond sector or Floating rate bond area. I am concerned, however, about the corporations continue to buy back their own shares while they are issuing debt to do it. This buying back of stock is building the asset bubble. This is one concern I have in addition Corona Virus.

An excerpt from Fundamental Economist Dr. Robert Genetski: from Classical Principles.com:
Stock Market Volatile as the Virus Gains

Investors switched from euphoria to fear and back several times this past week. When the dust settled, the Nasdaq, Nasdaq 100 and S&P 500 rose 1%-3% while small cap stocks fell 1%-2%.

The reason I recommend caution is related to the expectation of a sharp increase in the virus in the US. The US conducted only 473 tests through March 1. The number of tests will increase dramatically in the period ahead. More testing means more confirmed cases. The latest figures for the US show 226 cases.

Outside the US infections are growing at a rate of 20% a day. The rate of increase has slowed in Korea, but has increased dramatically in Italy and throughout Europe.

There is some good news. The daily rate of increase in China has slowed to less than 0.2% for the four days ending March 5th. Flexport, a global freight logistics company, reports that 60% of China’s manufacturing capacity is now back on line. Since US companies depend on China for critical supplies and medicines, the threat of shortages should soon be less pressing.
There was more good news this past week as surveys of business activity show the US economy remained remarkably strong in February. While various international companies are suffering greatly, recent indications show the US is weathering the storm well, at least through February. Amid the uncertainty over the spread of the virus in the US, it continues to make sense to be cautious about owning stocks.

Returns in 2020 Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until March 7, 2020. These are passive indexes.

*Dow Jones -8.9%
S&P 500 -8.2%
NASDAQ Aggressive growth -4.4%
I Shares Russell 2000 ETF (IWM) Small cap -12.84%
Midcap stock funds -12.54%
International Index (MSCI – EAFE ex USA -10.4% Moderate Mutual Fund Investment Grade Bonds (AAA) Long duration -4.70%
High Yield Merrill Lynch High Yield Index -3.7%

Floating Rate Bond Funds -2.4%
Short Term Bond +1.3%
Fixed Bond Yields (10 year) .76% Yield

The average Moderate Fund is down -4.70% 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 S&P 500 is above. I used a weekly chart as I think the S&P will fall below 2855 and possibly hit the following support levels for support.
2822, 2721-2747, 2600-2630, and 2340.

These are points that investors are looking at as a support levels. I think we have more to go on the downside. The Blue arrows are areas that listed to the left I think the S&P can go too.

The middle graph is the SK-SD stochastics. This shows a breakdown, Last month I said anything over the 88 level is overbought. It’s 21 to 48 on the Daily, now it’s getting OVERSOLD but can go down more.

The third graph is the Stochastics chart. Anything below 20 is showing the market is very oversold. But can still trend lower.

The Dow Jones is above. I drew the last three years and notice the that the 23576 is support right at the red line , but I believe the low will breakdown as it could test and breakdown and test its 200 week moving average at 23,587. If that doesn’t hold then the old lows of 21,734 are next.

This could be the capitulation investors are looking at to starting getting back into the markets. If this happens then there is a much greater chance that a Recession will occur. Please call me to Strategize your portfolio at 860-940-7020.

 Support levels on the S&P 500 area are 2822, 2721-2747, 2600-2630 and 2340. These might be accumulation areas if you are a Long term investor.
 Support levels on the NASDAQ are 7658 to 7715, 7303, and 6861.
 On the Dow Jones support is at 23,587 (200 week moving average), 21,734, 19,794 and 17,863
 These may be safer areas to get into the equity markets on support levels slowly.

THE BOTTOM LINE:
Now that the markets have broken down the trend line I explained last month. I am more Cautious on the markets. The Corona Flu will scare people and they will pull in their horns towards traveling, going out and this act alone can cause a Recession. The market is starting to become somewhat oversold but I still would no Buy here, but wait until the Corona Virus Fear is nearing the worst it could get. That could be over the next 2 months or so. I think the S&P 500 and the markets could continue to fall as energy is also going down.


Best to all of you,

Joe Bartosiewicz, CFP®
Investment Advisor Representative
Contact information:

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

March and April to the Rescue?

educational newsletters, jay kaeppel, market timing, seasonal, stock market, Uncategorized

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)

chart patterns, educational newsletters, indexes, jay kaeppel, market timing, stock market

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.

