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The BLUE LINE INVESTING® PRIMARY TREND Update: December 2019

“The only thing that is constant is change”

– Heraclitus

The US stock market, as measured by the S&P 500 Index (S&P), finished the month of December 8.40% above the BLUE LINE, compared to 7.10% at the end of November. As such, the current primary trend is categorized as a rising trend.

 

BLUE LINE PERSPECTIVE

Chart courtesy of StockCharts.com

As a quick reminder, we monitor the relationship between price and the BLUE LINE over time to help identify which stock markets worldwide are experiencing rising primary trends, sideways primary trends, and declining primary trends. We prefer to invest in those markets experiencing rising or sideways primary trends, while avoiding those markets experiencing declining primary trends. The BLUE LINE helps us identify these trends – and when changes may be taking place between them.

At the present time, my primary concern pertains to the “steepness” of the current price rise. Just two years ago the S&P experienced a steep rise where price exceeded the BLUE LINE by almost 13%, right before it experienced a violent price correction back to the BLUE LINE. Please refer to the red circle on the chart below, courtesy of StockCharts.com.

 

Chart courtesy of StockCharts.com

 

Whether the US stock market is currently rising because of “a good economy”, capital flight out of the Eurozone, or some other reason entirely, sharp price rises tend to be followed by sharp price declines. While the past does not have to repeat, I believe this bears close monitoring over the coming weeks.

 

TOP HEAVY(er?)

In a special report published to this blog on November 15, 2019, a reference was made to the top five largest stocks in the S&P 500 Index measured by market capitalization. If you would like to read it, please click here. Out of the 505 stocks that comprise the S&P, Apple, Inc. was the second largest at that time with a weight of 4.34%. In other words, price changes to Apple stock alone will likely impact the price of the index to a larger degree than the combined smallest 100+ stocks of the index.

Chart courtesy of StockCharts.com

As of the end of December, Apple now represents the largest weight in the S&P. Of the 30 stocks that comprise the Dow Jones Industrial Average, Apple is now the third largest priced stock and represents 6.97% of that index. And of the 100 stocks that comprise the Nasdaq 100, Apple is also the largest weight, representing 11.6% of the index. This information is as of December 31, 2019 and can be found at www.slickcharts.com.

It is interesting to note that Apple’s stock price is trading 31% above its BLUE LINE, which according to the BLUE LINE INVESTING® process is high. This is being pointed out to illustrate that the major US stock indices are becoming more top heavy with each passing day.

Thank you for reading the BLUE LINE INVESTING® PRIMARY TREND update, and please do not hesitate to call (833) 258-2583 with questions or if we may be of service.

Jeff Link

 

Would you find this service more beneficial in video format? If so, please let me know by sending an email to Info@BlueLineInvesting.com. I am considering changing format to a Zoom presentation to narrate this in the future for further clarity.

 

Disclaimers:

BLUE LINE INVESTING® (BLI) is an investment process that seeks to align investment decisions with the prevailing primary trend of the financial markets. BLI seeks to remain fully invested when the financial markets are experiencing either a long-term rising primary trend or a short-to-intermediate sideways trend. When the primary trend begins declining however, the process follows a 3-phase sell process to attempt to limit downside loss. We believe Warren Buffett said it best with his two rules: “Rule No. 1 – Never lose money. Rule No. 2 – Never forget Rule No. 1.”

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 BLI. The opinions referenced are as of the date of publication and are subject to change without notice. BLI 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. Forward looking statements cannot be guaranteed.

Advisory services offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. 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 (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama.

ACA-19-42

 

 

The BLUE LINE INVESTING® PRIMARY TREND Update: July 2019

Please read the entirety of this update.

The US stock market, as measured by the S&P 500 Index (S&P – see the chart below), finished the month of July +5.00% above the BLUE LINE, compared to +5.20% above the BLUE LINE at the end of June. We continue to categorize the primary trend as Neutral primarily due to price behavior remaining within what we believe to be a sideways trend.

