2016 – Adaptiv

Year: 2016

Summer Vacation Is Over: The Return Of Volatility

September 11, 2016April 13, 2022

Stocks sold off hard this past Friday, with the S&P 500 down -2.5% in one day on the largest trading volume in over two months. Summer vacation is over. The major market players are back at their trading desks. Time to get back to work. As market participants ourselves, this recent volatility should not surprise us. We knew our environment before Friday’s selloff. A week before, we shared the following market characteristic with our followers on Twitter (@360Research):

The following day, we released an article addressing this subject, highlighting important downside support levels on the S&P 500. In that article, we wrote:

If you are aware of your market environment, you know the week leading up to Labor Day is a notorious snoozefest in U.S. Equity Markets. With many large institutional money managers taking the week off, volume is extremely light and percentage moves slim. And if you study market seasonality, like we do, then we also know the next two months have an increased probability of volatility and downside risk.

And since we’re busy patting ourselves on the back, we also shared the following fun fact with our Twitter followers on September 6th:

Three days later, global equity markets and indices saw impressive one-day losses on heavy volume. Bonds were major losers in the global selloff with 10+ year Treasuries and Corporates being hit hard. Correspondingly, yields jumped. In addition, the VIX (a CBOE index which shows the market’s expectation of 30-day volatility) shot up 39%. That, my friends, is increased volatility. The tightest price range in 20 years has been followed by an increase in volatility. Not surprising.

Also not surprising are the nauseating, click-bait headlines. You know what we’re talking about: “Stocks Routed Due To Janet Yellen’s Bad Hair Day.” You never see headlines like, “Stocks Drop Due To More Sellers Than Buyers.” You won’t see that because it doesn’t make financial media money to report the simple truth. They require sensationalism in order to make money. Talk about a conflict of interest!

Thankfully, we don’t focus on headlines. We focus on buyers and sellers, supply and demand. We focus on price.

So where to from here? As always, let’s watch price to determine important levels of supply and demand. Here are the same charts provided last week, but updated with prices through last Friday.

It’s clear the S&P 500 ($SPX) is immediately challenging an upward trendline dating back to February 11, 2016. Also apparent is price testing an important resistance level, which was previously an area of supply between 2100 and 2150. Based on the rule of polarity, this is likely an area where buyers could step into the market.

Below is the daily chart updated from last week’s release.

Again, we see the S&P 500 has entered an area that should provide some resistance/buyers. If the area between 2100 and 2150 does not see buyers step in, a visit to 2000 is likely.

In conclusion, the recent explosion in volatility should not come as a surprise due to the strong seasonal tendencies of September and October. And we don’t need to click on fancy headlines to manage risk. Rather, we have price in front of us to help guide our decision making. Let’s use it.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.

Breakout

U.S. Equity Markets Mark Clear Lines In The Sand

September 2, 2016April 13, 2022

If you are aware of your market environment, you know the week leading up to Labor Day is a notorious snoozefest in U.S. Equity Markets. With many large institutional money managers taking the week off, volume is extremely light and percentage moves slim. And if you study market seasonality, like we do, then we also know the next two months have an increased probability of volatility and downside risk. One of our main responsibilities as market participants, if not our most important responsibility, is managing risk. With the aforementioned evidence in hand, we need to keep an eye on the most important piece of evidence: price. By observing price, we can keep an eye on previous areas of demand (and supply) in order to make risk-logical decisions. Here are the lines in the sand.

Below is a weekly line chart of the S&P 500 (our proxy for the overall US Equity Market). After moving sideways for approximately 18 months, with buyers and sellers battling for supremacy, this important index broke out to new highs this past July. This was a significant event as it proved that there were enough buyers to push the S&P to new all-time-highs.

Looking closer, we can see that since its strong breakout, the S&P has digested those gains through sideways consolidation. This is a tremendous positive development for US Stocks. Anytime buyers are able to push price to new highs after a large period of sideways consolidation (such as the aforementioned 18 month period), it carries significance. The old adage, “the longer the base, the higher the space” gains more and more weight, the longer price can remain above the 2015 highs.

