The Four Year Low, Part Three

The Four Year Low, Part Three

Vanguard is a well-known and respected fund company founded by the legendary Jack Bogle…They offer among other things, three ETF’s that are based on value based metrics like price to (earnings, book value, revenue, cash flow etc…)

The three ETF’s are as follows…

Vanguard Value ETF…………………....VTV

Vanguard Mid-Cap Value ETF………....VOE

Vanguard Small-Cap Value ETF……….VBR

(There are probably other ETF's out there I could use as a surrogate for my indicator but since I've already found that these ETF's work for me...why bother?...My favorite and the one I use is VOE, based on the Mid-cap space of the market...

I found that if you apply the MACD indicator to these indexes the resulting indicator looks something like my indicator (don’t get me wrong, I still prefer my own indicator which is based on the breadth of the market but using VOE isn’t bad and is a ready-made substitute  on the net.) An investor at home can use the chart of VOE to get a pretty good read on the four year cycle in the stock market (sometimes the low will be closer to 3 years and at other times closer to 5 years but the prominent lows will show themselves on the MACD indicator on these charts)...I use two sites to create these charts…

 www.bigcharts.com

The advantage to this site is that it gives an huge chart to display. The drawback is that you have to use the parameters they have hard-coded into the indicator (16 and 26)

www.stockcharts.com

The advantage to this site is that you can alter the parameters in the MACD to the ones I prefer (19 and 39 and o for the signal line). You can also adjust the time period to zero in on a particular segment of time to get a better look at what was going on during that period.  The drawback is the resulting chart is smaller than the one I can generate at bigcharts...This is the site I prefer as I like using the parameters (19,39,0) for the MACD indicator...this will display the indicator in a histogram format which I find is easier to read.

Below I have attached an sample chart from bigcharts...the blue line is the one to focus on...I was unable to copy the original link with the accompanying chart from stockcharts so the one from bigcharts will have to do, (sorry but I’m tech-challenged, that’s why this blog is so plain-vanilla looking.) I recommend you go to stockcharts yourself and generate your own charts…Try to get a 'feel' for how the indicator behaves over time...

http://bigcharts.marketwatch.com/advchart/frames/frames.asp?show=&insttype=Fund&symb=VOE&time=20&startdate=1%2F4%2F1999&enddate=7%2F19%2F2019&freq=2&compidx=aaaaa%3A0&comptemptext=&comp=none&ma=2&maval=30&uf=0&lf=4&lf2=0&lf3=0&type=4&style=370&size=4&x=29&y=3&timeFrameToggle=false&compareToToggle=false&indicatorsToggle=false&chartStyleToggle=false&state=11

You can see the important momentum bottoms (the four year low) neatly mapped out in front of you...the historic bottom at the end 2008...the next four year low at the end of 2011/beginning of 2012...the next one in early 2016...and finally the most recent sell-off at the end 2018...These were all excellent entry points for putting on positions.

Also notice the indicator slowly eroding before the four year low was reached signaling a gradual distribution of stocks as the market was weakening preceding the next low...in mid 2008, the indicator topped out below the all important zero line (a sign of extreme weakness)...in mid 2011 there was a strong divergence as the indicator weakened as the index was testing it's highs...and the indicator weakened all throughout 2015 leading up to the next sell-off...finally there was a huge divergence in the fall of 2018 signalling the next four year low...these were the times to lighten up on your positions and build cash for the coming sell-off, but be warned, it will be psychologically difficult to do this as everyone else will be bullishly buying and optimistic about the market...at times like these, an investor has to be contrary.

The whole object of this exercise is to...as Howard Marks would say, ‘ take the market’s temperature’ and get a read on where it is in its cyclic process…That way an investor can manage his risk by taking money off the table when the indicator is weakening (topping out at a lower level than before) and to re-deploy that money at the four year low when the MACD is at an oversold level.

And by the way...since the four year low was put in at the end of December of last year and considering that was only 6 or 7 months ago...that makes me bullish...So my read in the market right now is that despite all the worrying news about trade wars, fed comments and the economy being late in its cycle…the market itself is telling me that the risk of being in the market isn’t as high as the news media is making it out to be...