There are a lot of things that don’t make sense these days.  In fact, where would one even begin? So let’s move past all of that and look at something else that doesn’t seem to make sense one the face of it – i.e., the “Odd Couple” relationship between biotech and gold stocks.

The BIOGOLD Index

Using AIQ TradingExpert software I created my own “index” called “BIOGOLD” that simply combines ticker FBIOX (Fidelity Select Biotech) and ticker FSAGX (Fidelity Select Gold).  The index appears in Figure 1.

Editors note: Creating your own index is a function of creating a group list in AIQ Data Manager. Information on creating lists and groups can be found in this PDF on p 11 of 14.

Figure 1 – Jay’s BIOGOLD Index (Courtesy AIQ TradingExpert)

Also included in the lower clip is an indicator referred to as RSI32, which is the 2-day average of the standard 3-day RSI. The levels of 65, 50 and 35 are highlighted in red for reasons detailed below.

The Rules

For the record, I have changed “the rules” a few times over the years.  Call it curve-fitting if you’d like, but the goal is to generate the timeliest signals.  The rules now are as follows:

A “buy signal” occurs when either:

*The RSI32 drops to 35 or below

*The RSI32 drops below 50 (but not as low as 35) and then reverses to the upside for one month

After either of the buy signals above occurs, buy BOTH FBIOX and FSAGX

*After a buy signal, sell both funds when RSI32 rises to 64 or higher

To test results, we will:

*Assume that after a buy signal both FBIOX and FSAGX are bought in equal amounts

*We will assume that both funds are held until RSI32 reaches 64 or higher (i.e., there is no stop-loss provision in this test)

For testing purposes, we will not assume any interest earned while out of the market, in order to highlight only the performance during active buy signals. Figure 2 displays the hypothetical growth of $1,000 (using monthly total return data) using the “system”.

NOTE: All results are generated using total monthly return data for FBIOX and FSAGX, except for May 2020 which is based on price action only (my source of total return data does not update until sometime in June).

Figure 2 – Cumulative hypothetical % growth using Jay’s BIOGOLD System (1986-present)

*The most recent BUY signal occurred at the end of March 2020 when the RSI32 indicator for BIOGOLD closed at 33.67.

*The most recent SELL signal occurred at the end of May 2020 when the RSI32 indicator for BIOGOLD closed at 76.96.

Figures 3 and 4 display the price action for FBIOX and FSAGX during this two-month period.

Figure 3 – Ticker FBIOX (Courtesy AIQ TradingExpert)

Figure 4 – Ticker FSAGX (Courtesy AIQ TradingExpert)

Summary

Is this really a viable approach to investing?  That’s not for me to say.  But it seems to do a pretty good job of identifying favorable times to be in with that “Odd Couple” of biotech and gold. So there’s that…

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

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

Jay Kaeppel

Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author.  The information presented represents the views of the author only and does not constitute a complete description of any investment service.  In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security.  The data presented herein were obtained from various third-party sources.  While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets.  Past performance is no guarantee of future results.  There is risk of loss in all trading.  Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance.  Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.

The importable AIQ EDS file based on Vitali Apirine’s article in the April Stocks & Commodities issue, “On-Balance Volume Modified,” can be obtained on request via email to info@TradersEdgeSystems.com. The code is also available below.

I coded the indicator described by the author and also coded a simple buy-sell on crossovers of the indicator. I tested the long side in the AIQ EDS module. Figure 5 shows the backtest results over the last 10 years using the Nasdaq 100 list of stocks.

FIGURE 5: AIQ. Sample backtest results are shown for the last 10 years using the Nasdaq 100 list of stocks.

!ON-BALANCE VOUUME MODIFIED (OBVM) 
!Author: Vitali Apirine, TASC Apr 2020 !Coded by: Richard Denning 2/9/20 !www.TradersEdgeSystems.com 
!ON BALANCE VOLUME: 
C is [close]. 
C1 is val([close],1). 

