S&P 500 – Page 2

Category: S&P 500

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.

Equity

S&P 500 At Important Juncture

April 4, 2016April 13, 2022

Back in November and December of 2014, we released a 7 part series highlighting the weight of evidence piling up against U.S. stocks. In summary, our research showed a market top was upon us. If you weren’t with us back then, you can catch up and dig into our methods using the links below.

This research proved timely as U.S. equities subsequently stalled, moving sideways for the past 1.5 years.

To show the importance of our findings, as well as highlight its prescience, here is the S&P 500 from a bigger perspective.

If you were reading our research back then, we hope you used it to your advantage. All that being said, this isn’t just a puff-our-chest piece. The U.S. stock market is at an important juncture and we want you to see what we see. As we’ve highlighted in the past, corrections happen in one of two ways: through price -or- through time. It is too early to tell, but 1.5 years would qualify as a correction through time if price can move upward through current levels and sustain new highs. At the same time, further correction through price is still on the table. If the S&P 500 cannot breach this level and move on to new highs, it is very likely a correction between 5-15% will take place.

Here’s a daily chart of the S&P 500 (our U.S. stock market proxy) showing just how important this current price level is to market participants.

The area between 2072 and 2134 has seen sellers show up en masse in the past. In addition, this important index needs to overcome the downward green trendline annotated on the chart above. This dual resistance should be difficult to overcome in the short term. However, price knows more than we do. If price can overcome this area of supply, it would signify buyers’ willingness to test all time highs (2134) from the Summer of 2015. This rally from the early February lows has been fast and fierce. Yet, from a short-term perspective, it is long in the tooth. A consolidation or pullback here could be healthy. At the same time, if we ask ourselves the question, “is this where we want to put new money to work?” We think the answer is a simple, no.

At this important juncture, it’s time to watch closely and let the market signal its next move.

Check back often as we’ll be sure to share our findings as the next leg in the U.S. market unfolds.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.

Breakout

Bursa Malaysia Changes Direction

March 18, 2016April 13, 2022

Dictated by the simple fact that emerging markets are outperforming U.S. equities since January, we’re continuing our world tour with this research. We don’t dismiss that U.S. equities have been on quite a rally since their early February low. However, as impressive as that’s been, emerging markets have been even more so. Today, we’re taking a look at Malaysia using an ETF that mirrors the Bursa Malaysia (formerly Kuala Lampur) Stock Exchange. The ETF we’re using is EWM.

Here’s the weekly chart of EWM.

We quickly notice that Malaysian equities have been in a downtrend since mid-2014. The 42% depreciation was fast and fierce until Summer 2015, where price met demand at the 6.75 level. This level has historical significance dating back to 2010. Looks like buyers/sellers have a good memory. Since finding buyers near 6.75, Malaysian stocks have continued to attract more buyers, driving price into a new potential uptrend.

This recent breakout (annotated on chart) is significant and one we can use to our advantage. Nothing is guaranteed, but this setup has potential. Looking at the daily chart, we can see that EWM has been outperforming the S&P 500 (upper pane).

We can also see well-defined risk and potential reward. It is skewed in our favor. 8.40 is an important support level based on the principal of polarity (former supply becomes demand). Below 8.40 and we don’t need to own EWM. Above 8.40 and we like the reward potential. Malaysian stocks are worth owning until price tells us otherwise.

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

The Yen’s Impact On Job Security And Your Portfolio

February 11, 2016April 13, 2022

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

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

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

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

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

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

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

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

You can also follow me on Twitter here: @360Research

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.

Equity

Make Sure To Look At The Big Picture

February 1, 2016April 13, 2022

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

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

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

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

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

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

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

Until next time, trade safe.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions

Carry Trade

Why Is The Yen Carry Trade Such A Big…

October 18, 2015April 13, 2022

Depending on who you ask, the yen carry trade is either alive and well, or an overused parlance in the investment community.

What is a carry trade anyway?

A carry trade is an investment strategy in which an investor borrows money at a low interest rate in order to invest in assets they speculate will generate a greater return. This strategy is very common in the foreign exchange market and works especially well if asset prices are stable and the currencies involved do not move against the investor. Adding to the fun, many investment houses will ramp up their returns by using additional leverage. The return can be quite impressive if the currency borrowed remains stable or continues to depreciate against the currency used to purchase the investment.

So how does the “yen carry trade” work? In a nutshell:

Large money managers and hedge funds borrow the yen at extremely low interest rates.
Yen are converted to U.S. dollars, which are invested in U.S. Treasuries at a much higher yield than the interest cost for the borrowed yen. That creates a “positive carry” because of the differential in interest rates.
The buying drives up U.S. bond prices and the money managers experience large profits, especially when done with additional leverage (this assumes the yen doesn’t rise in value).
Even more profits are made when (A) The dollar rises vs. the yen and (B) U.S. Treasuries rise in price

Whether one thinks this investment strategy is widely used or not, we can assure you that investors (especially U.S. based investors) should care which direction the yen moves. Why? Correlation. The yen has an impressively high negative correlation to U.S. equity prices (today, we’ll use the S&P500 in our examples). And for our statisticians out there, we know that correlation doesn’t mean causation, but it does have implication. For many years now, the correlation between the yen and S&P 500 has been -0.9 to -1.0. Meaning, whichever direction one goes, the other goes equally the other direction. So as investors, we should definitely care which direction the yen is heading. If it is dropping in value, that is a positive for the S&P 500 while an increase in yen value means trouble for the S&P 500.

