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The Agony and Ecstasy of Locking a Profit

In this article I highlighted a hypothetical seasonal play in crude oil.  As you can see in Figures 1 and 2 – so far so good.  The crude oil market sold off almost exactly in line with its seasonal tendency to be weak during this time of year (just don’t go thinking that it is an automatic thing every year).1Figure 1 – Crude Oil following annual seasonal trend (Courtesy Sentimentrader.com)

Now the example trade I highlighted in the original article has:

*A very nice open profit

*The potential to give it all back and more if crude rebounds

2Figure 2 – USO example trade with an open profit (Courtesy www.OptionsAnalysis.com)

One great thing about options is the ability to “adjust” a trade as situations change.  In this example, it is not so much an “adjustment” per se, but rather more like “taking a lot of chips off the table.”

So here goes:

*Sell 7 Jan2019 USO 17.5 puts

This leaves us with 3 Jan2019 USO puts as shown in Figures 3 and 4.  The good news is that we still have more profit potential if USO continue to decline AND we have now locked in a minimum profit of +$690.3Figure 3 – Adjusted USO trade details (Courtesy www.OptionsAnalysis.com)

4Figure 4 – Adjusted USO trade risk curves (Courtesy www.OptionsAnalysis.com)

The Bad News

The one “quirk” is that – as you can see in Figure 5, which overlays the original position with the adjusted position – if USO does continue to decline the adjusted position will make a lot less money than the original position.5Figure 5 – The “Original” USO trade versus the “Adjusted” USO trade (Courtesy www.OptionsAnalysis.com)

The Choice

So, the question comes down to:

*Do you want to lock in a profit and let the rest ride (albeit with less potential)?

*Or, do you want to play for the maximum profit?

As always, there is no “correct” answer.  The key is to make your choice based on your best thinking at the moment – then let the chips fall where they may and NEVER look back in anger or regret.

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.

How to Avoid Losing 94% in Energy Service Stocks

Well, that’s a catchy title, no?  Of course, please note that the title does NOT read, “How to Make Incredible Sums of Money in Energy Services.”  This is an important distinction because making money in energy stocks has been a pretty tough thing to do since about 2008.  Still, avoiding 94% losses is probably a good thing to know how to do.  So, let’s proceed, shall we?

The Proxy for Energy Service Stocks

For our purposes we will use Fidelity Select Energy Services fund (ticker FSESX).

You will probably think I am kidding at first but, the way to avoid losing 94% in oil service stocks is simply to avoid investing in FSESX (or any security highly correlated to it) during the months of June through November.

That’s it.  Why, you might ask?  Simple.  Figure 1 displays the growth (Jay, that word “growth”, I do not think it means what you think it means) of $1,000 invested in FSESX ONLY during the months of June through November every year starting in 1986.

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Figure 1 – Growth of $1,000 invested in ticker FSESX June through November; 12/31/1985-10/31/2018 (Source: PEP database from Callan Associates)

It’s not pretty.  And it is a great thing to avoid.  But here comes the not so great part.  Figure 2 displays the growth of $1,000 invested in FSESX:

*Only during the months of December through May

*On a buy-and-hold basis

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Figure 2 – Growth of $1,000 invested in ticker FSESX December through May (blue) versus on a buy-and-hold basis (red); 12/31/1985-10/31/2018 (Source: PEP database from Callan Associates)

As I intimated earlier, even avoiding the “Bad Months” has not resulted in much in the way of capital appreciation in the last decade.  But please remember the point of this article is essentially as follows: if you invest in Energy Service stocks between the end of May and the end of November and you expect to make money, you may be, um, disappointed.  Or at least, that is what history strongly seems to suggest.

For the record:

*$1,000 invested on a buy-and-hold basis grew to $6,800

*$1,000 invested only December through May each year grew to $106,300

*$1,000 invested only June through November declined to $64 (i.e., -94%)

Summary

If you want to know how to make 94% in energy service stocks you will unfortunately have to find another article.  But for now, at least we know how to avoid losing 94%.

