AN EFFECTIVE HEDGE

Price volatility is the price all investors must pay when attempting to increase their wealth through the stock market. And while few complain about price volatility when stock prices rise, some complain, or at least become more concerned, when stock prices decline. Today I want to provide an example of how some investors can apply a protective hedge to their investment portfolios during periods when stock prices are correcting, as they have been in recent weeks.

Before continuing this article, I suggest you first read an article I wrote back in 2016 titled “Attempting to Profit From Falling Prices” that can be found here. As was highlighted in that article there are ways to attempt to profit from falling stock prices, and one particular way is by using inverse Exchange-Traded Funds (ETFs). But that article pertained to stock markets that were already in a negative primary trend. Since we currently believe the stock market continues to remain in a positive primary trend, we believe our goal should be to add a protective hedge to some of our existing investments to attempt to help limit financial losses. Here’s how we do this within our process, and if you have your own process, I believe you can do it too. Before proceeding, allow me to set the stage using technical analysis for illustration.

Look at the chart below of the Vanguard S&P 500 ETF, representing the past twelve months of price activity, courtesy of StockCharts.com.

The red arrow illustrates the point where price began to decline in earnest, or approximately $265. Within a few days price dropped 6 ½% lower to $248. But notice that on this decline price stopped just short of the gray line – a previous technical resistance and support zone that was established earlier this calendar year. When prices began to rally, our expectation – according to technical analysis – should be for prices to retrace 50% of the recent decline, which would be approximately $256.50. That number becomes our target. As it turns out, price rallied to approximately $258, a little farther than expected. But now we come to the purpose of this article – how to implement a protective hedge using inverse ETFs.

Let’s assume you own VOO in your investment portfolio. Based on the technical information observed above, if you believe that prices will soon resume their decline after the “bounce” you could add an inverse ETF, such as SH, to your portfolio that is an inverse ETF to the S&P 500 Index. By doing so, you are attempting to limit further losses on your investment in VOO without having to sell it. Look at the next chart of SH, courtesy of StockCharts.com.

This chart shows that SH performed in an almost exact opposite manner to VOO from the time of purchase. So, if you purchased SH on the “bounce,” based on some percentage of your investment in VOO, you could have effectively “hedged” some or most of your risk in VOO. This “hedge” can help you reduce or eliminate your downside price volatility depending on how much of SH you bought, and the specific price when you purchased it.

The next step will entail deciding when to sell your investment in SH, since this may not be an investment you want to own for very long. In my next article I will illustrate what we are currently monitoring to help with that decision.

Thank you for reading and please share this article with anyone you believe may find it of benefit. We hope this article helps you learn how to view the stock market from two dimensions, rather than one, and how you can take proactive action to attempt to protect some of your stock investments against declining price volatility.

Jeff Link

 

Disclaimers:

Blue Line Investing (BLI) is an alternative to traditional wealth management. BLI uses a disciplined, rules-based investment process to seek investment opportunities, regardless of whether financial markets are rising or falling. Based on technical analysis research, the process applies trend-following using specific Exponential Moving Averages (EMAs) of the market along with other technical indicators. A moving average is a widely used indicator in technical analysis that helps smooth out past price action by filtering out the “noise” from random price fluctuations. EMA’s can be calculated for any time period. Some examples include the 5 day EMA; 50 day EMA; and 150 day EMA. We have attempted to simplify this by calling the various EMAs we use in our process the “Blue”, “Purple” and “Green” lines.

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. The risk is that markets may not always follow patterns. There are certain limitations to technical analysis research, such as the calculation results being impacted by changes in security price during periods of market volatility. Technical analysis is one of many indicators that may be used to analyze market data for investing purposes and should not be considered a guaranteed prediction of market activity. The opinions expressed are those of Blue Line Investing. The opinions referenced are as of the date of publication and are subject to change without notice. Blue Line Investing reserves the right to modify its current investment strategies based on changing market dynamics or client needs.

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. This information is intended for educational purposes only and should not be considered financial advice. It should not be assumed that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. Forward looking statements cannot be guaranteed.

Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. The principle office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703.

Technically Speaking…The US stock market may be at a crossroads

After recently passing the half way point of the calendar year, the US stock market has so far provided low, single-digit returns. So, what might investors expect for the second half of the year? More of the same or something different? While no one has a crystal ball I have found technical analysis to be a helpful tool to set my expectations. The chart below, in my opinion, provides two important items for investors to pay attention to at present.