!OBV THAT HAS SAME SHAPE AS BUILT-IN OBV INDICATOR 
DaySum is hasdatafor(2000). 
F  is iff(C > C1,1,iff(C < C1,-1,0)). 
VolSum1  is Sum([volume] / 1000 * F, DaySum). 
VolSum2  is 1000 + VolSum1. 
OBVv1  is iff(FirstDataDate() >= Reportdate(),1000,VolSum2). 

!ON BALANCE VOLUME MODIFIED: 
!Hard coded version: 
len1 is 7. len2 is 10. 
VVV is expavg(OBVv1,len1). 
SigVVV is expavg(VVV,len2). 

!ON BALANCE VOULUME MODIFIED (***preferred version***): 
!Using built-in OBV indicator (runs much faster) 
pd1 is 7. 
pd2 is 10. 
OBVM is expavg([OBV],pd1). 
sigOBVM is expavg(OBVM,pd2). 

—Richard Denning
info@TradersEdgeSystems.com
for AIQ Systems

The old saying that “It Doesn’t Have to be Rocket Science” when it comes to the markets got to be an old saying by being true for all these years.  Despite all of the increases in technology and computer speed, in the end it mostly comes down to “Is price rising or falling?”  Let’s consider one the simpler approaches.

The Trend

Figure 1 displays four major indexes – The Dow, the S&P 500, the Nasdaq 100 and the Russell 2000. 

Figure 1 – 4 Major Indexes and their 200-day moving averages (Courtesy AIQ TradingExpert)

There is a great deal of useful information contained in these four charts.  To wit:

*3 of the 4 are presently below their respective 200-day moving averages, i.e., in “downtrends”

*The 200-day moving average for all but the Nasdaq has now “rolled over” and is declining

Interpretation can be fairly simple:

*If these trends do not change, more trouble lies ahead

That wasn’t so difficult, was it? 

Of course, for most people that’s “not good enough.”  We want to know in advance IF these trends will or will not persist.  My candid reply is “Good luck with that.”

My other response is “be patient, and keep a close eye on these indexes and these moving averages”:

*If the indexes fail to get back above these moving average, more pain is likely to unfold (see here and here)

*If the Nasdaq fails to hold above its moving average and joins the others, chances are serious defensive action (i.e., raise cash, hedge, etc.) is in order

*If the 3 down trending indexes follow the Nasdaq higher (and also this) then the worst is likely over and a much more aggressive investment stance would be warranted.

In the immortal words of Tom Petty: “The waiting is the hardest part.”

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

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.

3-26-20 saw the market on the third day of a rebound from the low of 18213 on 3-23-20. The chart below shows the Fibonacci retracements from the recent high to this low.

The retracement hit the 38.2% level and this level can offer resistance. The market is down again and could be we are headed down to retest at or near the last low.

If we rally passes the 38.2% the next resistance level will be at 23775 or so at the 50% retracement level.

AIQ Market Timing signals

The AIQ Market Timing system issued a 99-1 up signal on 3-10-20, the chart below shows the signal. The Phase indicator changing direction in the direction of the signal (moving down then moves up) provides confirmation market Timing signals. IN this case that didn’t happen.

Another up signal 99-1 fired on 3-24-20 and this time the phase turned up the same day and confirmed the signal.

Here are 3 of the bullish rules that fired to create this high up signal

• The 21 day stochastic has advanced and crossed the 20% line and the price phase indicator is also increasing.  In this weakly downtrending market this is taken as a strong bullish signal suggesting an increase in prices.

• Volume accumulation percentage is increasing and the 21 day stochastic has moved above the 20% line. In this downtrending market, this is taken as a   strong bullish signal that could be followed by an  upward price movement.

• The price phase indicator is negative but volume accumulation has started to advance.  This is a  non-conformation that, regardless of the type of market, is a bullish signal which usually results in an upward movement of the market.

The counter trend AI system that generates these signals can be early in their firing. 

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.