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

Bartometer November 11, 2019

educational newsletters, market timing, portfolio management, stock market

Hello Everyone,

Market Recap:

On my last Bartometer I stated that we were #1 On Buy signal, #2 the Dow Jones and the stock market had Bullish Ascending triangles patterns, #3. Money flow and On Balance Volume were breaking out to NEW HIGHS when the stock market wasn’t. This shows demand for stocks over and above the price. These 3 indicators were telling me and I was telling you that I thought the market would breakout to new highs, AND IT DID. The stock market broke out of the bullish ascending triangle, (see index on the next page about ascending triangles)*. On the S&P I said that it had to breakout of 3030 and it did. It is now 3093. I said the Dow Jones had to breakout of the 27400, and it did. It is now 27681.

Where does is go from here and could we get a little pull back?

See chart below for an explanation.

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

Stocks benefited from encouraging news of a potential trade agreement between the US and China as well as some good news on the economy. Markets seldom move in only one direction. The S&P500 is now within 3% of its fundamental value. A pause or even a slight correction is overdue, particularly if there is any negative news. Even so, with stronger fundamentals and the Fed purchasing securities, any correction should be fairly mild. Stay bullish on stocks.

Adding to Bob’s his Comment:

Signs of strength in the economy combined with gains in stock prices led to a sharp jump in intermediate and longer-term interest rates. This week the interest rate on 10-year T-Notes moved 25 basis points higher. The latest moves turned the yield curve to a more normal shape. As with stocks, interest rates have spiked higher and are overdue for some correction. However, after more than a decade of interest rates declining and being well below their fundamental levels, rates remain 200 basis points below fundamental levels. While the Fed’s low target places a limit on how high interest rates will go, there is still a lot of upward potential for longer-term rates. Fixed-income portfolios should remain defensive.

On the Technical Side:

Over the last almost 22 months, the Dow Jones FINALLY broke out to new highs from the old highs set on Jan 31, 2018 at 26,714. That is a POSITIVE. Money Flow and On Balance Volume are still at a new high, but the markets are again becoming overbought. So, could the market comes down a little now? YES, the markets are now overbought and there could easily be a slight decline to 27191 to 27298, a decline of around 2%, and the S&P to decline to 3029 area, a decline of 2% or so, BUT no more than that, because if the markets GO BACK BELOW THE BREAKOUT it can cause traders to start selling in mass. So look for a possible test of the breakout, but IF the markets close below the breakout of 27300 to 27384 on the Dow Jones or 3030 on the S&P convincingly, then I will be getting Very Cautious. If that doesn’t happen then I am still moderately bullish. But I realize the market are now OVERBOUGHT and in my opinion, it is not a time to go out and invest a lot of money in the markets. Dollar cost averaging is fine. I stated in my January Bartometer that I thought the S&P could reach 3130 to 3180+ this year. At 3093 currently, that is about 1-3% from here.

Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until November 9th, 2019. These are passive indexes.
*Dow Jones +20%
S&P 500 +24%
NASDAQ Aggressive growth +31%
I Shares Russell 2000 ETF (IWM) Small cap +19%
International Index (MSCI – EAFE ex USA) +16%
Moderate Mutual Fund +14%
Investment Grade Bonds (AAA) +13%
High Yield Merrill Lynch High Yield Index +11%
Floating Rate Bond Index +4.0%
Short Term Bond +4.0%
Fixed Bond Yields (10 year) +1.75.% Yield


The average Moderate Fund is up 14% this year fully invested as a 60% in stocks and 40% in bonds and nothing in the money market.

S&P 500

Ascending Triangle is above, and is Bullish as long as it stays above the breakout of 3027-3030

The S&P 500 is above. The S&P 500 contains 500 of the largest companies in the US. The 2 top companies by market value are Microsoft and Apple. But there are 498 other stocks in it. If you can see above the ASCENDING TRIANGLE that is BOLDED. Notice the clear breakout to new highs. This is clearly BULLISH like I thought would happen last month. And it did. Now that it has risen 2% ABOVE the breakout, a BREAKDOWN below the 3030 convincingly would get me VERY Cautious. It is normal to come back down to test the breakout, but not to break down below it. So if you see the S&P close below 3030 convincingly on heavy volume, I will be getting Cautious to Very Cautious depending on the reason. But the market is now at fair value to me and there may be another 1-4% more for the year in my opinion, but not much more unless there is incredible news from the Political or Tariff front. It is not a great time to go out and buy a lot in the stock market in my opinion as well.

The Middle graph is called the SK-SD Stochastics model. It shows the markets as being overbought when the indicator is above 88 where it is above the 88 horizontal line. Notice every time the indicator was above 88 it seemed to peak out and sell off. This is not guaranteed but it is good indicator.

The 3rd indicator is MACD or Momentum this indicator is still bullish until the pink line breaks down below the blue line. As of right now, momentum is still higher, but the markets are over bought, so be careful.

An ascending triangle is a chart pattern used in technical analysis. It is created by price moves that allow for a horizontal line to be drawn along the swing highs, and a rising trend line to be drawn along the swing lows. The two lines form a triangle. Traders often watch for breakouts from triangle patterns.