Hey, it’s a step in the right direction.

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.

Good Days to Seek Health Care (Stocks)

This is a follow up to this previous article.  It’s never a good day to be sick, but as it turns out there are days that are better than others for seeking health care, well, health care stocks at least.

The “Strategy”

Buy and hold ticker HCPIX (Profunds Healthcare fund – which tracks the Dow Jones U.S. Health Care Index leveraged 1.5-to-1) on the following days:

*Trading days #9, 10, 11 and 12 each month

*The last 4 trading days of the month and the first 2 trading days of the next month

Continue to make these trades each and every month until, um, well, until you no longer have a need for health care, if you get my drift.

The Results

Figure 1 displays the growth of $1,000 invested in HCPIX using the Strategy rules listed above.

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Figure 1 – Growth of $1,000 invested in HCPIX using Jay’s Strategy; 6/19/00-11/2/18

Figure 2 displays the growth of $1,000 invested in HCPIX during all other trading days.

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Figure 2 – Growth of $1,000 invested in HCPIX during all other trading days; 6/19/00-11/2/18

The results in Figure 2 are enough to make you sick.  Fortunately, the cure appears in Figure 1.

For the record, from 6/19/2000 through 11/2/2018:

*$1,000 invested during Good Days grew to $31,197 (+3,020%)

*$1,000 invested during Bad Days shrank to $112 (-89%)

Figure 3 displays year-by-year result through 11/2/2018.

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Figure 3 – Year-by-Year results; 6/19/00-11/2/18

*The Good Days gained an annual average of +20.8%

*The Bad Days lost an annual average of -8.4%

Summary

I hope this helps you feel better.

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 CISS Large-Cap/Small-Cap Strategy

Everyone is familiar with the KISS acronym, which – as everyone knows, stands for “Keep It Simple Stupid”.  Far fewer people are familiar the CISS acronym, which stands for “Clearly Insanely Stupidly Simple”.  Which is what the “system” that follows qualifies as.  The good news is that beyond being simple it has also been pretty darned effective over time.

The Large-Cap/Small-Cap Debate

If you search the web for info on large-cap stocks versus small-cap stocks you will come up with roughly 537 million possible results.  It is quite likely that somewhere in there you will find a more effective method than that which follows.  Still, that’s a lot of links to search through.  So may try this out first.

Jay’s CISS Large-Cap/Small-Cap “System”

Here are the rules:

*If the S&P 500 Index outperforms the Russell 2000 Index for the year, then buy and hold the S&P 500 Index during the following year.

*If the Russell 2000 Index outperforms the S&P 500 Index Index for the year, then buy and hold the Russell 2000 Index during the following year.

Did I mention it was simple?

The Results

To measure results I am using monthly total return data for the S&P 500 Index and the Russell 2000 Index.  We will look at performance for

*The System (as described above)

*The Opposite of the System (i.e., holding the worse performer from the pervious year)

*Splitting capital between S&P 500 and Russell 200 and rebalancing Jan.1 each year

Figure 1 displays the growth of $1,000 for each of the above starting on 12/31/1979.1b

Figure 1 – Jay’s System versus Buy-and-Hold and the “Opposite” of the System; 12/31/1979-10/31/2018

For the record:

*The “System” gained +10,361%

*Splitting money between SPX and RUT on Jan 1 each year gained +6,272%

*Doing the “opposite” of the System gained +3,471%

Because this “System” is always fully invested in either the S&P 500 Index or the Russell 2000 Index, it takes its lumps in bear markets.  So in 2008, for instance, it took a beating just like everything else.  But that is the nature of “always fully invested in stocks” methods.

The key point is that in the end the CISS System made 1.65 times as much as “buy-and-hold” and 2.98 times as much as doing the “opposite of the System”.

