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An Unusual 4 ETF Portfolio…That Seems to Work

I know I repeat it a lot but the purpose of this blog is not to offer recommendations but rather to share ideas.  So here is one that I am not quite sure about but am keeping an eye on.

The FourNonCorr Portfolio

Somewhere awhile back I started looking at trying to pair non correlated – or even inversely correlated – securities in a portfolio that had the potential to outperform the overall market. What follows is what I refer to as the FourNonCorr Portfolio.  For the record I do not trade this portfolio with real money.  I am still trying to figure out if there is something to it or not.  But given that it has outperformed the S&P 500 by a factor of 3-to-1 (granted, using hypothetical results) since December of 2007, I figure it might be worth monitoring for awhile.

The portfolio consists of four ETFs:

Ticker FXE – Guggenheim CurrencyShares Euro Trust

Ticker UUP – PowerShares DB US Dollar Index Bullish

Ticker TLT – iShares Barclays 20+ Yr Treas. Bond

Ticker XIV – VelocityShares Daily Inverse VIX ST ETN

The monthly charts for each appear in Figure 1.1Figure 1 –The Four ETFs in The Four NonCorr Portfolio (Courtesy AIQ TradingExpert)

As you can see there is a lot of “zigging” by one accompanied by “zagging” for another.  No surprise that when the Euro rises the dollar falls and vice versa. Also, TLT often seems to move opposite XIV. That is essentially the purpose of these pairings.

Figure 2 displays the correlations between the four ETFs in the portfolio (using AIQ TradingExpert Matchmaker function from 8/31/2012 through 8/31/2017 using weekly data).  A reading of 1000 indicates a perfect correlation, a reading of -1000 indicates a perfectly inverse correlation.

FXE UUP TLT XIV
FXE (913) 77 (13)
UUP (913) (117) 43
TLT 77 (117) (234)
XIV (13) 43 (234)

Figure 2 – Correlations for the FourNonCorr Portfolio ETFs (Source: AIQ TradingExpert)

Clearly there is a whole lot of “not correlating much” going on.

Results

For testing purposes I used monthly total return data for each ETF from the PEP Database from Callan Associates.  The one exception is ticker XIV which did not start actual trading until December 2010.  For January 2008 through November 2010 I used index data for the index that ticker XIV tracks inversely (S&P 500 VIX SHORT-TERM FUTURES INDEX). Actual XIV ETF data is used starting in December 2010.

As a benchmark, I also tracked the cumulative total return for ticker SPY (that tracks the S&P 500 Index).

Figure 3 displays the cumulative percent gain or loss for both the FourNonCorr Portfolio and ticker SPY.3Figure 3 – Cumulative % gain/loss for The FourNonCorr Portfolio (blue) versus SPY (red); 12/31/2007-9/30/2017

Year-by-year results appear in Figure 4

  4 NonCorr SPY Diff
2008 (6.0) (37.0) 31.0
2009 26.1 26.4 (0.3)
2010 45.2 14.9 30.3
2011 (1.3) 2.1 (3.4)
2012 34.3 15.8 18.5
2013 19.3 32.2 (12.9)
2014 5.3 13.5 (8.2)
2015 0.6 1.3 (0.8)
2016 21.0 11.8 9.2
2017* 24.4 14.1 10.2

Figure 4 – Year-by-Year Results

The results by the numbers appear in Figure 5.

4NonCorr SPY
Average 12mo % +/- 17.8 11.2
Median 12mo % +/- 14.9 15.0
Std. Deviation 17.1 16.8
Ave/Std. Dev. 1.04 0.67
Worst 12mo % (11.9) (43.2)
Max. Drawdown % (17.8) (48.4)

Figure 5 – By the numbers

All told The FourNonCorr Portfolio:

*Gained +334% versus +110% for SPY since 12/31/2007

*Experienced a maximum drawdown of -17.8% versus-48.4% for SPY

Thoughts

On paper, The FourNonCorr Portfolio looks pretty decent, particularly compared to the S&P 500 Index.  But you will recall that I stated earlier that I don’t actually trade this portfolio with real money.  Why not?  A few concerns:

*Interest rates tend to move in long-term waves up and down.  How beneficial will it be to have TLT in the portfolio if and when interest rates embark on a long-term wave up?