Chart courtesy of StockCharts.com

First, the stock market may be on the verge of making a trend decision. There are two patterns that can be identified on the weekly chart above – a consolidating channel and a rising channel. The consolidation channel labeled “1A” and “1B” illustrates a period when stock prices remained range bound and stagnated. Such was the case from late 2014 through early 2016. This pattern eventually became a rising channel labeled “2A” and “2B.” Such a channel illustrates a period when prices rise higher and higher over time.  But now we see the potential for a new consolidation channel labeled “3A” and “3B” forming inside the rising channel. So how can you determine which of the two is the dominant channel right now? Based on the chart it appears the US stock market is at a crossroads. If price rises decisively above line “3A” we believe it is likely the rising channel will continue with higher prices to come. But if prices decline decisively, possibly below line “2B,” it is likely a consolidation channel will continue, with stagnant prices for the foreseeable future.

Second, on each of the stock rallies since February, the relative strength indicator has topped at 60. This can be observed with labels 4A and 4B, 5A and 5B, and 6A and 6B. Historically speaking, I have found that relative strength tends to top out at 60 during consolidation channels, as well as with negative primary trends. Price does not typically continue in a rising channel with relative strength remaining at or below 60.

You may be wondering how this information can be beneficial. The answer has to do with money you already have invested versus money you may be considering investing. For money already invested, this information sets the expectation that prices are likely to consolidate or continue to rise for the foreseeable future. If that is your expectation there is likely no need to hedge or sell any investments over fear of a stock market downturn. For money being considered for investment, the outcome determines a purchase decision. If price decisively rises above line “3A” it could be advantageous to buy. However, if price declines decisively below line “3A” it could signal to delay new purchases, as lower prices may result in the near-term. Whatever happens over the coming days and weeks, the relationship between price and relative strength should help identify which of the two trend channels is dominant at this time.

Jeff Link

Disclaimers:

¹ Blue Line Investing (BLI) is an alternative to traditional wealth management. BLI uses a disciplined, rules-based investment process to seek investment opportunities, regardless of whether financial markets are rising or falling. Based on technical analysis research, the process applies trend-following using specific Exponential Moving Averages (EMAs) of the market along with other technical indicators. A moving average is a widely used indicator in technical analysis that helps smooth out past price action by filtering out the “noise” from random price fluctuations. EMA’s can be calculated for any time period. Some examples include the 5 day EMA; 50 day EMA; and 150 day EMA. We have attempted to simplify this by calling the various EMAs we use in our process the “Blue”, “Purple” and “Green” lines.

² The S&P 500 Index is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market, and a bellwether for the U.S. economy. It is comprised of 500 large companies having common stock listed on the NYSE or NASDAQ. The volatility (beta) of the account may be greater or less than the index. It is not possible to invest directly in this index.

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. The risk is that markets may not always follow patterns. There are certain limitations to technical analysis research, such as the calculation results being impacted by changes in security price during periods of market volatility. Technical analysis is one of many indicators that may be used to analyze market data for investing purposes and should not be considered a guaranteed prediction of market activity. The opinions expressed are those of Blue Line Investing. The opinions referenced are as of the date of publication and are subject to change without notice. Blue Line Investing reserves the right to modify its current investment strategies based on changing market dynamics or client needs.

The relative strength measure is based on historical information and should not be considered a guaranteed prediction of market activity. It is one of many indicators that may be used to analyze market data for investing purposes. The relative strength measure has certain limitations such as the calculation results being impacted by an extreme change in a security price.

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. This information is intended for educational purposes only and should not be considered financial advice. It should not be assumed that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. Forward looking statements cannot be guaranteed.

Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. The principle office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703.

Are Price Movements in the Stock Market Random?

Beginning in February price volatility returned to the US stock markets with a vengeance. Down 125 points! Up 108! Down 104! Up 87! Daily price changes like these in the S&P 500 Index may cause worry and anxiety for an investor. But should they? Are these individual price movements random? Or when viewed together do they reveal a pattern as the market attempts to tell investors a story?

Look at the weekly chart above courtesy of StockCharts.com. I believe there are four specific items worth paying attention to. They are:

  1. The rising primary trend channel (identified by the green dashed lines labelled 1A and 1B)
  2. The potential descending wedge (identified by the purple dashed lines labelled 2A and 2B)
  3. Price (identified by the vertical red and black lines)
  4. The “Blue Line.”

Using technical analysis, the current story the market may be telling investors is that prices could continue to rise in the not-to-distant future. First, all the daily price movements since February in the S&P 500 Index (and many other indices) have remained predominately above their “Blue Lines.” The Blue Line is our reference point and at present, we remain optimistic.

Second, the primary trend over the past two years has been positive with prices trading within a rising trend channel. This channel has been identified by the dashed green lines labeled “1A” and “1B.” If price continues to remain within this channel, technical analysis suggests higher stock market prices to come.