Figure 2 displays the Year-by-Year results:

Column A = Year

Column B = SPX total annual return

Column C = RUT total annual return

Column D = Which index is held during that calendar year

Column E = Annual % gain(loss) for The System for that calendar year

Column F = Annual % gain(loss) from holding the “other” index

Column G = % gain(loss) from splitting $ evenly between SPX and RUT on January 1st

Column H = $1,000 using System becomes

Column I = $1,000 using the “Opposite” of the System becomes

Column J = $1,000 using Buy-and-Hold (and annual rebalance) becomes

A B C D E F G H I J
Year SPX RUT Hold System Opposite Split System Opposite Split
1979 18.6 43.1 $1000 $1000 $1000
1980 32.5 38.6 RUT 38.6 32.5 35.5 1,386 1,325 1,355
1981 (4.9) 2.0 RUT 2.0 (4.9) (1.4) 1,414 1,260 1,336
1982 21.5 24.9 RUT 24.9 21.5 23.2 1,767 1,531 1,646
1983 22.6 29.1 RUT 29.1 22.6 25.8 2,282 1,877 2,072
1984 6.3 (7.3) RUT (7.3) 6.3 (0.5) 2,115 1,994 2,061
1985 31.7 31.0 SPX 31.7 31.0 31.4 2,786 2,613 2,708
1986 18.7 5.7 SPX 18.7 5.7 12.2 3,306 2,762 3,038
1987 5.3 (8.8) SPX 5.3 (8.8) (1.8) 3,480 2,519 2,984
1988 16.6 25.0 SPX 16.6 25.0 20.8 4,058 3,149 3,605
1989 31.7 16.3 RUT 16.3 31.7 24.0 4,717 4,147 4,469
1990 (3.1) (19.5) SPX (3.1) (19.5) (11.3) 4,571 3,339 3,965
1991 30.5 46.0 SPX 30.5 46.0 38.3 5,964 4,877 5,481
1992 7.6 18.4 RUT 18.4 7.6 13.0 7,062 5,248 6,195
1993 10.1 18.9 RUT 18.9 10.1 14.5 8,395 5,777 7,092
1994 1.3 (1.8) RUT (1.8) 1.3 (0.3) 8,242 5,853 7,074
1995 37.6 28.5 SPX 37.6 28.5 33.0 11,339 7,519 9,409
1996 23.0 16.5 SPX 23.0 16.5 19.7 13,942 8,759 11,265
1997 33.4 22.4 SPX 33.4 22.4 27.9 18,594 10,717 14,404
1998 28.6 (2.5) SPX 28.6 (2.5) 13.0 23,907 10,445 16,279
1999 21.0 21.3 SPX 21.0 21.3 21.2 28,938 12,665 19,722
2000 (9.1) (3.0) RUT (3.0) (9.1) (6.1) 28,064 11,512 18,526
2001 (11.9) 2.5 RUT 2.5 (11.9) (4.7) 28,762 10,143 17,656
2002 (22.1) (20.5) RUT (20.5) (22.1) (21.3) 22,870 7,902 13,897
2003 28.7 47.3 RUT 47.3 28.7 38.0 33,677 10,168 19,173
2004 10.9 18.3 RUT 18.3 10.9 14.6 39,850 11,275 21,973
2005 4.9 4.6 RUT 4.6 4.9 4.7 41,665 11,829 23,013
2006 15.8 18.4 SPX 15.8 18.4 17.1 48,246 14,001 26,944
2007 5.5 (1.6) RUT (1.6) 5.5 2.0 47,490 14,770 27,473
2008 (37.0) (33.8) SPX (37.0) (33.8) (35.4) 29,920 9,780 17,750
2009 26.5 27.2 RUT 27.2 26.5 26.8 38,050 12,368 22,510
2010 15.1 26.9 RUT 26.9 15.1 21.0 48,268 14,231 27,228
2011 2.1 (4.2) RUT (4.2) 2.1 (1.0) 46,252 14,531 26,947
2012 16.0 16.3 SPX 16.0 16.3 16.2 53,654 16,907 31,306
2013 32.4 38.8 RUT 38.8 32.4 35.6 74,484 22,383 42,452
2014 13.7 4.9 RUT 4.9 13.7 9.3 78,130 25,447 46,397
2015 1.4 (4.4) SPX 1.4 (4.4) (1.5) 79,211 24,324 45,694
2016 12.0 21.3 SPX 12.0 21.3 16.6 88,684 29,507 53,294
2017 21.8 14.6 RUT 14.6 21.8 18.2 101,674 35,949 63,015
2018 2.9 (0.7) SPX 2.9 (0.7) 2.9 104,613 35,712 64,836

