Monthly Archives: January 2018

Are These Hidden Gems…or Disasters Waiting to Happen?

January 29, 2018Uncategorizedadmin

There is an asset class (I think you can call it that) that I have been intrigued with for some time now but have never written about. There are three primary reasons for this.

*First, I’ve never actually invested there

*Second, I can’t decide if investing there is a good idea or not

*Third, I don’t want anyone to read my writing about them and toassume that I am necessarily endorsing or recommending them.

So what is the source of all this angst? Leveraged, high yield ETFs.

Leveraged, High Yield ETFs (heretofore LHYE)

First, here is what we are talking about: Leveraged high yield ETF are just what they sound like. They hold high yield securities (of varying types depending on the fund, however, many of them invest in closed-end funds, which can trade at a discount to their net asset value) and buy them using leverage. There is good news and bad news.

The good news is that the yields are terrific (up to 18% or more).

The bad news is twofold:

1. There are risks involved

2. I can’t quite figure out just how risky they are (but fear that they are much riskier than even I realize)

Figure 1 displays a list of a variety of LHYEs from an article by “Stanford Chemist” posted on SeekingAlpha.com. For more in depth information on one of the ETFs see this article by Lance Brofman.Figure 1 – A listing of various Leveraged High Yield ETFs (SeekingAlpha.com)

As you can see in Figure 1, there are some terrific yields offered. Some people who are getting 2% to 3% yield on their current investments might look at these yields and say, “Wow, this is great”. Others will look at them and say “This looks too good to be true.” So who’s right? The problem is that I don’t really know. But I do know that there is risk. Consider the charts in Figure 2.Figure 2 – Price Charts for several Leveraged High Yield ETFs (Courtesy ProfitSource by HUBB)

As you can see in Figure 2, each of these LHYEs had significant price declines somewhere along the way. An 18% yield looks great – right up until the point where price declines 40% to 60%. Then suddenly, that 18% yield doesn’t look so good anymore.

So what happens in a true stock bear market? I’m not sure. What about a bond bear market? Same answer. So the bottom line is that there is plenty of cause for caution and concern. Still, there is the other side of the coin.

Figure 3 displays 11 LYHEs that will be included in an index in Figure 4.

Figure 3 – 11 Leveraged High Yield ETFs used to create an Index

Figure 4 displays the total return growth for the 11 LHYEs displayed in Figure 3 versus buying and holding the S&P 500 Index starting on 5/31/2012.Figure 4 – Growth of $1,000 invested in 11 Leveraged High Yield ETFs (blue line) versus $1,000 invested in the S&P 500 Index; 5/31/2012-12/31/2017

*The good news is that while the stock market has had a pretty good run (+130%) since 5/31/2012, the total return for a portfolio comprised of the 11 LHYE’s listed in Figure 3 gained quite a bit more (+180%) during the same period.

*The bad news is that while the worst drawdown for SPX (using month-end total return data) was -8.4% the LHYE Index endured a -24.3% drawdown between then end of February 2015 and the end of January 2016.

So again, this leads me to wonder: How bad do things get in a true bear market for stocks and/or bonds?

Because I can’t answer that question I remain a bit gun shy. So is there something that can be done to mitigate risk a bit? Let’s look at one possibility.

Using Moving Averages to Filter for Trend

Figure 5 displays a price chart of our LHYE Index components along with a 10-month and 21-month simple moving average.Figure 5 – Jay’s LHYE Index (Courtesy AIQ TradingExpert)

For our purposes, a “sell” signal occurs when the Index closes two conseivutive months below the 21-month moving average and a
“buy” signal occurs when the Index closes 1 month back above the 10 month moving average.

*During “Buy signals” we will hold the index of 11 LHYEs (using monthly total return data).

*During “Sell signals” we will hold short-term treasuries (using Bloomberg Barclays Treasury 1-3 Yr. total return data)

Using the method just descrbied generates the “LHYE System” equity curve (blue line) displayed in Figure 6, versus buying-and-holding the S&P 500 Index (red line).

Figure 6 – Growth of $1,000 invested invested using Jay’s LHYE System (blue line) versus SPX buy-and-hold (red line); May 2012-present

The blue line in Figure 6 represents a 21.2% average 12-month return with a maximum drawdown (using monthly data) of -13.9%.

Summary

So a lot of questions remain. For example:

*Some readers might be asking “what the heck exactly is a leverage high yield ETF again?” Answer: You should explore further before even giving a thought to investing in them.

*Some readers might be asking “Just exactly how risky are these things?” As far as I can tell the answer to that question is “Very” (see Figure 2 again). Beyond that – given their limited history – it is hard to tell

*Others might ask: “Does the moving average filter used in Figure 6 reduce risk enough to justify taking the plunge?” Answer: It’s hard to say. Waiting for two monthly closes below a 21-month moving average works well in a standard issue, “stop advancing, churn sideways to lower for awhile, then start to breakdown” bull market to bear market transition. In a market crash, not so much.