See the pattern above? It’s an Ascending triangle. Ascending triangles are BULLISH as long as they don’t go back below the breakout. If this is a successful Ascending triangle the S&P can rise to 3130-3180 first and possibly higher IF the breakout isn’t broken convincingly on the downside or breaking and closing below 3030.

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.

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.

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 3027-3030, 3017, 2952, 2922, and 2812. These might be BUY areas.
  • Support levels on the NASDAQ are 8251, 8144, 8080 and 7771.
  • On the Dow Jones support is at 26,285, 25,763, and 25,458
  • These may be safer areas to get into the equity markets on support levels slowly.
  • RESISTANCE LEVEL ON THE S&P 500 IS 3130 and the Dow Jones breakout is 27,400. If there is a favorable tariff settlement, the market should rise short term.

THE BOTTOM LINE:

The Dow, the S&P 500 and the NASDAQ are at new highs after rallying over the last 3 weeks. Normally the markets after reaching new highs become overbought and may come back down towards the breakout areas to see if the breakouts area holds. lf breakout of 3030 are holds then the markets tend to drift back towards the old high to see if it can break out again. If it does then 3130 to 3180 could be the next target. If 3030 doesn’t hold on the S&P and starts to break down below 3030 then I will be getting cautious or very cautious.. I WILL CONTINUE TO ANALYZE THE TECHNICALS OF THE MARKET. The seasonal patterns of the markets are bullish towards the end of the year. Last year the markets fell in December. It looks like the market still wants to go up, but with tweets coming out hourly, market timing will be more difficult.

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.

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.

Chart Patterns: Flag and Pennants

chart patterns, stock market, Uncategorized

By Steve Hill

President, AIQ Systems

Stephen Hill is President of AIQ Systems. For the past 15 years he has been involved in all aspects of AIQ Systems, from support and sales to programming and education. Steve is a frequent speaker at events in the U.S. and Europe, talking on subjects as diverse as Portfolio Simulation Techniques, Advanced Chart Pattern Analysis and Trading System Design.

Chart pattern analysis, often thought of as part science part art is a key element in many traders decision process. Common patterns like double tops and bottoms are somewhat self-fulfilling, given that most of us can see these patterns occurring. Measures of what consititues a double top or bottom in good analytical terms we’ll save for another article. In this this article we are focussing on two of my favorite chart patterns; Flags and Pennants

Flags and Pennants are Consolidation or Continuation Patterns

These patterns break out in the direction of the previous trend, confirming the existing trend, suggesting that investors are considering whether the market is overbought or oversold but ultimately deciding to confirm the existing trend. Flags and pennants are of two types, bullish or bearish

Flags and pennants are generally considered continuation patterns as they breakout in the prevailing trend direction. They represent a brief pause especially after a steep run up in an active ticker. They are a fairly common and useful for short term trading.

Bullish Flags – formation

Lower tops and lower bottoms bounded by two parallel trendlines with pattern slanting against the prevailing trend are considered bull flags (figure 1).


Figure 1. Bullish flag pattern

Bearish Flags – formation

Higher tops and higher bottoms bounded by two parallel trendlines with pattern slanting against the prevailing trend are considered bear flags. (figure 2).


Figure 2. Bearish flag pattern

Elements of bullish flags

  • A rapid and steep price rise of around 20% from bottom of the pole to top.
  • Decreasing volume during the formation of the flag.
  • Breakout occurs to the upside with resumption of increase volume levels
  • Flags length excluding the pole classic should be around 10 days, can be less but not more than 20 days.
Figure 3. Whole Foods Market, Inc (WFMI) bullish flag


Bulkowski noted that the high and tight flag performed best. (source Encyclodpedia of Chart Patterns by Thomas Bulkowski).
2Some 25% of the patterns are horizontal notes Markos Katsanos. (source Measuring Flags & Pennants: Technical Analysis of Stocks and Commodities vol 23 no 4)bullish flag breakout on increased volume note the pole length is 20% + of the price action and the diminishing volume on the flag.


Elements of bearish flags

  • A rapid and steep price decline of around 20% from top of the pole to bottom.
  • Decreasing volume during the formation of the flag.
  • Breakout occurs to the downside with resumption of increase volume levels.
  • Flag length excluding the pole should be around 10 days, can be less but not more than 20 days.

Figure 4 shows MNST classic bearish flag breakout on increased volume note the pole length is 20% + of the price action and the diminishing volume on the flag.

Bullish Pennants – formation

Pennants look very much like symmetrical triangles, on the end of a pole, typically they are smaller in size and duration (figure 5).

Bearish Pennants – formation

An upside down bullish pennant, the triangle is at the bottom of the pole. (figure 6).

