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Sector Rotation Provides Clues About Current Market Environment

March 6, 2017April 13, 2022

The move in U.S. stocks over the past few months has been impressive. The rapid move has talking heads on TV proclaiming, “we’re overbought” and chances are, you or your neighbor think “this won’t end well.” Unfortunately, “overbought” is an ambiguous, bias-confirming adjective and “this won’t end well” is not an investment plan. Frankly, markets can stay “overbought” for a very long time (see 1995-2000). And those who lament, “this won’t end well”, will eventually be right; five weeks from now or five years from now. Neither of the aforementioned adds any value to the decision-making required to participate and profit in markets. If we’re going to make money in the markets, we need to understand how they operate and have an if/then plan ready to go. One of the more important aspects of understanding a market is looking underneath the surface and identify the undercurrents impacting supply and demand. An important exercise we can implement is studying sector rotation, which takes place as money moves from one industry sector to another. This process can give us clues and insights into the current market environment. Let’s put the work in.

At 360 Investment Research, we like to take advantage of Relative Rotation Graphs (RRG) Charts™ [1]. These charts show you an investable asset’s relative strength and momentum relative to a collection of other securities. Developed by Julius de Kempenaer of RRG Research, RRGs help us identify where we should be invested, or be looking to invest, within a universe of investments. Decisions should not be based solely on RRG analysis, but these charts definitely help us focus on those areas of the investment universe that deserve it. They give us the big picture within one picture. We appreciate their usefulness in observing sector rotation and you should too.

Using RRG™ analysis, we’re going to look at the relative strength of the U.S. Market’s largest sectors, using the S&P 500 as our benchmark. Basically, we want to see where in the U.S. Market money is moving and where we should be focusing our attention. We want to observe sector rotation from a momentum point of view. Accordingly, we’re going to use the following ETFs representing the 9 largest U.S. sectors and compare them against the S&P 500:

XLP (Consumer Staples)
XLY (Consumer Discretionary)
XLE (Energy)
XLF (Financials)
XLV (Health Care)
XLI (Industrials)
XLB (Materials)
XLK (Technology)
XLU (Utilities)

In the RRG™ below, the long tails represent the movement of each sector’s ETF over the past 7 weeks in comparison to the S&P 500 ETF, SPY. What do we see? The first thing to notice is the chart of SPY in the upper right corner. U.S. stocks have been moving upward in a positive trend. A series of higher highs and higher lows is about a simple as it gets in identifying an upward trend. Accordingly, when we analyze this chart, we want to be cognizant of the fact U.S. stocks as a whole have been a pretty good place to be.

Over the past 7 weeks, we can see there’s been some decent sector rotation. Right away, we notice three sectors in the blue upper left quadrant improving together. They used to be laggards during the strong push upward in the S&P 500. Over the past month and a half, these laggards have shown quality improvement. The three sectors are Consumer Staples (XLP), Health Care (XLV), and Utilities (XLU). Is there anything these sectors have in common? I thought you would never ask. These three sectors are considered defensive (or low beta) sectors. Money managers will move money into these sectors if they are undervalued or to protect assets during a decline in the market. After all, people get sick, need toilet paper, and buy electricity regardless of economic conditions (for the most part). So this improvement could simply be a healthy rotation, providing further fuel to the upside, or a warning that a decline in the market may be upon us. Before we go jumping to conclusions, it should be noted that a decline could be anything from -1% to -100%. As humans, we have this weird quirk where we assume the worst. It’s part of our fight or flight survival instinct. There’s nothing wrong with it unless this reaction clouds our vision so badly we make poor investment decisions. In order to get more clarity, let’s look at each of these three sectors individually from a price perspective.

First, Consumer Staples. Here’s the weekly chart:

Demand for Consumer Staples since late 2016 has driven XLP up to an area where sellers have shown up in the past. Interestingly, we notice XLP broke above a similar area of supply (the lower shaded area), which turned into support. That breakout took place in February 2016. You guessed it, while the S&P 500 was bottoming after the worst start to a year on record, Consumer Staples was breaking out. If XLP can break above the current level of supply near $55, it might not necessarily be a bad thing. This sector could be signaling the next leg up and be a leader in the overall market.

Next up, Utilities. No electricity = no wi-fi = armageddon.

Similar to Consumer Staples, Utilities were breaking above prior resistance (middle shaded area) in February 2016. Further back, we can see Utilities were a relatively safe place to be during the market upheaval taking place in late 2015. In fact, from late 2015 through early 2016, the Utility sector outperformed the other 8 major sectors. And just like Consumer Staples, XLU is at a very important level. The $51 handle marks an area where sellers have shown up in the past.

Finally, Health Care’s weekly chart:

This one is both the same, yet different, from the aforementioned sectors. Hwut? I know. Mind blowing.