Figure 2 – Year-by-Year Results

Summary

So is this a great, world-beater “System.”  Probably not.  But it has managed to outperform buy-and-hold by a factor of 1.65-to-1 over the last 38 years.

And did I mention that it’s simple?

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.

 

Taking What XLF Gives You (or Not)

In this article on 10/30 I highlighted a hypothetical example trade in XLF, based on:

*An expected bounce in the overall market

*Extremely negative sentiment for XLF

*A positive divergence between XLF price action and the 3-day RSI

Guess what, folks…sometimes this stuff actually works!

The example trade was intended as nothing more than a short-term speculation hoping for a “pop” in XLF.  Figure 1 displays the current status of the trade (assuming the trader was willing to risk $500 on the trade) as I type.

1Figure 1 – XLF Dec 26 call option trade (Courtesy www.OptionsAnalysis.com)

The good news is that XLF moved higher yesterday and is up more than 2% today.  The trade has already generated more than a 60% profit.  The bad news is that everything could change very quickly if XLF turns back down.

So, a trader in this example has 3 basic choices:

1. Let it ride

2. Take a profit

3. Adjust the trade

Here is one thing you need to know and accept if you are going to trade options:  There is no “correct” answer among the choices listed above.  Each trader must make decisions about how they want to proceed based on their own individual outlook and priorities.

#1. Let it Ride: If you think things are looking good and you want to try riding it further then no action is necessary.  Now would be a good time, however, to decide what exactly would cause you to act going forward, i.e., if XLF RSI hits 75, or if XLF price drops back below $26, etc., etc.  (here again, there are no “correct” answers).

#2. Take a Profit: As this was intended as a speculative short-term trade hoping for a “pop”, there is nothing wrong with saying “Mission Accomplished” and cashing out.  Just remember to avoid the human nature tendency to kick yourself if XLF keeps moving higher.  You accomplished your goal – move on without emotion.

#3. Adjust the Trade: There are countless possibilities and again, no “correct” choice.  But for the sake of example let me highlight one possibility. This one involves:

*Selling 4 Dec 26 calls @ $1.12

*Selling 2 Dec 27 calls @ $0.59

This leaves a trader with 3 long Dec 26 calls and 2 short Dec 27 calls.  The sum total of all of this appears in Figure 2.

2Figure 2 – Adjusted XLF position (Courtesy www.OptionsAnalysis.com)

This position has locked in a small profit and still enjoys the potential for unlimited profits if XLF continues to advance (albeit much less profit potential than with the original 7-lot position).

Summary

There are a lot of ways to “play the game”.  The key is to:

*Spot opportunity

*Exploit opportunity (without assuming more risk than you can handle)

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.

Serious Contrarian Speculation

When it comes to “investing” (roughly defined here as “putting money into investment vehicles with the intent of generating long-term growth of capital”), trend-following approaches tend to yield the best results (at least according to your esteemed author).

But when it comes to “trading” (roughly defined here as “speculating on shorter-term movements in the price of securities with the intent – if we’re being honest – of making as much money as possible as quickly as possible) anything goes.