Elements of bullish pennants

  • A rapid and steep price rise of around 20% from bottom of the pole to top.
  • Decreasing volume during the formation of the pennant.
  • Pennants look like symmetrical triangles on a pole, price action is converging.
  • Diminishing volume as pennant forms.
  • Breakout to the upside with re- sumption of volume levels.
  • Pennant length excluding the pole should be around 10 days, can be less but not more than 20 days.Figure 7 shows CDW classic bullish pennant breakout on increased volume

Figure 7. CDW Computer Centers (CDW) bullish pennant

Elements of bearish pennants

  • A rapid and steep price drop of around 20% from top of the pole to bottom.
  • Decreasing volume during the formation of the pennant.
  • Pennants look like symmetrical triangles on a pole, price action is converging.
  • Diminishing volume as pennant forms.
  • Breakout to the downside with resumption of volume levels.
  • Pennant length excluding the pole should be around 10 days, can be less but not more than 20 days.

How do you trade flags and pennants?

Katsanos study of Flags and pennants revealed that the average breakout was 45% over an average period of 11 days. Bulkowski noted a 63% average gain. to trade these breakouts, set tight stops at low of day before breakout and use trailing stops once breakout occurs.

Target prices are more difficult to predict as these are continuation patterns, but after 11 days you are beyond the average move in days.

AIQ tip

Once a breakout occurs, use AIQ space on right of the chart (rtalerts only) and advance 11 days into the future. Draw a trendline parallel to the pole trend from the breakout point.

A Useful Interest Rate Indicator

educational newsletters, ETFS, jay kaeppel, stock market

2018 witnessed something of a “fake out” in the bond market.  After bottoming out in mid-2016 interest rates finally started to “breakout” to new multi-year highs in mid to late 2018. Then just as suddenly, rates dropped back down.

1

Figure 1 displays the tendency of interest rates to move in 60-year waves – 30 years up, 30 years down.  The history in this chart suggests that the next major move in interest rates should be higher.Figure 1 – 60-year wave in interest rates (Courtesy: www.mcoscillator.com)

A Way to Track the Long-Term Trend in Rates

Ticker TNX is an index that tracks the yield on 10-year treasury notes (x10).  Figure 2 displays this index with a 120-month exponential moving average overlaid.  Think of it essentially as a smoothed 10-year average.

2

Figure 2 – Ticker TNX with 120-month EMA (Courtesy AIQ TradingExpert)

Interpretation is pretty darn simple.  If the month-end value for TNX is:

*Above the 120mo EMA then the trend in rates is UP (i.e., bearish for bonds)

*Below the 120mo EMA then the trend in rates is DOWN (i.e., bullish for bonds)

3

Figure 3 displays 10-year yields since 1900 with the 120mo EMA overlaid.  As you can see, rates tend to move in long-term waves.

Figure 3 – 10-year yield since 1900 with 120-month exponential moving average

Two key things to note:

*This simple measure does a good job of identifying the major trend in interest rates

*It will NEVER pick the top or bottom in rates AND it WILL get whipsawed from time to time (ala 2018).

*Rates were in a continuous uptrend from 1950 to mid-1985 and were in a downtrend form 1985 until the 2018 whipsaw.

*As you can see in Figure 2, it would not take much of a rise in rates to flip the indicator back to an “uptrend”.

With those thoughts in mind, Figure 4 displays the cumulative up or down movement in 10-year yields when, a) rates are in an uptrend (blue) versus when rates are in a downtrend (orange).

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Figure 4 – Cumulative move in 10-year yields if interest rate trend is UP (blue) or DOWN (orange)

You can see the large rise in rates from the 1950’s into the 1980’s in the blue line as well as the long-term decline in rates since that time in the orange line.  You can also see the recent whipsaw at the far right of the blue line.

Summary

Where do rates go from here?  It beats me.  As long as the 10-year yield holds below its long-term average I for one will give the bond bull the benefit of the doubt.  But when the day comes that 10-year yields move decisively above their long-term average it will be essential for bond investors to alter their thinking from the mindset of the past 30+ years, as in that environment, long-term bonds will be a difficult place to be.

And that won’t be easy, as old habits die hard.

5

Figure 5 is from this article from BetterBuyandHold.com and displays the project returns for short, intermediate and long term bonds if rates were to reverse the decline in rates since 1982.Figure 5 – Projected total return for short, intermediate and long-term treasuries if rates reverse decline in rate of past 30+ years (Courtesy: BetterBuyandHold.com)

When rates finally do establish a new rising trend, short-tern and intermediate term bonds will be the place to be.  When that day will come is anyone’s guess.  But the 10-year yield/120mo EMA method at least we have an objective way to identify the trend shortly after the fact.