The third and final piece of the story, at least in the short-term, includes a potential technical formation called a descending wedge. This formation can be identified by the downward-sloping dashed purple lines labeled “2A” and “2B.” This formation, if correct, has been created by all those individual up and down days mentioned in the beginning of this article. If this formation comes to fruition the market may be suggesting prices should break out to the upside above line 2A – eventually.

I believe the combination of all these pieces of information suggest the market may rise higher over the weeks to come. However, it doesn’t mean it can not drop lower first. Even though the story of the market can and will change over time, I believe these individual price movements, in concert with each other, can help investors set their expectations for what may happen next – even in the face of news headlines that may create noise, confusion, and anxiety.

After reading this article and witnessing the symmetry within the market from the chart provided I hope you will begin to see what I began seeing many years ago – individual price movements in the stock market may not be random at all. While it may take some time for the story to develop, I believe stock market price movements tend to be precise, and once investors learn how to recognize these patterns they can hopefully become more successful investors.

Jeff Link

Disclaimers:

¹ Blue Line Investing (BLI) is an alternative to traditional wealth management. BLI uses a disciplined, rules-based investment process to seek investment opportunities, regardless of whether financial markets are rising or falling. Based on technical analysis research, the process applies trend-following using specific Exponential Moving Averages (EMAs) of the market along with other technical indicators. A moving average is a widely used indicator in technical analysis that helps smooth out past price action by filtering out the “noise” from random price fluctuations. EMA’s can be calculated for any time period. Some examples include the 5 day EMA; 50 day EMA; and 150 day EMA. We have attempted to simplify this by calling the various EMAs we use in our process the “Blue”, “Purple” and “Green” lines.

² The S&P 500 Index is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market, and a bellwether for the U.S. economy. It is comprised of 500 large companies having common stock listed on the NYSE or NASDAQ. The volatility (beta) of the account may be greater or less than the index. It is not possible to invest directly in this index.

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. The risk is that markets may not always follow patterns. There are certain limitations to technical analysis research, such as the calculation results being impacted by changes in security price during periods of market volatility. Technical analysis is one of many indicators that may be used to analyze market data for investing purposes and should not be considered a guaranteed prediction of market activity. The opinions expressed are those of Blue Line Investing. The opinions referenced are as of the date of publication and are subject to change without notice. Blue Line Investing reserves the right to modify its current investment strategies based on changing market dynamics or client needs.

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. This information is intended for educational purposes only and should not be considered financial advice. It should not be assumed that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. Forward looking statements cannot be guaranteed.

Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. The principle office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703.

Kraft-Heinz Joins the GE club

Last November we published an article titled, “GE’s recent stock collapse: Were there advance warnings?” To read the article please click here. In the article we illustrated 3 specific phases of distribution that suggested the majority of investors in the stock were sellers – not buyers. When the sellers outnumber the buyers over time the primary trend turns negative and the stock price tends to decline.

Today, Kraft-Heinz has joined the GE club having fallen in price by over 20% since its Phase 2: FAILURE late last summer. Please refer to the chart below courtesy of StockCharts.com.

We call the three phases of distribution WARNING, FAILURE, and CONFIRMATION. As you can see from the chart above, the price of Kraft stock has not recovered since dropping below the Blue Line last summer.

We believe investors who own or owned this stock could have limited their losses by following a sell process. If you do not have a sell process and would like to learn more about ours, please click here.

We believe using a tested and proven sell process may help you prevent or minimize significant financial losses the next time the primary trend of the US stock market turns negative. Until then, who will be the next company to join the GE club?

Thanks for reading.

Jeff Link

Disclaimers:

¹ Blue Line Investing (BLI) is an alternative to traditional wealth management. BLI uses a disciplined, rules-based investment process to seek investment opportunities, regardless of whether financial markets are rising or falling. Based on technical analysis research, the process applies trend-following using specific Exponential Moving Averages (EMAs) of the market along with other technical indicators. A moving average is a widely used indicator in technical analysis that helps smooth out past price action by filtering out the “noise” from random price fluctuations. EMA’s can be calculated for any time period. Some examples include the 5 day EMA; 50 day EMA; and 150 day EMA. We have attempted to simplify this by calling the various EMAs we use in our process the “Blue”, “Purple” and “Green” lines.

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. The risk is that markets may not always follow patterns. There are certain limitations to technical analysis research, such as the calculation results being impacted by changes in security price during periods of market volatility. Technical analysis is one of many indicators that may be used to analyze market data for investing purposes and should not be considered a guaranteed prediction of market activity. The opinions expressed are those of Blue Line Investing. The opinions referenced are as of the date of publication and are subject to change without notice. Blue Line Investing reserves the right to modify its current investment strategies based on changing market dynamics or client needs.