When “trading”, it is OK to enter incredibly speculative positions (in fact some might argue that that is the whole point) in an effort to capture quick – and with any luck, sizeable – gains.

The key is to limit the amount of risk you expose yourself to in the process.

One Example

What follows is – as always – NOT a trade recommendation.  It simply serves to illustrate the points I am trying to make.

Ticker XLF is presently beaten down, hated and loathed – not to mention unloved.  In addition, in the last month it has broken down below its 200-day moving average.  A quick glance at Figure 1 reveals a stock that most “investors” would have no trouble staying away from.1Figure 1 – XLF trend appears to be breaking down (Courtesy AIQ TradingExpert)

But we are not talking today about “investing”. We are talking about “trading/speculating”.  So, let’s consider the following:

*The stock market tends to perform well during the last few days of October/first few days of November.

*Sentiment for XLF has been in a range that often precedes advances (See Figure 2.2Figure 2 – Sentiment has been very bearish for XLF (Courtesy Sentimentrader.com)

*The 3-day RSI for XLF is signaling a potential bullish divergence.  See Figure 3

3Figure 3 – Potential bullish divergence between XLF and it’s 3-day RSI (Courtesy AIQ TradingExpert)

XLF and 3-day RSI made a low on 10/11.  Price made subsequent new lows on 10/15 and 10/24 while RSI made higher lows – thus forming a potential bullish divergence.

What to Do

If you are an “investor”, the thing to do is to stop reading and move on to the next thing on your “To Do” list.

If you are a trader/speculator the next thing to do is to assess:

*Is this a situation worth risking money on?

*And, if “Yes”, assessing how to play it without taking too much risk

One potential example play appears below.  This play involves simply buying the Dec 26 call option on ticker XLF.  The particulars appear in Figure 4 and the risk curves in Figure 5

4Figure 4 – XLF Dec 26 call (Courtesy www.OptionsAnalysis.com)

5Figure 5 – XLF Dec 26 call risk curves (Courtesy www.OptionsAnalysis.com)

As this is written, buying a one-lot costs $71. A trader with a $25K account who is willing to risk 2% (or $500) on a trade could buy up to 7 of the Dec 26 calls ($71 x 7 = $497).

In terms of trade management:

*If the trade does no show a profit with 30 days left until expiration it might be a good idea to exit and cut one’s loss.

*This is a short-term speculative play so in terms of profit, the trade should be looking to either, a) take a profit, or b) sell some at a profit and let the rest ride, at the first decent opportunity.

Summary

Remember, I am not “predicting” that XLF is about to rally nor am I “recommending” the trade displayed above.  I am simply pointing out one example approach to Serious Contrarian Speculation

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.

 

 

 

 

Election Cycle to the Rescue?

Well that didn’t go well.  The month of October that is.  With most of the major stock market averages drooping below significant long-term moving averages and with some of the moving averages starting to “roll over” – not to mention rising interest rates, a key election and the rest of the world’s stock markets plunging – there is suddenly a lot of “doubt” out there.

And if price action does not improve soon my view is that investors do need to consider playing some “defense” (i.e., reduce risk, even if it ultimately means buying back in higher).  But the good news is that there is a chance that things will improve in the not too distant future.

The (Seasonal) Trend

For one thing, there are a lot of signs of an “oversold” market (see here for one example).  Another “thing” hiding in plain sight from most investors is that we are about to hit one of the “sweet spots” in the 4-year election cycle.  To wit:

*We will call the month of November in the mid-term election year through the month of April in the pre-election year a “bullish seasonal period.”

The Results

Figure 1 displays the growth of $1,000 invested in the Dow Jones Industrials Average ONLY during November of each mid-term election year through the end of April of the pre-election year (i.e., 6 months) starting on 12/31/1940.

