February 2017 – Adaptiv

3 Important Developments Ready To Impact Your Portfolio

February 27, 2017April 13, 2022

While stocks across the globe are rising, three very important assets have been consolidating. The demand for U.S. (and many international) equities has been incredibly strong for the past 3.5 months. After all, more demand than supply means higher prices. It’s economic law, not opinion, that drives price movement. The media and President Trump can politicize market movements all they want, but the truth is the urgency of buyers surpasses that of sellers. Call it a “Trump Rally” and you’ve got a nice sounding, gimmicky headline that grabs mouse clicks and eyeballs. It’s fake news. Don’t fall for it. Focus on the visual math of price instead. Have you ever met a price chart that lied to you? Exactly. Me neither. Price doesn’t lie. We can rely on it to make investment decisions and manage risk. And right now, the charts (aka visual math) is identifying three significant consolidations taking place in three important assets. When these compressions resolve, it will have an intermarket impact for at least the next few months.

First, let’s start with Oil, the world’s most consumed, and possibly most important, commodity. The price of black gold reverberates throughout economies and markets (keep in mind that a market is not the same as the economy it’s involved with). Nonetheless, the price of oil is important for many people, industries, sectors, and economies across the globe. It makes sense to pay attention to it. Since February 2016, oil has rallied over 100%. It should be noted, however, that this rally took place after a -75% drop dating back to June 2014. Oil would need to rally another 100% from current levels just to get back to June 2014 prices. This factual perspective is a stark reminder that massive drawdowns and losses are an investor’s worst enemy.

Looking at a daily chart of Oil, it’s easy to see price consolidating and compressing above the very important $50 level. Buyers and sellers are battling for the next move. In fact, you can’t go very far online without finding someone referencing the record long positions by institutions and record short positions by commercial traders.

More often than not, commercial traders seem correctly positioned. However, we don’t need to predict. We need to plan. A break upward out of this consolidation would start a race to $75. On the other hand, we want nothing to do with this underneath $50. The line in the price is clear. Above $50, it makes sense to own it. Below that, it can be someone else’s problem.

Another important development is the consolidation of the U.S. Dollar. Just like Oil, the US Dollar broke out above previous resistance in the 4th quarter of 2016. On the daily chart of the U.S. Dollar, we’re compressing between $99 and $101. A break above the upper green trendline would signify a resumption of the uptrend started in 2014. And if price moves below $100, there is no reason to own the greenback. If the Dollar moves down through this important level, we could have a false move on our hands, with selling pressure picking up and providing a major tailwind to the aforementioned important asset, Oil. At the same time, keep in mind that Oil and the Dollar can continue to appreciate together as they’ve been doing since early 2016. Each chart must stand on its’s own merit.

Finally, this trifecta of fun is concluded with a look at the 10-year Treasury Yield. The increase in yields from July, 2016, through the end of the same year was impressive to say the least. However, we need to remember the bigger context. We still remain in a 35-year downtrend in rates. That being said, resolution out of the consolidation annotated in the chart below will determine the next few months of direction for this important bond barometer. Note that the movements in rates have rhymed with the movements in the dollar. It’s likely that both resolve in the same direction. As mentioned before, each chart must stand on it’s own. With record short positions against 10-Year Treasury Bonds, we think the move out of this compression will be violent.

In conclusion, each of the three aforementioned assets are on the verge of picking a direction, up or down, that will have a major impact for the next few months ahead. Keep an eye on these consolidations for evidence to help you get on the right side of the trade. After all, if we’re in the markets to make money, it’s not about being right or wrong. It’s about being on the right side of the trade.

As always, you can get free real-time updates and commentary about this opportunity and many more 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

Lessons Learned From January

February 6, 2017April 13, 2022

Back in January, we highlighted some seasonal tendencies for the market. We promised a follow-up to see what lessons were learned from January. The short-yet-sweet updates are in green font below.