Chart courtesy of StockCharts.com

As a quick reminder to our readers, we monitor the relationship between price and the BLUE LINE over time to help identify which stock markets worldwide are experiencing rising primary trends, sideways primary trends, and declining primary trends. We prefer to invest in those markets experiencing rising or sideways primary trends, while avoiding those markets experiencing declining primary trends. The BLUE LINE helps us identify these trends – and when changes may be taking place between them.

 

SPECIAL INSERT: IS THE DOW JONES INDUSTRIAL AVERAGE HINTING AT ANOTHER PRICE CORRECTION?

The weekly* chart below of the Dow Jones Industrial Average shows three changing trends over the past five years. The gray dashed lines on the left show a sideways trend from 2014 – 2015 (2 years). The rising green dashed lines highlight a rising trend from 2016 – 2017 (2 years). And the sideways gray dashed lines on the right highlight what we believe to be a sideways trend that began in early 2018. However, we notice what may be a technical formation called an ascending wedge identified by the two converging red dashed lines inside the sideways trend. IF this technical formation plays out, investors should expect a price correction in the near future.

Chart courtesy of StockCharts.com

You may notice how price acts like a yo-yo within a sideways trend, first rising, then falling, then repeating. So far there have been three attempts on breaking out to the upside while only two on the downside. We would not be surprised if price corrects back towards 24,000 to the bottom of the gray dashed line once again. So, don’t be surprised with continued stock market price volatility – that is what is most commonly associated with sideways trends.

For readers of this BLUE LINE INVESTING® PRIMARY TREND update, please do not hesitate to call us with questions at (833) 258-2583.

Jeff Link

 

Disclaimers:

* Each vertical line on the chart represents one week of price change.

BLUE LINE INVESTING® (BLI) is an investment process that seeks to align investment decisions with the prevailing primary trend of the financial markets. BLI seeks to remain fully invested when the financial markets are experiencing either a long-term rising primary trend or a short-to-intermediate sideways trend. When the primary trend begins declining however, the process follows a 3-phase sell process to attempt to limit downside loss. We believe Warren Buffett said it best with his two rules: “Rule No. 1 – Never lose money. Rule No. 2 – Never forget Rule No. 1.” 

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 BLI. The opinions referenced are as of the date of publication and are subject to change without notice. BLI 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. Forward looking statements cannot be guaranteed.

Advisory services offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. 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 (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama.

 

The BLUE LINE INVESTING® PRIMARY TREND Update for May 2019

COMMENTARY

The US stock market, as measured by the S&P 500 Index (S&P), finished the month of May -1.00% below the BLUE LINE, compared to +6.70% above the BLUE LINE at the end of April. We continue to categorize the primary trend as Neutral.

As a quick reminder to our readers, we monitor the relationship between price and the BLUE LINE over time to help identify which stock markets worldwide are experiencing rising primary trends, sideways primary trends, and declining primary trends. We prefer to invest in those markets experiencing rising or sideways primary trends, while avoiding those markets experiencing declining primary trends. The BLUE LINE helps us identify these trends – and when changes may be taking place between them.

THE BIG PICTURE

The weekly* chart below of the S&P shows three changing trends over the past five years. The Green dashed lines highlight a rising trend; the Gray dashed lines highlight a sideways trend; and when pictured, Red dashed lines highlight a declining trend.

Based on the observable pattern above (see Sideways Trend #2?) it currently appears the S&P is likely in a sideways trend. If so, this type of trend can be frustrating for investors as prices tend to rise and decline for an undefined period with little price advancement. While frustrating, we believe sideways trends offer two potential advantages for some investors. First, they may offer strategic target prices to purchase into the stock market with money held in cash equivalents within a stock strategy. Second, for investors who make new contributions to their accounts, a sideways trend can help with the timing of when it may be advantageous to invest the money into the market in the short-term compared to the alternative of making random purchases at any price.