*I don’t entirely trust ticker XIV.  Because of the way it is built it seems to have the benefit of upward bias due to contango in the VIX futures market (the opposite of ticker VXX – please Google “VXX” and/or “contango” for an actual explanation) it also holds the potential to sell off in shocking fashion.  Using the index data as I did in order to replicate hypothetical performance from Jan 2008 through Nov 2010, XIV declined a stunning -72% between the end of May 2008 and the end of November 2008. It also experienced a -60% decline in 2015-2016. Need to give some thought to adding a security that is even capable of that to a permanent portfolio.

*On the flip side, XIV has been the driving force for gains in recent years and shows a cumulative gain of +416% since 12/31/2007.  If (and when?) we ever do see a bear market and/or a significant pickup in volatility will XIV have a large negative influence on performance?  That seems to be the $64,000 question.

Summary

As a thought experiment, The FourNonCorr Portfolio shows a pretty decent track record and seems to hold some interesting promise.  As a real money, real world experience – questions remain.

Stay tuned, tinker and experiment if you wish,and don’t be too quick to “dive in.”

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  Whilne 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.

 

This is One Crude Approach

In this previous article I wrote about some conflicting outlooks for crude oil in the near-term.  On one hand, the software that I use is pointing to higher prices based on a bullish Elliott Wave count.  On the other hand, there appears to be a lot of upside resistance and we are in a typically unfavorable seasonal period for crude oil.

For this piece we will assume that a trader:

1) Has settled on the “bearish case” and wants to enter a position that will profit if crude oil does decline in price in the days and weeks ahead.

2) Does not want to “bet the ranch”

3) Has no opinion as to how far crude oil may fall (i.e., would like to profit even if crude declines only a small amount).

The “purest” play for this trader would be to sell short crude oil futures. If crude declines the trader makes money and vice versa.  The problem for a lot of traders is that each $1 movement in the price of crude oil equates to a $1,000 gain or loss in their account.  Too rich for the “average” trader’s blood.  So let’s consider a “cheap” alternative.

In-the-Money Put Option on Ticker USO

Ticker USO is an ETF that is designed to track the price of crude oil futures (one warning: because of the vagaries of futures pricing there can over time be significant variances between the overall movement of crude oil futures and that of ticker USO).  As I write, ticker USO is trading at $10.48 a share.  This means that the 13 strike price put is $2.52 “in-the-money”.  The Dec 15 put is trading at $2.53 per option (or $253 since each option is for 100 shares).

For the record, a trader could easily buy a less expensive at-the-money put option.  However, the reason we are opting for the ITM put in this example is because we want point-for-point movement with the underlying shares. Consider:

Strike Price – option price = breakeven price

13 – 2.53 = $10.47

USO shares are trading at $10.48; buying this put at $2.53 gives us a breakeven price of $10.47.  In other words we are paying just $0.01 (x100) in time premium.  Below $10.47 a share we will enjoy point for point movement just as if we had sold short shares of USO.

Figure 1 displays the particulars; Figure 2 displays the risk curves.

1Figure 1 – USO Dec 13 put (Courtesy www.OptionsAnalysis.com)

2Figure 2 – USO Dec 13 put risk curves (Courtesy www.OptionsAnalysis.com)

Position Management

Important: As always, any trade examples appearing on JayOnTheMarkets.com are for educational purposes only and should not be considered “recommendations.”   With that in mind, let’s complete this example by discussing how a trader might manage this position once entered into.

As you can see in Figure 3, there are several prices levels that could be considered as “resistance” levels.  A trader holding the Dec 13 put might consider using these as “stop-loss” levels – i.e., exiting the trade, presumably with a loss, if USO rises above the chosen resistance level. 3Figure 3 – USO with resistance levels (Courtesy ProfitSource by HUBB)

*If the trader exits the trade if USO rises above the first resistance level of $10.71 a share, he or she would lose roughly -$30 (out of the initial $253 investment).

*If the trader exits the trade if USO rises above the second resistance level, he or she would lose roughly -$82 (out of the initial $253 investment).

