Not my own stuff today, but two ideas that I found particularly interesting – and potentially useful.

The first is an article by Danny that discusses what happened in the stock market the year after the S&P 500 experienced a “flat” year (defined as a year during which the S&P 500 gained or lost less than plus or minus 5%).  Spoiler alert: Fasten your seat belts on New Year’s Eve.

Article #1: Stocks in 2016: why I like what I see by Danny

The second is an article written by Sal Ciella and highlights a simple “trading tip.”  I cannot confirm or deny its effectiveness but I do intend to explore it in greater depth.  If you are an active trader you may wish to also.

Article #2: Fine Tune Your Entries and Exits Trading the 3 Day EMA

Happy New Year and a Prosperous 2016!

Jay Kaeppel

The Bad News is that the stock market overall looks pretty awful to me.  The Good News is that I personally possess almost no “predictive” capabilities.  So what I “think” about the markets should mean even less to you then it does to me.

Still, I do study the markets a lot (some might say “too much”) and what I see – objectively – is a U.S. stock market that is still technically in an “uptrend” (based on the current status of several trend-following methods that I follow).  What “I think I see” (subjectively) is a U.S. stock market that is forming a major “topping” formation.

The bottom line is:  You should be watching the U.S. stock market very closely NOW and in the months ahead.  This is a market that (in my opinion) absolutely, positively needs to stage an upside breakout soon (early 2016?) or things could get ugly.

For Comparison’s Sake

Figure 1 displays the S&P 500 as it topped out in 2000.  Note:

a) A big run up followed by

b) A long period of sideways action within a fairly large range

Figure 1 – SPX October 2000

The S&P 500 subsequently declined about -45% over the next 21 months.

Figure 2 displays the S&P 500 as it topped out in 2007.  Note:

a) A big run up followed by

b) A long period of sideways action within a fairly large rangeFigure 2 – SPX December 2007

The S&P 500 subsequently declined about -54% over the next 15 months.

Figure 3 displays the S&P 500 in 2015.  Note:

a) A big run up followed by

b) A long period of sideways action within a fairly large range.Figure 3 – SPX December 2015

Does Figure 3 resemble Figures 1 and 2 to you?  And if so, how worried should we be?

On the Plus Side

Figures 4 and 5 show two different “trend following” indicators that are both “bullish” at the moment.  Figure 4 displays the S&P 500 with the 50-day and 200-day moving averages.  The mosr recent sell signal in late August resulted in a “whipsaw” (selling lower and buying back higher).  But that is the nature of trend-following indicators.  For our purposes:

*50-day>200-day = GOOD

*50-day<200-day = BAD

Figure 4 – SPX with 50-day and 200-day moving averages

Figure 5 displays one timing method I use.  Two consecutive monthly closes below the 21-month moving average generates a “sell” signal and a close above the 10-month moving average generates a “buy” signal. The most recent sell signal at the end of September was essentially a “wrost case” event as the stock market turned and rallied hard in October.  But again, that is the natre of trend-following.  The long-term results for this timing model is far superior to buy-and-hold, but not every signal is a “winner”.  For our purposes:

*Unless and until SPX closes 2 straight months below 21-month MA = GOOD

*If and when SPX closes 2 straight months below 21-month MA = BAD

Figure 5 – SPX with 10-month and 21-month moving averages

Summary

So here is what to watch as 2015 winds down and 2016 begins:

*If the trend-following indicators remain bullish and the major average breakout to the upside, then the bull market lives on.

*If the stock market fails to breakout to the upside and the trend-following indicators break to the bearish side you absolutely, positively should (again, in my opinion) be prepared to take some form of “defensive action” (raising some cash, hedging with options, etc.).

Um, Happy New Year (?)

Jay Kaeppel

In this article I wrote about a trade idea that involved the then very questionable idea of picking a bottom in gold stocks.  So did gold stocks actually bottom out?

The reality is that it is too soon to say.  But in the context of the trade I highlighted in the linked article, the only thing that matters is that they bottomed out “for awhile”.

Figure 1 displays the trade on the date of inception.

(click image to enlarge)Figure 1 – Original Position in GDX put options (Courtesy www.OptionsAnalysis.com)

Figure 2 displays the trade as I write.  Basically three things have happened since 11/19.

1. GDX rose from $13.97 to $14.35
2. 22 days of option time decay has worked in favor of this option position
3. This combination of factors has resulted in both options losing virtually all of their value.

The key to note is that the maximum profit has pretty much been achieved.  As a result, there doesn’t seem to be much point in holding onto this position through expiration (1 week from now).

(click image to enlarge)Figure 2 – Updated Position in GDX put options (Courtesy www.OptionsAnalysis.com)

The only downside to exiting now is that the bid/ask spread and commissions will knock a few bucks off of the final profit.  But this is far better than holding on for another week and – the Market Gods being who they are – gold stocks deciding to plummet.

Jay Kaeppel

As I wrote about here,  here, here and yes, here (and, um, also here), the holiday season tends to be a good time to invest in the stock market in general and in specific sectors in particular (with that pesky fly in the ointment, monkey in the wrench, pain in the rear caveat that “there are no guarantees this time around”).  So let’s add one more to the mix.

 (Jay Kaeppel Interview at BetterSystemTrader.com)

 Favorable Seasonal Period for Financial Stocks

*A favorable seasonal period for the financial stock sector tends to start at the close of the 11^th trading day of December (12/15/15 this year)

*The favorable period extends through December 31^st of the current year

We will use Fidelity Select Finance (ticker FIDSX) as a proxy for testing results.  However, it should be noted that due to switching restrictions, FIDSX cannot actually be used to trade the method I am about to discuss.  Fortunately other funds and ETFs are available and are listed a little later.  But for now, Figure 1 displays that growth of $1,000 invested in FIDSX only during this mid-to-late December period described above since 1988.