For clients of BLUE LINE INVESTING® please do not hesitate to call us with questions at (833) 258-2583.

Jeff Link

 

Disclaimers:

 * Each vertical line on the chart represents one week of price change.

BLUE LINE INVESTING® (BLI) is an investment process that seeks to align investment decisions with the prevailing primary trend of the financial markets. BLI seeks to remain fully invested when the financial markets are experiencing either a long-term rising primary trend or a short-to-intermediate sideways trend. When the primary trend begins declining however, the process follows a 3-phase sell process to attempt to limit downside loss. We believe Warren Buffett said it best with his two rules: “Rule No. 1 – Never lose money. Rule No. 2 – Never forget Rule No. 1.”

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 BLI. The opinions referenced are as of the date of publication and are subject to change without notice. BLI 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. Forward looking statements cannot be guaranteed.

Advisory services offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. 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 (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama.

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.

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.

 

BLI Market View, February 2018

The BLUE LINE INVESTING™ (BLI)¹ Market View of the

 S&P 500 Index² for the month ending February 2018

Commentary:

The S&P 500 Index (S&P) finished the month of February closing 5.36% above the Blue Line, over five percent lower from 10.81% at the end of January. With the S&P remaining above the Blue Line we continue to categorize the primary trend as Positive.

The price “correction” that occurred last month appears suspicious in that while the S&P touched the Blue Line on the sharp selloff  – albeit very briefly –  two other noteworthy US stock indices did not. Experience has taught us to be cautious when major indices diverge. At present it appears the stock market “correction” is not over and the market very well may retest the recent lows in the days or weeks to come.

Even if it does, according to our process the market has not signaled a change in trend…yet.

Thanks for reading.

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 along with observations of economic moving averages of the market and other technical indicators.

 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.

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.

Distinguishing a Price Correction from a Change In Trend using the Blue Line

With the current stock market correction in full gear we thought this would be a great time to expound on the comment we made in an article posted on January 26th – “Is the DOW within 3% of a temporary top?” Why would we say “temporary” rather than just “top?” We believe the answer can always be found with the Blue Line.

At the time of this writing, the S&P 500 Index² (S&P) has dropped 7 ½% in under two weeks. But even with that drop the S&P still remains above the Blue Line. Since 1980, the first thing that has to happen before the market can transition into a Negative Trend is price has to drop below the Blue Line. Right now the market is still 4% above the Blue Line (but we would not be surprised to see it drop below the Blue Line before this corrective phase is over). Therefore we continue to believe this to be a “temporary” top and not THE “top.”

So historically speaking, what are some examples of price corrections in the S&P worse than the present that did not cause an end to the bull market that was in process at that time?

1987     30% price correction from October to December (3 months)

1998     21% price correction from July to September (3 months)

2010     16% price correction from April to July (4 months)

2011     18% price correction from July to September (3 months)

2014     09% price correction from September to October (2 months)

Even in 1987, during the long bull market in the Tokyo Nikkei 225 Index ($NIKK), the NIKK experienced a 20% price correction from October through November (2 months) before continuing the bull market.

So what do we expect from here? We expect the stock market to experience a price bounce in the coming days or maybe weeks. We intend on making some strategic changes to our strategies at that time in an effort to protect against what could be another decline that occurs thereafter. We expect the markets to touch the Blue Line before this corrective phase is over. For new clients to Blue Line Investing, the Blue Line is our preferred purchase point when clients are holding cash in their accounts, as well as to invest money held within cash equivalents within our BLUE LINE INVESTING™ Strategies.

Of course, anything can happen, but we are making preparations based on what we expect may happen. If the data changes from what we expect, we will modify our plan accordingly.

Please do not hesitate to call us at the number at the top of the page with any questions or concerns. As a value-added service to our clients, we would be happy to talk with family, friends, or co-workers who may be concerned during the current price correction.