There really is no “best” choice.  The key determinant is the traders own decision whether to give the trade “more room to move” or to “keep it on a tight leash.”

4Figure 4 – USO Dec 13 put position management plan (Courtesy www.OptionsAnalysis.com)

Summary

The purpose of this piece is NOT to convince you to play the short side of crude oil.  The purpose of this piece is to highlight a way to get point-for-point movement via the use of options instead of trading the underlying security.  Instead of selling short shares of USO – with the attendant margin requirements and unlimited risk – a trader can buy an in-the-money put for a fraction of the cost and still profit even on a small decline in the price of  USO.

That’s a lot to accomplish for $253.

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 Critical Juncture (and Rough Time of Year) for Crude Oil

I’ve been reading a lot of “bullish talk” regarding crude oil of late.  And I think that there might be something to it.  However, I for one will probably hold off on jumping on the bullish bandwagon for just a little while longer.

One the One Hand

Figure 1 displays the spot price for crude oil with key support and resistance levels highlighted.  Until price breaks out of this range all predictions are just that – predictions.

1Figure 1 – Monthly Crude Oil (Courtesy ProfitSource by HUBB)

Figures 2 and 3 show weekly and daily crude oil charts with the Elliott Wave counts from ProfitSource by HUBB. Note that the weekly put in a Wave 5 bottom a while back and the daily is now suggesting an impending 5th wave up.2Figure 2 – Weekly Crude Oil (Courtesy ProfitSource by HUBB)

3Figure 3 – Weekly Crude Oil (Courtesy ProfitSource by HUBB)

The caveat here is that EW wave counts can and do change and the counts presented in Figures 2 and 3 in no way “guarantee” that a rally is in the offing.  But Figures 1 through 3 do illustrate why there is a lot of “bullish talk” regarding crude oil.

On the Other Hand

The historical performance of crude oil suggests that this may not be the ideal time to pile onto the bullish side.  Figure 4 displays the Annual Seasonal chart for crude oil futures since they started trading in 1983.

4aFigure 4 – Crude Oil Annual Seasonal Trend

It is important to note that Figure 4 is NOT a “roadmap” and that prices do not simply follow this pattern year in and year out.  Historically through, crude has been a very “seasonal” market and it often is useful to know whether the current predominant seasonal trend is up or down. The seasonal trend has been up since mid-June – which as you can see in Figure 3 coincided with the most recent low in price.

The next significant seasonal period is bearish and extends from the close on October Trading Day #9 (which is Thursday 10/12) through the close on December Trading Day #8 (which is Tuesday 12/12).  As with any seasonal trend there is no guarantee that crude will decline in price between these dates. Still, consider the historical performance of crude oil during this period as displayed in Figures 5 and 6

5Figure 5 – $ gained (lost) holding a long 1-lot position in crude oil futures from Oct TDM 9 through Dec TDM 8 (1983-present)

Figure 6 displays a summary of crude oil performance during this particular seasonal period.

6

Figure 6 – Crude oil performance; Oct TDM 9 through Dec TDM 8 (1983-present)

Summary

Please remember that I am not urging anyone to play the short side of crude.  I am merely pointing out why I am hesitating to play the bullish side. Crude oil has historically been one of the more reliable seasonal markets. But remember that nothing can be counted on 100%.  Even the highlighted awful, terrible, no good, very bad October into December period has seen crude show a gain almost 30% of the time.

The bottom line: If the bullish case plays out I will miss out on an opportunity (It wouldn’t be the first time).  Nevertheless – and despite what anyone may say – investing and trading really is about playing the odds.  For the next several months the odds appear not to favor the bulls in crude.

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.

Buy Low, Sell High?

The act of “buying low and selling high” has long been regarded as the “ultimate goal” of the “average investor”.   But is it actually achievable on any kind of a consistent basis?  Depends who you ask, I think.  Another reasonable question is “is it even necessary?”  As a trader and investor who has spent a lot of time focusing on trends and relative strength, I would aver that it is –in the immortal words of Radar O’Reilly – “not necessarily necessary.”  Still, opportunities are where you find them.