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First Five Days in January

For 2017, the first five days of January ends today. And over the past 41 times where the first five days of the year were up, the subsequent full-year gains have been up 35 times. That’s a hit rate of 85%. The average gain during such years was roughly 14%. Not too shabby. On the flip side, the first five days in January are a less reliable indicator when negative. When this takes place, the positive or negative return for the remainder of the year is almost a coin flip (about 48% accuracy) with an average gain of just 0.2%.

The S&P 500 closed positive with a 0.49% gain in the first five trading days of January.

Down Januarys Warn of Trouble Ahead

Looking at the S&P 500’s performance in January going back to 1950, every down January with one exception (2016!) preceded a flat market, a 10% correction, or an extended bear market. Except for 2016 (which had one of the worst starts in market history), when the first month of the year has been down, the rest of the year followed with an average loss of almost 14%. (PS, when an indicator with such a strong track record results in an opposite outcome, market participants should pay attention to the significance. The fact that 2016 did not finish down is something to note.)

The S&P 500 closed positive for January. There’s nothing to see here.

The January Barometer

“As Goes January, So Goes The Year.”

When the S&P 500 records a gain in the month of January, history suggests that the rest of the year will benefit and finish up as well. Since 1950, this indicator has an amazing hit rate of almost 90%. Specifically, 88.7% of the time, when January records a positive return in the S&P 500, the year finishes positive as well. Pretty incredible.

The S&P 500 closed at 2278.87 for January, recording a 0.93% gain.

January Barometer Portfolio

This is a tendency for the Standard & Poor’s top performing industries in January to outperform the S&P500 over the next 12 months. As described by Sam Stovall of S&P Capital IQ, it’s an effective way to align your portfolio for the remainder of the year. If on February 1st, you invested equally in the 3 best performing sectors in January and held them until February 1st of the following year, you would’ve received a compound rate of growth around 8% as compared with 6.6% for the S&P 500. In addition, the opposite applies. If you bought the worst performers in January, you would’ve underperformed the market with about a 5% return. Since 1970, the compounded growth rate of the ten best performing sub-industries (based on their January performance) was roughly 14% compared to about 7% for the S&P 500. In addition, these ten best performing groups in January went on to beat the market in the subsequent months nearly 7 out of every 10 years, while the worst performing sub-industries outperformed the S&P only 38% of the time. Conclusion: we’re better off letting the January winners ride rather than trying to bottom pick from the January losers.

This one, we’ll have to come back and update. As of this writing, the Standard & Poor’s website that provides sector performance information was down and unresponsive. Once this site is back online, we’ll make sure to get you an update.

The January Effect

Different from the January Barometer, but just as significant, The January Effect is the tendency for Small Cap stocks to outperform Large Cap stocks in January. Many speculate as to why this happens. But we don’t need to get caught up in the why in order to benefit. And frankly, many us of already know that we could call this the mid-December Effect. From 1953 to 1995, small caps outperformed large caps in January 40 out of 43 years. However, about 30 years ago after the crash of 1987, this tendency shifted to mid-December. Even more recently, during the past five years, it appears this has shifted earlier to November. We’ll need a few more years of tendency before we can rename this The November Effect.

This was a mixed bag. Small Caps were down -1.09% during January. Mid Caps barely outpaced Large Caps, recording a +1.04% return during January while the S&P 500 recorded +0.93%. As noted in the original article, this is a market dynamic that seems to be shifting to December, maybe even November. We’ll keep our eye on it for you.

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So there you have it. Here’s to seasonality and being on the right side of the trade for the remainder of 2017.

As always, you can get free real-time updates and commentary about this opportunity and many more here: @360Research

AND, you’ve got FREE access to an investing tool we’ve created, The Ultimate ETF Cheat Sheet. It’s an easy-to-use resource guide.

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 2017

3 Important Developments Ready To Impact Your Portfolio

Lessons Learned From January