Figure 1 – Growth of $1,000 invested in FIDSX during Seasonally Favorable Period (1988-2015)

Figure 2 displays the year-by-year results for both FIDSX (which has switching restrictions that would likely result in a 2.5% deduction if you actually used FIDSX to trade this method) and ticker FNPIX (ProFunds Financial).  FNPIX started trading in 2000, has no switching restrictions and uses leverage of 1.5-to-1.

Figure 2 – FIDSX and FNPIX %+(-) during Seasonally Favorable Period (1988-2015)

For the record, during this period FIDSX has:

*Gained 24 times (89%)

*Lost 3 time (11%)

*Average % gain = +3.49%

*Average % loss = (-1.03%)

Since 2000 Ticker FNPIX has:

*Gained 13 times (87%)

*Lost 2 times (13%)

*Average % Gain = +4.77%

*Average % Loss = (-3.16%)

A Few Alternatives

Since FIDSX is not a viable trading alternative a trader might also consider

*ProFunds Finance fund (FNPIX)

*Rydex Real Estate fund (RYFIX)

*SPDR Financial Sector ETF (XLF)

Summary

As always I need to point out two things:

1) This is not a “recommendation”.  It is simply a presentation of information regarding a pattern that has held up reasonably well in the past (in this case “reasonably well” is defined as “89% winning trades and a 3.4-to-1 profit/loss ratio”).

2) There is never the slightest hint of a guarantee that any seasonal trend will play out “this time around” as well as it has in the past.

Still, as whoever said it first said it, Hey, 89% is 89%”

Jay Kaeppel

I’ll be honest – it always scares me a little to write headlines like this.  They create a lot of opportunity to look like an idiot.  Still, a “system/method” that I developed several years ago is poised to give a short-term buy signal or eMini futures (or SPY or DIA for ETF traders).

(See Jay Kaeppel Interview at BetterSystemTrader.com)

Two things to note:

*This article details this method in great detail so I’ll not be rehashing it here

*The most intriguing factor is that since 2004 this method has generated 44 winning trades and 0 losses.

*The 43rd and 44th winners are not included in the linked article.  The 43^rd bought the March 2015 eMini S&P on 12/18/14 at 2011.5 and sold it at the close that day 2060.25.  The 44^th bought the December 2015 eMini S&P at 2092.25 on 12/1/15 and sold it at the close that day at 2100.00.

*Despite the “undeafeted” record this should BY NO MEANS be considered a “low risk” trading method.  There is a very wide stop-loss built in and in essence each trade signaled amounts to a “fairly large risk for as little as a one-tick reward” trade.

In other words, examine the idea closely and understand the risks before even thinking about “jumping in.” Eventually – inevitably – this method will suffer a loss and it will hurt.

And I can’t tell you that it won’t be on the next trade.

Jay Kaeppel

First the good news: The “trend” of the stock market is bullish (and least based on the particular trend-following indicators that I follow) and I am hoping for a standard issue “Santa Claus Rally.”  But hey, you’re not a real investor if you’re not worried about something.  So for the benefit of my fellow worrywarts, let me point out a few warning signs looming ominously on the horizon.

(Jay Kaeppel Interview at BetterSystemTrader.com)

Margin Debt Declines

In this article I detailed a model for using margin debt and credit balances to help identify the trend of the stock market.  The Bad News: it just turned bearish.  Does this mean we should “sell everything”?  Not necessarily.  But it is also not something to dismiss.  As you can see in Figure 1, the last two major contractions in margin debt were followed by something “nasty” in the stock market (more specifically, the 2000-2002 bear market and the 2008-2009 bear market).Figure 1 – A warning sign from margin debt contraction

Jay’s Margin Debt and Credit Balance in Margin Accounts Model

This model is described in detail here so I’ll not take the time to spell it all out again (Sorry, it’s just my nature).  But the relevant fact is this: both margin debt and credit balances in margin accounts are below their 12-month moving averages.  Figure 2 displays the growth of $1,000 invested in the Dow Jones Industrials Average only during previous such times.Figure 2 – Growth of $1,000 invested in Dow when margin debt and credit balances in margin accounts are BOTH below their respective 12-month MA

Do twin downtrends guarantee a stock market decline is imminent?  Not at all.  But as you can see in Figure 2, the track record isn’t too impressive.

Since December 1959:

*While one of more of these two measures is bullish the Dow has gained +2,540%

*While both of the measure is bearish the Dow has lost (-1.2%)

Also, for the sake of contrast (and to highlight the potential usefulness in tracking this data), Figure 3 displays the growth of $1,000 invested in the Dow only when both margin debt and credit balances are above their respective 12-month moving average.

Figure 3 – Growth of $1,000 invested in Dow when margin debt and credit balances are BOTH ABOVE 12-month MA

A much “prettier picture” than the one in Figure 2, no?

Mutual Fund Cash

One “bonus thing to worry about”: the chart in Figure 4 is courtesy of Zerohedge.com (via http://www.acting-man.com/blog/media/2015/12/6-MuFu-Cash-long-term.png) and displays the % of cash held by stock mutual funds. Cash on hand can also be equated with “buying power”.

Figure 4 – Mutual Fund cash as a percentage of portfolio (Courtesy: ZeroHedge.com via Acting-Man.com)

As you can see in Figure 4, the current level of cash held in mutual funds is near the all-time low end of the range.  While this in no way “guarantees” a bear market, more to the point, it is certainly in no way a “bullish” sign.

In the meantime, let’s hope Santa Claus comes through as this pre-election year wraps up.

Jay Kaeppel