First, let’s stick with the similarities. Health Care (XLV) bottomed via a false breakdown (price moved below previous demand and quickly reversed up) in February 2016 along with the rest of the market. That’s where the similarity ends. Looking further left on the chart, it’s apparent demand for this important sector was high for several years in the past. In fact, XLV outperformed the S&P 500 each year from 2011-2015. That’s five years of market leadership. If this important sector could retake its leadership title, it would be a tailwind for the broad market. And just last week, it showed signs of doing just that as buyers drove price through an area where sellers had shown up urgently twice before. This breakout is significant. The longer Health Care can stay above $74, the more likely this sector will recapture its market leadership title. Keep an eye on this one.

In conclusion, the last few weeks have seen defensive sectors improve dramatically. This sector rotation could be a harbinger of an incoming broad market decline or a sign of healthy undercurrents for this raging bull market. We don’t need to predict what’s next. We’ll watch price instead. Price keeps us on the right side of the trade and knows more than we do.

As always, you can see our daily market thoughts on Twitter @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.

[1] Note: The terms “Relative Rotation Graph” and “RRG” are registered trademarks of RRG Research.

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

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.

Breakout

This Is What Drives The Next Big Move In…

January 24, 2017April 13, 2022

One of the more interesting developments over the past nine months is the rising price of Oil within a rising U.S. Dollar environment. Since early May 2016, we’ve seen both Oil and the Dollar increase in value. While not impossible, it’s a relationship dynamic worth paying attention to. More often than not, a falling Dollar is a tailwind for commodity prices. Conversely, a rising Dollar is a headwind for commodities, like Oil. For example, from July 2014 through March 2015, the U.S. Dollar appreciated almost 26% against other major currencies (using the U.S. Dollar Index as our gauge). During the same timeframe, West Texas Crude (continuous contract) dropped almost 58%. So when we see black gold and the mighty greenback rising together, we sit up and take notice. Oil is showing some strength in the face of a mighty headwind.

Check out the charts below. First, we see the normally negative correlation between the U.S. Dollar and Oil in full effect. The chart is a bit color-crazy at first. Take time to digest it. The upper pane is the U.S. Dollar. The lower pane is Oil. The majority of the time, when the Dollar falls, Oil rises and vice versa. However, sometimes they move together, or one is moving a direction while the other is flat. This latter characteristic can be a precursor of major price moves to come. Look at the period in late-2010 through mid-2011. The Dollar is rising and Oil is flat. What happens when the Dollar finally falls in value? Oil jumps 68%. Similarly, as foreshadowed in the opening of this article, the period of mid-2013 through mid-2014 had the Dollar down, yet Oil could not budge upward. As soon as the Dollar took off in mid-2014, Oil’s 2013 weakness during a falling Dollar period was a precursor to a nasty 58% drop in value.

Further examination of the chart above shows we’re currently in a period where the Dollar and Oil are rising together. This synchronized move has been in place since early 2016. This is a warning. Eventually, one or the other will give and the subsequent price moves will be fast and furious. If the Dollar keeps rallying, expect this recent Oil breakout to fail. On the other hand, if the Dollar drops here, we could see an impressive upward move in Oil which targets $75 (+41% from current levels).

Digging deeper into our analysis, we find seasonality can be an important part of our process. Seasonality, in relation to markets, is simply the recurrence of similar price movements during certain periods of the year. It’s the tendency for commodities (or stocks, bonds, currencies) to perform better during some time periods and worse during others. Seasonality is not as important as price itself, but it’s still a powerful piece of evidence. What does seasonality look like for the Dollar and Oil? I thought you’d never ask.

Below is the seasonality of Oil for the past 10 years. This shows the percentage of months in which Oil closed higher than it opened. The bar height shows the percentage time that a month is positive. The number at the bottom of each bar is the average return for that month during the past 10 years. Accordingly, January’s bar represents the past 10 Januarys. We can easily see Oil has been up in January only twice (20%) in the past 10 years with an average return of -3.5%. When we look at this year, however, it sticks out like a sore thumb. As of Friday’s close, Oil is up about 1.7%. This could obviously change between now and January 31st. But the strength out of Oil during a seasonally weak month for this energy commodity is worth noting. In addition, February is almost a week away. During the past 10 years, February has been the best performing month for Oil by a wide margin. Up 90% of the time with an average return of +5.1% is significant. Combined with the correlation (or lack thereof) highlighted at the beginning of this article and the breakout levels identified below, there is a powerful case to be made that Oil is on the verge of a large move upward move.

