Market Environment & Structure

Category: Market Environment & Structure

Here’s The Skinny On Long Bonds

June 27, 2017April 13, 2022

Back in mid-April, we posted about Why You Should Be Long The Long Bond. Back then, we noted the extreme pessimism regarding US Treasuries (aka Long Bonds) due to skewed short positions and anecdotal evidence that too many were confident yields would go higher. This long bond pessimism, and more importantly, the price action of Long Duration Treasuries (ticker: TLT), had us more than just liking long bonds. In fact, we became rather obnoxious about them on Twitter:

A little over 2 months and +7% later, and we’re back writing about long bonds. Why? Not because we love bonds so much. Rather, if you’ve been long the long bond since our Tweets and subsequent post, we think it might be time to take some of those gains off the table. In our April post, we wrote:

The longer demand pushes and holds TLT above 122, the more likely we revisit the gap breakdown near 129.

Yesterday, TLT quickly reacted to the high of 128.57. Close enough fro us. There is a reason for using price targets. These measured moves define our potential reward when determining whether a trade opportunity exists. What’s our risk? What’s our reward? The answer to these questions will determine whether or not it makes sense to enter a new position. After all, everyone should have an exit plan prior to entering a trade. That’s sound risk management and our number one priority as market participants. Yesterday, the ETF for Long Duration Treasuries (ticker: TLT), hit our upside target. Not only that, but we have this important new development: Last week alone, TLT received more inflows than all domestic equity mutual funds, and all domestic equity ETFs combined year-to-date [1]. Think about that for a moment. In only one week, TLT exceeded the total incoming purchases of all domestic equity mutual funds and ETFs made in the past 6 months! Talk about a sentiment shift. Everybody and their grandma is now piled into Long Duration Treasuries. Sounds like a crowded trade to us. Large crowds make for small exits. Can Treasuries move higher from here? Absolutely. However, without price sustaining 129 (and above) on TLT, we would be very skeptical of any further upside in this move. Keep in mind, this move from March until now is countertrend in nature. Price is above a falling 200-day simple moving average. A falling 200-day simple moving average is a hallmark of downtrends. As a friendly reminder, bonds and yields have an inverse relationship.

And if long bonds are reversing here, it means higher yields are on their way. And if higher yields are on their way, it will include ramifications for some other important sectors [cough *Financials* cough], which we’ll cover in another post. For the time being, TLT needs to regain 129, or at a minimum, stay above 124 to ruin our “higher yields from here” thesis.

In conclusion, with TLT reaching our price objective in a countertrend trade and inflows reaching extreme levels, we think it makes sense to take some off the table here. What applies to us may not apply to you. Trade safe.

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

By the way, we created this free tool for you, The Ultimate ETF Cheat Sheet. It’s an easy-to-use ETF resource guide. We think you’ll like it.

[1] Source

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. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in this blog. Please see our Disclosure page for full disclaimer.

Energy

The Index You Never Heard Of Is Giving Important…

May 30, 2017April 13, 2022

For our readers in the United States, we hope this update finds you refreshed after the long weekend and remembering those who gave their life to ensure their fellow countrymen remain free. The U.S. Markets were closed for this important observance, with trading resuming this morning. If you’re a regular reader of our work, you know it’s important to take a look at price, markets, and trends from different angles. Any edge we can gain in identifying opportunities is valuable. In this week’s post, we want to show you an important index you’ve probably never heard of that can provide valuable insights regarding the health of the U.S. stock market: the Value Line Geometric Index (XVG). This index tracks the median move of stocks within the index using the assumption that each stock has an equal amount (for example, $1,000) invested in them. The daily average move of this index is calculated geometrically (rather than arithmetically). I don’t want to bore you with the details, but if you need more info, you can read more about the methodology here, page 4. More simply put, this index eliminates an illusion created by weighted index components. Weighted stocks within an index can pull it higher even as the majority of the stocks within the index are not following along. For example, in a weighted index like the S&P 500, it’s possible for the top 100 weighted stocks to carry the index higher while the remaining 400 stocks lose value. As an investor, it might be helpful to identify when this is happening.

By looking at the Value Line Geometric Index alongside the S&P 500, we gain valuable insight into what is currently taking place in the market. Looking at the chart below, the Value Line Geometric Index is in the upper panel and the S&P 500 in the lower.