One website I like a lot (in the interest of full disclosure, part of the reason I like it a lot is because they often link to my articles) is The McVerry Report.  If you are a market junkie (“Hi, my name is Jay”) or have even just a passing interest in a wide variety of market thoughts, McVerry is an excellent place to visit.

Way Up and Way Down

So today I will highlight two diametrically opposed ideas.  For the record, I am not endorsing these websites per se, nor am I endorsing the ideas set forth.  All I am saying is that I found them to be interesting and I believe that you might as well.

The first comes from www.StockCharts.com and highlights ticker LIT – an ETF that tracks the price of lithium.  As you can see in Figure 1, LIT is exhibiting a few “classic” signs of a blow off top – a parabolic move up plus a potential double-top.1Figure 1 – Ticker LIT; A parabolic blowoff and a double top?  Only time will tell

Has the rally in LIT run its course and is it doomed to collapse from here?  Not necessarily.  But I for one will be keeping an eye on this one.

The second idea comes from www.Stockerblog.blogspot.com

I recently wrote an article about the “potential joys and likely sorrows” associated with picking a bottom.  The two stocks highlighted don’t exactly fit that bill.  They are more in the “stocks forming a potential long-term base by moving sideways in a range for an extended period of time” category.

Very often – but definitely nowhere close to always – stocks that build a long narrow base eventually breakout to the upside and can register significant gains.  Under the category of CYA, for the record I am not suggesting that that will happen with the stocks displayed in Figures 2 and 3, nor am I recommending that you buy these stocks.  The truth is I don’t even really know what either of these companies do, what their fundamentals are, etc.

I just like a long, tight consolidating base.  Whether either of these examples pan out remains to be seen.  But you get the “picture.”

2Figure 2 – Ticker BEBE

3Figure 3 – Ticker SPRT

Summary

The average reader might come away from this piece thinking “so this Kaeppel fella wants me to buy BEBE and SPRT and to sell short LIT.”  Um, no.  All I am saying is this:

Securities that “spike” higher and then form a (potential) double top often have trouble making further headway.  Likewise – and more importantly – if a security exhibits this pattern and then starts to break, the subsequent decline can be swift and severe.  Will that prove to be the case with LIT? We’ll have to wait and see.

As I learned from my AAPTA colleague Charles Kirkpatrick, buying stocks that have formed a long sideways base is an extremely viable approach when it comes to achieving long-term investment success.  Does that mean that BEBE and SPRT are destined to soar? Not at all.  But they might be a good place to start looking.

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.

 

 

 

Gold Stocks in October

Figure 1 displays the action in gold stocks (using ETF ticker GDX as a proxy) since late 2007.  Here is one possible interpretation- gold stocks:

1. Plunged -81% from 2011 into the January 2016 low

2. Rallied 156% into August 2016

3. Retraced 68.1% of that rally into December 2016

4. Since then have been “coiling” into an ever tighter range

1Figure 1 – Ticker GDX

This may lead some traders to conclude that gold stocks are due for a breakout in the not too distant future.  Could this happen?  Of course.  Could it happen in the month of October?  Abolutely.

But is that the way to bet?

Gold Stocks and the Month of October

For testing purposes we will use monthly total return data for ticker FSAAGX (Fidelity Select Gold) sector fund since it started trading in 1986.  Figure 2 displays the monthly total return for ticker FSAGX during each month of October since 1986.

Year FSAGX %
1986 (1.4)
1987 (29.2)
1988 1.0
1989 1.0
1990 (16.4)
1991 7.7
1992 (3.0)
1993 14.9
1994 (7.2)
1995 (12.1)
1996 (2.7)
1997 (15.3)
1998 (3.0)
1999 (8.4)
2000 (11.0)
2001 (1.9)
2002 (10.5)
2003 9.6
2004 2.6
2005 (5.7)
2006 3.7
2007 12.1
2008 (35.3)
2009 (4.4)
2010 1.9
2011 6.7
2012 (3.1)
2013 (0.7)
2014 (17.9)
2015 7.6
2016 (7.3)

