The old adage is that we should “buy when there is blood in the streets.”  It basically means to buy when things look their worst.  Well, for the record I am not actually a fan of this intonation. While it is probably a fair statement, I for one prefer to see some sign of hope – some sign of a trend reversal at the very least – before taking the plunge. 

One historically useful indicator suggests we may be nearing that point. 

I refer to this indicator as JKHiLo.  I included my initials in the acronym because I “developed” it.  OK, all I really did was take one guy’s useful indicator and multiply it by another guy’s useful indicator and voila. 

In a nutshell JKHilo multiplies Norman Fosback’s HiLo Logic Index by Gerald Appel’s High/Low Indicator.

The Fosback HiLo Logic Index (FHLLI)

I wrote two articles here and here about this indicator.  In short, a very low number of stocks making new lows is bullish for the stock market – it indicates that stocks overall are going up and is bullish.  At the same time, a very low number of stocks making new highs is also (typically) ultimately bullish going forward, as it tends to signal a “washed out” market. 

So this indicator:

*takes the lower of new highs and new lows each day

*divides that number by the total number of issues trades

*takes a 10-day moving average of daily readings

Specifically, the Fosback HiLo Logic Index (HLLI) is calculated as follows:

A=Daily Nasdaq New Highs

B=Daily Nasdaq New Lows

C=The lower of A and B

D=The total number of Nasdaq issues traded

E = (C / D) * 100

FHLLI = 10-day average of E

Readings above 2.15% are considered a sign of “churning”, i.e., a lot of new highs AND new lows.  Reading below 0.40% are considered “bullish” because either new highs OR new lows is very low.

The Fosback HiLo Logic Index finally dropped below 0.40% on 3/23/20.  Figure 1 displays the OTC Composite Index with this indicator through 12/31/2019.

Figure 1 – Fosback HiLo Logic Index

The Appel High/Low Indicator

This indicator (heretofore AHLI) is more of a trend-following indicator.  It simply divides the number of new highs each day by the total of new highs AND new lows, then takes a 10-day average.

The AHLI is calculated as follows:

A=Daily Nasdaq New Highs

B=Daily Nasdaq New Lows

C = A / (A+B)

AHLI = 10-day average of C

Figure 2 displays this indicator versus the OTC Composite from 12/29/17 through 3/23/20.

Figure 2 – Appel High/Low Indicator (x100; blue line) with OTC Composite (/100; red line); Dec17 through 3/23/20

Extremely low readings tend to highlight oversold market conditions.  For the record, an actual “buy signal” for this indicator occurs when it drops below 0.20 (or 20 in Figure 3 since the blue line is the indicator x 100) and then rises back above that level.

The JK Hilo Index (JKHiLo)

So then one day some young punk comes along and multiplies the Fosback indicator by the Appel indicator and has the audacity to add his own initials.  Some people. Anyway:

JKHiLo = (FHLLI x AHLI) x 500

A “12-month Buy Signal” occurs when this indicator:

*drops below 5.00

*then turns higher for one day

The first part of this signal has happened.  As of the close on 3/23/20 JKHL has plunged to 1.8. 

Let’s look at previous instances when JKHL fell below 5.00 and then ticked higher for one day.

IMPORTANT: This upside reversal technically constitutes a “12-month buy signal”.  What does that mean?  It means:

*We expect the market to be higher 12-months later

*HOWEVER, it is NOT an “All Clear, Everything is Great, You Can’t Lose” signal

The bottom line is that it typically does NOT mark the actually bottom.  In most cases, another new low or at least a retest of the low follows within a few months.  But not always.

Figure 3 displays the 7 buy signals that have occurred since 1990.

A = Date of signal – i.e., date the JKHL indicator ticked up one day after dropping below 5

B = SPX closing price on date of signal

C = Subsequent low closing price for SPX

D = SPX closing price 12 months after signal date

E = # of trading days between date of signal and ultimate low

F = % decline by SPX from date of signal to ultimate low

G = % change in SPX closing price 1 year after date of signal

Figure 3 – JKHL 12-month buy signals

It is important to note that each previous “buy signal” was followed by further downside price movement prior to the ultimate low.  It ranged from 2 trading days in 2018 to 101 trading days in 2008.  6 of the 7 signals saw a further decline of no more than -6.3%.  But the 2008 signal saw the market continue to plunge another -31% of the following 3+ months.