So there you have it. The bottom line is that my job here is not to “tell you what to do”, but to simply “tell you what I see.” With Leveraged, high-yield ETFs I see lots of market beating potential –and lots of risk.

Over to you…..

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.

U.S. Dollar – Breakdown or Bear Trap?

January 25, 2018Uncategorizedadmin

The U.S. Dollar (USD) is getting a lot of attention these days, and not in a good way. If you look at the chart in Figure 1, it would appear that the answer to the question posed in the headline is pretty obvious.Figure 1 – US is clearly breaking down…… (Courtesy ProfitSource by HUBB)

One can look at Figure 1 and pretty easily conclude “Breakdown”. And they may be right. But sometimes a little perspective can offer a view in a different light.

Figure 2 is a longer-term chart and seems to suggest that USD is heading smack dab into what has historically been “the scrum zone” (for lack of a better term) for the dollar.

Figure 2 – …..or is it? (Courtesy ProfitSource by HUBB)

As you can see the USD has a long history of bouncing around at or near its current level. What happens from here? Let’s add one more interesting (OK, “interesting” might be a little strong, but hey I’m a market geek) item. The charts in Figure 3 were posted on Twitter by renowned trader Peter Brandt and displays sentiment among two different groups of traders. If you look closely you will note that both readings are at extreme levels that historically have been followed by reversals in the dollar.Figure 3 – US Dollar sentiment as a contrary indicator (pointing to a reversal?) (Courtesy: Peter Brandt)

Summary

So which way the dollar? Have to go with my standard response – “It beats me.” But the key things to note are:

1) Don’t necessarily buy the idea that the “dollar is dead”

2) Recognize that whatever happens in the USD wil have a big impact on currencies, metals and energies, particularly crude oil.

Jay Kaeppel

Time to Adjust FXE and USO Positions?

January 25, 2018Uncategorizedadmin

In recent articles I wrote about “example” trades in the Euro (using ETF ticker FXE) and crude oil (using ETF ticker USO). Given the state of the US Dollar it might be time to look at adjusting those positions.

The Euro (ticker FXE)

In this article I highlighted an “example” trade for FXE using the “backpread” strategy.

Figure 1 displays the original position form the original article.Figure 1 – Original FXE risk curves (Courtesy www.OptionsAnalysis.com)

Figure 2 displays the position updated through 1/24/18. Figure 2 – Original FXE position as of 1/24/2018 (Courtesy www.OptionsAnalysis.com)

Figure 3 displays one possible adjustment.Figure 3 – FXE position adjustments (Courtesy www.OptionsAnalysis.com)

Figure 4 displays the risk curves for the adjusted positionFigure 4 – Risk curves for adjusted FXE position (Courtesy www.OptionsAnalysis.com)

The key thing to note is that after the adjustment the remaining position still enjoys unlimited profit potential and the “worst case scenario” is a profit of +$766.

Crude Oil (ticker USO)

In this article I highlighted an “example” trade for USO using the “backpread” strategy.Figure 5 – Original USO risk curves (Courtesy www.OptionsAnalysis.com)

Figure 6 displays the position updated through 1/24/18.

Figure 6 – Original USO position as of 1/24/2018 (Courtesy www.OptionsAnalysis.com)

Figure 7 displays one possible adjustment.Figure 7 – USO position adjustments (Courtesy www.OptionsAnalysis.com)

Figure 4 displays the risk curves for the adjusted positionFigure 4 – Risk curves for adjusted USO position (Courtesy www.OptionsAnalysis.com)

The key thing to note is that after the adjustment the remaining position still enjoys unlimited profit potential and the “worst case scenario” is a profit of +$530.

Jay Kaeppel

The Earnings Play Road Less Traveled

January 24, 2018Uncategorizedadmin

A lot of trades get made based on earnings. Some investors buy (or sell short) shares in anticipation of strongly higher (or lower) earnings announcements. Some option traders try to play both sides by buying a straddle (i.e., buy a call and a put option in hopes that the underlying shares will move significantly in one direction or the other) and hope that the gain on the profitable side will be larger than the loss on the other side.

Today I will highlight “third way.” It definitely qualifies as something of a “special situation” and an option strategy that in all candor is typically best avoided.

The Reverse Calendar Spread

A standard calendar spread involves buying a call or put option at a given strike price in a farther out expiration month and selling a call or put option at the same strike price in a closer expiration month. The hope is that the underlying security will remain within a particular price range and a profit will ensue as the shorter term option loses time premium faster than the longer-term option. An example of a standard calendar spread appears in Figure 1.Figure 1 – Standard calendar spread risk curves(Courtesy www.OptionsAnalysis.com)

As you might guess, the Reverse Calendar Spread is entered by doing the opposite – buying the shorter term option and selling the longer term. Why would someone do this? Is this even a good idea? The candid answer is “it depends”. In reality, this strategy should only be used under certain circumstances.