Figure 2 – FSAGX total return during the month of October

Figure 3 displays the growth (er, decline) of $1,000 invested in ticker FSAGX ONLY during the month of October.  In sum an initial $1,000 declined by -78% to just $218.3Figure 3 – Growth of $1,000 invested in FSAGX ONLY during October (1986-2016)

But no one should take this to mean that gold stock cannot advance during October.  To wit:

*FSAGX has risen 11 times (35% of the time)

*FSAGX has declined 20 times (65% of the time)

*The average UP month was +6.3%

*The average DOWN month was -9.8%

*The maximum October gain was +14.9% in 1993

*The maximum October loss was -35.3% in 2008

*October has registered a gain of +10% or more twice

*October has registered a loss of -10% or more eight times

Summary

So how will gold stocks perform during October 2017?  Well, so far so good.  After a sharp decline between the first week of September and the end of the month gold stocks have “bounced” higher during early October.

A fair number of usually reliable seasonal trends in a variety of areas have not panned out according to their usual tendencies in 2017 so there is certainly no guarantee that the overall bearish trend during October will play out in gold stocks.  In fact, as we saw in 1993, 2003 and 2007,there is no reason gold stocks cannot rally quite sharply just because the calendar reads “October.”  Given the setup described in Figure 1 above gold stocks could breakout strongly to the upside at anytime.

But history suggests that that is not the way to bet.

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.

Bottom Pickers Heaven

For openers I should point out that there are alternative names for “Bottom Pickers Heaven.”  The most common one is “Suckers Hell”.  In any event, I am pretty sure that “Bottom Pickers Heaven” is located on “Do You Feel Lucky Punk Avenue”.  But let’s not worry about all of that right now.

For now, welcome to the New Normal, which can be pretty well summed up as follows: Stocks go up, everything else goes down.

To wit, the microcap ETF ticker EWC has been up 26 of the last 28 trading days.  I am going to be brutally candid here: I have no idea what this means going forward.  Now onto our original topic.

Attempting to “pick bottoms” in the financial markets is often referred to as attempting to “catch a falling safe” or “catch a falling knife”, take your pick.  And there is good reason for this.  The desire to be a “hero” and to “maximize profit” and to buy as closely as possible to an actual bottom in price – well, in the immortal words of the late, great Glenn Frey – “it’s got a very strong appeal.”

Unfortunately, like trying to catch a falling safe, it’s a great trick when it works, but comes with certain inherent risks.  Does this mean you should never, ever attempt to pick a bottom? Not necessarily.  What it does mean is that “bottom picking” should fit firmly in the “Speculation with a very small percentage of your capital with an understanding that a great many of these attempts will fail spectacularly so you’d better have some kind of risk controls in place” portion of your overall portfolio.

Lastly, known of the securities highlighted below are “recommended” only “highlighted”.

Ticker UNG

Natural gas has been in a serious downtrend June 2008 when the fracking boom got going. Is that decline about to end? Probably not.  But as highlighted here we are in a (potentially) seasonally favorable period for natural gas and with UNG trading at $6.31 the “low to beat” is $5.78.1Figure 1 – Ticker UNG (Courtesy AIQ TradingExpert)

Ticker SGG

Like UNG, physical commodities of all stripes have been pretty much a disaster since 2008.  Sugar – as tracked by ETF ticker SGG – has declined roughly -72% since August 2011.  Does this mean it is about to rally?  Not necessarily.  But SGG appears to be attempting to form some sort of a short-term multiple bottom in the $26.50 area, with a “low to beat” of $24.97 established back in August of 2015.2Figure 2 – Ticker SGG (Courtesy AIQ TradingExpert)

Ticker SWN

The energy market in general has taken it on the chin since about June of 2014 with an attempt to rally in 2016 followed by more weakness in 2017.  Ticker SWN stands as a classic “bombed out” stock.  After a roughly 90% decline since its peak in 2010, SWN has formed (at least for now, he said ominously) a double bottom at $5 a share.  Will that low hold?  It beats me.  But if you’re wearing your “bottom pickers heaven” sunglasses, that means you think the sun is shining (For what its worth, SWN reported a 17% rise in revenues in the last quarter.  Does that mean anything?  I guess we will find out).3Figure 3 – Ticker SWN (Courtesy AIQ TradingExpert)

Summary

Please DO NOT go out and buy any of these securities based solely on what I have written here.