So, like I said earlier, even when this indicator does turn up and generate a new signal, that DOES NOT mean “All Clear”.  Still, to get an idea of what we might expect, each of the previous signals are displayed in the Figures below.

Figure 4 – 1990 signal (-3.4% to low, +25.6% 12 months later)
(Courtesy AIQ TradingExpert)

Figure 5 – 1998 signal (-6.3% to low, +31.3% 12 months later)
(Courtesy AIQ TradingExpert)

Figure 6 – 2002 signal (-4.1% to low, +24.3% 12 months later)
(Courtesy AIQ TradingExpert)

Figure 7 – 2008 signal (-31.3% to low, +10.7% 12 months later)
(Courtesy AIQ TradingExpert)

Figure 8 – 2011 signal (-0.5% to low, +25.4% 12 months later)
(Courtesy AIQ TradingExpert)

Figure 9 – 2016 signal (-4.1% to low, +19.1% 12 months later)
(Courtesy AIQ TradingExpert)

Figure 10 – 2018 signal (-2.4% to low, +28.9% 12 months later)
(Courtesy AIQ TradingExpert)

We DO NOT have a new signal yet, but JKHiLo is below 5, so it is just a matter of waiting for the daily value to tick higher for one day (and then – if history is a guide – waiting for the ultimate low to be put in before a subsequent rally).

Figure 11 – As of 3/23/20 (Courtesy AIQ TradingExpert)

Summary

Are we on the cusp of a new opportunity?  Or on the edge of a cliff?  In this time of unprecedented uncertainty, I can’t pretend to know the answer.  So, I rely on objective indicators to guide me.

At this moment in time the “trend-following” indicators are bearish and so caution is undoubtedly in order.  But other indicators such as the one discussed here remind us to remain alert to new opportunities.

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.

Hello Everyone,

Market Recap:

It seems like a broken record, but the markets continue their upward trek. As the economy continues to be healthy, and the employment numbers continue to stupefy pundits, the markets continue to show optimism by pushing stocks higher. We had a slight 3-4% decline in the markets like I thought and then a resumption of its upward trend. At this point, the markets are now fundamentally overvalued by about 6-8% depending on the metrics used in determining overvaluation.

Warren Buffet said on CNBC a few months ago that “if interest rates stay where they are at 1.58% on the ten-year government bond, the stock market is reasonably priced. If interest rates rise to 2.5% that no one sees now, then the markets are 10-15% overvalued. At these prices, the markets are slightly overvalued.” CNBC also said that in 2000 the markets were 80-90% overvalued and in 2007, the markets were 30-35% overvalued. Again, the stock market is about 6-8% overvalued.

Market Perspective:

Could the market go up more? Yes, but if the Coronavirus scares the populous from traveling and going out, then the economic growth can surely suffer for some time. The stock market could easily have a 10% correction if the Coronavirus inhibits spending and keeps people in their homes. The best sector would be technology or things that are delivered to your home like online purchasing companies. I am CAUTIOUS on this market, as I can see optimism with no regard to the Coronavirus.

Sector Performance:

One of the best sectors again in the stock market is the Large Cap Technology growth stocks, like Apple, Microsoft, Tesla, Amazon and more. Because of the massive size of these companies now, i.e., Apple and Microsoft each being $1.5 trillion, any increase in their prices has a significant influence on the markets. The NASDAQ went up 38% last year and why it’s up 10% this year. It was due in large part due to the large growth sector with stocks like Apple Computer going up 88% and Microsoft up 56% over the last year. These extremely large tech companies are pushing up the market. Most stocks are not doing that well this year. It’s large tech stocks for the most part pushing this market higher.

This year the market is doing the same thing with Apple 11%, Microsoft +18%%, Alphabet +14%, and Amazon +16% and more. When stocks are so large and they go up a significant amount they can skew the market averages, making people think the markets are doing better than they are on average, when in fact, the small and midcap stock indexes are up only 1-2%%. In conclusion, either the small and midcap stocks have to catch up or the large growth and technology stocks have to fade.

Proceed with Caution:

Going up without a correction is not a good thing 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 steeply. It’s called a MELTUP. That’s a concern to me somewhat. The rise might continue and I am still relatively bullish as I think the S&P could hit 3450 to 3500 later in the year.

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.” Also, markets go down a lot quicker than they go up.

