More on bonds and rising rates; Buy and hold index funds?

GMI

6/6

GMI-2

8/8

What is the GMI?
 

WORDEN T2108

52%

Last post I explained why bonds fall in value when interest rates rise. What I neglected to add was that with interest rates having declined so much over the past few years since the 2008 debacle, a lot of people who invested in bonds saw their bonds increase  in value. Many of these people will likely flee their bonds if (when?) rates start to reverse up.  People who became accustomed to merely holding bonds and watching them rise in value may be in for a large shock when they plummet. After the turn when rates rise enough to be attractive, people will exit risky stocks in favor of more conservative bonds or CDs, precipitating a bear market in stocks. For example, if the day ever returns that  I could nail down 6% annual interest in insured CDs, I and many other boomers would presumably be happy to get out of stocks and park our money in interest bearing instruments after retirement.  It is for this reason that I need to be very vigilant for the first signs that interest rates are reversing up….

Mr Market tends to seduce people into the stock market so that the most persons get hurt at some point. I am noticing more and more articles by the media pundits saying that people should just buy  index ETF’s. Why try to beat the market when most professionals fail? Along with this advice is the idea not to try to time the market. Just buy the index ETF and don’t even peek at it.  What could happen to make this advice hurt the most people?  What if the entire market as reflected in these index ETFs or mutual funds declined 30% or more in a short  period of time?  Would these investors who swore off market timing throw in the towel and panic at the exact bottom? I think so.  The boomers who put their faith in index funds will look at the impact of a declining market on their retirement finances and run for the exits. I think we fail to acknowledge the huge negative reaction that boomers will have to the next large stock market decline.

Using many of the components I put into the GMI, and my experience in the markets since the 1960’s, I exited the markets during the major 2000-2002 and 2008 market declines. I then reinvested after the dust had settled. Today I am that much closer to retirement and refuse to hold an index fund through the next big market decline.  I cannot afford (emotionally or financially) to wait even 3  years for the market and my account balances to recover. So I disagree with all of these “buy and hold  index funds (or ETFs)” adherents. Maybe they do not depend mainly on their 401(k)s and IRAs to fund their retirements (hint: that is why they sell their advice)….

I do not know when the market will turn down (no one does). I do know that when it turns it will be quick and massive as the boomers head for the exits. I will monitor my GMI for the early signs and remain a chicken, willing to exit early rather than late.

 

3rd day of $QQQ short term up-trend; double top in bonds?

GMI

6/6

GMI-2

8/8

What is the GMI?
 

WORDEN T2108

52%

Over my 40+ years of trading I have learned that the one thing that can kill a bull market is the Fed’s raising interest rates.

When interest rates rise the price of bonds decreases.  This is because  the dividend paid by  bonds is usually fixed. This is why the media often say that a bond moves inversely to interest rates. Most people find this difficult to understand. So here is how I teach my students. Say a bond is issued a $100 and it pays the holder $3 per year. That $3 is fixed for the life of the bond that might extend for many years. If the $100 bond pays $3, its yield= 3% each year (3/100). Now say that interest rates rise over a few years to 6%.  Then new $100 bonds issued will pay $6 per year (=6%). Someone holding the older bonds (that pay $3 per year) if he wanted to sell his bond early and get his money back would likely be offered only about $50 for his bond which he had bought for $100.  Remember the annual payment was fixed at $3 per year.  Thus $3/X (price of bond)=6%.  By solving this equation with rudimentary high school algebra, one realizes that x=50.  Thus a person selling his original  bond in the environment where new bonds now pay 6% would be offered only about $50 in the resale market.  The new buyer will only be willing to pay half of what the bond was originally issued at in order to get the prevailing 6% return. Thus when interest rates double, a person’s bond loses one half of its value, if it is being sold long before maturity. None of this applies if one holds the bond until maturity because the person will get his $3 each year and then the full $100 back when the bond matures and the person is repaid his principal.

All of the above is to explain why the trend in bonds may be worth watching. If bonds start to decline, it means that investors see rising interest rates ahead. It is for this reason that I am a little concerned by this chart of TLT, the 20 year treasury bond ETF. It looks to me like we may have put in a double top, indicating that interest rates may have bottomed out. Note the big decline on Tuesday.  (Click on chart to enlarge.)

TLTdaily12232014

If the economy is heating up, the Fed better raise rates so that it has ammunition to fight the next economic downturn. Here we go again…….

Meanwhile, Happy Holidays to all!

2nd day of $QQQ short term up-trend; $HACK, new cyber-security ETF

GMI

6/6

GMI-2

8/8

What is the GMI?
 

WORDEN T2108

51%

The GMI and GMI-2 are both a their maximum values. IBD still sees the market in a correction………

There is a new ETF that focuses on cyber-security. I thought you might like to investigate HACK. It does look like it is a little over extended though, trading above its top BB. Here is its entire daily chart.

HACK12222014

1st day of new $QQQ short term up-trend; GMI back to Buy

GMI

6/6

GMI-2

7/8

What is the GMI?
 

WORDEN T2108

50%

The QQQ short term down-trend only lasted 4 days. I have written that short term down-trends often last under 5 days and that I do not trust a short term trend change until it persists for at least 5 days. The GMI Sell signal also only lasted for 4 days. As of Friday’s close the GMI signaled a new Buy.  IBD still sees the market in a correction.

I expected December to end strong because of mutual fund window dressing. But when the GMI issued its Sell signal, I shed most of my long positions.  The bounce we have had looks a lot, technically,  like the bounce we had in mid-October.  The QQQ bounced from its lower 15.2 daily BB. So maybe it will persist.  If I fly by instrument I would go long here. But my instinct is to hold back for a while. I just do not trust this bounce.  Are the problems that precipitated the recent decline really over?  So, for now, I am mainly in cash. (I may prove to be the ideal contrary indicator!)