Not to be ignored, here’s the seasonality chart for the Dollar. It uses the same parameters as the seasonal chart for Oil. Right off the bat, we notice January is an okay month for the Dollar; up 55% of the time with an average return of 0.8%. For the current month, however, the Dollar is down almost 2.5%. And next month’s seasonality for the Dollar is quite different. The Dollar is only up 40% of the time with an average return of -0.1%.

So we are heading into February, which is one of the weakest months for the Dollar and the strongest month for Oil during the past 10 years. We think things are about to get very interesting for one of the most important commodities on the planet.

Let’s dig into some charts of Oil and the Dollar. We know that each asset must stand on its own merit from a price perspective. And we care about important levels of supply and demand as they mark levels of risk when we consider entering a trade. In addition, if we’re going to enter a trade, we better have an exit plan. Identifying areas of supply and demand can help us do just that. Scrutinizing both charts brings further clarity about important risk management levels. After all, if we’re trying to make money in the markets, we’re in the risk management business. We care about being on the right side of the trade. And if we’re on the wrong side, it would make sense to know WHEN we’re on the wrong side.

Here’s the weekly chart of Oil.

The weekly divergence between price and 14-period RSI was a clue that Oil would eventually rebound. Since early 2016, we’ve seen Oil rally (don’t worry, it started before Trump was President so we can’t call this a “Trump Rally”). This past December, Oil broke through and held the $50 level. Previously an area where sellers showed up to drive price back down, a move above this level was significant. And the longer it holds above this level, the more significant that breakout is.

Here is the daily chart of Oil.

It’s easy to see Oil price consolidating and compressing above the very important $50 level. A break upward out of this consolidation would start the 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.

Likely to be in conjunction with Oil’s next leg, is a move in the US Dollar. Nothing is guaranteed. Oil and the Dollar can keep moving in similar directions. But, the evidence suggests that when the current positive correlation is broken, both will experience significant moves.

Here’s the weekly chart of the US Dollar.

Just like Oil, the US Dollar broke out above previous resistance in the 4th quarter of 2016. Specifically, this important piece of paper broke above $100 this past November. This level had sellers show up a few times in 2015. The ability of buyers to drive this major currency above $100 is significant. On the flip side, if the Dollar cannot hold $100, it could signal a false move. And from false moves, come fast moves in the opposite direction.

Here’s the daily chart of the Dollar.

On the daily chart of the US Dollar, we’re testing that all-important $100 level. If price moves below this level, there is no reason to own this major. Above $100, own it. Below $100, don’t own it. It’s that simple. And 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 other important asset in this article, Oil.

We’ve covered a lot of ground and looked at some important charts. The thesis is simple. The next big move in Oil is likely to be dictated by the Dollar’s next move. If the Dollar breaks below $100, and Oil breaks upward out of consolidation, the thesis of Oil going to $75 becomes that much stronger. The opposite also applies. If the Dollar holds $100 and Oil drops back below $50, we want to own Dollars and have nothing to do with Oil.

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.

Here’s to being on the right side of the trade.

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

January Seasonality and Its Impact on Your Portfolio

January 9, 2017April 13, 2022

As market participants, we want to weigh evidence which will help us make money in the markets. After all, that’s why we’re in the market, right? We’re not in the market to have strong opinions or have bragging rights to say, “I’m right.” From experience, I can tell you that pride and market participation do not go together. We’re simply in the market to make money. We shouldn’t care about being “right.” We should only care about being on the right side of the trade. As we work hard to be on the correct side of the trade, one piece of evidence to consider is something called seasonality. Seasonality, in relation to markets, is simply the recurrence of similar price movements during certain periods of the year. It’s the tendency for stocks (or bonds or commodities) to perform better during some time periods and worse during others. For example, Yale Hirsh of the Stock Trader’s Almanac discovered the six-month seasonal pattern or cycle. Since 1950, the best six-month period for the S&P 500 runs from November to April. By extension, the worst six-month period runs from May to October. There are many more examples, but for today, let’s focus on January. Is there anything about January that can give us an advantage? Funny you should ask. You didn’t ask, but you read that question in your mind as if you asked. So let’s answer the question you didn’t, but wanted to ask. The answer to this question is a resounding YES. January can give us some key insights into the possibilities of performance in the year ahead. Nothing is guaranteed, but let’s dig in and understand the different ways January can give us an edge.

First Five Days in January

Down Januarys Warn of Trouble Ahead

The January Barometer

“As Goes January, So Goes The Year.”

January Barometer Portfolio

The January Effect

In about a month, we’ll revisit these indicators to see how they performed and what type of insight they might provide. Nothing is guaranteed, but with some impressive accuracy in play, it makes sense to add January seasonality to our process when identifying opportunities and working to get ourselves on the right side of the trade.

Here’s to enjoying another year in the markets!

As always, you can see our daily market thoughts on this and other opportunities on Twitter @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.

Bonds

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.