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.

Trend-Following in One Minute a Month (A Quick Update)

educational newsletters, jay kaeppel, stock market

This article is intended to be a quick update to this article.  The original idea is based on the theory propounded by Ken Fischer that suggests that one should not worry about a “top” in the stock market until after the market goes at least 3 months without making a new high.

Three things to note:

*Like all trend-following methods the one detailed in the linked article will experience an occasional whipsaw, i.e., a sell signal at one price followed some time later by a new buy signal with the market at a higher price.

*Like any good trend-following method the real purpose is to help you avoid some significant portion of any major longer-term bear market, i.e., 1973-74, 2000-2002, 2007-2009).

*The secondary purpose is to relieve an investor of that constant “Is this the top, wait, what about this this, this looks like the top, OK never mind, but this, this time it definitely has to be the top” syndrome.

The Rules

For a full explanation of the rules please read the linked article.  In general, though:

*A “Sell alert” occurs when the market makes a 6-month high, then goes 3 full calendar months without piercing that high

*The “trigger” price is the lowest low for the 3 months following the previous high

*A “Sell signal” occurs at the end of the month IF the “trigger” price is pierced to the downside during the current month

*The “trigger” is no longer valid if the S&P 500 makes a high above the high for the previous 6 months prior to an actual “Sell signal”

*If a “Sell signal” occurs then a new “Buy signal” occurs when the S&P 500 makes a high above the high for the previous 6 months

Sounds complicated, but its’s not.  Figure 1 displays the signals and alerts and trigger prices since 2005.

Green Arrows = Buy Signal

Red Arrows = Sell Signal

Red horizontal lines = Sell trigger price

1

Figure 1 – One Minute a Month Trend-Following Alerts, Trigger prices and Signals (Courtesy AIQ TradingExpert)

Note that actual sell signals occurred in 2008, 2011 and 2015.  The signal in 2008 was a life-saver, while the signals in 2011 and 2015 resulted in small whipsaws.  Sorry folks, that’s just the nature of the beast.

Interestingly, there have been two “Sell alerts” in the last year.  The first occurred at the end of April 2018, however, that alert was invalidated at the end of August 2018 when the S&P 500 pierced the previous 6-month high.  Another alert occurred at the end of December 2018.  The “Trigger price” is the December 2018 low of 2346.58.  That trigger is still active but could be invalidated if the month of May 2019 makes a high above whatever the high for April 2019 turns out to be.

The key point here is that despite the volatility and painful sell-offs in October and December of 2018, the “system” has remained on a buy signal.

Where to from here?  We’ll just have to wait and see.

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.

An Obscure But Useful Trend-Following Tool

indexes, jay kaeppel, stock market, technical indicator

Everyone has heard about trend-following.  And most traders have at least a foggy grasp of the relative pros and cons associated with trend following.  And anyone who has ever employed any type of trend-following technique is aware that they are great when there is an actual trend, but that whipsaws are inevitable.

What I am about to show you will not change these facts.  But today’s piece is just a “quickie” to highlight an obscure way to use a common indicator as a “confirmation/ denial” check when assessing the trend of a given security.  For the record, I am making no claim that this indicator generates profitably “trading signals in and of itself.  Its one of those things that – and I hate this phrase as much as you do but – should be used in conjunction with other indicators to get a good sense of the current “state of the trend” for a given security.

Nothing more, nothing less.

MACD Stretched Long

Most traders are familiar with the MACD indicator.  Originally popularized by Gerald Appel, it uses a set of moving averages to attempt to assess the trend in price (and many traders also use it to try to identify overbought or oversold situations).  Standard parameters are 9,26 and 12.  The version I use is different in several ways:

*Whereas the standard MACD generates two lines and a histogram can be drawn of the difference between the two, this version just generates one line – we will call in the trend line (catchy, no?)

*We will use parameters of 40 and 105

*One other note is that (at least according to me) this indicator is best used with weekly data.

The MACD4010501

Here is the formula for AIQ TradingExpert Expert Design Studio:

Define ss3 40.

Define L3 105.

ShortMACDMA3 is expavg([Close],ss3)*100.

LongMACDMA3 is expavg([Close],L3)*100.

MACD4010501Value is ShortMACDMA3-LongMACDMA3.

As I said this should be used with “other” indicators.  For example, one might consider the current price versus a 40-week moving average.

Standard Interpretation:

*If price is above the 40-week moving average (or if whatever other trend-following indicator you are using is bullish), AND

*The MACD4010501 is trend higher THEN

ONLY play the long side of that security

Likewise:

*If price is below the 40-week moving average (or if whatever other trend-following indicator you are using is bearish), AND

*The MACD4010501 is trend lower THEN

ONLY play the short side of that security (or at least DO NOT play the long side)

Finally, DO NOT assume that every change of trend in MACD4010501 is some sort of buy or sell signal.  Consider it only as a filter for your trades.