QQQdaily12192014GMI12192014

My market indexes on brink of turning positive; buying climax?

GMI

5/6

GMI-2

7/8

What is the GMI?
 

WORDEN T2108

47%

With the GMI back to 5 and the short term trend about to turn positive, it looks like we may have had another small and short lived correction. IBD still sees the market in a correction and is waiting for a follow-through day to this current snap back rally. I still think this rise could be a brief bout of year end mutual fund buying (window dressing) that could quickly disappear with the new year.  So I must be very nimble and ready to exit if the market fails to surpass its recent peak of 2079 on the S&P500 and 106 on the QQQ. Below is the daily chart of each index. This rally  seems a little too frenetic to me–climax run? Given that the market always falls quicker than it went up, the next decline will likely be a doozy. Note the 30 day average (red line) of both indexes is flat, which often leads to a lot of whip-saws. Failure of these averages to hold this line on Friday would be a very bearish sign to me.

SP50012192014

QQQ12192014

3rd day of $QQQ short term down-trend; Dead cat bounce? $CELG bounces

GMI

1/6

GMI-2

2/8

What is the GMI?
 

WORDEN T2108

37%

It is too early to discern if Wednesday’s bounce from oversold will hold. This is likely a good opportunity for me to reduce my holdings in mutual funds in my university pension accounts. I am not willing to risk a return to the losses my 403 (B) sustained before yesterday’s bounce. Failure of this bounce to hold would be bloody. For now, the short term trend of the QQQ remains down.

On the other hand, a lot of my oversold bounce alerts in TC2000 went off on Wednesday. If the market were in a short term up-trend I would buy some of these bouncing stocks.  An example would be CELG, which bounced from its lower 15.2 daily BB and crossed above its 30 day average. Check out this daily chart. Note the similar bounces that occurred last October and again in November. If I had purchased CELG yesterday, I would have placed my sell stop just below the bounce, around 108.25. This is one of the best scans that I teach my university students to run on TC2000. I also put my students on a list to receive all of my TC2000 alerts as they are triggered. Let’s see if CELG (and others like it) can hold this bounce for a few days.

CELG12172014

 

 

2nd day of $QQQ short term down-trend; super cautious

GMI

1/6

GMI-2

1/8

What is the GMI?
 

WORDEN T2108

27%

Market is getting very oversold.  T2108 is at 27%, 598 daily new lows, 62% of stocks with an oversold 10.4 stochastic, GMI and GMI-2 both= 1. And yet the longer term trend of the market is still up, in a Weinstein Stage 2 up-trend. Based on my 45+ years of trading experience I think the market has further to decline. So many people have come to   believe that the market only rises, based on the past 5 years of gains.  When the new year starts many may be willing to sell and take their gains in the new tax year. And then there are all of the retiring boomers who will panic from the fear of their imminently needed retirement savings diminishing. I just remember a lot of significant market tops occurring in January…….

Tuesday was the second day of the new $QQQ short term down-trend. I own mainly SQQQ and will accumulate more if this decline lasts 5 days. Since 2006, about 40% of  short term down-trends (the way I define them)  have lasted   5 days or less. Once one passes 5 days, it often goes a lot further. I remain largely in cash in my trading accounts. If I could frequently trade my mutual funds in my university pension, I would have transferred some money to money market funds.  We need to be super cautious and to read what Mr. Market is telling us about his likely direction.

This monthly chart of the SPY shows that the current decline hardly registers. This could mean that the current decline will be tiny or that it is yet to begin…. (red arrows show month of May to track the sell in May signal)

SPYmonthly12162014

 

GMI signals Sell; New $QQQ short term down-trend; IBD calls correction

GMI

1/6

GMI-2

2/8

What is the GMI?
 

WORDEN T2108

30%

With the GMI at 1 on Monday, this marks two days below 3 and a new Sell signal.  The QQQ short term trend also turned down.  IBD signaled on Tuesday that the market is now in a correction. I am almost sold out of all of my long positions and hold some SQQQ. Time to watch from the sidelines. This daily chart of the QQQ shows the recent GMI buy and sell signals. Click on chart to enlarge.

QQQdaily12152014

Trend change imminent; World markets in free-fall

GMI

2/6

GMI-2

3/8

What is the GMI?
 

WORDEN T2108

36%

The GMI registered 2 after Friday’s close and will likely be 2 or less again on Monday, triggering a GMI Sell signal. If so, I will close out my few longs and accumulate a leveraged inverse ETF (SQQQ). The T2108 is at 36% and has a long way to fall before our markets are at the level where declines typically end. (See weekly chart below.)

GMI12122014T2108wkly12142014

I am very concerned that many of the world’s markets are in free fall and we tend to pretend that the U.S. market is immune from the fall-out. Do we really think that the U.S. economy exists in its own cocoon? Take a look at the recent weekly charts of some of the foreign ETF’s:

TRF: Russia/East Europe:

TRFEWZ: Brazil:

EWZEWG: Germany:

EWGEWC: Canada

EWCEWW: Mexico:

EWWUSX–X: China:

USX--XCEE: Central Europe, Russia, Turkey:

CEEAre we worried yet? Or maybe it’s just a benign and temporary oil price precipitated scare….. (would you like to buy a bridge?) I’m not going to wait around to find out. (I have told you I trade like a chicken.)

 

 

34th day of $QQQ short term up-trend; $ALDR-another biotech green line break-out

GMI

4/6

GMI-2

3/8

What is the GMI?
 

WORDEN T2108

45%

QQQ, DIA and SPY  are  all on support. Friday will tell the resolution. Meanwhile, in the midst of all of this market volatility, ALDR had a  green line break-out to an all-time high on Thursday.

ALDR12112014



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