Let’s face facts:

Fact #1. Bottom picking has an allure

Fact #2. Bottom picking fails way more often than it succeeds

Fact #3. I have no strong feelings regarding the securities highlighted above one way or the other.

With all these “facts” in mind, the bottom line is that these securities are at the very least “attempting” to form a bottom.  Should you choose to examine these more closely or simply to run or the hills is entirely up to you.

If you do choose to look more closely remember to put on your “high risk speculation” hard hat.  It could come in handy.

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.

 

Seasonality All Over the World

It has been pretty well documented that certain days of the month have been better than others for the U.S. stock market. As it turns out, this may not just be an “American Thing.”

Country ETFs

In March 1996 17 iShares single country stock index ETFs began trading.  The tickers are listed below.

EWA – Australia

EWO – Austria

EWK – Belgium

EWC – Canada

EWQ  – France

EWG  – Germany

EWH – Hong Kong

EWI – Italy

EWJ – Japan

EWM – Malaysia

EWW – Mexico

EWN  – Netherlands

EWS  – Singapore

EWP – Spain

EWD – Sweden

EWL – Switzerland

EWU – United Kingdom

The Test

Buy and hold in equal dollar amounts all of the ETFs listed above only during the following days each month starting in 1996:

*The 1st 2 trading days of the month

*Trading days #9 through 13

*The last 4 trading days of the month

*While out of the market we will assume interest is earned at a rate of 1% annually.

We will compare this test to the results achieved by buying and holding all of the ETFs listed above with an annual rebalancing at the end of each year.

The Results

Figure 1 displays the growth of $1,000 invested in our “Seasonal System” (blue) versus $1,000 invested on a buy-and-hold basis with an annual rebalance (red).1Figure 1 – Growth of $1,000 invested using “Seasonal Single Country System” (blue) versus “Buy-and-Hold” (red); 3/29/1996-9/29/2017

Things to note:

Measure System Buy/Hold
Average 15.3 9.2
Median 13.4 11.2
Std. Deviation 12.4 21.3
Ave/SD 1.2 0.4
Worst 12 Mos.% (21.3) (56.6)
Max. Drawdown % (24.9) (62.2)

Figure 2 – “Seasonal System” versus “Buy/Hold”

Note in Figure 2 that the “System” generates a higher rate of return (+15.3% versus +9.2%) with a significantly lower annual standard deviation (12.5% versus 21.3%) and much lower (though not small) maximum drawdown of -24.9% versus -62.2% for “Buy/Hold”.

Other things to note:

*Overall the “System” gained  +1,746% while Buy/Hold gained +363%.

*The “System” showed a 12-month gain 92% of the time and a 12-month loss 8% of the time

*”Buy/Hold” showed a gain 66% of the time and a 12-month loss 34% of the time.

*The “System” outperformed “Buy/Hold” 61% of the time (looking at trailing 12 month performance) and “Buy/Hold” outperformed the “System” 39% of the time.

Summary

The results presented here – utilizing 17 non-US single country ETFs – suggest that the idea that certain days of the month are better than others for stocks is not limited to U.S. stocks.

Still, while the “system” presented herein outperformed buy-and-hold by 4.8-to-1 since 1996, it only outperforms buy-and-hold 61% of the time.  And in fact, in the past 12 months the “System” has gained +8.4% versus a gain of +25.6% for the “Buy/Hold” approach.  So it should be noted that in a rip-roaring bull market the “Seasonal” approach can under perform simple “Buy/Hold” by a significant amount.

Still, the long-term hypothetical results depicted here do suggest a significant long-term edge for the seasonal trading day-of-the-month approach.

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.

 

Do You Think Gold Will Rally?

Please notice that the title of this piece is in the form of a question.  I am not offering any suggestions regarding the future direction for the price of gold. The sole purpose of this article is to highlight a particular strategy that many traders never consider – but which can be a terrific way to express a market opinion without risking a lot of money.