Some random examples appear in Figures 1 through 4 (click to enlarge any chart)

1

Figure 1 – AMZN (Courtesy AIQ TradingExpert)

2

Figure 2 – IBM (Courtesy AIQ TradingExpert)

3

Figure 3 – WMT (Courtesy AIQ TradingExpert)

4

Figure 4 – TLT (Courtesy AIQ TradingExpert)

Summary

To repeat, the proper use of this obscure version of the popular MACD indicator is as follows:

*Consider the trend of MACD4010501

*Consider one or more other trend-following indicators

*If there is bullish agreement, then apply your own shorter-term entry and exit techniques to trade the long side.

*If there is bearish agreement, then apply your own shorter-term entry and exit techniques to trade the short side (or simply stand aside).

Trade on!

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.

New Highs, Check…Now What?

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

Let’s open with Jay’s Trading Maxim #7.

Jay’s Trading Maxim #7: Being able to identify the trend today is worth more than 1,000 predictions of what the trend will be in the future.

Yes trend-following is boring.  And no, trend-following never does get you in near the bottom nor out at the top.  But the reality is that if you remain long when the trend appears to be up (for our purposes here let’s define this roughly as the majority of major market averages holding above their long-term moving averages) and play defense (i.e., raise cash, hedge, etc.) when the trend appears to be down (i.e., the majority of major market averages are below their long-term moving averages), chances are you will do pretty well for yourself.  And you may find yourself sleeping pretty well at night as well along the way.

To put it more succinctly:

*THE FOREST = Long-term trend

*THE TREES = All the crap that everyone tells you “may” affect the long-term trend at some point in the future

Human nature is a tricky thing.  While we should clearly be focused on THE FOREST the reality is that most investors focus that majority of their attention on all those pesky trees.  Part of the reason for this is that some trees can offer clues.  It’s a question of identifying a few “key trees” and then ignoring the rest of the noise.

A New High

With the Dow Industrials rallying to a new high virtually all the major averages have now reached a new high at least within the last month.  And as you can see in Figure 1 all are well above their respective 200-day moving average.  Long story short the trend is “UP”.

(click to enlarge)1Figure 1 – U.S. Major Market Indexes in Uptrends (Courtesy AIQ TradingExpert)

Now What? The Good News

As strong as the market has been of late it should be noted that we are about to enter the most favorable seasonal portion of the 48-month election cycle.  This period begins at the close of September 2018 and extends through the end of December 2019.

Figure 2 displays the growth of $1,000 invested in the Dow Industrials only during this 15-month period every 4 years.  Figure 3 displays the actual % +(-) for each of these periods.  Note that since 1934-35, the Dow has showed a gain 20 out of 21 times during this period.

2a

Figure 2 – Growth of $1,000 invested in Dow Industrials ONLY during 15 bullish months (mid-term through pre-election year) within 48-month election cycle.

Start Date End Date Dow % +(-)
9/30/1934 12/31/1935 +55.6%
9/30/1938 12/31/1939 +6.2%
9/30/1942 12/31/1943 +24.5%
9/30/1946 12/31/1947 +5.1%
9/30/1950 12/31/1951 +18.9%
9/30/1954 12/31/1955 +35.5%
9/30/1958 12/31/1959 +27.7%
9/30/1962 12/31/1963 +31.8%
9/30/1966 12/31/1967 +16.9%
9/30/1970 12/31/1971 +17.0%
9/30/1974 12/31/1975 +40.2%
9/30/1978 12/31/1979 (-3.1%)
9/30/1982 12/31/1983 +40.4%
9/30/1986 12/31/1987 +9.7%
9/30/1990 12/31/1991 +29.2%
9/30/1994 12/31/1995 +33.1%
9/30/1998 12/31/1999 +46.6%
9/30/2002 12/31/2003 +37.7%
9/30/2006 12/31/2007 +13.6%
9/30/2010 12/31/2011 +13.0%
9/30/2014 12/31/2015 +2.2%

Figure 3 – 15 bullish months (mid-term through pre-election year) within 48-month election cycle

Now What? The Worrisome Trees

While the major averages are setting records a lot of other “things” are not.  My own cluster of “market bellwethers” appear in Figure 4.  Among them the Dow Transportation Index is the only one remotely close to a new high, having broken out to the upside last week.  In the meantime, the semiconductors (ticker SMH), the inverse VIX index ETF (ticker ZIV) and Sotheby’s (ticker BID) continue to meander/flounder. This is by no means a “run for the hills” signal.  But the point is that at some point I would like to see some confirmation from these tickers that often (though obviously not always) presage trouble in the stock market when they fail to confirm bullish action in the major averages.