Notice the equal-weighted Value Line index is holding steady above the highs of 1998, 2007, and 2015 while the S&P 500 has continued higher (divergence). This condition has been persistent since December 2016. This means the market is thin: money is flowing into large cap stocks and leaving the rest behind. This is a stock picker’s market and can be a hallmark of market tops, but is not a guarantee a price correction is upon us. It should be noted when looking at the chart above that this condition can persist for quite a while before there is an overall resolution to the market (aka a correction in price). In the past, a noticeable divergence developed between the Value Line Geometric Index and the cap-weighted S&P 500 before the S&P 500 corrected in price. This doesn’t mean the S&P will correct in price right now or at all. But, it does mean that it is getting harder to find U.S. stocks that are trending up. If the majority of U.S. stocks are flat or down, what stocks are carrying the market higher? Awesome question. Let’s take a look at the data. Here’s a great visual from Financial Times using data from Bloomberg:

This chart shows while most stocks within the S&P 500 have been flat, it’s Technology pulling this major index higher. Many assume when the S&P 500 records new highs, it means everything under the surface is participating. This couldn’t be further from the truth. In fact, many sectors are currently underperforming the overall index. Because of tech’s large weighting (over 20%) in the S&P 500, it’s been carrying the water for other sectors currently struggling to gain traction for the past few months.

While the condition persists, market participants will need to be diligent in their stock selection. In addition, we’ll want to watch for clues from the leading sector, Technology, on whether this current run can continue. It’s a positive when economic bellwethers like Apple (AAPL), Amazon (AMZN), Facebook (FB), Google (GOOGL), Nvidia (NVDA), Adobe (ADBE), Microsoft (MSFT), and Netflix (NFLX) can lead. At the same time, it would be healthy if more sectors start to participate. If and when laggards like Energy and Financials find demand, it could signal another strong leg higher for the overall market. But if Technology start to sell off and the Value Line Geometric Index fails to hold these recent highs, it likely means a decent correction will be underway. As always, we don’t need to predict to invest. Price is the only fact that matters. And as long as this condition is in place, we’ll be watching the price of the S&P 500 closely. You should be too.

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

AND, you’ve got FREE access to a time-saving tool we’ve created, The Ultimate ETF Cheat Sheet. Click this link to get your FREE easy-to-use resource guide for all your ETF needs.

Currency

This Important Piece Of The Market Puzzle Will Impact…

May 22, 2017April 13, 2022

Back in February, we highlighted some important developments which could impact the months ahead. One of those developments was the consolidation of the U.S. Dollar. Back then, we wrote:

Another important development is the consolidation of the U.S. Dollar… 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…

Here’s the U.S. Dollar back on February 27th:

The power of using price charts is we can identify where demand and supply dynamics change and use these levels to manage risk, the most important part of being a market participant. We identified the $99-100 level as important support. Here’s the updated chart:

While recording new highs in early January, the U.S. Dollar Index was also logging lower highs in 14-Period RSI (our favorite momentum indicator). New highs and lagging momentum can sometimes signal limited upside continuation. In this case, the divergence in momentum was an important tell for the demand of U.S. Dollars. This was confirmed when buyers could not keep the Greenback from breaking $99, a significant level over the past 2.5 years. You can see this important level better when we step back to a bigger picture timeframe. It’s always important to look at the bigger picture. Here’s the weekly chart of the U.S. Dollar Index dating back to 2010:

The importance of the $99-100 level can be clearly seen. Sellers showed up twice at that level in 2015 making the breakout at the end of 2016 notable. However, since the highs in January, selling pressure has returned. The increase in supply has created a false move. From false moves come fast moves in the opposite direction. The fast move in the opposite direction is taking place right now. We don’t need to predict. Price shows us there’s no need to be a buyer of U.S. Dollars right now.

In conclusion, the Almighty Dollar, an important piece of the market puzzle, needs to prove itself before we’d consider a long position. If the selling continues, we’d expect buyers to show up near the $92-93 handle, an area where they showed up in the past (see green annotated arrows in the chart above). Since many market pieces are priced in Dollars, this current move could have an impact across a variety of assets, including commodities and foreign equity markets.