Like what? I thought you’d never ask.

To profit using this strategy two catalysts need to be in place:

1. A reason to believe the underlying security will make a move

2. Extremely high implied volatility and some expectation that volatility will decline during the course of the trade

Enter Under Armor

First off – as always – what follows is NOT a “recommendation”, but merely an “example”.

Before proceeding, a quick lesson in implied volatility. In Figure 2 we see a bar chart for ticker UA along with the implied volatility for 90+ day UA options. You don’t have to be an expert to recognize that implied volatility is at an extremely high level.Figure 2 – Ticker UA with implied option volatility at record highs (Courtesy www.OptionsAnalysis.com)

Why does this matter? Two things to keep in mind.

1. IV tells us relatively how much time premium is built into the price of the options on a given security. So Figure 1 tells us that UA options are “expensive”.

2. Longer-term options will gain or lose much more time premium than shorter-term options based on changes in IV.

OK, now to our example trade:

*Buy 1 UA Apr2018 12.5 put

*Sell 1 UA Jan2019 12.5 put

Figure 3 displays the particulars of the trade. Note the “Vega” figure of -$2.51 in the upper right. A quick explanation. Vega is a Greek term that tells us how much (in dollars) this position will gain or lose if implied volatility rises by one percentage point. So in this case we see that IV rises even higher from here that will hurt this trade since Vega is negative. However, this trade is a bet on sharply lower IV going forward. In other words the impetus for the trade is the hope that after earnings are announced the implied volatile for UA options will collapse back down into the normal range.

In this case, if IV fell 10 full percentage points it would generate $25.10 in profit in this trade (-$2.51 x -10 points = +$25.10). Are we having fun yet?Figure 3 – UA Reverse Calendar Spread particulars (Courtesy www.OptionsAnalysis.com)

Figure 4 displays the risk curves for the trade at the time the trade is entered. Note that these curves are not terribly impressive on the face of it, as it would appear that a significant price move is required to generate a profit. Of course, the other catalyst for the trade is the belief that the stock price may jump or fall significantly when earnings are announced.Figure 4 – UA Reverse Calendar Spread initial risk curves (Courtesy www.OptionsAnalysis.com)

Now let’s look at what might happen if in fact we are correct and that

1. Implied volatility collapse after earnings are announced, and/or;

2. Price makes a significant jump or fall

We are hoping for a “quick” profit – i.e., earnings are announced and a) and/or b) above occur, we take our profit and move on. However, if that does not happen, because the option we are buying expire in April we could hang on for awhile if necessary to see if IV will eventually subside.

Still, because time decay works against this trade in the last 30 days we will assume that we will not hold this position during the last 30 days before July expiration.

To test these possibilities, in Optionsanalysis.com we will adjust the settings for this position as shown in Figure 5 – i.e., we will assume as 30% decline in IV (done by setting the multiplier to 0.70) and we will set the last date for the risk curve to 30 days before July expiration.

Figure 5 – Adjusting IV levels in OptionsAnalysis (Courtesy www.OptionsAnalysis.com)

If in fact IV declines by 30%, our risk curves for this position will resemble those displayed in Figure 6.Figure 6 – UA Reverse Calendar Spread risk curves if IV falls 30% from current record high levels (Courtesy www.OptionsAnalysis.com)

What we see is the decline in volatility causes the January2019 call option that we are short to give up a lot of its time premium. As you can see, under this scenario this trade would be profitable at any price. Also, the further the price of UA moves the more profitable the trade.

Summary

As always, I need to emphasize again that I am not “recommending” this trade. I am simply using it to illustrate “one way” to trade based on a given set of circumstances. To recap:

*A company will soon be announcing earnings

*Speculation about those earnings has driven implied option volatility to exorbitant levels

*We are willing to risk a certain amount of money that when earnings are announced the price of the stock will move significantly, and/or implied volatility to decline significantly.

Ironically, under most circumstance the Reverse Calendar Spread is not an attractive choice of strategy. But as you have seen, under the right circumstances – and assuming of course that any of our assumptions actually play out – it can offer some interesting potential.

Jay Kaeppel

What to Worry About – and When – in the Bond Market

January 19, 2018Uncategorizedadmin

There is a lot of hand-wringing going on these days regarding the bond market. And rightly so given that interest rates have been (were?) in a downtrend for 35+ years. Given that, given the long-term cyclical nature of interest rates and given that rates are at a generational low level, “concern” is understandable.

However, needless hand-wringing over events that have yet to occur is not.