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. This information is intended for educational purposes only and should not be considered financial advice. It should not be assumed that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. The principle office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703.

 

Almost Everything Eventually Returns to the Blue Line

A mere six weeks ago Bitcoin was the darling to talk about. It was the talk around the water cooler and the one investment that everyone seemed to be clamoring to buy. Fast forward to today and the price has dropped by almost 68% from its high. Is there a simple explanation for this sudden change in trend?

As we wrote recently in our BLI Market View (viewable here), whenever an investment rises too quickly and rises too high above its Blue Line, it is typically followed by a reversion to the mean. When pertaining to our process the Blue Line is the mean.

Take a quick look at the chart below of the Bitcoin Investment Trust, symbol: GBTC, that trades on the over-the-counter (OTC) market for illustration. Do you notice how price reverted to the Blue Line from its recent high?

A lot of money was likely made from early investors in Bitcoin. But for those who joined the party too late, they have likely experienced losses. We believe one of the best ways to limit potential losses is to have a process that helps minimize your emotions from your decision to buy or sell. For us, that process incorporates the Blue Line.

Jeff Link

Disclaimers:

¹ Blue Line Investing (BLI) is an alternative to traditional wealth management. BLI uses a disciplined, rules-based investment process to seek investment opportunities, regardless of whether financial markets are rising or falling. Based on technical analysis research, the process applies trend-following using specific Exponential Moving Averages (EMAs) of the market along with other technical indicators. A moving average is a widely used indicator in technical analysis that helps smooth out past price action by filtering out the “noise” from random price fluctuations. EMA’s can be calculated for any time period. Some examples include the 5 day EMA; 50 day EMA; and 150 day EMA. We have attempted to simplify this by calling the various EMAs we use in our process the “Blue”, “Purple” and “Green” lines.

 ² Bitcoin is a digital currency created in 2009. It follows the ideas set out in a white paper by the mysterious Satoshi Nakamoto, whose true identity has yet to be verified. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies. Today’s market cap for all bitcoin (abbreviated BTC or, less frequently, XBT) in circulation exceeds $7 billion.

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. The risk is that markets may not always follow patterns. There are certain limitations to technical analysis research, such as the calculation results being impacted by changes in security price during periods of market volatility. Technical analysis is one of many indicators that may be used to analyze market data for investing purposes and should not be considered a guaranteed prediction of market activity. The opinions expressed are those of Blue Line Investing. The opinions referenced are as of the date of publication and are subject to change without notice. Blue Line Investing reserves the right to modify its current investment strategies based on changing market dynamics or client needs.

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. This information is intended for educational purposes only and should not be considered financial advice. It should not be assumed that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. The principle office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703.

Is the Dow within 3% of a temporary top?

With all the emotional euphoria surrounding the continued rise in the US stock market, we thought it beneficial to share one theory, that if correct, could warn the market may be within 3% of a temporary top. To be clear – we are not calling a top, nor do we make investment decisions for clients based on what is being provided within this article. We simply want to provide information for investors to consider before throwing caution to the wind and chasing into a rising stock market.

We will do our best to keep this simple. According to Elliott Wave theory, collective psychology, or crowd psychology, moves between optimism and pessimism in natural sequences. These mood swings create patterns and a typical optimistic pattern follows a 5 wave advancing sequence. Upon completion of the 5 wave advance, a 3 wave corrective pattern typically follows.

Take a look at the image above of the rally in #theDow going back to the bottom in 2009. What do you notice about the potential wave structure since that time?

Advancing Wave 1: + 98%

Corrective Wave 2: – 19%

Advancing Wave 3: + 75%

Corrective Wave 4: – 16%

Advancing Wave 5 (so far): + 70%

Corrective waves 2 and 4 were almost the same in percentage terms which lends evidence this may very well be a 5 wave pattern. If this theory proves true, the current Wave 5 rally could equal the same percentage advance as wave 3 or wave 1. In other words, according to the Elliott Wave theory the “targets” for the completion of wave 5 could be approximately 27,037 (or 3% higher if equal to wave 3) or 30,900 (or 18% higher if equal to wave 1). The question we believe all investors should consider is “are new purchases worth the risk?”

With this information in mind should you sell out of your existing investments? We believe the answer is “absolutely not.” What if the market rallies another 18% and you sold out of your investments? Rather, we believe investors should be thinking about how to add protective hedges to their existing investments when appropriate. Since stock markets rise and fall, there very well may be a better buying opportunity for new purchases in the months to come.

We hope you found this information beneficial and we will provide more commentary on protective hedges in a future article.

