The Trend, the Trend, the Trend

  • SumoMe

In real estate, it’s “Location, Location, Location.” In the financial markets it’s “the Trend, the Trend, the Trend.”  There is a great deal of certainty about what will happen next in stocks, bonds and gold.  But the key to successfully navigating these turbulent times starts not with predicting the future but rather with identifying the current trend in the here and now and going from there.  So let’s take a look at, well, what else, the trends.

See also Please Don’t Buy That S&P 500 Index Fund

I have certain trend-following models that I follow to help me to determine which way to be leaning in the markets.  Like any trend-following method they are far from perfect (my stock market model for example, suffered not one but two significant whipsaws in the last year+).  But for me there is no expectation that they will be perfect.  The only goal is to catch most of the upside during major bull markets, and miss much of the downside during major bear markets.

Stocks

For stocks I look at the 10-month and 21-month moving averages for the S&P 500 Index and use the following rules:

*A sell signal occurs when the S&P 500 closes 2 consecutive months below its 21-month moving average AND is also below its 10-month moving average

*Following a sell signal a new buy signal occurs when the S&P 500 registers a monthly close above its 10-month moving averagestock-trendFigure 1 – Stock Market trend-following signals (Courtesy AIQ TradingExpert)

This method avoided much of the 1973-1974, 2000-2002 and 2008 bear market destruction.  That’s the good news.  The bad news is that it sold at the end of September 2015 and at the end of February 2016 – both just prior to powerful upside reversals (like I said, trend-following models ain’t perfect).

The most recent signal was a buy signal on 3/31/2016.  

So the trend for stocks is presently BULLISH

Bonds

I have written several posts about this in the past.  My favorite bond timing indicator is Japanese stocks.  No seriously.  They have a string tendency to trade inversely to the 30-yr US t-bond.  I track ticker EWJ and watch the 5-week and 30-week moving averages.  Because Japanese stocks and t-bonds trade inversely I use the following rules:

*A buy signal for bonds occurs when the 5-week moving average for EWJ drops below the 30-week moving average for EWJ

*A sell signal for bonds occurs when the 5-week moving average for EWJ rises above the 30-week moving average for EWJ

The most recent signal was a sell signal for t-bonds on 6/10/2016

So the trend for bonds is presently BEARISH

bond-trendFigure 2 – Bond trend-following signals(Courtesy AIQ TradingExpert)

Gold

For gold I use two moving averages on a weekly chart for something I refer to as Jay’s Anti-Gold Index.  Rather than go into a long explanation I will link to the original article on the topic and offer a short explanation.  In AIQ TradingExpert I created a ticker comprised of 4 other tickers (GLL, RYSDX, SPX and YCS) which all trade in a negatively correlated manner to the price of gold (er, usually).

One moving average I call the “FrontWeighted36DayMA” (“FrontWeightedMA” for short.  The calculations are based on someone else’s work – unfortunately I cannot recall the person’s name so cannot give proper credit.  Hopefully Karma will work and somewhere that person will  Have a Nice Day without really knowing why.  The calculations are a bit long-winded so the AIQ TradingExpert code appears at the end of this article.

The other is the 55-week exponential moving average.

(CAVEAT: Because some of these tickers did not exist until 2006 trading signals began on 12/31/1996, so yes, it is by my standards a relatively short test period for a long -term moving average method.  To put it another way, don’t bet the ranch on  gold basedon this one indicator)

The trading rules are as follows:

*When the FrontWeightedMA closes a week BELOW the 55-week MA then a BUY signal for gold occurs.

*When the FrontWeightedMA closes a week ABOVE the 55-week MA then a BUY signal for gold occurs.

gold-signals-3Figure 3 – Gold Trading Signals (Courtesy AIQ TradingExpert)

The most recent signal was a buy signal on 3/18/16.

So the trend for gold is presently BULLISH.

Summary

These indicators do NOT represent “my opinion as to where the markets are headed next” (because the truth is I don’t know).  There are objective, mechanical measures of where things stand today.  Nothing more, nothing less.

Also, none these indicators falls into the “World Beater” or “You Can’t Lose in Investing” categories.  But then again they are not really designed to (BTW if you do posses methods that do fit into either of the aforementioned categories, I would love to hear from you – off the record, of course).  What they do achieve is to offer a decent frame of reference during times of doubt.

And that is one of the most powerful tools any investor can possess.

So in sum, the current trend (at least according to what you’ve seen here) for stocks and gold is bullish and the current trend for bonds is bearish.

How long any of these trends will remain in place is anyone’s guess.  So enjoy them while they last.

Jay Kaeppel

Code for JKma moving average

Bar34 is val([close], 34) * 0.01.

Bar33 is val([close], 33) * 0.01.

Bar32 is val([close], 32) * 0.01.

Bar31 is val([close], 31) * 0.01.

Bar30 is val([close], 30) * 0.01.

Bar29 is val([close], 29) * 0.01.

Bar28 is val([close], 28) * 0.01.

Bar27 is val([close], 27) * 0.01.

Bar26 is val([close], 26) * 0.01.

Bar25 is val([close], 25) * 0.02.

Bar24 is val([close], 24) * 0.02.

Bar23 is val([close], 23) * 0.02.

Bar22 is val([close], 22) * 0.02.

Bar21 is val([close], 21) * 0.02.

Bar20 is val([close], 20) * 0.02.

Bar19 is val([close], 19) * 0.02.

Bar18 is val([close], 18) * 0.02.

Bar17 is val([close], 17) * 0.03.

Bar16 is val([close], 16) * 0.031.

Bar15 is val([close], 15) * 0.031.

Bar14 is val([close], 14) * 0.031.

Bar13 is val([close], 13) * 0.031.

Bar12 is val([close], 12) * 0.031.

Bar11 is val([close], 11) * 0.031.

Bar10 is val([close], 10) * 0.031.

Bar9 is val([close], 9) * 0.031.

Bar8 is val([close], 8) * 0.031.

Bar7 is val([close], 7) * 0.006.

Bar6 is val([close], 6) * 0.006.

Bar5 is val([close], 5) * 0.07.

Bar4 is val([close], 4) * 0.07.

Bar3 is val([close], 3) * 0.07.

Bar2 is val([close], 2) * 0.07.

Bar1 is val([close], 1) * 0.07.

Bar0 is [close] * 0.079.

 

OneFrontWeighted36BarMA1 is bar34 + bar33 + bar32 + bar31 + bar30 + bar29 + bar28 + bar27 + bar26 + bar25 + bar24 + bar23 + bar22 + bar21 + bar20 + bar19 + bar18.

 

TwoFrontWeighted36BarMA2 is bar17 + bar16 + bar15 + bar14 + bar13 + bar12 + bar11+ bar10 + bar9 + bar8 + bar7 + bar6 + bar5 + bar4 + bar3 + bar2.

 

ThreeFrontWeighted36BarMA3 is bar1 + bar0.

 

FrontWeighted36DayMA is OneFrontWeighted36BarMA1 + TwoFrontWeighted36BarMA2 +ThreeFrontWeighted36BarMA3.

 

h15 is expavg([high],15).

l15 is expavg([low],15).

hl15 is (h15+l15)/2.

 

JKma is (FrontWeighted36DayMA+hl15)/2.

 

(I know, fun right?)

 

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