Figure 1 – Long-term treasury yields through the years (Courtesy: ObservationsanNotes.blogspot.com)

(The chart in Figure 1 is updated only through about 2012. Nevertheless, it effectively highlight the long-term cyclical nature of interest rates.)

The problem is the “well, interest rates are destined to rise therefore I should immediately [fill in your defensive action here].”

Many analysts and investors are following and attempting to interpret every tick in bond yields. In fact, some very well known bond “people” have proclaimed a “bond bear market”. And they may be right. But still…

What I Follow in the Bond Market

What follows are a few random thoughts on some of the things I look at when tracking the bond market.

#1. 30-Year Yield versus 120-month Exponential Moving Average

Figure 2 displays ticker TYX, an index which tracks the yields on 30-year bonds (for some reason it multiplies by 10 – so a yield of 3% appears on the chart as 30.00).Figure 2 – 30-year treasury yields versus 120-month exponential moving average (Courtesy AIQ TradingExpert)

Using the data from Figure 1 I have found that a 120-month (i.e., 10-year) average does a pretty good job of riding the major trends in interest rates. As you can clearly see in Figure 2, TYX is still noticeably below its 120-month EMA. This could obviously change quickly but for the moment by this objective measure the long-term trend in interest rates right at this very moment is still “down.”

Please note that I am not saying that interest rates will not rise and move above this MA. I am saying two things:

1. Until the crossover occurs try not to focus too much attention on dire predictions.

2. Once the crossover does occur the bond market environment that most of us have known throughout all or most of our investment lives will change dramatically (more on this topic when the time is right).

#2. The Yield Curve(s)

Figure 3 displays the yield curves for 30-year yields minus 10-year yields and 10-year yields minus 2-year yields. The narrowing trend is obvious. This is causing great consternation because historically when the yield curve “inverts” (i.e., when shorter-term rates are higher than longer-term rates) it is a very bad sign for the economy and the financial markets.Figure 3 – 10-yr yield minus 2-year yield (blue) and 30-year yield minus 10-year yield (orange); (Courtesy: YCharts)

The problem here is that there is still an important difference between “narrowing” and actual “inverting”. Many people seems to look at Figure 3 and assume that an inverted yield curve (i.e., if and when these lines go into negative territory) is “inevitable” and that things are therefore doomed to get worse for the economy and the markets.

Repeating now: There is still an important difference between a “narrowing” yield curve and an actual “inverted” yield curve. Until the yield curve actually does invert try not to focus too much attention on dire predictions.

#3. The Current Trend in Bonds

One trend following indicator that I follow (and have written about in the past) is the inverse relationship between long-term t-bonds and Japanese stocks. Figure 4 display ticker EWJ (an ETF that tracks an index of Japanese stocks) versus ticker TLT (an ETF that tracks the long-term treasury bond).

Figure 4 – Ticker EWJ versus Ticker TLT (Courtesy AIQ TradingExpert)

Figure 5 displays two equity curves. The blue line represents the $ gain achieved by holding long 1 treasury bond futures contract ONLY when the EWJ 5-week moving average is below the EWJ 30-wek moving average and the red line represents the $ loss achieved by holding long 1 treasury bond futures contract ONLY when the EWJ 5-week moving average is above the EWJ 30-week moving average. Figure 5 – Holding long t-bond futures when EWJ is in a downtrend (blue line) versus holding long t-bond futures when EWJ is in an uptrend (red line); December 2003-present

Notice anything different about the blue line versus the red line? With EWJ trending strongly higher, caution remains in order or the long-term treasury bond. If the trend in EWJ reverses things may look better for long-term bonds.

#4. Short and Intermediate Term Bonds remain a Viable Alternative

As I wrote about here an index of short and intermediate treasury and high grade corporate remains a viable long-term approach for income investors. Figure 6 displays the growth of $1,000 invested using the “Boring Bond Index” I wrote about in the aforementioned article. This index has gained in 38 of the past 42 years.Figure 6 – Growth of $1,000 invested using “Boring Bond Index” Method; 12/31/1975-11/30/2017

Summary

There are good reasons to be wary of interest rates and bonds. At the same time overreacting to dire headlines also remains a very poor approach to investing.

So in sum:

*The very long-term trend in interest rate is still technically “down”

*The yield curve is narrowing but still has a ways to go before it inverts

*The current trend in long-term bonds is bearish

*Short and intermediate term bonds experience much less volatility than long-term bonds (and reinvest more frequently, which may come in handy if rates do begin to rise in earnest).

*If and when TYX pierces its long-term average and/or when the yield curve inverts, the time will arrive for investors to make some wholesale changes in how they approach their bond market investments.

*If and when EWJ starts to fall, things may improve for the current plight of the long-term treasury.

*And through it all, a boring approach to bonds may still prove very useful.

Jay Kaeppel

The VixRSI14 Indicator – Part 2

January 18, 2018Uncategorizedadmin

In this article I detailed an indicator I refer to as VixRSI14 using monthly charts. Today let’s apply the same method to weekly bar charts. Before we do that a quick look at how this indicator functions.

VixRSI combines two indicators – Larry William’s VixFix and Welles Wilder’s Relative Strength Index (RSI). In Figure 1 you see a weekly bar chart for YHOO. Notice that as price declines the VixFix indicator rises and RSI falls. VixRSI14 essentially measures the difference between the two and looks for extremes as a sign of a potential reversal. See Figure 5 for YHOO with VixRSI14.

Figure 1 – YHOO with Williams VixFix (with 3-day exponential smoothing) and Wilder’s 14-period RSI (Courtesy AIQ TradingExpert)

The Weekly Version of VixRSI14

We will use the same method I described in the previous article, i.e.:

*We will calculate the VixRSI14 indicator (see code at end of article) on a weekly basis

*A “buy alert” occurs when VixRSI14 drops below 3.00 after first rising to 3.50 or higher

Once again, please note that:

*There is nothing magic about 3.50 or 3.00

*Not every “buy alert” is followed by an immediate rally (or even any rally at all for that matter)

*Any actually trading”results” will depend heavily on what you trade, how much of it you trade, when you actually get in, when you get out with a profit and/or when you get out with a loss.

*This VixRSI14 alert signal is simply serving notice that a given security may be overdone on the downside and may be ready soon to reverse to the upside. Nothing more, nothing less.Figure 2 – AAPL

Figure 3 – AXP

Figure 4 – IP (Courtesy AIQ TradingExpert)

Figure 5 – YHOO (Courtesy AIQ TradingExpert)

Summary

In 2018 I intend to try to share a few more trading “ideas” that maybe are not quite “finished products”. VixRSI14 fits neatly into the “Idea” category. Sometimes the alerts are early. Sometimes the alerts are late. Sometime the alerts don’t really pan out at all. Sometimes alerts are followed by one more sharp decline which is then followed by a major rally. So maybe some sort of trend reversal confirmation would be helpful. I don’t know.

Hey, that gives me an idea….

Code:

William’s VixFix is simply the 22-period high price minus today’s low price divided by the 22-day period price (I then multiply by 100 and then add 50). That may sound complicated but it is not.

The code for AIQ TradingExpert appears below.

########## VixFix Code #############

hivalclose is hival([close],22).

vixfix is (((hivalclose-[low])/hivalclose)*100)+50.

###############################

####### 14-period RSI Code ###########

Define periods14 27.

U14 is [close]-val([close],1).

D14 is val([close],1)-[close].

AvgU14 is ExpAvg(iff(U14>0,U14,0),periods14).

AvgD14 is ExpAvg(iff(D14>=0,D14,0),periods14).

RSI14 is 100-(100/(1+(AvgU14/AvgD14))).

###############################

VixRSI14 is then calculated by dividing the 3-period exponential average of VixFix by the 3-period exponential average of RSI14

####### VixRSI14 Code ###########

VixRSI14 is expavg(vixfix,3)/expavg(RSI14,3).

###############################

Jay Kaeppel

The VixRSI14 Indicator – Part 1

January 17, 2018Uncategorizedadmin

While the bulk of the financial world focuses most of its attention on whether or not Bitcoin will turn to sh, er, something that rhymes with Bitcoin, a lot of “old timers” continue on with trying to look at markets in a more traditional way. Unfortunately, some people who try to look at markets in a more traditional way also spend an inordinate amount of time “dividing one number by another” thinking there is some purpose to it (“Hi. My name is Jay”)

The only good news is that every once in awhile something useful – or at least potentially useful (since no single calculation guarantees profitability which also involves other “minor” issues such as which securities to trade, allocation size, entry method, profit taking criteria, stop loss triggers and so on and so forth). A number of years ago I stumbled upon a calculation that I ultimately refer to as VixRSI (for reasons that will become fairly obvious soon). More specifically I have a few different versions but one I like is call used VixRSI14.

First the Good News: In this and some future articles I will detail how I apply VixRSI14 to monthly, weekly and daily price charts.

Now the Bad News: Nothing that I will write in any of those articles will detail a “simple automated system that generates you can’t lose trading signals guaranteed to make you rich beyond the dreams of avarice.” Sorry about that. But I thought you should know.

The truth is that the indicator generates signals – and yes, a certain percentage of the time those signals aren’t that great. And even on occasions when the signals are decent all of the factors I mentioned above (securities traded, capital allocation, etc.) still hold the key to turning a “signal” into a “profit”.

VixRSI14

VixRSI14 is calculated by combining Larry William’s “VixFix” indicator with the standard old 14-day RSI from Welles Wilder. I’ve decided to put the calculations at the end of the article in order to avoid scaring anyone off.

For now let’s look at what to look for on a monthly price chart.

VixRSI14 on a Monthly Chart

OK, true confession time: there is (at least as far as I can tell) no “one best way” to use VixRSI14 on a monthly chart. So I will simply show you “One way.”

*A “buy alert” is triggered when the monthly value for VixRSI14 first rises to 3.5 or higher and then drops back to 3.0 or below

*Before going on please note that there is nothing “magic” about 3.5 or 3. Different values can be used and will generate varying results.

*Also, some may prefer to simply look for a drop from above 3 to below 3 without requiring a move above 3.5

*Finally please note the use of the phrase “buy alert” and the lack of the phrase “BUY AS MUCH AS YOU CAN RIGHT THIS VERY MINUTE!!!!”

Figures 1 through 4 show several different Dow30 stocks “through the years.”Figure 1 – Ticker AXP (Courtesy AIQ TradingExpert)

Figure 2 – Ticker BA (Courtesy AIQ TradingExpert)

Figure 3 – Ticker HPQ (Courtesy AIQ TradingExpert)

Figure 4 – Ticker IBM (Courtesy AIQ TradingExpert)

Summary

Buy alerts on monthly charts using the criteria I described are obviously very rare. In fact many securities never see the VixRSI14 rise high enough to trigger an alert. Likewise, not every 3.5 then 3 event for every stock will work out as well as those depicted in Figures 1 through 4.

Still, remember that I am just presenting an “idea” and not a finished product.

Code:

William’s VixFix is simply the 22-day high price minus today’s low price divided by the 22-day high price (I then multiply by 100 and then add 50). That may sound complicated but it is not.

The code for AIQ TradingExpert appears below.

########## VixFix Code #############

hivalclose is hival([close],22).

vixfix is (((hivalclose-[low])/hivalclose)*100)+50.

###############################

####### 14-period RSI Code ###########

Define periods14 27.

U14 is [close]-val([close],1).

D14 is val([close],1)-[close].

AvgU14 is ExpAvg(iff(U14>0,U14,0),periods14).

AvgD14 is ExpAvg(iff(D14>=0,D14,0),periods14).

RSI14 is 100-(100/(1+(AvgU14/AvgD14))).

###############################

VixRSI14 is then calculated by dividing the 3-period exponential average of VixFix by the 3-period exponential average of RSI14

####### VixRSI14 Code ###########

VixRSI14 is expavg(vixfix,3)/expavg(RSI14,3).

###############################

Jay Kaeppel

Happy Holidays Revisited

January 16, 2018Uncategorizedadmin

I know what you’re thinking –“Dude, the holiday season just ended, you can’t miss them that badly yet.” For the record, a) Yes I can, and, b) the title is not actually referring to the Christmas/New Years time frame jut past. It refers to stock market Holiday’s in general.

This article is essentially a follow-up to this article and this article from last January.

One Approach to Market Holidays

So here’s a question. What would the results look like if we bought and held the Dow Jones Industrials Average only during the 3 trading days before and the 3 trading days after each stock market holiday? These include:

*Martin Luther King Day

*Presidents Day

*Easter

*Memorial Day

*Independence Day

*Labor Day

*Thanksgiving

*Christmas

*New Years

For our test we are going back to December 1933. The growth of $1,000 invested in the Dow only during the 6 trading days surrounding each stock market holiday (note that until the early 1950’s there were two holidays in February – Lincoln’s Birthday and Washington’s Birthday – which were ultimately combined into President’s Day. Also, Martin Luther King Day was first celebrated in 1998) appears in Figure 1.

In order to capture only the market action around holidays no interest is assumed to be earned during all other days.Figure 1 – Growth of $1,000 invested in Dow Jones Industrials Average ONLY during the 3 trading days before and 3 trading days after each stock market holiday; 12/1/1933-1/12/2018

The equity curve shown in Figure 1 is by no means a “straight line” advance. Nevertheless, the long-term “lower left to upper right” trend is unmistakeable.

These “Holiday Days” comprise roughly 18.9% of all trading days. What makes the results fairly interesting is when we compare these “Holiday Days” to “all other trading days”.

Figure 2 displays the same line as in Figure 1. It also plots the growth of $1,000 during “all other trading days” (red line).Figure 2 – Growth of $1,000 invested during “Holiday Days” (blue line) versus “All Other Days” (red line)

For the record:

Measure	Holiday Days	All Other Days
% of All Trading Days	18.9%	81.1%
$1,000 becomes	$19,168	$13,613
Total % +(-)	+1,817%	+1,261%
% Up Days	54.8%	51.9%
%Down/Unch Days	45.2%	48.1%
Ave. daily %+(-)	+0.0755%	+0.0194%
Median daily%+(-)	+0.0793%	+0.0353%

Figure 3 – Holiday Days versus All Other Days

The most interesting finding to me in Figure 3 is the the average daily % gain for “Holiday Days” (+0.0755%) is 3.9 times greater than the average daily % gain for “All Other Days” (+0.0194%).

Trading with a Leveraged ETF

For this test we will employ the following rules:

*If today is within 3 trading days before or 3 trading days after a stock market holiday we will hold ticker UMPIX (Profunds Ultra MidCap – which tracks the daily change for the S&P 400 MidCap Index times 2).

*For all other trading days we will hold cash and will assume we earn an annualized rate of interest of 1%.

*We will start our test on 2/7/2000, which was the first day of trading for ticker UMPIX

The growth of $1,000 invested using the rules above appear in Figure 4 along with the growth of $1,000 invested in the Dow Jones Industrials average on a buy-and-hold basis during the same time.Figure 4 – Growth of $1,000 invested in ticker UMPIX using Holiday Days Trading Rules (blue line) versus buying and holding the Dow Jones Industrials Average (red line); 2/7/00-1/24/17

For the record:

*The system is in UMPIX only 20.7% of all trading days and in cash 79.3% of all trading days.

*The average annual return for System = +13.2%

*The average annual return for Dow Buy-and-Hold = +5.5%

*The maximum System drawdown was -34.3%

*The maximum Dow Buy/Hold drawdown was -53.8%

Summary

Despite the fact that “Holiday Days” comprised only 19% of all trading days since 1933, they generated a higher a greater cumulative returns than the “other” 81% of all trading days. Likewise, they realized a higher percentage of up days and a much higher average and median daily rate of return.

So once again I would like to launch my annual drive and implore each of you to join me in contacting our representatives and demanding more holidays!

Jay Kaeppel

Trend or Countertrend? Why Not Both?

January 11, 2018Uncategorizedadmin

First the brutal disclaimers: What follows is NOT a trading “system.” It is merely an “idea.” Even more brutally, I can’t even claim that it “works”. All the testing I have done so far is more anecdotal. Also to an extremely huge degree, the actual entry trigger and exit trigger that trader might choose to use will have – as always – at least as much if not more impact on overall trading results as the actual “alert” signal detailed below.

Got that? OK, then let’s proceed.

The Debate

The ongoing debate in trading is always – trend-following or countertrend? Which is the way to go? There are (conservatively) at least a bazillion and one ways to argue one way or the other. Figure 1 displays ticker TXN with upper and lower “Acceleration Bands” (code for AIQ TradingExpert appears after disclaimer at end of article) drawn.Figure 1 – Ticker TXN with Acceleration Bands (Courtesy AIQ TradingExpert)

Want to start a debate? Ask this question: Is it better to buy when price hits the upper band or the lower band? Sometimes price hits the upper band and just keeps going. Sometimes it hits the upper band and the move peters out and reverses fairly quickly.

Going with the trend can lead to some big winning trades along the way, but typically involves a lot of whipsaws as well. Trading countertrend can lead to some great, quick profits – expect of course for when the initial trend never quite reverses and quick losses accrue instead.

What to do, what to do?

So the “idea” I mentioned at the outset generally goes like this:

*In an uptrend (which we will define in a moment)

*Wait for price to hit the Upper Band

*Then wait for a pullback

*Then wait for the uptrend to reassert itself

Got that? OK, me neither exactly. So let’s try to define things a little more clearly.

1. As long as the closing price remains above the 200-day moving average, we will call that an “uptrend”

2. Within an uptrend wait for the high of a trading day to reach or exceed the Upper Acceleration Band.

3. Following #2, wait for the 4-day RSI to drop to 32 or lower with the following caveats:

*If price touches the Lower Acceleration Band OR closes below the 200-day moving average

*Then the setup is invalidated

This is the “Setup”. For sake of example I will add an entry trigger as follows:

4. Following a valid #3 Alert Signal, buy when price exceeds the previous day’s high

I am going to purposely NOT add an exit trigger – just so that no one decides to “try it out” without at least giving it some thought on their own.

So Figure 2 shows the “Alerts” and “Entry Triggers” for the chart in Figure 1.Figure 2 – Ticker TXN with Example “Entry Triggers” (Courtesy AIQ TradingExpert)

So Figure 3 shows the “Alerts” and “Entry Triggers” for ticker EBAYFigure 3 – Ticker EBAY with Example “Entry Triggers” (Courtesy AIQ TradingExpert)

So Figure 4 shows the “Alerts” and “Entry Triggers” for ticker CSCOFigure 4 – Ticker CSCO with Example “Entry Triggers” (Courtesy AIQ TradingExpert)

So are these signals any good? Well, like a lot of trading methods, some look pretty good and others do not. As I also mentioned earlier, a lot depends on the method or methods you use to exit each trade.

Summary

The reality is that there is a chance that the “idea” contained herein is just no darn good.

