April 2016 – Adaptiv

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.

Month: April 2016

Market Awaits Banking Sector’s Next Move

U.S. Dollar Needs Buyers

S&P 500 At Important Juncture

Red Dragon Awakes: Chinese Equities On The Move