The State of GLD

Figures 1 and 2 display two potentially alternate views for ticker GLD – an ETF that tracks the price of gold bullion.  Some people will look at Figure 1 and see a bullish setup, some will look at Figure 2 and see a chart with LOTS of overhead resistance and some people will simply shrug their shoulders and say, “it beats me.”1Figure 1 – Ticker GLD with bullish Elliott Wave count (Courtesy ProfitSource by HUBB)

2Figure 2 – Ticker GLD with a lot of overhead resistance levels (Courtesy AIQ TradingExpert)

For the purposes of this article let’s assume or a moment that you fall somewhere in the “I wouldn’t mind being bullish but I don’t really feel like risking much betting on it” category.  Given this hypothetical assumption, let’s consider the following hypothetical trade:

Buy 1 Jan2018 GLD 130 call

Sell 2 Jan2018 GLD 140 calls

Buy 1 Jan2018 GLD 150 calls

This strategy is referred to as an “Out-of-the-Money Butterfly Spread” or OTM Butterfly for short.  It might also be unofficially called a “really cheap bet just in case things go right.”

In essence the relevant questions are:

1) Do you think there is chance gold will rally between now and mid-January 2019?

2) Do you have $53 bucks?

Figure 3 displays the particulars and Figure 4 displays the risk curves.

3Figure 3 – GLD OTM Butterfly Spread (Courtesy www.OptionsAnalysis.com)

4Figure 4 – GLD OTM Butterfly Spread Risk Curves (Courtesy www.OptionsAnalysis.com)

Things to note:

*A 1x2x1 spread costs $53.  This is the maximum risk on the trade

*If GLD does rally the potential profit will peak out and roll over if GLD rises above the middle strike of 140

*If GLD fails to rally this trade will absolutely, positively lose money

*The breakeven price for GLD at January expiration is $130.53

Bottom line: GLD MUST rally at some point or this trade will lose money.  But remember, the maximum risk only $53.  In the meantime – and for example’s sake – if GLD rises to roughly $130 a share by say, December 12, the open profit at that time would be roughly $125 – i.e., +136% ROI.

Either these types of numbers float your boat or they don’t.

Summary

Am I suggesting in any way shape or form that gold is going to advance in price between now and mid-January 2019?  Nope.

Am I recommending that you load up on the trade detailed above?  Nope.

The trade detailed above is intended to serve merely as an example of “one way to play” if:

*You think something “might” move

*You are willing to actually enter a trade to bet on that “something” actually moving

*But you don’t want to risk much capital

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 Simple Indicator for Traders

First the Bad News: There are no “magic bullets” when it comes to trading.  There are people in this industry who have literally tested somewhere in the range of six bazillion “indicators” – give or take (“Hi. My name is Jay”).  Every trend following indicator looks like a gold mine when it latches onto a huge trend and rides it (but not so much when it starts getting whipsawed).  And every overbought/oversold indicator looks like a gift from heaven from time to time when it somehow manages to peak (or valley) and then reverses right at a high (or low).  And then the next time the thing gets oversold the security in question just keeps plunging and the previously “amazingly accurate” indicator just gets more and more oversold.

Bottom line: what I am about to discuss is likely no better or worse than a lot of other indicators.  And it is no holy grail.  Still, I kinda like it – or whatever that is worth.

UpDays20

I call this indicator UpDays20 and I stole, er, learned it originally from Tom McClellan of McLellan Financial Publications.  My calculation may be slightly different because I wanted an indicator that can go both positive and negative.  For a given security look at its trading gains and losses over the latest 20 trading days.

UPDays20 = (Total # of Up days over the last 20 trading days) – 10

So if 10 of the last 20 trading days showed a gain then UpDays20 would read exactly 0.

If only 6 of the last 20 trading days showed a gain then UpDays20 would read -4

You get the idea (and proving once again that it “doesn’t have to be rocket science”).  As a “trading method” it is always advised that this indicator – like most all other indicators – NOT be used as a standalone approach to trading.  That being said, the way I follow this indicator is as follows.