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.

³ 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. 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.

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.

Substitute or Sell?

soccer-resized

Blue Line Investing, Article 8 of 12

 

For as long as we can remember the investment industry has maintained a standard investment practice with how they apply active management to their client investment accounts. But we believe in recent years it appears the industry may be questioning how effective it is over the long run. This practice consists of substituting investments rather than selling investments. Understanding this difference can have a material impact on your rate of return over the long run, especially when the primary trend of the market changes from positive to negative.

We will use the game of soccer to illustrate the substitution strategy. During a game the players get tired. So when the coach makes a substitution he is effectively exchanging one player for another. After the substitution the number of players on the field remains the same. Compare this with how active management is conducted at many investment firms and financial institutions today. They, like coaches in the game of soccer, are making substitutions to investments. For instance, they remove the ABC Growth fund owned within their client investment portfolio to replace it with the XYZ Growth fund. Or, maybe they might become displeased with the performance results from the 123 Real Estate fund and substitute it for the 456 Real Estate fund. In effect, like the players on a soccer field, the substitution strategy keeps all money fully invested within the portfolio at all times regardless of whether the primary investment trend is positive or negative.

Continuing with our soccer analogy, during play one of the players might receive a red card from the referee, resulting in their ejection from the field. Should this happen there will be no substitution of players. The team loses that player and must continue the game playing one man down. While not a perfect analogy, we liken this to the idea of a sell rather than a substitution change. We believe improvements to clients’ long-term rates of return can be made by making sell decisions rather than substitution changes. In other words, when the primary trend of the market is negative, then doesn’t it seem logical to keep the proceeds from a sell decision in cash rather than reinvesting it immediately into another similar investment? Of course, this all depends on the primary trend of the market.

For instance, consider when stock markets were in primary negative trends, like 2000-2002 or 2008-2009 (which coincided with the broad market remaining below the blue line for the duration of the stock market decline). By substituting risk investments like stocks, the value of your investment portfolio is likely going to decline along with the stock market decline. But by taking the approach of making a sell decision and keeping the proceeds in cash you could afford yourself the opportunity to reinvest the proceeds at cheaper prices in the future after the primary negative trend is exhausted. After all, isn’t the old adage, “Buy low, sell high?”

We believe that during a rising stock market a substitution strategy will work fine and likely result in financial gains for investors. But when markets change from positive to negative primary trends, the substitution process will likely result in losses, which could be material depending on the extent of the market downturn. We believe a successful investment process must have a sell discipline to reduce risk to the overall investment portfolio and this will be discussed further in our next article.

Disclaimer:

Past performance is not indicative of future results. This material is intended for educational purposes only and is not financial advice or an offer to buy or sell any product. The investment strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. The opinions expressed are those of Blue Line Investing and are not necessarily those of Gordon Asset Management, LLC 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. 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.

Does Diversification Reduce Risk?

Does Diversification Reduce Risk?

Blue Line Investing, Article 7 of 12

 

Stocks? Check. Bonds? Check. Real Estate? Check. Commodities? Check. “Don’t put all your eggs in one basket” as they say. You are likely familiar with this saying, and in theory we believe it is prudent advice. But when it comes to actual implementation, does it make sense? Presuming you are already familiar with the potential benefits of diversification, we believe the answer to the title of this article is yes – diversification can reduce investment risk – but at what cost?

Diversification can help reduce the risk to your investment portfolio depending on your asset allocation. Asset allocation is how you choose to invest your money among categories of investments like those listed above.  Some categories are considered “risky” (such as stocks, real estate, and commodities) due to the potential volatility of their prices, while others are considered “risk free” (such as bonds and cash equivalents) because the volatility of their prices is more stable. It is this asset allocation decision that will likely have the largest impact on how much you reduce risk as you diversify your investment portfolio.

