Well the stock market just seems to keep chugging along.  Despite the shaky economy, the national debt, the political discord, the terrorists on the march and the price of – well, just about everything made in China. And as a dutiful trend-follower I continue to “ride the ride” all the while repeating the ever apt phrase, “What, me worry?”

Three things for the record:

1) The stock market is in a clearly established uptrend and who am I to say otherwise?
2) Personally I still expect a serious “something” between now and the end of September
3) Arguably the most important bullish seasonal trend of all kicks in at the close on September 30, 2014.
Huh?

Yes folks, as of the close on September 30th it will be time for “the Mid Decade Rally”

Defining the Mid-Decade Rally
For the purposes of this article we will break each decade into two periods:

*Period 1 (i.e., the “Bullish 18″) = the 18 months extending from the end of September of Year “4” (2014, 2004, 1994, etc.)

*Period 2 (i.e., the “Other 102″) = the other 102 months of every decade.
So in a nutshell, Period 1 comprises 15% of each decade while Period 2 comprises 85% of each decade.  Given that Period 2 is 5.67 times as long as Period 1 it would seem likely that an investor would make more money being in the stock market during Period 2 than during Period 1.

I mean if you had to choose – particularly given the long-term overall upward bias of the stock market – would you choose to be in the market 85% of the time or only 15% of the time.  Safe to say most investors would answer the former.  But if you are among those who chose this answer, perhaps you should read a little further.

Period 1: The “Bullish 18 Months” of the Decade
In Figure 1 you see the growth of $1,000 invested  in the Dow Jones Industrials Average only during the middle 18 months (Sep. 30, Year 4 through Mar. 31, Year 6) of every decade starting in 1900.  See if anything at all jumps out at you from the chart.

Does the word “consistency” come to mind? For the record, $1,000 invested only during this 18-month period grew to $40,948, or +3,994%.  Now this all looks and sounds pretty good, but surely an investor would have made a lot more money investing in the stock market during the other 102 months of each decade, right? Well, not exactly. In fact, a more accurate statement might be, “not at all.”

Period 2: The “Other 102” Months of the Decade
Figure 2 displays the growth of $1,000 invested in the Dow Jones Industrials Average only during the other 102 months of each decade.  $1,000 invested in the market 85% of the time – but excluding the mid-decade bullish period – would have grown to $6,166, or +517%.

Now for the record, +517% is +517% and no one is saying that you should simply mechanically sit out the 102 “other” months. But the point is simply that the “Bullish 18” made 7.73 times as much money – while invested only 15% of the time – as the “Other 102” – which was invested in stocks 85% of the time.
The difference is even clearer when the two lines are drawn on the same chart as shown in Figure 3.

Mid Decade “Bullish 18” Performance

For the record:

*The average % gain for the Bullish 18 was +41.7%
*The median % gain for the Bullish 18 was +42.5%
On the other hand:
*The average % gain for the Other 102 was +34.3%
*The median % gain for the Bullish 18 was -2.2%

So you see why I am marking September 30, 2014 on my calendar.
By the way, if you like this one, in the immortal words of Jimmy Durante, “I got a million of ‘em.”

Jay Kaeppel  
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client

With the Fed “pumpin’” and the economy “thumpin’” (as in “thumping along like a flat tire”) it seems unlikely that interest rates would rise.  Still, sometimes is makes sense to go against the grain if enough evidence presents itself.  So let me show you what I am looking at in the bond market.

EWJ vs. T-Bonds     
As I wrote about in a previous article (T-Bonds and Japanese Stocks, Inversely….), for whatever reason, t-bonds have long exhibited a strong inverse correlation to Japanese stocks (no, seriously).  In Figure 1 we see EWJ (the ETF that tracks Japanese stocks) with a 5 week and 30 week moving average drawn in the top clip.  In the bottom clip we see ticker TLT (the ETF that tracks the 30-year t-bond). You can see that – using highly technical terms that we quantitative analysts types like to use to impress others with how much we know about the markets – when EWJ “zigs”, TLT tends to “zag”, and vice versa.

This past weekend the 5-week moving average for EWJ once again rose back above the 30-week moving average for EWJ.  If history is an accurate guide then this may be a negative sign for t-bonds.  Although I would be remiss if I did not invoke:

Jay’s Trading Maxim #216: History is not always an accurate guide (but it beats flipping a coin).
Figure 2 displays the raw dollar gain or loss from:

a) Holding a long position in t-bond futures (1 point movement = $1,000) when EWJ 5-week is below EWJ 30-week (red line)
b) Holding a long position in t-bond futures (1 point movement = $1,000) when EWJ 5-week is above EWJ 30-week (blue line)

Obviously this indicator is not perfect, but equally obvious is the fact that bonds have typically performed better when the EWJ 5-week MA is below that EWJ 30-week MA. So let’s call this – if nothing else – a potentially negative sign.

TLT vs. Elliott Wave
I am not a true “ElliottHead” but I do tend to pay attention to the Elliott Wave count for a given market when the daily and weekly counts point in the same direction.  Figures 3 and 4 present the latest daily and weekly Elliott Wave counts for TLT as figured by ProfitSource by HUBB.
The daily count just completed a bullish Wave 5 (i.e., implying that the latest rally has run its course) and the weekly count is signaling a potentially Bearish Wave 4 sell signal.  For the record, I do not believe in the “magic” of Elliott Wave.  But I do like when daily and weekly signs for just about any indicator appear to confirm one another.

Ways to Play
So if a trader buys the idea that t-bonds will decline in price in the months ahead, there are lots of way to play.  A trader could:
*Sell short 100 shares of ticker TLT.  This would require roughly $5850 of margin money and would technically entail unlimited risk. 
*Trader could buy 100 shares of ticker TBT, an inverse leveraged ETF that is designed to track t-bonds times minus 2 (In other words, if bonds decline -1%, then ticker TBT should rally roughly +2%).  This would require roughly $6,200.
*Buy a put option on ticker TLT.
*Buy a call option on ticker TBT.
There are pros and cons to each, but the trade that I want to highlight is buying a call on ticker TBT.

Call on TBT
If t-bonds do decline, then TBT would be expected to advance, hence the reason for considering a call option on TBT.  The reason I am looking at this trade is simply because it offers the most “bang for the buck.”  Not only are TBT shares leveraged 2 to 1, but by buying a call option we can obtain even more leverage with limited risk.  As you can see in Figure 5, TBT has support at roughly $56 and resistance at roughly $80.

So let’s look at buying the September 62 call for $281 (NOTE: the bid/ask is fairly wide at $2.62/$2.81.  For illustrative purpose I am simply assuming a market order and a fill at $2.81.  An astute trade might consider a limit order that splits the difference).  Figure 6 displays the risk curves for buying the Sep TBT 62 call at $2.81.

As you can see, in the worst case the maximum loss is $281.  In the best case – i.e., TBT rallies all the way back up to $80, the trade can generate a profit in excess of $1,500.  Also there are three months for “something” to happen. 

Summary
As always, I am not “recommending” this trade.  I am simply pointing out some potentially bearish evidence that I have found in regards to t-bonds and have highlighted “one way” to play such a situation using the limited risk associated with options.

So will t-bonds take a tumble and in turn, will TBT soar, thus generating an excellent rate of return?  As always, “It beats the heck out of me.” But from a trader’s perspective, the real question is, “Am I willing to risk $281 to find out?”

Jay Kaeppel  
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client

For the record, I am now – and have for some time been – a “reluctant bull.”  I can look at a dozen different things – including the fact that they economy still shows no signs of the robustness that would typically justify the run that the stock market has enjoyed in recent years – and make an argument that the stock market is way overdue to run out of steam.

But the timeless, well-worn phrase, “The Trend is Your Friend” didn’t become a timeless, well-worn phrase for nothing. 

And so I continue to “ride the ride”.  But as I have mentioned more frequently of late, I am keeping a close eye on the exit.  Given my present “bad attitude” I tend to focus on and point out a lot more potentially bearish developments than bullish.  But what the heck, I might as well let the sun shine through on occasion.  So this time out, let’s highlight one development that suggests that “The End Is (Not Necessarily) Near!”
This is one of the things that has prompted me to “sit tight” and not listen to “those voices in my head” (No not those voices, the other ones…..), despite the fact that a meaningful correction could begin at any moment.

The Bullish Outside Month
Just as it takes a lot of “thrust” to get a rocket off of the ground, a large thrust upward in the stock market can be a sign that a particular rally is in the early stages rather than the late stages.  

So here is a pattern to consider:

A) This month’s low is less than or equal to last month’s low
B) This month’s close is greater than last month’s high
That’s it.  In Figure 1 we see the S&P 500 monthly bar chart from 1996 to the present with these “Bullish Outside Months” highlighted in green.  The first one occurred in October 1998 and launched the final surge in great bull market of the 1990’s (or as most of us above a certain age refer to it – “The Good Old Days”).

The most recent signal occurred at the end of February of this year.  This was only the 19th signal since 1970.  The action of the S&P 500 index following previous signals – looking out 3 months, 6 months and 12 months after each signal – appears in Figure 2.

As you can see, on a 3-month, 6-month and 12-month basis, the S&P 500 has been higher at least 77% of the time following previous signals.  Which creates something on a conundrum.

Summary
In my mind’s eye the stock market is ridiculously overbought and “due” for a good solid “whack” sometime between now and the end of September.  But this particular indicator suggests that that “whack” may not come. So for now my own primary investment strategy remains to play the long side of the market unless and until the major averages (Dow, SPX, Nasdaq 100 and Russell 2000) drop below their respective 200-day moving averages.  Fairly boring yes, but it pays to mind:

Jay’s Trading Maxim #72: Boring and effective is much better than exciting and AAAAAHHHHHH!!

Jay Kaeppel  
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client

Watching Weekly Dow Momentum
The stock market – like the Energizer Bunny – just keeps chugging along, with the Dow, the S&P 500 and the Nasdaq 100 all touching new highs in the last week (the Russell 2000 small-cap index is another story, and may ultimately serve as the “canary in the coal mine”, but for now “majority rules”).  So for now, disciplined trend-followers (“Hi my name is Jay – although it is a little difficult to speak at the moment as my teeth remain tightly clenched”) have done well to avoid all of the “Sell in May” warnings from all of those so called experts (“Um, hi my name is Jay?”).   But there is one sign that I think investors should follow that has historically proven useful during the middle months of mid-term election years.  

I first wrote about this on 5/6/2014 in an article titled “A Warning Sign to Watch“.  For full details I suggest you read that article, but for now let me give you the gist.

-Between May and October of mid-term election years, a warning sign occurs when the MACD Oscillator (many traders refer to it as the MACD Histogram) drops into negative territory.

For the record, the MACD Oscillator was below 0 during early May, but was in a rising trend along with the Dow itself.  The Oscillator returned to positive territory on 5/23 and remains there still.  So let me sum up my advice as succinctly as possible:

*KEEP AN EYE ON THE WEEKLY MACD OSCILLATOR FOR THE DOW JONES INDUSTRIALS AVERAGE. 

If it drops into negative territory be prepared to take defensive action.
If you have even the most basic charting software, checking the status of the weekly Dow MACD Oscillator after the close each week will take up approximately 12 seconds of your time.  Per the 5/6/14 article, if history is any guide, the 12 seconds a week time investment may prove to be very useful.

Looking for a Reversal in T-Bonds
As I write, t-bonds are in the middle of a nasty short-term sell off.  But there is hope.  As I wrote about on 4/8/14 in an article titled “A Simple Signal for Bond Traders”, a short-term bullish setup may be forming at the moment.  In a nutshell:

*When the 25-day moving average for ticker EWJ is below the 150-day moving average for ticker EWJ (long story short, t-bonds tend to trade inversely to Japanese stocks – go figure), then
*Wait for the 10-day CCI (Commodity Channel Index) for ticker TLT to drop below -100 and then turn up for one day.

Once that occurs a trader might consider buying the call option with at least 40 days left until expiration and the highest gamma among call options for that expiration.