Using the chart above, we can see there will be buyers ready to defend important levels near 2150, 2134, and 2110. If September seasonality shows up in its most bearish form, we should see these levels tested. If 2110 breaks, then the next level of support is near the Brexit-panic-lows at 2000. None of the aforementioned guarantees a September/October pullback. In fact, the characteristics of how traders impacted July and August opens the door for the opposite scenario, but you’ll have to wait for another post from us on that development. 🙂

In conclusion, we have our lines in the sand. We can use them to manage risk, our number one priority as market participants.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.

Bonds

Pay Attention To This Interest Rate Instead

August 26, 2016April 13, 2022

While everyone is listening to the noise of the Federal Reserve, we’re focusing on reality. Janet Yellen can wax intellectual about theories. We’ll continue to focus on the hard data, such as the 10-Year US Treasury Yield, an interest rate market participants should really care about.

Since establishing an all-time-low in early July, the 10-Year Treasury Yield has found continuous support. So much so, that this important metric created a consolidation triangle near the lows established back in early 2015 and again in early 2016. You can see this important consolidation in the chart below.

With the 10-Year Yield breaking out, this could have some potentially positive consequences for equities. When we discuss bond yields, the supply and demand battle is fought on the bond price side of the product. As the 10-Year Treasury Bond price increases, its yield decreases. The opposite is also true. So the 10-Year Yield breakout highlighted above is a direct reflection of 10-Year Treasuries being sold. For many institutional investors, the 10-Year Treasury Bond is used as a safe haven. When the big money leaves a safe haven, what do you think it’s buying? You got it: Equities.

Nothing is guaranteed, but if the 10-Year Yield can sustain this breakout, it should provide a tailwind to Equities as an asset class.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.

Equity

U.S. Equity Rally More Than Just Noise

August 18, 2016April 13, 2022

For over 500 days, the broad U.S. Equity market moved sideways in a 15% range (fun fact: this was one of the tightest ranges since the inception of the S&P 500) with the most recent market low taking place in early February. More specifically, the lowest point of this 500 day period was on February 11, 2016. Was there any significance to this date? Other than being my very good friend’s birthday, we found another significant development on that date. Here it is:

“I wouldn’t take them [negative rates] off the table, but we would have work to do to make sure they would be workable.” ~ Janet Yellen | Feb 11, 2016

So on February 11, 2016, with U.S. Equities on the verge of a major breakdown, Janet Yellen decided to open her mouth and wish my friend, “Happy Birthday!” Not exactly true, but what a gift this experimental financial insight was to the broad market. Proven by buyers showing up en masse to buy U.S. Stocks since that date, the market has not looked back, gaining almost 20% in 6 months. Impressive.

As you know, we’re fans of avoiding noise and studying the facts, with price being the most important fact. That 2/11/16 low was significant. We know that by looking at price, not listening to Federal Reserve Chairs. We don’t need to guess what Janet’s words mean when we have the benefit of watching market participants (which is what we are, after all) put their money to work in the market. By watching price, we are watching the economic law of supply and demand. More supply than demand, price goes down. More demand than supply, price goes up. It’s simple. It’s fact.

Another such fact was the Industrial Sector making a higher low on February 11, signaling that the Industrial Sector could lead the market higher. And it did, outperforming the S&P 500 and leading both to new all-time-highs.

This was/is an important development as U.S. Equities perform best when the Industrial Sector leads. Don’t believe us? Check out the facts below.

By using ratio analysis, dividing Industrials (XLI) by the S&P 500 (SPY), and comparing it against the S&P 500 itself, it becomes very clear that when Industrials outperform the S&P 500, U.S. Stocks perform best.