(click to enlarge)4Figure 4 – Jay’s 4 Bellwethers (SMH/TRAN/ZIV/BID) (Courtesy AIQ TradingExpert)

Another source of potential concern is the action of, well, the rest of the darn World.  Figure 5 displays my own regional indexes – Americas, Europe, Asia/Pacific and Middle East.  They all look awful.

(click to enlarge)3Figure 5 – 4 World Regional Indexes (Courtesy AIQ TradingExpert)

Now the big question is “will the rest of the world’s stock markets start acting better, or will the U.S. market start acting worse?”  Sadly, I can’t answer that question.  The key point I do want to make though is that this dichotomy of performance – i.e., U.S market soaring, rest of the world sinking – is unlikely to be sustainable for very long.

Summary

It is hard to envision the market relentlessly higher with no serious corrections over the next 15 months.  And “yes”, those bellwether and world region indexes trees are “troublesome”.

Still the trend at the moment is inarguably “Up” and we about to enter one of the most seasonally favorable periods for the stock market.

So, my advice is simple:

1) Decide now what defensive actions you will take if the market does start to breakdown

2) Resolve to actually take those actions if the need arises

3) Enjoy the ride as long as it lasts.

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 SPX ‘Magic Number’

ETFS, indexes, stock market

According to one simple technique the “Magic Number” for the S&P 500 Index is 2872.87.  According to this simple technique if the S&P 550 Index closes above this number the stock market “should” continue to be bullish for at least another year.

Sounds optimistic? Well, there certainly are no “sure things” in the financial markets.  Still, let’s take a closer look.

The Simple Technique

The technique I mentioned works like this:

When the S&P 500 Index:

*Closes at its highest price in the past 252 trading days

*For the 1st time in the most recent 126 trading days

*It generates a bullish signal for the next 252 trading days

In essence, we are talking about buying when the index makes a 1-year high for the 1st time in 6 months and holding for 1 year.

Figure 1 displays the most recent previous buy signal that occurred on 7/11/16.  The sell date was 252 trading days later on 7/11/17.

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Figure 1 – 2016 Signal (Courtesy AIQ TradingExpert)

Figure 2 displays the signal before that which occurred on 2/27/12.  The sell date was 252 trading days later on 2/26/13.

2

Figure 2 – 2012 Signal (Courtesy AIQ TradingExpert)

Figure 3 displays all the signals since 1933.

Buy Date Sell Date Buy Price Sell Price %+(-)
5/27/33 4/6/34 9.64 10.95 +13.6
5/18/35 3/20/36 9.87 15.04 +52.4
10/6/38 8/9/39 12.82 11.78 (8.1)
10/7/42 8/10/43 9.17 11.71 +27.7
6/1/44 4/7/45 12.31 13.84 +12.4
5/15/48 4/8/49 16.55 14.97 (9.5)
10/5/49 8/23/50 15.78 18.82 +19.3
3/5/54 3/4/55 26.52 37.52 +41.5
8/4/58 8/4/59 47.94 60.61 +26.4
1/10/61 11/2/62 58.97 57.75 (2.1)
4/15/63 4/15/64 69.09 80.09 +15.9
4/24/67 4/25/68 92.62 96.62 +4.3
4/30/68 6/9/69 97.46 101.2 +3.8
1/8/71 1/6/72 92.19 103.51 +12.3
2/7/72 2/8/73 104.54 113.16 +8.2
6/24/75 6/22/76 94.19 103.47 +9.9
8/1/78 7/31/79 100.66 103.81 +3.1
8/14/79 8/12/80 107.52 123.79 +15.1
10/8/82 10/6/83 131.05 170.28 +29.9
11/7/84 11/7/85 169.17 192.62 +13.9
10/19/88 10/18/89 276.97 341.76 +23.4
5/30/90 2/13/92 360.86 413.69 +14.6
7/30/92 7/29/93 423.92 450.24 +6.2
2/6/95 2/5/96 481.14 641.43 +33.3
9/3/03 9/2/04 1026.27 1118.31 +9.0
11/5/04 11/4/05 1166.17 1220.14 +4.6
10/13/09 10/13/10 1073.19 1178.1 +9.8
11/5/10 11/4/11 1225.85 1253.23 +2.2
2/27/12 2/26/13 1367.59 1496.94 +9.5
7/11/16 7/11/17 2137.16 2425.53 +13.5

Figure 3 – Previous Signals

Things to note:

*27 of the 30 signals (i.e., 90%) have witnessed a 12-month gain

*3 of 30 signals (i.e., 10%) have witnessed a loss

*The last “losing trade” occurred in 1961-1962

*The last 20 signals have been followed by a 12-month gain for the S&P 500

*The average of all 30 signals is +13.9%

*The average for all 27 winning trades is +16.1%

*The average of all 3 losing trades is -6.6%

*The worst losing trade was -9.5%

Two Technical Notes

Believe it or not, into the early 1950’s the stock market used to be open on Saturday.  So those days counted toward the 126 and 252 trading days counts.  This explains why the buy and sell dates prior to 1954 were less than one calendar year apart.