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Figure 1 – Growth of $1,000 invested in Dow Jones Industrials Average; November 1 of Mid-Term Year through April 30 of Pre-Election Year; 12/31/1940-10/26/2018

Figure 2 displays the returns seen by the Dow during the period in each election cycle.2a

Figure 2 –Dow Jones Industrials Average % price return; November 1 of Mid-Term Year through April 30 of Pre-Election Year; 12/31/1940-10/26/2018

*As you can see, the average 6-month return during this period is a resounding +15.0%.

*The largest gain was +25.6% during 1998-1999.

*The worst performance was a gain of +0.9% in 1946-1947.

Summary

So, does this mean that the worst is behind us and that stocks are destined to zoom higher in the months ahead?  Not necessarily.  As always, the one problem with seasonal trends is that you never know for sure if they are going to pan out as expected “this time around”.

Still, the consistency displayed in Figures 1 and 2 – combined with the heightened bearish sentiment currently surrounding the market – suggests that now may not be the exact moment to hit the panic button.

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.

 

 

 

 

‘Dogs’ ‘Due’ for ‘Days’

While I am by and large an avowed “trend-follower” I also recognize that sometimes things get beaten down so much that they ultimately offer great potential long-term value.  Or, as they say, “every dog has it’s day.”  So, let’s consider some “dogs”.

For the record, and as always, I am not “recommending” these assets – I am simply highlighting what look like potential opportunities.

Dog #1: Soybeans (ticker SOYB)

As I wrote about in this article, soybeans are very cyclical in nature.  According to that article there are two “bullish seasonal periods” for beans and one “bearish”:

*Long beans from close on the last trading day of January through the close on 2nd trading day of May

*Short beans from the close on 14th trading day of June through the close on 2nd trading day of October

*Long beans from the close on 2nd trading day of October through the close on 5th trading day of November

In Figure 1 (ticker SOYB – an ETF that tracks the price of soybean futures) has been beaten down quite a bit.  This doesn’t mean price can’t go lower.  However, given the cyclical nature of bean prices they probably won’t go down forever.1Figure 1 – Weekly SOYB; prices beaten down (Courtesy AIQ TradingExpert)

Figure 2 is a daily chart of SOYB and displays the recent “bearish” seasonal period and the latest “bullish” period so far.

2Figure 2 – Daily SOYB (Courtesy AIQ TradingExpert)

Dog #2: Uranium (ticker URA)

In this article and this article, I wrote about the prospects for uranium and ticker URA – an ETF that tracks the price of uranium.  Since that time URA has basically continued to go nowhere.  As you can see in Figure 3, it has been doing just that for some time.  While there is no guarantee that the breakout out of the range indicated in Figure 2 will be to the upside, historically, elongated bases such as this often lead to just that.  A trader can buy it at current levels and put a stop loss somewhere below the low for the base and take a reasonable amount of risk if they are willing to bet on an eventual upside breakout.

3Figure 3 – Ticker URA with a long (really long) base (Courtesy AIQ TradingExpert)

Dog #3: Base Metals (Ticker DBB)

Under the category of – I called this one way, way too soon – in this article I wrote about the potential for ticker DBB to be an outperformer in the years ahead.  As you can see in Figure 4, so far, not so good.

4Figure 4 – Base Metals via ticker DBB (Courtesy AIQ TradingExpert)

Still, the argument for base metals is this:

*In Figure 3 is this article you can see that commodities as an asset class are due for a good move relative to stocks in the years ahead.

*In addition, the Fed is raising interest rates.

As discussed in the linked article, historically base metals have been the best performing commodity sector when interest rates are rising.  Ticker DBB offers investors a play on a basket of base metals.

Summary

Will any of these “dog” ideas pan out?  As always, only time will tell.  But given the cyclical nature of commodities and the price and fundamental factors that may impact these going forward, they might at least be worth a look.

In the meantime, “Woof” (which – as far as I can tell – means “Have a nice day”).