Jeff Link

Disclaimers:

Chart courtesy of StockCharts.com

¹ Blue Line Investing (BLI) is an alternative to traditional wealth management. BLI uses a disciplined, rules-based investment process to seek investment opportunities, regardless of whether financial markets are rising or falling. Based on technical analysis research, the process applies trend-following using specific Exponential Moving Averages (EMAs) of the market along with other technical indicators. A moving average is a widely used indicator in technical analysis that helps smooth out past price action by filtering out the “noise” from random price fluctuations. EMA’s can be calculated for any time period. Some examples include the 5 day EMA; 50 day EMA; and 150 day EMA. We have attempted to simplify this by calling the various EMAs we use in our process the “Blue”, “Purple” and “Green” lines.

 ² The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. It is not possible to invest directly in an index.

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. The risk is that markets may not always follow patterns. There are certain limitations to technical analysis research, such as the calculation results being impacted by changes in security price during periods of market volatility. Technical analysis is one of many indicators that may be used to analyze market data for investing purposes and should not be considered a guaranteed prediction of market activity. The opinions expressed are those of Blue Line Investing. The opinions referenced are as of the date of publication and are subject to change without notice. Blue Line Investing reserves the right to modify its current investment strategies based on changing market dynamics or client needs. Forward looking statements cannot be guaranteed. Material presented has been derived from sources considered reliable, but Blue Line Investing cannot guarantee its completeness or accuracy.

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. This information is intended for educational purposes only and should not be considered financial advice. It should not be assumed that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. The principle office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703.

What Does History Suggest Will Happen After The Peak?

Stock market trends are like a rollercoaster. The ride up begins slow and steady, rising higher and higher until the peak. But after the peak the ride turns down with a decline that can be fast and furious. The US Stock market continues to press higher and higher destined for a peak that lies somewhere in the future. So what should investors expect after the peak? Can history be a guide? We believe the answer is yes and will use the Japanese Nikkei 225 Index (Nikkei²) for illustration.

According to the late Richard Russell, author of Dow Theory Letters, when a stock market trend finally peaks the resulting decline retraces one-third to two-thirds’ of the prior advance – and in short order. The Nikkei began the early 1970’s trading around the mid-2,000 price level. Over the next 20 years it progressed on its upward journey and experienced a few price corrections along the way.  In 1989 it finally peaked just shy of 39,000. Referring to the chart below, think of the Nikkei as the rollercoaster and the Blue Line as the track. During the rising phase (highlighted by the rising green arrow) the rollercoaster tends to remain on top of the Blue Line.

But after the peak, the rollercoaster drops below the Blue Line – and sometimes in spectacular fashion. Referring to the chart below, the rollercoaster will tend to remain below the Blue Line until the negative trend (illustrated by the declining red arrow) is exhausted and all selling subsides.

So, what are the lessons from this? First, by the end of 1992, most buy-and-hold investors who bought into the Nikkei after 1986 lost money. That’s six years of lost money, lost time, and lost opportunity if they didn’t recognize the change in trend and take proactive action.

Second, for 20 years the Nikkei enjoyed a rising trend, culminating in a cumulative return of over 1,500%. But after it peaked it lost over 56% of the preceding gain – within the next 3 years! Think about that – In just 3 short years over half of the gains accrued over 20 years were eliminated!

We believe historical examples such as the Nikkei illustrate the need for investors to utilize a sell process. Will history repeat when the current US Stock market rally peaks? We believe so, but maybe not in exactly the same way. If you do not have your own sell process and would like to learn more about ours, please visit www.BlueLineInvesting.com/process.

Jeff Link

Disclaimers:

¹ Blue Line Investing (BLI) is an alternative to traditional wealth management. BLI uses a disciplined, rules-based investment process to seek investment opportunities, regardless of whether financial markets are rising or falling. Based on technical analysis research, the process applies trend-following using specific Exponential Moving Averages (EMAs) of the market along with other technical indicators. A moving average is a widely used indicator in technical analysis that helps smooth out past price action by filtering out the “noise” from random price fluctuations. EMA’s can be calculated for any time period. Some examples include the 5 day EMA; 50 day EMA; and 150 day EMA. We have attempted to simplify this by calling the various EMAs we use in our process the “Blue”, “Purple” and “Green” lines.

 ² The Nikkei 225 is a stock market index for the Tokyo Stock Exchange (TSE). It is a price-weighted index, operating in the Japanese Yen, and its components are reviewed once a year. Currently, the Nikkei is the most widely quoted average of Japanese equities, similar to the Dow Jones Industrial Average. The volatility (beta) of an account may be more or less than an index. It is not possible to invest directly in an index.

 Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. The risk is that markets may not always follow patterns. There are certain limitations to technical analysis research, such as the calculation results being impacted by changes in security price during periods of market volatility. Technical analysis is one of many indicators that may be used to analyze market data for investing purposes and should not be considered a guaranteed prediction of market activity. The opinions expressed are those of Blue Line Investing. The opinions referenced are as of the date of publication and are subject to change without notice. Blue Line Investing reserves the right to modify its current investment strategies based on changing market dynamics or client needs.

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. This information is intended for educational purposes only and should not be considered financial advice. It should not be assumed that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. The principle office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703.

GE’s recent stock collapse: Were there advance warnings?

“Those who cannot remember the past are condemned to repeat it.” This quote from the Spanish philosopher, essayist, poet and novelist George Santayana came into clear focus in recent months for investors in GE common stock. Excluding dividends, GE is down over 40% year-to-date. By any standard this is a significant loss and likely has had a negative impact on those investors who owned it. But did it have to be that way? Were there advance warnings for investors to hedge or sell their GE stock to attempt to limit losses? We believe the answer is yes and will illustrate why in this article.

To begin we must first take a step back in time. The BLUE LINE INVESTING™,¹ sell process was created as a result of a distribution pattern discovered during 2008. Specifically, we identified 3 specific phases of distribution that some publicly traded investments experience just prior to experiencing a significant price decline. Please refer to the chart below of the S&P 500 Index² (S&P) for calendar years 2007-2008:

Chart courtesy of StockCharts.com

For 8 months leading up to the significant part of the price decline the S&P experienced all 3 phases of price distribution, or what we refer to as WARNING, FAILURE and CONFIRMATION.* Eight months! Once the third and final phase occurred the stock price collapsed. Now, look at the chart below of GE. Do you notice what appears to be the same distribution pattern? All 3 phases of distribution occurred, and as we believe, provided ample advance warning that additional losses were likely.

Chart courtesy of StockCharts.com

Depending on what rules an investor applies to the distribution pattern above we believe they may have been able to limit their losses. If using alternative investment strategies they may have actually been able to profit from the selloff in the stock.

For those wondering if the US Stock market followed a similar “topping” process back in 2000, we invite you to review our case study on the S&P on our website.* We hope you have formulated your own sell process because as we stated in the beginning of this article, “Those who cannot remember the past are condemned to repeat it.”

Jeff Link

*For additional information please visit www.BlueLineInvesting.com/process to view our case study on the S&P. 

Disclaimers:

¹ Blue Line Investing (BLI) is an alternative to traditional wealth management. BLI uses a disciplined, rules-based investment process to seek investment opportunities, regardless of whether financial markets are rising or falling. Based on technical analysis research, the process applies trend-following using specific Exponential Moving Averages (EMAs) of the market along with other technical indicators. A moving average is a widely used indicator in technical analysis that helps smooth out past price action by filtering out the “noise” from random price fluctuations. The EMA gives bigger weight to more recent prices, compared to the SMA, or Simple Moving Average which does not. EMA’s can be calculated for any time period. Some examples include the 5 day EMA; 50 day EMA; and 150 day EMA. We have attempted to simplify this by calling the various EMAs we use in our process the “Blue”, “Purple” and “Green” lines.

 ² The S&P 500 Index is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market, and a bellwether for the U.S. economy. It is comprised of 500 large companies having common stock listed on the NYSE or NASDAQ. The volatility (beta) of the account may be greater or less than the index. It is not possible to invest directly in this index.

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. The risk is that markets may not always follow patterns. There are certain limitations to technical analysis research, such as the calculation results being impacted by changes in security price during periods of market volatility. Technical analysis is one of many indicators that may be used to analyze market data for investing purposes and should not be considered a guaranteed prediction of market activity. The opinions expressed are those of Blue Line Investing. The opinions referenced are as of the date of publication and are subject to change without notice. Blue Line Investing reserves the right to modify its current investment strategies based on changing market dynamics or client needs.

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. This information is intended for educational purposes only and should not be considered financial advice. It should not be assumed that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. The principle office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703.

Using BLUE LINE INVESTING™ to attempt to identify a Bull Market

In our recent BLI Market View, published November 3, 2017, we commented on how the current stock market seems to be “behaving” similarly to 1995. In this article we will illustrate what we meant by that statement.

Before proceeding however, we want to make one clarification. The “Blue Line” is not the only indicator we use within our investment process. There are other technical indicators we follow, and it is how price “behaves” in relation to each and every other indicator – individually and cohesively – that is of consequence. The other indicators include, but are not limited to, the “Green” and “Purple” lines as well. We simply reference the “Blue Line” to keep the concept simple.