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

AND, you’ve got FREE access to an investing tool we’ve created, The Ultimate ETF Cheat Sheet. Click this link to get your FREE easy-to-use resource guide for all your ETF needs.

Breakout

This Is How South Korea Could Lead Emerging Markets…

May 15, 2017April 13, 2022

Before we get too far into today’s research, I want to acknowledge all those amazing Moms out there. We celebrated Mother’s Day yesterday here in the United States. It’s a special day where we recognize those special Moms who have impacted us and those around us. For me personally, I’ve been blessed to be around some amazing Moms, including my wife, my mom, my mother-in-law, my sister and sister-in-laws, and each of my grandmothers. These are some of the strongest and most compassionate people I know. For many, this is a time to reflect on Moms from today and yesterday. Some are no longer with us, but their impact is still felt. What would our world look like without Moms? I have no idea, but we’d all agree it wouldn’t be good. Who would care and nurture like they do? Who would unconditionally love the next generation? Who would bring empathy and thoughtfulness into our everyday lives? Moms are so important to our families and society. If you’re one of them, thank you! Here’s to the Moms. We appreciate everything you do.

*****

With that important acknowledgment concluded, let’s dig into today’s findings: South Korea. And right away, I know what you’re thinking. How could South Korean stocks possibly be a good place to invest? They’ve had major corporate and political corruption scandals, including the impeachment of ex-President Park Geun-hye this past March. On their northern border sits a nuclear saber rattling regime lead by enigmatic “supreme leader” Kim Jong-un. And South Korean stocks have gone nowhere for eight years. So how can anyone consider a position in South Korean equities? Well, as you know we’re fond of pointing out: price leads news, not the other way around. Case in point, remember our research in March 2016 regarding Brazil? No one wanted to touch Brazilian stocks and the negative financial “news” surrounding them was palpable. Since that article, Brazilian equities have rallied 65%. Price first. News second. Just recently, YahooFinance reported, “Brazil’s Economic Activity Hits Fastest Pace in 8 Years.” We need to keep in mind that financial news reports on the past. Price is from today. And markets are future discounting mechanisms. Brazilian markets saw the economic improvement before the financial media. Accordingly, we should use price, not news, to participate in markets. Even though the news surrounding South Korean equities is negative, we don’t need to listen. It’s noise. Price is all that matters.

Let’s take a look at what’s really happening in South Korean equities. Below, is a weekly chart of the South Korean Composite Index ($KOSPI) dating back to 1999. Quickly, we can see South Korean stocks have gone nowhere since the selloff in 2007. That’s 10 years of zero to negative returns!

More recently, since 2011, the $KOSPI has been in a narrow range between approximately 1700 and 2200. This battle between buyers and sellers has created a base six years long. If you’ve followed our work long enough, you know we’re fans of long bases as they can lead to high spaces. Here’s our Tweet from March as we’ve been watching this base for a long time.

No doubt about it, six years is a long base. This battle of supply and demand was worth keeping an eye on. Here’s a closer look. For six years, we had no business owning South Korean stocks as a group. But that’s changed as we can clearly see the recent breakout to new 10-year highs.

Does this long base and subsequent breakout guarantee higher prices? Absolutely not. Yet, we know if there’s enough demand to push prices past areas where sellers have shown up before, it likely means a change in the demand/supply dynamic. Buyers have control. And the advantage of identifying important levels of supply and demand is we can use those levels to manage risk. You can’t invest in the $KOSPI directly, but it’s 2017 and ETFs allow us access to markets our parents only dreamed of. By the way, if you haven’t done so already, we’ve created a free resource for you – the Ultimate ETF Cheat Sheet. You can click here to get it => Ultimate ETF Cheat Sheet. It’s a great reference tool for ETFs of all types, including an ETF for South Korea: EWY. Let’s use it to participate. Here’s the weekly chart of EWY:

The $62 level is the line in the sand. We can use that level to manage risk. Own EWY above $62. Don’t own it below $62. Pretty simple. As long as EWY sustains trading above $62, the upside target remains $82, which is calculated using the range between lows and highs. In this case, buyers showed up at the $42 level and sellers previously showed up at the $62 level. Add the difference ($20) to the high of the range ($62) and we have a target of $82, or +24% from current levels. With defined risk of 6%, we have a reward:risk profile of 4:1. Not too shabby.