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 Look Ahead in Stocks, Bonds and Commodities

In the interest of full disclosure, the reality is that I am not great at “predicting” things.  Especially when it involves the future.  That being said, I am pretty good at:

*Identifying the trend “right now”

*Understanding that no trend lasts forever

*Being aware of when things are getting a bit “extended”

So, I am going to highlight a few “thoughts” regarding how one might best be served in the markets in the years ahead.

Where We Have Been

*After 17 years of sideways action (1965-1982) the stock market has overall been in a bullish trend since about 1982 – albeit with some major declines (1987, 2000-2002 and 2007-2009) when the market got significantly overvalued.

*Bond yields experienced a long-term decline starting in 1981 and bottomed out in recent years.

*Commodities have mostly been a “dog” for many years.

The way the majority of investors approach these goings on is to:

*Remain bullish on the stock market (“Because it just keeps going up”)

*Continue to hold bonds (“Because I have to earn a yield somewhere”)

*Avoid commodities (“Because they suck – and they’re scary”)

And as an avowed trend-follower I don’t necessarily disapprove.  But as a market observer I can’t help but think that things will be “different” in the not too distant future.

Considerations Going Forward

Stocks

Figure 1 displays the Shiller P/E ratio.  For the record, valuation measures are NOT good “timing” tools.  They don’t tell you “When” the market will top or bottom out.  But they do give a good indication of relative risk going forward (i.e., the higher the P/E the more the risk and vice versa).

Note:

*The magnitude of market declines following previous peaks in the P/E ratio

*That we are presently at (or near) the 2nd highest reading in history

(click on any chart below to enlarge it)

1Figure 1 – Shiller P/E Ratio (and market action after previous overvalued peaks) (Courtesy: www.multpl.com/shiller-pe/)

The bottom line on stocks:  While the trend presently remains bullish, valuation levels remind us that the next bear market – whenever that may be – is quite likely to be “one of the painful kind”.

Bonds

Figure 2 displays the 60-year cycle in interest rates.2Figure 2 – 60 -year cycle in interest rates (Courtesy: www.mcoscillator.com)

Given the historical nature of rates – and the Fed’s clear propensity for raising rates – it seems quite reasonable to expect higher interest rates in the years ahead.

Commodities

As you can see in Figure 3 – which compares the action of the Goldman Sachs Commodity Index to that of the S&P 500 Index) – commodities are presently quite undervalued relative to stocks.  While there is no way to predict when this trend might change, the main point is that history strongly suggests that when it does change, commodities will vastly outperform stocks.3Figure 3 – Commodities extremely undervalued relative to stocks (Courtesy: Double Line Funds)

The Bottom Line – and How to Prepare for the Years Ahead

*No need to panic in stocks.  But keep an eye on the major averages.  If they start to drop below their 200-day averages and those moving average start to “roll over” (see example in Figure 4), it will absolutely, positively be time to “play defense.”

4Figure 4 – Major stock average rolling over prior to 2008 collapse (Courtesy AIQ TradingExpert)

*Avoid long-term bonds.  If you hold a long-term bond with a duration of 15 years that tells you that if interest rates rise one full percentage point, then that bond will lose roughly 15% in value.  If it is paying say 3.5% in yield, there is basically no way to make up that loss (except to wait about 4 years and hope rates don’t rise any more in the interim – which doesn’t sound like a great investment strategy).

*Short-term to intermediate-term bonds allow you to reinvest more frequently at higher rates as rates rise. Historical returns have been low recently so many investors avoid these.  But remember, recent returns mean nothing going forward if rates rise in the years ahead.

*Consider floating rate bonds.  Figure 5 displays ticker OOSYX performance in recent years versus 10-year t-note yields. While I am not specifically “recommending” this fund, it illustrates how floating rate bonds may afford bond investors the opportunity to make money in bonds even as rates rise.5Figure 5 – Ticker OOSYX (floating rate fund) versus 10-year treasury yields)

*Figure 6 display 4 ETFs that hold varying “baskets” of commodities (DBC, RJI, DJP and GSG clockwise from upper left).  When the trend in Figure 3 finally does reverse, these ETFs stand to perform exceptionally well.6Figure 6 – Commodities performance relative to stock performance (GSCI versus SPX)

Finally, the truth is that I don’t know “when” any of this will play out.  But the bottom line is that I can’t help but think that the investment landscape is going to change dramatically in the years ahead.