How we use BLUE LINE INVESTING¹ to attempt to identify a BULL MARKET

From our research and years of experience, we believe the strongest bull markets form a particular pattern. Specifically, when price rises and remains above the Green Line, and the Green Line remains above the Purple Line, and the Purple Line remains above the Blue Line, we believe the investment being observed is in a bull market (i.e. Positive Primary Trend).

Consider the S&P 500 Index² (S&P) during 1995 as shown below:

 

 

 

 

 

 

 

From the chart above we can observe that when prices corrected during this bull market they were shallow and tended to bounce off of the Green Line, and occasionally, the Purple Line. Price corrections to the Blue Line tended to be rare, but when they occurred, they tended to be sharp and quick.

Compare the chart above to the one below that has been updated for the current calendar year:

 

 

 

 

 

 

 

Since the election last November, the S&P has exhibited a similar pattern to that of 1995. Price corrections have been relatively shallow; often bouncing off the Green Line, and occasionally the Purple Line. So far we continue to wait for another “test” of the Blue Line. As a reminder, the Blue Line represents our preferred point of purchase for any new investment or when purchasing into our strategies for new clients.

It is important to note that this pattern has no predictive capability, nor does it infer that the past is likely to repeat. We simply monitor this pattern, along with other indicators, to attempt to determine if the existing bullish trend is likely to continue over the coming days and weeks, or if a price correction or price “top” is becoming more likely.

We have also found that this pattern is not limited to any one market or sector. The following charts of the PowerShares Aerospace and Defense Portfolio ETF³ and the First Trust NASDAQ-100 Technology Sector Index ETF⁴ have been exhibiting this behavior as well.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The BLUE LINE INVESTING™ process uses this pattern to attempt to identify bullish trends across many financial markets and sectors. Once identified, we use various relationships between price and the indicators to pinpoint where purchase and/or sell decisions should be considered.

For reference of what bearish and neutral trends look like according to our process, please visit our website at  https://www.bluelineinvesting.com/process, and review our Case Study on the S&P from 1980 – 2015.

Thanks for reading.

Jeff Link

Disclaimers:

¹ Blue Line Investing (BLI) is an alternative to traditional wealth management. BLI uses a disciplined, rules-based investment process to seek investment opportunities, regardless of whether financial markets are rising or falling. Based on technical analysis research, the process applies trend-following using specific Exponential Moving Averages (EMAs) of the market along with other technical indicators. A moving average is a widely used indicator in technical analysis that helps smooth out past price action by filtering out the “noise” from random price fluctuations. The EMA gives bigger weight to more recent prices, compared to the SMA, or Simple Moving Average which does not. EMA’s can be calculated for any time period. Some examples include the 5 day EMA; 50 day EMA; and 150 day EMA. We have attempted to simplify this by calling the various EMAs we use in our process the “Blue”, “Purple” and “Green” lines.

 ² The S&P 500 Index is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market, and a bellwether for the U.S. economy. It is comprised of 500 large companies having common stock listed on the NYSE or NASDAQ. The volatility (beta) of the account may be greater or less than the index. It is not possible to invest directly in this index.

 ³ The PowerShares Aerospace and Defense Portfolio ETF tracks a market-cap-weighted index of US-listed stocks involved in the defense, military, homeland security and space industries.

 First Trust NASDAQ-100 Technology Sector Index ETF tracks and equal-weighted index of the largest NASDAQ-listed U.S. technology stocks.

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. The risk is that markets may not always follow patterns. There are certain limitations to technical analysis research, such as the calculation results being impacted by changes in security price during periods of market volatility. Technical analysis is one of many indicators that may be used to analyze market data for investing purposes and should not be considered a guaranteed prediction of market activity. The opinions expressed are those of Blue Line Investing. The opinions referenced are as of the date of publication and are subject to change without notice. Blue Line Investing reserves the right to modify its current investment strategies based on changing market dynamics or client needs.

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. This information is intended for educational purposes only.

Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. The principle office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703.

 

 

 

 

TECHNICALLY SPEAKING

Blue Line Investing

 

 

THE LINE IN THE SAND

We believe the line in the sand for the U.S. stock market, as measured by the S&P 500 Index (S&P) is 2,125. We believe it is imperative that this price level hold on a weekly closing basis in order for a price rally to ensue in the short run. If prices close on a weekly basis below 2,125, then we believe it is possible another corrective phase may ensue for the stock market.

FROM THE BLUE LINE INVESTING STANDPOINT

Before delving into the technical formations of the S&P, allow us to share a few brief observations from a strict Blue Line Investing standpoint. Probably the most positive observation at this moment is that the S&P is above its blue line – not by much, but nevertheless it is above it. However, with our work we also follow two other economic moving averages. And right now, the S&P is stuck in the middle between these economic moving averages (above the S&P) and the blue line (below the S&P). A potential danger is that if the S&P can not rally soon to rise above the green and purple line, those lines may become resistance. If that happens the S&P very well could begin another corrective phase. In order for a new positive primary trend to begin, we believe a price rally must occur that takes price above all three of these colored lines.

