Observations

The charts will be updated by every Saturday. When no change to text, [NC] will be used.

Market Timing         (11/12/2022)

Long-Term Trends Dominate    (11/25/2016)

Determining the Bull and Bear Cycle   (12/1/2012 with recent chart)

See the chart below.

5/9/2015:  From November 23, 2007, this method produced four bull cycles of 12, 11, 6 and the current 35-month bull cycle. The bear cycles are 17, 3.5, 2 and 0.75 months long.

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12/1/2012:  In the past, the longer-term bull cycle was determined by whether there were higher highs and higher lows on a weekly S&P 500 chart -- plus the price being above the 200-day simple moving average. It is somewhat arbitrary as to what highs and lows on a chart are significant enough to use to determine the trend. Therefore, more recently that was dropped as a criteria.

Just using the 200-day MA causes whipsaws as occurred in November. The smoothing of a moving average is needed. But one that reacts fairly fast near the start or end of a market swing -- as measured on a weekly chart. These cycles are meant to be long compared to the swings followed on the site's home page. 

The following will be used to determine when the bull cycle changes, and will be called the Bull Cycle Alert (BullCyc).  The weekly chart below shows closing prices of the S&P 500 and has a 41-week simple moving average (red) that corresponds to a 200-day SMA. Also shown is a 30-week exponential moving average (blue). These will be used to determine the bull or bear cycle. The 30-week EMA was suggested by Gerald Appel in his "Stock Market Trading Systems" published in 1980. 

When the 30-week EMA (blue) moves up for three consecutive weeks AND the week-end closing price is above the 41-week SMA, a green pole is added to show the start of a bull cycle with a Bull Cycle Alert. If the price does not confirm the EMA movement up, a dashed green pole is used. Similarly, a red pole is added to show the start of a bear swing. A dashed pole is used until the price goes below the 41-week SMA.

11/17/2018:  The MACD shown gives signals very similar to the criteria above. These, however, come a little earlier, which is good. The MACD will be used in the future to signal the cycle changes.

Seeking Dividends   (8/25/2012)

Bond yields are as low as they have ever been, and they are too low for retirees to live on. So the search for yield has been a theme in the markets. Stock and sector ETF investors have turned to utilities that are yielding about 4% now. However, they "are more expensive now then they have been roughly 90% of the time. Likewise, telecoms, which yield about 4.5%, are costlier than they have been about 80% of the time. The consumer-staples sector, which yields north of 3%, is in nosebleed territory, too: Its valuation is higher than it has been in almost 90% of its history." -- says Jacqueline Doherty in Barron's.

Doherty wants you to make sure your dividend-stock portfolios are diversified as a stock earnings report can disappoint and the stock can be hit hard. Funds would be the way to go for diversification. She recommends not buying the funds with the very best yields. The lower-yielding funds "may own less expensive stocks that have room to boost their payouts."

I have found that high-yield bond funds are quite often better than dividend-paying stock funds. For example, the Fidelity Focused High Income Fund (FHIFX) sports a yield of 5.8%. This may be low by previous high-yield standards, but it beats most high dividend stocks. The analysis below has the details of risk and reward.

High Yield Bonds     (Charts and text as of 8/17/2012)

9/27/2015:  The default rate of these low-rated junk bonds may increase as many are issued by companies in the oil industry. Standard & Poor's projects that 2.9% of junk bonds will default through the first half of 2016.

10/25/2014:  The yield spread between high-yield bonds and Treasury bonds has diminished over the last year or so. However, Barron's reported on 10/20/14 that John Bellows, bond portfolio manager at Western Asset, stated that "As long as inflation is low, growth is moderate, and the Fed remains accommodative, there's value in high-yield [bonds]."

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Junk bond funds are sensitive to the economy, however, the current default rates are between 1% and 3.5%, whereas the historical average is 5%. Default rates are expected to stay below their historical average through 2013, according to Beverly Goodman in Barron's (8/20/12). She also states:

"The more important indicator in today's market is the spread -- the price difference between high-yield bonds over Treasury bonds with comparable maturities. As junk-bond prices rise, the spread narrows. This past week the spread was 510 basis points [5.10%], a bit lower than the historical average of a 535 basis-point spread, though the the spread has dropped as low as 300 basis points."

For fund selection, Eric Jacobson, director of fixed-income fund research for Morningstar, suggests looking at how a fund did in 2008 . . . and in the third quarter of 2011 (see chart), when interest rates fell and investors moved into safer investments.

Chart and data by FastTrack.net

The fund FHIFX, that was mentioned in Barron's as a low-cost fund "with a good long-term track record," only dropped -3.40% during the quarter, whereas FAGIX dropped -10.84%. The chart below shows the rise from the bottom of the dip on 11/25/11 to the present [8/17/2012].

This time, FHIFX rose the least of the funds shown, 10.76%. FHYTX is the aggressive leader rising 18.21%. But which fund came out better if bought on 6/30/11 and kept to the present?

The winner is FHYTX (10.37%) by only 0.89% over FHIFX (9.48%). BUT would you have kept FHYTX during the -11.33% down-draft of Sep. 2011 -- or would you have sold for a loss (to protect principal)? FHIFX only dropped -5.61% during that time. The standard deviation measure of volatility favors FHIFX by 1.52% to 2.36%. FHIFX has a short-term redemption fee of 1.0% if kept less than 90 days. FHYTX has a fee of 2.0% if kept less than 90 days.

One of the better ETFs is HYG, iShares iBoxx High-Yield Corporate Bond Fund. Over the above time period, it went up 9.06% with a dip in Sep. 2011 of -8.98%. It's standard deviation is 3.53%.

Long vs. Short-Term Trading   (12/2/2011, updated 9/5/2012)

Each investor or trader has a certain time frame the he (she) is comfortable with. There is the long-term investor who looks at the market and calls it a bull market starting with the March 2009 low. It will remain a bull market until we have a lower major low -- when a pull-back drops below 1100 on the S&P 500. Of course this indication of a change from bull to bear will lag behind the market top by many months of down-side action.

So to avoid the large drawdown, if one should sell when the bear indication occurs, one looks at a shorter time frame. We have been following an intermediate-term outlook where a cyclical bull or bear market is defined on the page called Longer Term. Supplementing this approach is the page that addresses Market Cycles of various periods, including the average market action for the month. 

The Health of the Market and the Market Status pages describe the shorter-term outlook. It is designed to catch the beginning an end of market swings that last 2 to 4 months. This is momentum trading. Of course all indicators that flag buy or sell points lag real time by time constants that are designed to smooth out the market fluctuations and minimize lag -- two conflicting requirements. 

The problem in 2011 was that the market swings have been sharp and occur very often. Momentum trading does not work well in this environment. One tends to buy well off the bottom of the swing, and sell after the peak has occurred by too much to make a decent profit. Emotions get in the way also. It is hard to buy near the bottom of a swing due to fear the market will go lower; and it is hard to sell when the market is doing well as greed requires a bigger profit. So often one buys too late (near the top of a swing) and sells too late (near the bottom of a swing). It is also hard to cut your losses when a trade goes against you. This is why an investing or trading system is required. But no system where chart reading is involved is totally reliable and timely. Mechanical systems have not done well either as they were back-tested during more tranquil times. Company or sector fundamentals are helpful, but not for timing entry and exit points.