But therein lies one of the main costs of diversification – the more money that is allocated to “risk free” investments in attempt to reduce your risk, it will likely lower your expected rate of return over the long run. And further, the more you broadly diversify your investments within each of the categories listed above, the more likely you are to own investments that are in both rising and declining trends. It is those investments experiencing negative primary trends that detract from your total portfolio returns. So what can an investor do? Is there a way that can help to reduce risk without necessarily having to limit the potential return on your portfolio? We believe the answer is yes.

We have found that when a publicly-traded investment falls below its blue line by more than 5%, it may be the markets way of providing an early warning to investors. When this 5% warning happens, and if thereafter the investment’s price goes through the next 2 steps of our sell discipline, then we believe there is a high probability that prices are now in a negative primary trend and will continue to fall further. At that point in time we believe the investment should be sold. We believe it is preferable to identify and own those investments that trend above their blue line while avoiding those that, at least at that moment in time, do not.

While we believe diversification can help reduce risk, we believe it is likely to lead to an average return over the long run. For investors striving to achieve an above-average return instead, we believe a sell discipline (not a substitution discipline) is required in your investment process. Our next article will distinguish this difference.

Disclaimer:

Past performance is not indicative of future results. This material is intended for educational purposes only and is not financial advice or an offer to buy or sell any product. The investment strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. The opinions expressed are those of Blue Line Investing and are not necessarily those of Gordon Asset Management, LLC 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. 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.

Investment Witnesses

Investment Witnesses

Blue Line Investing, Article 6 of 12

 

When playing poker it can be advantageous if you can learn the “tell” of your opponent. A tell is defined by Wikipedia as “a change in a player’s behavior or demeanor that is claimed by some to give clues to that player’s assessment of their hand. A player gains an advantage if they observe and understand the meaning of another player’s tell, particularly if the tell is unconscious and reliable.” We believe the stock market has its own tell, but how can its reliability be determined? We believe the answer is to look at witnesses!

When money moves in the stock market it typically flows out of one sector and into another. These changes in the bid and ask price for an investment are what causes prices to rise and fall over time. For instance, historically, when stocks have a price correction, symbolized by more selling than buying, you may observe other sectors like bonds rising as they become the recipient of that money (at least in the short term). While these historical relationships are not absolutes, they help illustrate the concept.

In recent weeks we have observed the stock market from the Daily perspective, which suggested a negative outcome (at least in the short term). The resulting price correction led to a successful “test” of the price breakout which we observed when looking at the Weekly perspective (the intermediate term). With the successful test, we believed the market was suggesting a further rise in price. But the Monthly perspective (long term) seemed to suggest caution. So where else can we look for two or more witnesses in hope of correctly determining the potential reliability of the markets tell?

One witness may be observing the price action and behavior in other sectors, like U.S. Government Bonds. As mentioned above, when investors become concerned they typically seek safety. A second witness may be observing another type of investment within the same sector, like high-yield, or “junk” bonds. Since they behave more like the stock than bond market, their behavior may shed more light on expectations for the next potential move in the stock market. A third witness may be observing a volatility investment like the exchange-traded fund (ETF) VXX. After all, when knowledgeable investors begin to get nervous, they might buy put options and sell call options as a defensive strategy. Some of this behavior can be observed by monitoring the VXX ETF.

By monitoring all these witnesses in unison we are better able to evaluate the reliability of what we perceive to be the market’s tell. It is important to keep in mind that when prices make dramatic moves in the stock market, it doesn’t typically happen in isolation and without advance notice. If you can learn to read the market’s tell, then we believe over time you are likely to make more profitable than unprofitable investment decisions.

In our next article we will revisit the concept of diversification.

 

Disclaimer:

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.

Past performance is not indicative of future results. This material is intended for educational purposes only and is not financial advice or an offer to buy or sell any product. The investment strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. The opinions expressed are those of Blue Line Investing and are not necessarily those of Gordon Asset Management, LLC 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. 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.

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.