FROM THE TECHNICAL ANALYSIS STANDPOINT

The chart below provides one perspective that illustrates the potential importance of the 2,125 price level. As can be seen, over the past 2 years and 9 months, the market previously formed price resistance at the 2,125 price level on a weekly closing basis (identified by the red dashed horizontal line and red arrows), and has formed price support around the 1,860 price level (identified by the blue dashed horizontal line and blue arrows). Each time the market rallied up to 2,125 the sellers overwhelmed the buyers and prices retreated. Each time the market declined towards the 1,860 price level buyers overwhelmed the sellers and prices rallied. Over recent months we can see prices finally broke up through 2,125. But at present, prices appear to be forming a descending triangle of sorts. If prices can hold the 2,125 level, it is possible they will break up through the downward sloping red dashed line (which would become new support) and move higher in the direction of the blue arrow.

sand-chart-1

Using the same chart below, but modifying the annotations, provides another perspective that illustrates the potential importance of the 2,125 price level. In this chart, we can see a technical formation called a rising trend channel. Since the bottom of the correction earlier this year, prices have risen to the top blue dashed line where sellers overwhelmed buyers and then prices corrected during the “BREXIT” vote in June and were stopped at the rising blue dashed line making up the “rising channel.” At the time of this writing, price is at the support line for both the rising channel (bottom blue line) and support level (red dashed line).

sand-chart-2

Using the same chart below, but modifying the annotations one more time, provides a third perspective.  Looking at the chart from closing prices only, we can observe a possible “Ascending Wedge” that formed from the rally this year. In late August, prices failed to hold the bottom rising wedge line. They thereafter rallied up to test that line – which failed at #1 – and prices are now again testing the 2,125 price level. The good news is stock market tops do not usually form from this technical formation. So it is possible a price rally could occur very soon, possibly after the election. But the negative news is, at least for the short-term, the top of the ascending wedge coincided with a head-and-shoulders formation which does usually signal a market top. Another reason we believe the 2,125 price level is very important from a technical perspective.

sand-chart-3

One potential negative is that there appears to be a type of positive divergence forming with the VXX, an exchange-traded note (ETN) that we like to monitor for warnings of potential danger signs in the market (see the chart below). If that positive divergence executes, we would expect the 2,125 price level to be broken to the downside on the S&P. But even if that occurs, we believe it may only be a very short-term price correction. We would thereafter need to see if price can close back above 2,125 on a weekly closing basis to maintain hopes of a new primary positive trend to form.

sand-chart-4

For existing clients we are always happy to answer any questions you have about our current investment positions, next planned investments, and where we are looking for investment opportunity in the stock, bond, and commodity markets. Thank you for your continued trust and confidence.

Disclaimers:

Blue Line Investing (BLI) is a disciplined investment process, based on technical analysis research. The process applies trend-following, along with observations of the moving averages of the market. Key to the process is the “blue line”, which is derived from comparing an investment’s price against its moving average. BLI monitors those activities over time in order to determine allocations within client accounts.

“Technically Speaking” is a special report being provided to supplement our monthly BLI MARKET VIEW report. Its purpose is to help clients and investors contemplate the attractiveness or unattractiveness of investing in the stock market, at the present time, using technical analysis and the Blue Line Investing investment process.

The S&P 500 Index is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market, and a bellwether for the U.S. economy. It is comprised of 500 large companies having common stock listed on the NYSE or NASDAQ. The volatility (beta) of the account may be greater or less than the index. It is not possible to invest directly in this index.

The iPath® S&P 500 VIX Short-Term Futures™ ETNs (the “ETNs”) are designed to provide exposure to the S&P 500 Index VIX Short-Term Futures™ Index Total Return (the “Index”). The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the “VIX Index”) futures.

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. There are certain limitations to technical analysis research, such as the risk is that markets may not always follow patterns. This investment process should not be considered a guaranteed prediction of market activity and is one of many indicators that may be used to analyze market data for investing purposes. There is no guarantee that this process will be successful or will result in the projections contained herein.

This information is intended for educational purposes only. Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. This is not a recommendation to buy or sell a particular security. The opinions expressed are those of Blue Line Investing and are not necessarily those of Gordon Asset Management and are subject to change without notice. Blue Line Investing reserves the right to modify its current investment strategies based on changing market dynamics or client needs. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass.

Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. The principle office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703.

Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. The volatility (beta) of an account may be greater or less than the indices. It is not possible to invest directly in these indices. The investment strategy or strategies discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances.