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Trends In Stocks, Bonds And Gold

By Jay KaeppelMarket OverviewJul 05, 2017 10:07AM ET,-bonds-and-gold-200199204
Trends In Stocks, Bonds And Gold
By Jay Kaeppel   |  Jul 05, 2017 10:07AM ET
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In the end it is not so much about “predicting” what will happen next in the financial markets, but rather recognizing – and being prepared for – the potential risks, that makes the most difference in the long run. So let’s start by looking at current trends.


Let’s start with a most simple trend-following model that works like this:

-A sell signal occurs when the S&P 500 Index (SPX) registers two consecutive monthly closes below its 21-month moving average

-After a sell signal, a buy signal occurs when SPX register a single monthly close above its 10-month moving average.

Figure 1 displays recent activity.

SPX Trend-Following signals
SPX Trend-Following signals

Figure 1: Courtesy AIQ TradingExpert

The good news is that this model does a good job of being out of stocks during long bear markets (1973-74, 2000-2002, 2008-2009). The bad news is that – like any trend-following model – it gets “whipsawed” from time to time. In fact the two most recent signals resulted in missing out on the October 2015 and March 2016 rallies.

But note the use of the phrase “simple trend-following model” and the lack of phrases such as “precision market timing” and “you can’t lose trading the stock market”, etc.

For now the trend is up. A few things to keep an eye on appear in Figures 2 and 3. Figure 2 displays four major averages. Keep an eye to see if these averages break out to the upside (see here) or if they move sideways to lower.

Four Major Market Averages
Four Major Market Averages

Figure 2: Courtesy AIQ TradingExpert

In addition, I suggest following the 4 tickers in Figure 3 for potential “early warnings” – i.e., if the major averages hit new highs that are not confirmed by the majority of the tickers in Figure 3.

Four Potential “Early Warning” Sickers
Four Potential “Early Warning” Sickers

Figure 3: Courtesy AIQ TradingExpert


My main “simple bond trend-following model” remains bearish. As you can see in Figure 4, a buy signal for bonds occurs when the 5-week moving average for ticker iShares MSCI Japan (NYSE:EWJ) (Japanese stocks) drops below its 30-week moving average and vice versa.

EWJ 5-week, 30-Week Moving Average Vs. TLT
EWJ 5-week, 30-Week Moving Average Vs. TLT

Figure 4 – Ticker EWJ 5-week and 30-week moving average versus ticker iShares 20+ Year Treasury Bond (NASDAQ:TLT), Courtesy AIQ TradingExpert

A 2nd model using metals to trade bonds has been bullish of late but is close to dropping back into bearish territory. Figure 5 displays the P/L from holding a long position of 1 t-bond futures contract ONLY when both the EWJ AND Metals models are bearish (red line) versus when EITHER model is bullish (blue line)

Using Metals To Trade Bonds
Using Metals To Trade Bonds

Figure 5 – T-bond futures $ gain/loss when iShares MSCI Japan (NYSE:EWJ) OR Metals Models are Bullish (blue line) versus when EWJ AND Metals Models are both Bearish (red line); August 1990-present


My most basic gold trend-following model is still bearish. This model uses my “Anti-Gold Index” (comprised of tickers ProShares UltraShort Gold (NYSE:GLL), S&P 500, PowerShares DB US Dollar Bullish (NYSE:UUP) and ProShares UltraShort Yen (NYSE:YCS)). It is bullish for gold when a Front-Weighted Moving Average (detailed here) is below the 55-week exponential moving average and vice versa.

“Anti-Gold Index” Vs. GLD
“Anti-Gold Index” Vs. GLD

Figure 6: Courtesy AIQ TradingExpert


So at the moment the stock model is bullish and the bond and gold models are bearish. Are these trends certain to persist ad infinitum into the future? Definitely not. Will the models detailed here provide timely signals regarding when to get in or out the next time around? Sorry, but it doesn’t always work that way with trend-following.

But as for me I prefer “riding the trend” to “predicting the future.”

Some painful lessons just stick with you I guess.

Trends In Stocks, Bonds And Gold

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Trends In Stocks, Bonds And Gold

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