But also remember that there are other “trend filters” (besides the 200-day moving average), there are other “bands” (besides Acceleration Bands”), there are other oversold indicators (besides 4-day RSI) and there are other entry and exit triggers.

As such, this piece is essentially for people who are willing to do a little digging on their own and, a) become comfortable (or not) with the idea, and b) develop some position sizing, stop-loss and profit-taking criteria.

Jay Kaeppel

Acceleration Bands Code

a is ([high]-[low]).

b is ([high]+[low])/2.

c is (a / b).

d is (c*2).

e is (1+d).

f is (1-d).

g is ([high]*e).

h is ([low]*f).

AccelUB is Simpleavg(g, 20).

AccelLB is Simpleavg(h, 20).

Cheap Speculation in Crude Oil

January 10, 2018Uncategorizedadmin

Crude oil has surprised a lot of people by rallying quite strongly through the winter months (ironically, October into December is typically a period of weakness for the gooey stuff).

As you can see in Figure 1, crude oil futures are at a key resistance level. In Figure 2 we see that ticker USO – an ETF that purports to track the price of crude oil is also at a key price level.Figure 1 – Crude Oil futures at a key level (Courtesy ProfitSource by HUBB)

Figure 2 – USO ETF at a key level (Courtesy ProfitSource by HUBB)

Will crude break through and rally to higher new highs? Or will it bump its head on resistance and fall back? Here is where a skilled analyst would insert his or her spot on analysis of why crude oil is destined to do one or the other. Unfortunately, there’s no one like that here on staff. Which is OK because this blog is not intended to give advice or make specific recommendations, only “education”. So let’s look at an “example” of one “cheap” way to trade crude oil assuming you have a particular outlook on crude oil.

Playing for an Upside Breakout

For the record I am making no “predictions” about crude oil. However, for example’s sake let’s say that a trader wants to enter a position that will allow him or her to profit if crude oil continues to rally. Let’s also assume that this trader does not want to risk alot of money.

For the average trader the obvious play would be to buy 100 shares of USO. At $12.57 a share you would need to put up $1,257 to enter the trade. The risk curve for this trade is a straight line as shown in Figure 3. For each $1 in price USO rises the positions gains $100 and vice versa.Figure 3 – Risk graph for long 100 shares of USO at $12.57 (Courtesy www.OptionsAnalysis.com)

Now let’s look at an alternative trade. This one cost $74 to enter. The strategy is referred to as a “Vertical Calendar Spread” and involves:

*Buying 4 USO Mar 13 calls @ $0.23

*Selling 3 USO Feb 13.5 calls @ $0.06

As you can see in Figures 4 and 5 the cost to enter – and maximum risk – is $74. Profit potential is unlimited and the breakeven price is $12.82 a share.Figure 4 – Vertical Calendar Spread (Courtesy www.OptionsAnalysis.com)

Figure 5 – Risk Curves for USO Vertical Calendar Spread (Courtesy www.OptionsAnalysis.com)

To really get the picture let’s compare the risk curves or the two trades as shown in Figures 6a, 6b and 6c. The dark black line (the one that curves) is the option trade at the time of February option expiration (Feb 16). The lighter line (the one that is a straight line represents simply owning 100 shares of USO).

If USO shares are above $13.10: the option trade will generate a higher profit than being long 100 shares of USO.Figure 6a – Comparing risk curves for Long 100 shares of USO versus Vertical Calendar Spread (Courtesy www.OptionsAnalysis.com)

If USO shares are between $11.88 and $13.10: the option trade could lose up to $30 more than simply holding 100 shares of USO (unless volatility rises sharply, which would increase the value of the option trade).Figure 6b – Comparing risk curves for Long 100 shares of USO versus Vertical Calendar Spread (Courtesy www.OptionsAnalysis.com)

If USO shares are below $11.88: The option trade worst case is a loss of -$74. The 100 shares of USO position will lose an additional $100 for each full point that USO stock declines in price.

Figure 6c – Comparing risk curves for Long 100 shares of USO versus Vertical Calendar Spread (Courtesy www.OptionsAnalysis.com)

On the Flipside

For a trader thinking USO will not follow through, the example trade in Figures 7 and 8 might make more sense. This trade involves:

*Buying 5 USO Mar 12.5 @ $0.41

*Selling 4 USO Feb 12.5 @ $0.06

Figure 7 – Bearish USO Example trade (Courtesy www.OptionsAnalysis.com)Figure 8 – Risk curves for Bearish USO Example trade (Courtesy www.OptionsAnalysis.com)

Summary

For the record I am not suggesting that crude oil is going to rise from current levels. Nor am I suggesting it will fall, for that matter. The trades detailed above are simply intended to serve as examples of different, inexpensive ways to speculate at a fraction of the cost of buying or selling short the underlying shares.

Jay Kaeppel