In conclusion, as long as Industrials continue to outperform the S&P 500 while both sustain these recent all-time-highs, it means great things for the overall U.S. Stock market and your portfolio. Those long this market want to see Industrials lead the way. If Industrials cannot lead, then another correction below recent highs is likely. As always, we’ll ignore the noise and pay attention to the only thing that pays: PRICE.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.

Breakdown

Deutsche Bank Is Rock Solid?

June 10, 2016April 13, 2022

Whenever a major financial institution feels the need to send correspondence to its employees, informing them their “bank is strong and its financial reserves are adequate,” investors should become alarmed. And when the same institution encourages employees to inform clients the bank is “absolutely rock-solid”, an investor’s BS meter should be blaring over 100 decibels (dB). Such was the case back on February 9, 2016, when co-CEO of Deutsche Bank (DB), John Cryan, sent those exact words to his employees. When we learned about this back on February 9th, our dB level about DB went off the charts. We’ve seen this before. Let’s take a look and see if Deutsche Bank is “rock solid.”

As you know, price is the final arbiter of value. Price is fact. When we study price, we are studying facts. When we study the stock price of Deutsche Bank, we should be able to draw a conclusion on whether or not this bank is “rock solid.”

Here’s the weekly chart dating back to 1997.

DB is down 87% since its all-time-high back in 2007 before the great financial crisis (GFC) engrained itself in the investor psyche. At all-time-lows, we would want to see some type of evidence from price that DB is “rock solid.” However, to the contrary, here is the daily chart.

Deutsche Bank (DB) has broken down from a triangle pattern, which implicates a continuation of its 9 year downtrend. This breakdown is problematic as it targets a stock price for DB in the single digits. In addition, it’s self-evident this price action contradicts the bank’s claims. If anything, its stock price appears to be tied to a solid rock thrown overboard. From a global perspective, we hope this is a false breakdown and DB quickly recovers the $20 level. Because if DB is going to single digits (or worse), we don’t see how the global economy can avoid the counterparty consequences of their €41 Trillion in derivatives.

In conclusion, we hope we’re wrong and that price moves back above $20, proving that Deutsche Bank is not yet in trouble. Otherwise, the consequences of further price decline of this company would mean the exact opposite of “rock solid” for their bank, and for global markets.

Get updates about this development and additional market commentary here: @360Research

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.

Breakout

Twitter Ready To Fly

June 3, 2016April 13, 2022

You might have thought we “sold in May and walked away.” Not so as it doesn’t make for a great investment strategy. Sometimes, the market calls for patience and diligence. Other times, it calls for action and execution. Which brings us to today’s findings. One of the more battered stocks of the past two years has been Twitter (TWTR). Losing 80% during that timeframe, many have written it off as an also-ran in the growing social media landscape. In an industry dominated by Facebook, LinkedIn, and Snapchat, Twitter has been a mess since its IPO surge in late 2013. The carnage was so tremendous that we had to grab this screen shot of Twitter news headlines back on April 27th, 2016, right after their earnings release. We added the quotes in red.

As you know, we don’t invest based on hope, gossip, rumors, or opinions. We invest by studying the most important data point of all: price. When it becomes apparent that the herd is all headed in one direction, we take notice and are ready to act when the most important data point shows us a low risk / high reward entry point. The herd can stay on the right side of the trade for longer than you think… until it doesn’t. Price shows us logical areas where the herd either becomes exhausted or changes direction rapidly.

Below is a weekly chart of TWTR dating back to its IPO in late 2013. It’s easy to see the dramatic decline. It’s also easy to see that momentum has been diverging from price (annotated in purple) since the beginning of 2016. We like that. In addition, TWTR appears to be breaking out from a year long downtrend. We like that too.

Looking closer at the daily chart, we can see momentum and price divergence in this time frame as well. Throw in the fact that price likes to fill in gaps (such as the one created back on April 27th), we like this set-up. Low risk. High reward.

A quick move to $17 could materialize, and possibly more if this is a substantial breakout. Below 14.45, and we’re wrong. Above 14.45, we like it. Below that level, and we’ll give it back to the herd.