So:

a) Pay attention, and

b) Be prepared to adapt

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.

 

 

 

Watch This Indicator

So, the big question on every investor’s mind is “What Comes Next?”  Since this is not an advisory service (and given the fact that I am not too good at predicting the future anyway) I have avoided commenting on “the state of the markets” lately.  That being said, I do have a few “thoughts”:

*The major averages (as of this exact moment) are still mostly above their longer-term moving averages (200-day, 10-month, 40-week, and so on and so forth).  So, on a trend-following basis the trend is still “up”.

0Figure 1 – The Major Index (Courtesy AIQ TradingExpert)

*We are in the most favorable 15 months of the 48-month election cycle (though off to a pretty awful start obviously) which beings Oct.1 of the mid-term year and ends Dec. 31st of the pre-election year.

*Investors should be prepared for some volatility as bottoms following sharp drops usually take at least a little while to form and typically are choppy affairs.  One day the market is up big and everyone breathes a sigh of relief and then the next day the market tanks.  And so on and so forth.

An Indicator to Watch

At the outset let me state that there are no “magical” indicators.  Still, there are some that typically are pretty useful.  One that I follow I refer to as Nasdaq HiLoMA.  It works as follows:

A = Nasdaq daily new highs

B = Nasdaq daily new lows

C = (A / (A+B)) * 100

D = 10-day moving average of C

C can range from 0% to 100%.  D is simply a 10-day average of C.

Nasdaq HiLoMA = D

Interpretation: When Nasdaq HiLoMA drops below 20 the market is “oversold”.

Note that the sentence above says “the market is oversold” and NOT “BUY NOW AGGRESSIVELY WITH EVERY PENNY YOU HAVE.”  This is an important distinction because – like most indicators – while this one may often give useful signals, it will occasionally give a completely false signal (i.e., the market will continue to decline significantly).

A couple of “finer points”:

*Look for the indicator to bottom out before considering it to be “bullish”.

*A rise back above 20 is often a sign that the decline is over (but, importantly, not always).  Sometimes there may be another retest of recent lows and sometimes a bear market just re-exerts itself)

*If the 200-day moving average for the Dow or S&P 500 is currently trending lower be careful about using these signals.  Signals are typically more useful if the 200-day moving average for these indexes is rising or at least drifting sideways rather than clearly trending lower (ala 2008).

Figures 2 through 8 displays the S&P 500 Index with the Nasdaq HiLoMA indicator.  Click to enlarge any chart.

1Figure 2 – SPX with Jay’s Nasdaq HiLoMA ending 2006 (Courtesy AIQ TradingExpert)

2Figure 3 – SPX with Jay’s Nasdaq HiLoMA ending 2008 (Courtesy AIQ TradingExpert)

3Figure 4 – SPX with Jay’s Nasdaq HiLoMA ending 2010 (Courtesy AIQ TradingExpert)

4Figure 5 – SPX with Jay’s Nasdaq HiLoMA ending 2012 (Courtesy AIQ TradingExpert)

5Figure 6 – SPX with Jay’s Nasdaq HiLoMA ending 2014 (Courtesy AIQ TradingExpert)

6Figure 7 – SPX with Jay’s Nasdaq HiLoMA ending 2016 (Courtesy AIQ TradingExpert)

7Figure 8 – SPX with Jay’s Nasdaq HiLoMA ending 2018 (Courtesy AIQ TradingExpert)

Summary

The stock market is in a favorable seasonal period and is oversold.  As long as the former remains true, react accordingly (with proper risk controls in place of course).

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.