Expert Opinion:

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

“A sharp jump in reported infections in China was due to an improved technique for diagnosing the disease, not a new explosive outbreak. There was no similar spike in cases outside of China. Japan has the second most cases outside of China at 255. 218 of Japan’s cases are on a quarantined cruise ship. The large number on the ship shows how infectious the virus can be. The good news is that there has been no upward trend in the number of infections outside of China. They continue to average close to 15 a day.”

Stock Market Outlook

Stocks racked up another strong week with gains ranging from 1⁄4% on the Dow to 1 1⁄2% for the NASDAQ and Nasdaq 100. Increases brought the S&P500 to 7 1⁄2% above my estimate of its fundamental value. Although stocks are slightly overvalued, strong growth in the economy and earnings can send them higher. Investors should remain cautiously bullish. Maintain a high level of exposure to stocks in equity portfolios despite the likelihood of some correction.

Interest Rates

Interest rates remained relatively stable this past week. While further upward pressure can be expected when the economy accelerates, the Fed’s efforts to keep interest rates low will continue to hold them close to current levels.

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

Monetary Policy

The Fed continues to purchase securities, and banks continue to adjust their excess reserves to accommodate the demand for loans and investments. Monetary policy is sufficient to allow for an expansion in business activity this spring.

Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until January 10th, 2020. These are passive indexes.

Dow Jones +3.36%
S&P 500 +4.89%

NASDAQ Aggressive growth +10.3%
I Shares Russell 2000 ETF (IWM) Small cap +1.35%
Midcap stock funds +1.81%
International Stock Markets -0.3 of 1.0%
Moderate Mutual Fund +2.2%
Investment Grade Bonds (AAA) Long duration +2.2%
High Yield Merrill Lynch High Yield Index +.95%
Short Term Bond +.69%
Fixed Bond Yields (10 year) +1.6% Yield

The average Moderate Fund is up +2.2% 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 first chart is the NASDAQ. Its largest companies are Apple, Microsoft, Google, Amazon and more. These stocks continue to get the bulk of the money. Because they are all over $1 Trillion, any increase to them skews the market averages on an equal weighted position. In other words, these 4 stocks are worth more than 15% of the market.

This is why, the markets are going straight up. Any increase in these stocks puts a large percentage increase in the average, basically it is because they are so large, and the Nasdaq and the S&P are market weighted indexes.
Notice the channel. There are 3 touches of the channel. This means that if those trend lines in Black are broken, it could mean the end of this rise. So CURRENTLY, a break and close below 9274 in the Nasdaq could mean the beginning of a correction. That is a 4% drop in movement before I would get concerned.

The next chart of the NASDAQ Advance Decline Line. Notice as the Nasdaq is reaching new highs, it is doing it on fewer and fewer stocks. It means the rally is narrow. Not a great sign. It’s a watching point.

The next two charts are Money Flow and On Balance Volume. Both look good and confirming the upside.

The biggest concern is that although my computer models are at a BUY-HOLD. The Nasdaq is at the upper band top and it’s a narrow rally.

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 3340, 3263 area, 3210, and 3186. These might be BUY areas.
– Support levels on the NASDAQ are 9588, 9299, 9160, and 8975.
– On the Dow Jones support is at 28,692, 27783 area, and 27385 Breakout and 200 days moving average.
– These may be safer areas to get into the equity markets on support levels slowly.
– RESISTANCE LEVEL ON THE S&P 500 3450.

THE BOTTOM LINE:

The market is somewhat overbought and about 6-8% overvalued at this time. There are now some cracks in the dam showing as explained above, but my computer systems are still at a Buy-Hold for the market direction. The markets are rallying on large-cap growth and technology stocks and watching the other smaller to midcap companies up only slightly with international stocks declining. Either we start to see the small and midcap stocks begin to rally or the market could begin to fall. The S&P could hit 3450 later in the year. Earnings could potentially grow 5 to 7% or more this year and that is why there is the possibility that the S&P 500 could reach 3450+ in 2020, a much smaller rise in the stock market than in 2019 but hopefully, a decent return, with obvious no guarantees expressed or implied. The Corona Virus COULD put a scare in the market that could put the travel industry and restaurant industry and more on hold, dropping earnings. The Federal Reserve could be more accommodative if this happens.

Best to all of you,
Joe Bartosiewicz, CFP®
Investment Advisor Representative
5 Colby Way
Avon, CT 06001
860-940-7020 or 860-404-0408

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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 StochasticsWhen 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.

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