Out of stocks and maybe into bonds?

Until recently, miners used to bring Canaries in the deep mines to warn them of the possibility of oxygen depletion

and carbon monoxide intrusion. Canaries, like all birds, are good early detectors of carbon monoxide because they are vulnerable to airborne poisons. They need immense amounts of oxygen to enable them to fly to heights that would make most of us altitude sick. They were small and compact and kept in small cages carried by the miners. Any sign of distress would be a warning to leave the mine.

The stock market, I believe has such a warning system. The Bond-Stock ratio.

Whenever the bond market appears to doing better than stocks, be prepared to take some preparatory action.

Such is the case, almost, right now.

Below is the daily and the 30 minute charts chart of the ETF’s: BND, and SPY.

Everything looks OK. Spy is still doing better. The red vertical line shows that SPY(red) is stronger.

But, the 30 minute chart shows another possible story. An early warning? Since June 14, 2018, BND seems to doing a little better on a 30 Minute basis.

BND vs SPY 30 MinBND vs SPY Daily

Finding Swing Trading Candidates

“The best-performing stock in the S&P 500 this year was the company behind Invisalign clear braces

  • Align Technology makes “clear aligners” that orthodontists use to straighten a patient’s teeth in lieu of metal braces and headgear.
  • Despite an onslaught of competition, Align Technology was the top-performing stock among S&P 500 companies in 2017.
  • Align Technology’s stock shot up from a $96.49 opening price on the first day of trading this year to an opening price of $223.22 on Wednesday. “(12/27/2017)
  • CNBC

ALGN performance in 2017 was most suprising because of wht it was not. It was not a tech or bitcoin stock. It is a medical device company.

In my previous post on How to Find Swing Trading Stocks (listed below), I mentioned that the basic first step is to find those stocks that have demonstrated, through their income statements and balance sheet, that the company has the potential to become a moat stock.

Once that this potential has been noted, the next step is to find the breakout stage, when the rest of the investing world notices that the company has developed some positive price momentum.

Align Technology started to show early signs of both after the annual report of the year ending December 2010.

The financial results continued to get better. The stock price followed.

The following monthly, and weekly pictures of ALGN should illustrate

the earnings and price growth of this unusual company.

ALGN WeeklyALGN monthly

AAPL Earnings

Remember when Robinson Crusoe, stranded on an island, comes across a footprint in the sand.

“I stood as one thunderstruck, or as if I had seen an apparition. … I came home not feeling, as we say, the ground I went on, but terrified to the last degree, looking behind me at every two or three steps …”

The price graph of Apple (AAPL) from Thursday, November 2, 2017, pre-earnings announcement, should indicate that some footprints are not to be afraid of, but taken advantage of. Clearly, the trading activity pointed to a very positive announcement, which was confirmed when earning were announced after the close on Thursday.

New AAPL

 

Putting It Together. Part two

Friday, October 27, 2017, The Wall Street Journal, on page B12, had an article “Celgene’s Plunge Sickens Biotech Sector.

“Celgene’s Corp biggest stock plunge in nearly 17 years propelled a popular biotechnology index to its seventh straight day of losses.

Shares declined 16% to close at 99.99 on Thursday after the company reported disappointing quarterly revenue and cut a series of long-term financial targets. Celgene’s drop was the steepest since November 2000 and carried the stock below $100 for the first time this year. The stock’s swoon weighed on the Nasdaq Biotechnology Index which fell 2.3%.”

The article compared the price action of Celgene to those of Biogen and Amgen, two other components of the Biotech index.

The following graph, not from the Wall Street Journal using some PerfectStorm indicators, should illustrate this point.

Biotech October 28

There were obvious warning signs before this decline occurred.

On October 5, Celgene stock closed below two of the Relative Strength indicators at a price of $140.01, and on October 18th the Biotech ETF IBB closed below its indicator at 335.97.

Any investor believing in my basic strategy of only being long when Relative Strength and Momentum are positive would have not been invested in Celgene after October 5th and certainly not after October 18th. ($137)

On Friday, October 27, 2017, CELG closed at $98.17, and IBB closed at 316.12. Q.E.D.

Equifax Breach

In todays Wall Street Journal there is an interesting article on multiple pages diagramming the security intrusion and the inability of one of the largest holders of private information in the United States to secure that information. Near the end of the article there is what I portray as a “very interesting” statement:

“Three Equifax officials, including the companies finance chief, sold a total of about $1.8 million in stock Aug. 1 and 2, according to securities filings. Equifax has said they didn’t know about the breach at the time of the stock sales.”

The attached graph of the price behavior of Equifax shows that someone knew something.

The Green verticals indicate a preliminary bullish indication while the green arrows indicate a purchase. Yellow line indicates a close of the current position. Red vertical indicates bullish sentiment , Red arrows says sell.

Price as of the close today, September 18, 2017

 

EFX

Putting It Together

For the past ten years or so I have been putting out a blog on my websites: swingtrader.com, relativevalue.com, and perfectstormtradingstrategy.com.

During that time I have proposed looking at the investing/trading world through a different lens, focusing on relative strength combined with absolute momentum.

Since I started my blogs, I noticed others promoting similar strategies.

A book was written a year ago highlighting some of my thoughts and a global advisory established counseling many of the worlds largest money managers, using many of the tools that I had developed.

Most studies of actively managed funds tell us that only four percent of money managers can outperform, on a risk adjusted basis, the Dow or the S&P 500 averages over a ten year period.

I believe that most, if not all of the poor performance is a result of two factors.

One) The inability of the manager to sell positions that are in decline because of the requirements that the manager has to be fully invested. That is, there is no viable alternative, so the manager stays invested, even in losing positions.

Two) The behavioral problem in admitting that you are wrong. The reason for the initial purchase is no longer valid. Not that you were wrong then, but you are wrong now. It has happened to all of us.

My strategy/system remedies both of these problems.

If you are an investor in equities, commodities, foreign exchange, long term, short term, or day trader, if interested in adding significant value to your investing/and or trading portfolio, please contact me at:

rfeit@msn.com

Pairs Trading Strategy as Proxy for Swing Trading

It should be no surprise to learn that the most successful quantitative hedge fund founders were, at the beginning of their careers, successful convertible arbitrageurs. I was fortunate to be one of the earliest inventors/discoverers of the basic convertible arbitrage strategy.

The basics of convertible arbitrage revolve around the concept of relative value. When the convertible is demonstrably more valuable than the underlying shares, than the convertible arbitrageur purchases the convertible security and shorts the underlying shares. Reversing the trade when the relative values return to normal.

In the early days of the convertible arbitrage strategy, the position carried a positive cash flow and the reversal of the position could take many months until a more favorable opportunity made the position less favorable.

The relative value strategy follows into other quantitative strategies.

Most pairs trading strategies use two securities in the same economic sector that have movements that are highly correlated and co -integrated. They track each other almost perfectly, the ratio of the price of the two such stocks should be almost the same. When their relative movements deviate from their expected behavior, the strategy dictates that the relatively cheaper one be purchased and the more expensive one be sold short. A reversion to the mean relationship. Traders waiting for various deviations, trying to put trades on at maximum deviations. Hundreds if not thousands of pairs traders follow the same highly correlated co-integrated pairs. It becomes a game of chicken. Each trader trying to get the trade on at the best possible time.

Similar to what happened to convertible arbitrage, the returns on the strategy go down as the number of players participating increase. It is a limited universe. The amount of funds devoted to mean reversion pairs trading decreases the amount of profit to be made.

I have developed a swing trading strategy that uses the relative value of the pairs components. Like convertible arbitrage, the strategy uses a large portfolio approach, putting on lots of different positions in differing economic sectors to diversify risk. Many investors may find it useful in a long only portfolio.

Swingtrading for farmers

Corn-Wheat 8-15-2014BTodays(Monday Aug 18, 2014) Wall Street Journal on page C1 has an article “U.S. Farmers Are Up to Ears in Corn”

To no ones surprise, the economic factors that led farmers to plant increasingly more acreage in corn has caused an oversupply of corn just when the demand is declining. This demand fall off is due to a decline in livestock herds and declining purchases from China.

In addition to the supply/demand problem, more farmers in certain parts of the country which have traditional planted wheat have moved to corn due to the changes in weather patterns over the last few years. In other parts of the country, the opposite is happening.

The choice to plant corn or wheat or a new combination of both is happening in farms all over North America.

Fortunately there are ways for farmers to hedge their crops. Traditionally that has been in the futures market.

In September 2011, Teucrium introduced an ETF designed to replicate the returns that mirror the movements in the spot prices of wheat. WEAT. It has developed other commodity ETF’s that follow corn,soybeans and others. The ETF for corn is CORN.  For more information on the construction and costs please go to the Teucrium website.

The following daily chart of CORN versus WEAT illustrates a Swingtrading approach to corn and wheat. Both commodities have been in a decline, but at various times, the better play was to follow the relative momentum. Prices as of the daily close, Friday, August 15,2014

Corn-Wheat 8-15-2014A

and a closer view:

Corn-Wheat 8-15-2014B

For further information on all the topics covered and how you can implement these and many others in your trading plan. Please contact me at rfeit@msn.com See www.relativevalue.com for day trading ideas.

Swing trading using pairs, Emerging versus Frontier Markets

A recent Wall Street Journal article, Saturday/Sunday February 1-2, 2014,tracked the relative performance of ETF’s representing emerging markets and even less developed economies referred to as ‘frontier markets’. The article points out that the frontier markets have seen a ‘steady trickle of investment from fund managers hoping to ride years of steady growth’.

I have used the ETF IEMG to represent emerging markets and the ETF FM to represent frontier markets.

Since the end of 2013, IEMG is down almost eight per-cent while FM has flat performance. The U.S. market as represented by SPY is down a little more than five per-cent.

As a portfolio manager who is looking to diversify into less developed emerging markets, a look at the relative strengths of IEMG versus FM would be of some value.

The following graph illustrates this point.

 

Pairs IEMG-FM 1-31-

Pairs trading. VIX versus SPY

One of the groups that are active in LinkedIn is Automated Trading Strategies(Algorithmic Trading of Stocks,…). A current questions is about the VIX and the SP500.

The VIX, first introduced by the CBOE in 1993 using the S&P100 (OEX) was a weighted measure of the implied volatility of at the money put and call options on the S&P 100. Some years later it was changed and is now based upon the S&P500 index. The ETF of the S&P500 is SPY. The VIX index is often called a fear index by traders because in most cases when the market is calm and moving in a narrow trading range, volatility is low. As the market sells off, anxiety among traders increases and volatility increases. The VIX raises in periods of higher volatility.

The VIX tends to move in an opposite direction as the S&P500.
The following chart of the SPY versus the VIX for the daily period ending January 10, 2014 should illustrate that point.

Pair-SPY-VIX 1-10-2014

The top wriiten symbol in green is SPY, the bottom security with the symbol written in red is the VIX.
The chart clearly illustrates that as the SPY rises, the VIX declines. As SPY declines, VIX rise.

The vertical lines indicate turning points in the direction of the SPY and the VIX. Green lines tell the trader to purchase SPY, the symbol written in green and sell VIX, the symbol written in red. Red vertical lines indicate the decision to purchase VIX the red symbol and sell SPY the green symbol.

The latest trading decision was indicated on October 16, 2013. Buy SPY, sell VIX.
If a trader had purchased SPY the next day at the high of 173.32 and held it through the close of 184.14 on January 10, 2013,it would represent a profit of 6.24%. A sale of VIX at the low of the next trading day after October 16 at 52 and still holding the sale through the close of 40.84 on January 10, 2014 would represent a 27.3% profit.