As always, we’ll let price dictate our involvement. To us, this is pretty simple. Own EWY above $62. If it’s below $62, someone else can have it. After all, our job is not to marry our positions. Our job is to be on the right side of the trade.

As always, you can get real-time updates and commentary about this development and many more opportunities 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.

Education

Why The Hindenburg Omen Is More Than Just A…

May 8, 2017April 13, 2022

Four days ago, on May 4th, a Hindenburg Omen triggered on the same day for both the New York Stock Exchange and Nasdaq Composite. Recording a Hindenburg Omen for both exchanges on the same day is a rare event. This chart, courtesy of SentimentTrader, shows just how rare this event is:

Before we dig into the market implications, let’s put the work in and get a big picture understanding of the Hindenburg Omen, how it came to be, what it is, what it’s not, and how we can use it to identify opportunity and manage risk.

Ironically, two days ago (May 6th) was the 80th anniversary of the tragic explosion of the Hindenburg, a behemoth airship which measured as long as the famous ocean liner, Titanic. Filled with hydrogen, the Hindenburg represented the aspirations of human flight only a decade after Charles Lindbergh became the first to fly solo across the Atlantic. The Hindenburg carried passengers during a time when very few had experienced human flight. It was a futuristic symbol of aviation and an icon of technological progress. However, on May 6, 1937, the Hindenburg exploded in flames, crashing to the ground, taking 36 lives with it. It was a catastrophe not only because of the loss of life, but because just like the Titanic, the Hindenburg had once projected invincibility. It was a tragedy which reverberated across the globe as new technologies of film, tv, and radio, carried the calamitous news far and wide. Are you familiar with the phrase, “oh, the humanity!”? These were Herbert Morrison’s famous words as he emotionally reacted to the disaster live on radio. Watch the 40-second clip below to hear the emotion in his voice and grasp the magnitude of this event:

To the world in 1937, this was a tragedy of immense proportion. And for decades following, the word “Hindenburg” was synonymous with catastrophe. Which brings us to the Hindenburg Omen, a technical indicator named after the aforementioned crash. If using the word “Hindenburg” wasn’t enough, adding the word “Omen” surely solidified the sinister connotation implied when labeling one of the most misunderstood indicators in the market today. If you were to Google “Hindenburg Omen,” you would receive a plethora of results providing the metrics for calculating it, yet none of them are in agreement. We’re not going to pretend this article has the final say on the specifics of the Hindenburg Omen. But, we’re hoping this post provides a tremendous amount of clarity (and sanity) regarding this legitimate approach for identifying market conditions during which there is an increased likelihood of a market correction.

Let’s break down the Hindenburg Omen into bite-size factoids and illustrations for better understanding:

The Hindenburg Omen is meant to operate as a warning signal and was developed by the late James R. Miekka as an improvement to Gerald Appel’s Split Market Signal.
A man named Kennedy Gammage first named the indicator “the Hindenburg Omen” in his market newsletter, the Richland Report. The label stuck. And in our humble opinion, this was a terrible label meant to imply and sensationalize disaster ahead for the market. Case in point, in today’s financial media, when there is a Hindenburg Omen sighting (which may not even be accurate – see below), they sensationalize it (e.g. “This Indicator Just Signaled Market Disaster Ahead”), and then dismiss it as ineffective when the market does not sell off dramatically.
The Hindenburg Omen does not guarantee large market corrections. Rather, it highlights when the market being measured is showing signs of fracturing, which can lead to corrections large AND small.
The Omen can be calculated and tracked on difference indices such as the Nasdaq Composite and New York Stock Exchange.
The Hindenburg Omen’s basic function is to identify when significant bifurcation is taking place within any given market. Basically, think of it this way. Imagine you are driving down a two-lane highway with hundreds of other vehicles, all heading in the same direction. The traffic is flowing in sync at about 75 miles per hour. This is perfectly normal and expected behavior. We’re making great time and life is good. All of a sudden, the traffic in the left lane accelerates to 90 miles per hour and the traffic in the right lane slams on the breaks. What’s going on here? Is it an accident? Is there road construction? Has someone been pulled over by highway patrol? We won’t know until we travel further down the road. It could be nothing, but understandably, we may want to take heed and be on alert for something odd up ahead. It’s the same way with the Hindenburg Omen, which does a great job identifying when stocks are traveling at two different speeds (or more accurately, directions).
Here is the formula for triggering a Hindenburg Omen, as written by Jim Miekka himself:
1. First, the number of issues in a specific exchange hitting 52-week highs (left lane of traffic) and lows (right lane of traffic) must both exceed 2.8 percent of the number of issues in said exchange. (Many articles report a requirement of 2.2 percent, which is incorrect.)
2. Second, the benchmark index for the exchange must be above the value it had 50 trading days, or 10 weeks, ago. (Again, many sources get this incorrect, referencing an exchange must be above its 50-day moving average. This is not accurate.)
3. Once the two aforementioned events have occurred, the signal is valid for 30 trading days. During the 30 days, the signal is activated whenever the McClellan Oscillator (MCO) is negative, but deactivated whenever the MCO is positive. (This is an extremely important distinction that many publications inexplicably omit.)
There are many charts and articles on the internets which indicate the Hindenburg Omen is a “cry wolf” indicator that only “works” 30% of the time. Unfortunately, these articles use incorrect calculation methods (they do not use the parameters above, often omitting the McClellan Oscillator requirement) or use improper success metrics (e.g. since the market didn’t crash 20% – it only corrected 5% – the indicator doesn’t “work”). Garbage in. Garbage out. If the proper calculations are not used or improper means of measuring a successful result are taking place, then it’s no wonder there is so much confusion regarding the Hindenburg Omen.

To show just how important this signal is, here is a chart showing times when Jim Miekka’s Hindenburg Omen has triggered on the Nasdaq Composite:

Greg Morris, a 40-year market technician and acquaintance of Jim Miekka, was kind enough to use the correct methodology to create the signals in the lower pane of the chart above. It’s quite clear the Hindenburg Omen tends to be an important indicator of market fracturing. It’s not perfect. But even at first glance, it becomes obvious this indicator of market health has significance and should be recognized as a warning sign for the overall market. Does it guarantee an impending market correction? Absolutely not. But it does have the capacity to identify when markets are fractured and breadth is narrow, which are characteristics of an unhealthy market.

As always, price knows best. Higher highs in the overall market are still a possibility. Market bulls will want this bifurcation to resolve with increased participation and a reduction in new lows on each index. And whenever the Hindenburg Omen is referenced, make sure it’s Jim Miekka’s formula and not a clickbait garbage pushed by entertainment networks masquerading as financial news outlets. After all, data and facts matter. And when the real Hindenburg Omen triggers, market participants should pay attention to its warning.

As always, you can get real-time updates and commentary about this development and many more opportunities 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.

Breakout

One Important Divergence Bulls Need To See

May 1, 2017April 13, 2022

Last time we checked, new all-time-highs are not a characteristic of bear markets. While all bear markets start from all-time-highs, not all-time-highs start a bear market. With many U.S. Indices recording new highs last week, we see uptrends still intact. And new all-time-highs have a tendency to make traders and investors nervous. In the end, we don’t need emotions involved in our investment decisions. We need to use hard data and the weight-of-evidence to guide us. And since we’re students of the markets and use intermarket relationships as part of our approach, we can look across sectors, industry groups, regions, and asset classes to get a top-down, big-picture view of market health. As part of that exercise, we want to see what areas are not making all-time-highs. Simply, as all-time-highs in U.S. markets are recorded, are there any important areas not currently joining the uptrend party? This is called divergence. Once such divergence market bulls need to keep an eye on is the Transportation sector. Take a look.