Step 1) UpDays20 drops to at least -2

Step 2) UpDays20 rises 2 points from a low

Step 3) The security in question then rises above its high for the previous 2 trading days

It is preferable to follow this setup hen the security in question is above its 200-day moving average, but that is up to the trader to decide (the danger to using this with a security below its 200-day moving average is that it might just be in the middle of a freefall.  The upside is that counter trend rallies can be fast and furious – even if sometimes short-lived).

Again, there is nothing magic about these particular steps.  They are simply designed to do the following:

1) Identify an oversold condition

2) Wait for some of the selling pressure to abate

3) Wait for the security to show some sign of reversing to the upside

Like just about every other indicator/method, sometimes it is uncannily accurate and sometimes it is embarrassingly wrong (hence the reason experienced traders understand that capital allocation and risk management are far more important than the actually method you use to enter trades).

In this previous article (in Figures 3 and 4) I wrote about using this indicator with ticker TLT.  Figure 1 and 2 display the “buy” signals generated using the rules above for tickers IYT and GLD.1Figure 1 – UpDays20 “Buy” Alerts for ticker IYT (Courtesy AIQ TradingExpert)

2Figure 2 – UpDays20 “Buy” Alerts for ticker GLD (Courtesy AIQ TradingExpert)

Are these signals good or bad?  That is in the eye of the beholder and not for me to say.  One big unanswered question is “when do you exit”?  That is beyond the scope of this “idea” article – however, “sell some at the first good profit and then use a trailing stop” looks like a decent approach to consider) but would have a profound effect on any actual trading results.

Some of the signals displayed in Figures 1 and 2 are obviously great, others are maybe not so hot.  Interestingly, some of the signals in Figure 1 and 2 that don’t look to timely at first blush actually offered a profitable opportunity to a trader who was inclined to take a quick profit. Again, how you allocate capital and when you exit with a profit and when you exit with a loss would likely have as much impact on results as the raw “buy” signals themselves.

Summary

No one should go out and start trying to trade tomorrow based on UpDays20.  No claim is being made that the steps detailed herein will result in profits nor even that this is a good way to trade.

But, hey, it’s one way.

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 Election Cycle and…Gold Stocks?

It is not a little known fact that certain portions of the 4-year U.S. election cycle tend to witness above average stock market performance. Is it possible the same might be true for gold stocks?

Let’s examine the possibility.

The Gold Stock Election Cycle Calendar

Figure 1 displays my unofficial “Gold Stock Election Cycle Calendar.”1

Figure 1  – Jay’s Unofficial Gold Stock Election Cycle Calendar

Figure 2 displays the growth of $1,000 invested in ticker FSAGX (Fidelity Select Gold Sector Fund) only during the months labeled “Miners” in Figure 1.2Figure 2 – Growth of $1,000 invested in FSAGX during months labeled “Miners”; 1985-2017

Figure 3 displays the growth of $1,000 invested in ticker FSAGX only during months NOT labeled “Miners”.3Figure 3 – Growth of $1,000 invested in FSAGX during months NOT labeled “Miners”; 1985-2017

For the record:

*$1,000 invested during the months labeled “Miners” grew +3,766% to $38,662.

*$1,000 invested during the months NOT labeled “Miners” declined -87.5% to $125.

Probably the main thing to note is that anyway you cut it gold stocks are extremely volatile.  Figures 4 and 5 display the 12-month % profit/loss for both the favorable and unfavorable periods displayed in Figures 2 and 3.4Figure 4 – Rolling 12-month % rate-of-change from holding FSAGX during months labeled “Miners”; 1985-20175Figure 5 – Rolling 12-month % rate-of-change from holding FSAGX during months NOT labeled “Miners”; 1985-2017

*The “Miners” months had a maximum 12-month gain of +74.3% and a maximum 12-month loss of -16.6%.

*The “Non Miners” months had a maximum gain of +71.7% and a maximum 12-month loss of -63.1%

Summary

As a student of seasonal market trends I find all of this very interesting.  Nevertheless, given that the “good months” depicted herein can still witness some significant “downs” and that the “non good months” can still witness some very significant “ups”, it seems best to avoid the temptation to think that any sort of gold stock ”magic bullet” exists.

Never hurts to look for an “edge” though.

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.