By the way, if you want to receive real time updates regarding this Twitter analysis, you can follow us on (you guessed it) Twitter! Right here: @360Research

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.

Education

Market Awaits Banking Sector’s Next Move

April 15, 2016April 13, 2022

When the banking sector performs well, it’s a healthy characteristic for the overall equity market. When the banking sector performs poorly, it’s no surprise to see overall stocks perform the same. Case in point, when banking stocks rolled over in Summer, 2015, so did the overall market. Don’t take our word for it. Check out the weekly chart of the KBW Bank Index below. The KBW Bank Index (BKX) is a modified market capitalization weighted index designed to track the performance of leading banks that are publicly traded in the U.S. We can’t trade it directly, but it’s a great index to monitor and identify what’s going on within the economically important banking sector.

In the weekly chart below, we can see that banks topped at the same time (mid-July, 2015) as the overall U.S. equity market. Is this a surprise? We think not. And since the top in 2015, the banking industry has struggled, taking the U.S. stock market with it. If this is not a surprise, then the fact that banks have rallied since early February along with U.S. stocks should also not be a surprise. Which brings us to today. We think the current price level will determine the next move for the overall equity market.

We can see that the BKX has rallied up into the very important $66-67 price level. This price level is important based on the principle of polarity, which simply means that once an area of demand is broken, that same level becomes an area of supply (and vice versa). We can see this principle in action in the chart below. Notice in 2010 and 2011, sellers showed up in the area of $55-56, driving prices downward. This area of supply was overcome in early 2013. Low and behold, during the most recent sell0ff, buyers stepped in at that same level over three years later. Investor memory and psychology are real forces within the marketplace.

Under those same forces, we find BKX up against another point of polarity. For over a year, the $66-67 level is where buyers provided demand for this important sector. This level was broken in late 2015 and is now expected to be an area of supply that must be overcome for the overall market to continue upward.

Here’s the daily chart. We can see the breakout from three days ago. We can also see that price is right up against the point of polarity at $66-67. What happens next is extremely important in signaling the next move for U.S. equities.

If buyers can drive BKX over $66-67 and sustain above it, that bodes well for the prospects of U.S. stocks in general. If there are more sellers than buyers right here, causing price to fall towards new demand, then we can expect renewed weakness within the overall U.S. stock market.

Keep an eye on this one.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.

Currency

U.S. Dollar Needs Buyers

April 14, 2016April 13, 2022

Those who follow our work know we are ambassadors of patience, risk management, and high probability asymmetric risk/reward scenarios. Simply put, we like to minimize losses while maximizing gains. Related to our top-down approach, we have been known to tell our readers that “cash is a position too.” When reviewing the cash position, we like to study the U.S. Dollar Index (USDX). The U.S. Dollar Index is our proxy for the value of the U.S. dollar. This index uses a weighted mean of the dollar’s value relative to other select currencies. When USDX rises, it indicates U.S. dollar strength and when it falls, U.S. dollar weakness. (If we ever want to take advantage of an appreciating dollar, we can use ETFs such as UUP to capture that move.)

As we’ve highlighted in the past, using a big picture perspective, the world’s most important currency has broken out of a 30 year downtrend:

Looking closer, we can see the USDX has been trading sideways for over a year. In addition, we can quickly identify U.S. dollars have been outperforming an investor favorite, the S&P 500, for almost 1.5 years. And you thought “cash is a position too” couldn’t be an appropriate investment strategy? Well, if cash is outperforming stocks, we would say it is the preferred position. That being said, back in March this dynamic changed. The U.S. dollar began underperforming U.S. stocks. Which brings us to today. The USDX is now at an important price point. What happens at this level will impact many markets and asset classes. Accordingly, we want to pay close attention to this development.