For many logical reasons, the Transportation sector is a bell-weather sector. This means it gives important clues about overall market health. This is due to its economic importance. If there is no demand to transport goods and commodities, it is logical that overall demand for those goods and commodities is to be desired. Many reading this will identify this relationship in regards to Dow Theory. For brevity’s sake, we’re not going to get into the nitty gritty of Dow Theory. We’ll save that for another post as it’s an important tenet of technical analysis. For now, we’ll observe the relationship in the chart above. Right away, we notice the Transportation industry giving important clues to market health in late 2014 through 2015. As U.S. markets were making new highs (using the S&P 500 as our proxy here), the Transportation sector was not. It was diverging. Making lower highs and lower lows. By very definition, this was not an uptrend. Rather, it was a downtrend. A downtrend that signaled caution for the overall market, which ended up selling off hard in July 2015. It came as no surprise when the S&P 500 bottomed exactly when Transports did the same. Together, they recorded higher highs and higher lows, the most significant new high coming in early November 2016. Since then, U.S. equities have been ripping. However, with last week’s new high across many U.S. indices, the Transportation sector recorded a divergence as it did not follow suit with new weekly highs. This is an important divergence bulls will want to see resolved to the upside. A breakdown here (below $160 using IYT, an ETF for the Dow Jones Transportation Average), would be problematic for broad market health. Conversely, if bulls are going to see this market continue to rip higher, we need the Transportation sector to participate. A new closing high above 170.74 would clear this divergence and indicate ongoing health for the overall market. Keep your eye on this one.

As always, you can get real-time updates and commentary about this development and many more opportunities 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.

Consumer Staples

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

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.

Equity

Internal Weakness Means Caution Is Warranted

March 31, 2015April 13, 2022

As curious investors, we need to know that the performance of stocks within an index is just as important as the performance of the index itself. And when the two aren’t confirming each other, it is time to sit up and take notice. For the past six months, if not longer, we’ve been witness to that scenario. While the S&P 500 (a major U.S. Stock barometer) has been gaining ground since July 2014, the individual stocks within this index are not participating at the same pace. This is called a thinning (or stock pickers) market and could be a harbinger of a change in direction for the overall market. This is just a warning sign. Something to be aware of. We don’t need to take action… yet. We just need to be aware that things are not as they seem. This symptom can resolve itself with an increase in stock participation. If that happens, it means great things for the upward trajectory of the market. However, if this symptom does not resolve itself, any downturn in the market could be significant (a 10 to 30+% correction).

Let’s take a look at what’s happening. The chart below is pretty simple. The line above is the percent of S&P 500 stocks that are above their 200 day moving average. Notice that a less and less percentage of stocks are above their 200 DMA. The line below is the S&P 500 itself. Price is near new highs, but fading. I’ve annotated (in 360 green) where past divergences have taken place. Notice the eventual reaction of the market. It doesn’t tell us when, but simply, that a resolution must take place. As you can see, the current divergence has been in place for a significant amount of time when compared to similar occurrences in the past eight years. We’re taking notice as we weigh the evidence. Do we think a major correction is upon us? Maybe. We don’t trade on maybe, but caution is warranted. We trade on price and we’ll be watching it closely to see what our next move should be.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security.

Breakout

Fear Hits Target

March 12, 2015April 13, 2022

About a week ago, we let you know about a bullish breakout in the Volatility Index (VIX) from a downward wedge formation. As anticipated, VIX continued its breakout and has hit our target. In addition, we pointed out that:

At minimum, we’ll see a retest of previous highs in the S&P 500. If those previous highs are taken out, a false move will be in play and we could see a rapid downward move in the market.

As expected, the breakout in volatility coincided with weakness in US markets, including the S&P 500, which is down 3% in 5 days and has broken down through previous highs.

We indicated back in February that in regards to the S&P500, we would be long above 2088.48, short below it. Investors could have taken advantage of this situation by shorting the S&P 500 using an ETF such as SH and/or (we like doing both) going long VIX using ETFs such as TVIX and UVXY (both up 20% since the breakout). At this point, when you look at the chart above, the S&P 500 is right at the edge of our shaded resistance and up against a 61.8% Fibonacci retracement (in purple). In addition, VIX is up near several points of resistance (not shown), including the upper edge of a downward channel and at 38.2% retracement. Accordingly, we’re closing our long VIX trade and watching the S&P 500 price action closely. We expect the S&P 500 to bounce a bit here and we’d reestablish a long S&P 500 position if/when new highs are made with a close above 2117 on the index. On the other hand, if VIX breaks up from the downward channel, we’ll consider jumping back into the VIX long trade.

No matter the trade, we’ll let price be our guide.

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Disclaimer: nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. Simply put, you are an adult. You invest based on your own decisions. 🙂