In Figure 2 you can see that this setup is presently “locked and loaded” and will be triggered when the 10-day CCI for ticker TLT reverses back to the upside.

Traders should always remember that there is never any guarantee that the next signal will generate a profit, and should always have some sort of stop-loss or risk limiting planin place at the time that any new trade is entered.

Jay Kaeppel  
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client

FIGURE 6: AIQ DATA MANAGER. Use the AIQ Data Manager to set the RS tickers to the AIQALL list.

FIGURE 7: AIQ DATA MANAGER. Use the AIQ Data Manager to compute the group & sector indexes for the AIQALL list.

!A Trading Method for the Long Haul
!Author: Donald W. Pendergast Jr., TASC Bonus Issue 2014
!Coded by: Richard Denning 3/10/14
!www.TradersEdgeSystems.com
!INPUTS:
trendLen is 200.
rsiLen is 2.
minAvgVolume is 10000.
volaLen is 21.
relStrLen is 80.
minVolaRatio is 0.5.
rsSPXmin is 1.0.
rsGroupmin is 1.0.
trailBars is 2.
rsiBuyLvl is 5.
rsiExitLvl is 95.
exitLen is 18.
C is [close].
H is [high].
L is [low].
PD is {position days}.
!LONG TERM MOVING AVERAGE:
emaLT is expavg(C,trendLen).
emaST is expavg(L,exitLen).
!RSI WILDER
!To convert Wilder Averaging to Exponential Averaging use this formula:
!ExponentialPeriods = 2 * WilderPeriod - 1.
U is C-valresult(C,1).
D is valresult(C,1)-C.
rsiLen1 is 2 * rsiLen - 1.
AvgU is ExpAvg(iff(U>0,U,0),rsiLen1).
AvgD is ExpAvg(iff(D>=0,D,0),rsiLen1).
rsi is 100-(100/(1+(AvgU/AvgD))).
!VOLATILITY
price1 is H.
price2 is L.
ratio is price1 / price2.
dp is Ln(ratio).
dpsqr is Ln(ratio) * Ln(ratio).
totdpsqr is sum(dpsqr,volaLen).
sumdp is sum(dp,volaLen).
sumdpsqr is sumdp * sumdp.
sumdpave is sumdpsqr / volaLen.
diff is totdpsqr - sumdpave.
!!use 252 for daily, or 52 for weekly below
factor is 252 / (volaLen-1).
result is sqrt(diff * factor).
vola  is result * 100 .  
volaAvg is expavg(vola,volaLen).
volaSPXavg is tickerUDF("SPX",volaAvg).
volaRatio is volaSPXavg/volaAvg.
!AVERAGE VOLUME
avgVolume is expavg([volume],50).
!RELATIVE STRENGTH
roc is C / valresult(C,relStrLen).
rocSPX is tickerUDF("SPX",roc).
rocGroup is tickerUDF(rsticker(),roc).
groupSymbol is tickerUDF(rsticker(),symbol()).
groupName is tickerUDF(rsticker(),description()).
rsSPX is roc / rocSPX.
rsGroup is rocGroup / rocSPX.
!SCREENING RULES
VolumeRule if avgVolume > minAvgVolume.
TrendRule if C > emaLT.
VolaRule if volaRatio > minVolaRatio and simpleavg(H-L,10) > simpleavg(H-L,200).
RelStrRule if rsSPX > rsSPXmin and rsGroup > rsGroupmin.
PullbackRule if rsi < rsiBuyLvl.
EnoughData if hasdatafor(trendLen+10) > trendLen.
!FundamentalRule if [eps]>[eps est].
Screen if EnoughData
and TrendRule
and VolaRule
and RelStrRule
and PullbackRule
!and FundamentalRule
and VolumeRule.
EntryTrigger if C > lowresult(H,2,1).
Buy if valrule(Screen,1) and EntryTrigger.
Exit if (C < lowresult(L,trailBars,1)) 
or 
(valrule(C > emaST,1) and C < emaST)
or
rsi > rsiExitLvl.
ShowValues if EnoughData.