It is possible to get a new signal before an existing signal reaches it’s Sell Date.  In those rare cases we simply extend the holding period an additional 252 trading days.  This occurred in 1961-1962, 1968-1969, 1990-1992.

Figure 4 shows that SPX is very close to generating a new signal.  The most recent high close was in January at 2872.87 which was more than 126 trading days ago.  A new signal will occur if SPX closes above that level.

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Figure 4 – Potential new signal forming (Courtesy AIQ TradingExpert)

Summary

The Good News is that this technique has a 90% accuracy rate and that one good day in the market could generated a new buy signal.  The Bad News is that – as I mentioned earlier – there are no “sure things” in the market.  Given that this particular method is on a 20-trade winning streak, it is understandable to think that maybe the law of averages is against it this time.

We’ll just have to wait and see what happens.

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.

A Focus on the Trends in Stocks, Bonds and Gold

ETFS, indexes, jay kaeppel, market timing, stock market
In the end it is not so much about “predicting” what will happen next in the financial markets, but rather recognizing – and being prepared for – the potential risks, that makes the most difference in the long run.  So let’s start by looking at current trends.
Stocks
Let’s start with a most simple trend-following model that works like this:
-A sell signal occurs when the S&P 500 Index (SPX) registers two consecutive monthly closes below its 21-month moving average
-After a sell signal, a buy signal occurs when SPX register a single monthly close above its 10-month moving average.
Figure 1 displays recent activity.
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Figure 1 – SPX Trend-Following signals (Courtesy AIQ TradingExpert)
The good news is that this model does a good job of being out of stocks during long bear markets (1973-74, 2000-2002, 2008-2009).  The bad news is that – like any trend-following model – it gets “whipsawed” from time to time.  In fact the two most recent signals resulted in missing out on the October 2015 and March 2016 rallies.
But note the use of the phrase “simple trend-following model” and the lack of phrases such as “precision market timing” and “you can’t lose trading the stock market”, etc.
For now the trend is up.  A few things to keep an eye on appear in Figures 2 and 3.  Figure 2 displays four major averages.  Keep an eye to see if these averages break out to the upside (see here) or if they move sideways to lower.
2Figure 2 – Four Major Market Averages (Courtesy AIQ TradingExpert)
In addition, I suggest following the 4 tickers in Figure 3 for potential “early warnings” – i.e., if the major averages hit new highs that are not confirmed by the majority of the tickers in Figure 3.3
Figure 3 – Four potential “Early Warning” tickers  (Courtesy AIQ TradingExpert)
Bonds
My main “simple bond trend-following model” remains bearish.  As you can see in Figure 4, a buy signal for bonds occurs when the 5-week moving average for ticker EWJ (Japanese stocks) drops below its 30-week moving average and vice versa.
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Figure 4 – Ticker EWJ 5-week and 30-week moving average versus ticker TLT (Courtesy AIQ TradingExpert)
A 2nd model using metals to trade bonds has been bullish of late but is close to dropping back into bearish territory.  Figure 5 displays the P/L from holding a long position of 1 t-bond futures contract ONLY when both the EWJ AND Metals models are bearish (red line) versus when EITHER model is bullish (blue line)
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Figure 5 – T-bond futures $ gain/loss when EWJ OR Metals Models are Bullish (blue line) versus when EWJ AND Metals Models are both Bearish (red line); August 1990-present
Gold
My most basic gold trend-following model is still bearish.  This model uses my “Anti-Gold Index” (comprised of tickers GLL, SPX, UUP and YCS).  It is bullish for gold when a Front-Weighted Moving Average (detailed here) is below the 55-week exponential moving average and vice versa.
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Figure 6 – Jay’s “Anti-Gold Index” versus ticker GLD (Courtesy AIQ TradingExpert)
Summary
So at the moment the stock model is bullish and the bond and gold models are bearish.  Are these trends certain to persist ad infinitum into the future?  Definitely not.  Will the models detailed here provide timely signals regarding when to get in or out the next time around?  Sorry, but it doesn’t always work that way with trend-following.
But as for me I prefer “riding the trend” to “predicting the future.”
Some painful lessons just stick with you I guess.
Jay Kaeppel  Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client. 
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.