February 2016 – Adaptiv

The Yen’s Impact On Job Security And Your Portfolio

February 11, 2016April 13, 2022

If you’re a fan of Kyle Bass, founder and principal of Hayman Capital Management, then you’re most likely familiar with his Japanese Finance Minister Index. If not, you probably should be. As a refresher, a Japanese Finance Minister is responsible for the foreign exchange policy of Japan. They carry similar responsibilities that the Federal Reserve Chair holds for the Federal Reserve. For the last decade, the job of Japanese Finance Minister has been tumultuous to say the least. How bad has it been? Let’s take a look at the Japanese Finance Minister Index (this version is from 2012 and doesn’t include two additional changes at this position in the past three years!):

screen20shot202013-05-0820at2012-35-5820pm — Source: Kyle Bass via businessinsider.com

The fact that Japan is on its 12th Finance Minister in the past 10 years should give you an idea of how difficult it’s been to manage their country’s currency during an ongoing deflationary cycle that started 25 years ago. For reference, the Federal Reserve has had two chairs during past 10 years: Ben Bernanke & Janet Yellen.

What does the aforementioned have to do with your portfolio? The Japanese Finance Minister Index lets us know that managing the Yen is more than a difficult job. Some (maybe a former Finance Minister?) might say impossible. And as we highlighted back in October, the Japanese Yen should be watched closely as it gives clues regarding the direction of U.S stocks. If the Yen were to start appreciating, which is exactly the opposite of what Japan wants, we should pay attention. And if the Yen has a strong negative correlation to U.S. stocks, we should be on the edge of our seats and very concerned about a deepening correction in U.S. equities. As we pointed out in our October article:

For many years now, the correlation between the yen and S&P 500 has been -0.9 to -1.0. Meaning, whichever direction one goes, the other goes equally the other direction. So as investors, we should definitely care which direction the yen is heading. If it is dropping in value, that is a positive for the S&P 500 while an increase in yen value means trouble for the S&P 500.

So what has the Yen been up to lately? Let’s take a look. Here is a 4-year chart of the Yen (using ETF FXY as our proxy) along with the S&P 500 (top pane):

We can see that two days ago, the Yen broke out over an area of supply that’s been in place since late 2014. In the past, buyers had stepped in near the 82-83 price level. But a little over 48 hours ago, this changed. Demand for Yen has driven its price to new 52-week highs. Correspondingly, U.S. stocks (represented by the S&P 500 in the top pane) have held up so far, holding near previous areas of demand (shaded gray area). If the Yen continues upward, we expect U.S. stocks to resume their descent. Nothing is guaranteed and as investors and market participants, we must not marry our opinions and keep an open mind. We only care about price. It’s still possible for buyers to step in at this level and save U.S. stocks from further downward pressure. If that takes place, we expect the Yen to rapidly reverse course.

We’ll make sure to provide updates to this scenario as it unfolds, with price targets for both the Yen and U.S. equities.

You can also follow me on Twitter 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.

Equity

Tesla (TSLA) Running Out Of Battery

February 4, 2016April 13, 2022

When considering a clever title for this article, it didn’t seem prudent to use my favorite choice: “Elon Musk Needs That New Car Smell”. So alas, you get a clever title and reference to a snarky title that didn’t get used. See what was done there? We used a funny title while saying we didn’t use it, when in fact, we did. And secretly, you kinda like it.

One of the more anticipated earnings releases is less than a week away for one of investors’ most favorite transformative car makers, Tesla (TSLA), run by multi-faceted business magnate, Elon Musk. While appreciating Elon’s business intellect and execution prowess, we see potential trouble for Tesla’s stock price.

Let’s jump right into it with a look at TSLA’s weekly chart. By visualizing and studying price, we can identify areas where logical changes in supply and demand should occur. And when logical areas of demand fail, we sit up and take notice. Here’s the chart:

02-04-2016 TSLA Weekly

It is quickly apparent that during the past two years, buyers stepped in and bought TSLA in the 180-190 price range. Similarly, when demand drove price up to the 270-280 price level, sellers quickly unloaded the stock, driving price back down. Two days ago, TSLA reached the 180 level again and something changed: Not enough buyers! Where’s the demand? Accordingly, price quickly fell through 180 and on to a new two year low for the car maker. This is known as a breakdown and makes further price declines much more likely. Frankly, there is no reason for us to own this stock below 180.

Zooming in, let’s take a look at TSLA on a daily chart and understand the power of breakouts, breakdowns, and false moves.

02-04-2016 TSLA Daily

When breakouts (through supply) or breakdowns (through demand) take place, further price moves in the prevailing direction are likely. In this case, TSLA is most likely headed to lower prices – targeting 120 and 100. However, there are times when breakouts and breakdowns fail. These are called false moves. And from false moves come fast moves in the opposite direction. Case in point, twice price broke through supply near 270, only to fail and quickly move in the opposite direction (down). Though not likely, TSLA can do the same here. A move back up through 180 would indicate a false breakdown occurred and price would move quickly upward. Accordingly, we like TSLA above 180. Below that level and we’re not interested.

Until next time, trade safe.

You can follow me on Twitter 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

Equity

Make Sure To Look At The Big Picture

February 1, 2016April 13, 2022

At 360 Investment Research, we study price to understand the interaction of supply and demand in the marketplace. When there is more demand than supply, price goes up. When there is more supply than demand, price goes down. This is a simple, but often overlooked, concept that all investors should pay attention to on a regular basis. Studying price is paramount because it gives us an edge in the market and is the only coincident, or even leading, indicator available. Nothing is more current than price.

In market environments such as the current one, it can be a valuable exercise to step back and review price from a big picture perspective. Rather than being shortsighted and look at the past few weeks, we can gather tremendous insight from looking at price over the past 30 years (or more).

Below is a monthly chart of the S&P 500 dating back to 1987. Overlaying the monthly price candlesticks are some proprietary moving averages that do a great job indicating when to be long or short U.S. equities. Check it out:

By function, moving averages lag price. Even though these averages lag price, they are still more actionable than any economic indicator the BEA, BLS, or Federal Reserve can provide (if you’re from any of those agencies and reading this, please don’t take offense). And upon reviewing the most recent crossover, we can see that the S&P 500 is not buyable or ownable right now.

We can look at the same chart, but from a different perspective, by removing the moving averages and studying previous areas of supply and demand. Going through this exercise, we can see that sellers appeared in a big way around the 2100 level on the S&P 500. Likewise, during the recent price correction, buyers stepped in near the low 1800s. Take a look.

Upon inspection, we can see that we’re in “no man’s land” – an area between 1812 and 2134 where buyers and sellers will determine the markets next big move. In order for the market to regain solid ground and not deepen the current correction, demand needs to keep price from breaking the 1800 level and eventually drive price on to new highs. From a historical perspective, a major trendline (in green) dating back to 1987 carries significance. If that trendline is broken, more sellers will step in. And if not enough buyers are available in the 1812-2134 window, selling will intensify and price will seek demand (aka price discovery) through further price declines until demand is reintroduced. The next most likely area of demand is near 1550-1600, which is an area of price polarity where previous supply (the tops in 2000 and 2007) became an area of demand.

We’re not predicting further price declines, but the study of price indicates that there are more sellers than buyers from this vantage point. Until that changes, and buyers step in to take the S&P 500 to new highs, we’re not interested in owning this market.

Until next time, trade safe.

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

Month: February 2016

The Yen’s Impact On Job Security And Your Portfolio

Tesla (TSLA) Running Out Of Battery

Make Sure To Look At The Big Picture