Since early 2015, sellers have shown up at the $100.00 level and buyers have stepped in at the $93.00 level. Today, we’re near that very important $93.00 level again. Will buyers step in for the sixth time in 1.5 years? Time will tell, but the bullish falling wedge (annotated in orange) is a promising development for those who want to see USDX move up from here. However, on the flip side, there is nothing more bearish than a failed bullish pattern. If the U.S. dollar drops (or pops and drops) from this pattern, it is a bearish tell.

The line in the sand is $93.00. If USDX were to break below that level, it likely would mean a trip to $87.00 and have a major impact on various markets and asset groups. We like it above $93.00. Below that, someone else can have it.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.

Equity

S&P 500 At Important Juncture

April 4, 2016April 13, 2022

Back in November and December of 2014, we released a 7 part series highlighting the weight of evidence piling up against U.S. stocks. In summary, our research showed a market top was upon us. If you weren’t with us back then, you can catch up and dig into our methods using the links below.

This research proved timely as U.S. equities subsequently stalled, moving sideways for the past 1.5 years.

To show the importance of our findings, as well as highlight its prescience, here is the S&P 500 from a bigger perspective.

If you were reading our research back then, we hope you used it to your advantage. All that being said, this isn’t just a puff-our-chest piece. The U.S. stock market is at an important juncture and we want you to see what we see. As we’ve highlighted in the past, corrections happen in one of two ways: through price -or- through time. It is too early to tell, but 1.5 years would qualify as a correction through time if price can move upward through current levels and sustain new highs. At the same time, further correction through price is still on the table. If the S&P 500 cannot breach this level and move on to new highs, it is very likely a correction between 5-15% will take place.

Here’s a daily chart of the S&P 500 (our U.S. stock market proxy) showing just how important this current price level is to market participants.

The area between 2072 and 2134 has seen sellers show up en masse in the past. In addition, this important index needs to overcome the downward green trendline annotated on the chart above. This dual resistance should be difficult to overcome in the short term. However, price knows more than we do. If price can overcome this area of supply, it would signify buyers’ willingness to test all time highs (2134) from the Summer of 2015. This rally from the early February lows has been fast and fierce. Yet, from a short-term perspective, it is long in the tooth. A consolidation or pullback here could be healthy. At the same time, if we ask ourselves the question, “is this where we want to put new money to work?” We think the answer is a simple, no.

At this important juncture, it’s time to watch closely and let the market signal its next move.

Check back often as we’ll be sure to share our findings as the next leg in the U.S. market unfolds.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.

China

Red Dragon Awakes: Chinese Equities On The Move

April 1, 2016April 13, 2022

It’s no secret that Emerging Markets have been outperforming U.S. Equities since mid-January. We get it, the financial media loves to look at U.S. equities. That’s their problem. We aren’t myopic. Instead, we like to look globally across all asset classes to find opportunities. Why would we ever want to limit ourselves? There is so much opportunity outside the U.S., it would be negligent to ignore it. That brings us to today’s research release regarding Chinese equities.

Chinese equities have been hit hard for the past 11 months, dropping 45% during that time frame. Recently, however, the trend has changed. Buyers have stepped into the market, creating demand for Chinese stocks and moving prices off of their mid-February lows. Using FXI, an ETF that seeks to track the investment results of an index composed of large cap Chinese equities that trade on the Hong Kong Stock Exchange, we can take see the change in demand and take advantage of this potential opportunity.

Here’s a daily chart of FXI going back two years:

We can easily see the dramatic depreciation over the past year. We can also see that price and momentum (14-period RSI) diverged for over a month. We like that. Subsequently, buyers created enough demand to cause price to breakout of the year-long downtrend. This, combined with the aforementioned momentum divergence, is a great set-up for a well-defined risk/reward trade. After all, investing is not just about buying blindly and hoping for the best. Rather, our job as market participants is to minimize risk while investing in high reward scenarios. FXI fits our asymmetric risk/reward profile.

We think FXI is worth owning above 32.70. Below that, and we’re no longer interested. We’re not gamblers. We’re investors. We’re decision makers. After all, if we wanted to gamble, we’d head over to Macau.