As you might have guessed by now, studying the yen is a valuable exercise in determining what type of environment the S&P500 is in. So let’s take a look at it. Here is a 4 year chart of the yen (using ETF FXY as our proxy) along with the S&P 500 (top pane):

It quickly becomes obvious there is an important relationship here. The yen was breaking out from a 4 year downtrend at the same time as the S&P 500 was breaking down from a 4 year uptrend. Lucky coincidence? Maybe. Significantly important? Absolutely. Especially to those who are trying to make money in the markets.

When we move in for a closer look, we find the recent breakout and consolidation of the yen is targeting 86 if overhead supply near 82 is cleared and a return to 77 if the yen breaks below 80. If the former takes place, it is better than an educated guess that the S&P will continue to correct. If the latter takes place, the S&P will continue upward.

At 360 Investment Research, we don’t care about being right. Rather, we care about being on the right side of the trade. In this case, we think the relationship between the yen and U.S. equity prices is an important one for helping us identify opportunities in the U.S. stock market. Let’s keep an eye on the yen and see what happens. We’ll follow-up on this release once the yen picks a direction.

Trade safe.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.

Keywords: yen to dollar, yen symbol, yen carry trade unwind, yen carry trade collapse, yen carry trade example, yen carry trade meaning, yen and carry trade, yen carry trade appreciation

Equity

Supply And Demand

October 11, 2015April 13, 2022

Back on September 28th, we took a look at the S&P 500 (SPY) and shared the following with our readers:

We anticipate buyers should step in right here and provide a relief rally. If that takes place, any ownership should be sold until new highs are made.

9 trading days and +7% later, here we are with another update. And again, we are at an important juncture. After anticipating this rip-your-face-off rally, we’ve reached a level of resistance that is worth watching. As you might remember, price is simply the interaction of supply and demand. More demand than supply, price goes up. More supply than demand, price goes down. This is economic law. Price moves to equilibrium — where there is a balance between supply and demand — until one outbalances the other and a new equilibrium must be discovered. In liquid markets, such as the S&P 500, this is an ongoing and fluid process.

As we study price (aka technical analysis), we can identify those areas where supply (selling) and demand (buying) are greatest just by watching price itself. As of Friday’s closing price, the S&P 500 (using ETF SPY as our proxy), has hit an area of resistance we find significant. In the past, the 201-203 area was an area of support, where buyers would step in and send price upward. This characteristic changed on August 21st, when SPY dropped through this important level without buyers stepping in. Using the chart from September 28, let’s zoom in a bit so you can see what we’re referring to:

We see price is currently up against an area of resistance. Looking left , we find this area of resistance was previously an area of support, where buyers stepped in to create demand. But on August 21st, this changed. On that date, there were not enough buyers to keep price from descending through this level. Accordingly, this area of support became an area of resistance, which was confirmed on September 17th, when increasing prices were met with significant supply (selling) at the 202 level, sending price downward in search of new demand.

Because of the aforementioned, we will be watching price closely. Those long SPY want to see buyers increase and drive price through this level and on to new highs. Those short want to see resistance hold and price turn downward again. We anticipate that sellers will step in at this level. However, we’ll let price determine our next step.

Trade safe.

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.

Equity

Should You Own U.S. Stocks Right Now?

September 28, 2015April 13, 2022

As you know, at 360 Investment Research, we’re big proponents of price. Price is the manifestation of opinion and final arbiter of value. When we visualize price on a chart, all we need to do is look left to identify important characteristics of the security we’re observing. We like to look for evidence to support our investment decisions. The best and most important piece of evidence is price. What is it doing? What’s its direction? If price is making higher highs and higher lows, the trend is up. If price is making lower highs and lower lows, the trend is down. By analyzing price itself, we can determine the general trend and the potential change thereof.

When observing a popular U.S. equity market, such as the S&P 500, we can grasp the current state of that market by looking at its price action. To summarize what we’re seeing currently, the price behavior of the S&P 500 indicates there is no reason to own U.S. equities (as a whole) right now.

Using the ETF SPY as our proxy for the S&P 500, you can see that our concerns dating back to 01/17/15 were warranted. Here is the chart of SPY we shared on that day back in January:

[click to enlarge]

And, here is the same chart updated through today’s prices:

[click to enlarge]

As you can clearly see, price moved to new highs in early February, but could not hold them. The lower green trendline proved to be a significant resistance point, that when broken, brought in new supply (aka selling). Accordingly, a new lower low was established, indicating a major change in trend could be upon us. Subsequently, we noticed a new lower high recently, where sellers stepped in near the 200.00 level, causing the price to fall again. Bringing us to today. See the re-annotated chart below:

[click to enlarge]

As a reminder, in an uptrending market, we want to see higher highs and higher lows. As of right now, a new lower low and lower high have been established. If buyers do not step in at this junction, price will fall rapidly again to find demand. Though it is possible that a rip-your-face-off rally could take place from this price point, we want nothing to do with this (as a long trade) until new highs are established (a close above 212.00). Each gray area indicates where previous demand, now turned to supply, will be at its greatest. And if the lower green tramline (aka parallel line equidistant from previous trendlines) breaks, the next area of support / demand near 177.00 will be tested.

Nothing is guaranteed and our opinions, no matter how strong they are, don’t matter. Only price matters. We’ll continue to watch price to identify our next move and find our next opportunity.

Trade safe.

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.

Equity

Falling Knives

August 25, 2015April 13, 2022

A Technical Analyst and a Fundamental Analyst are chatting about the markets in the kitchen. Accidentally, one of them bumps a kitchen knife off the counter, landing right in the Fundamental Analyst’s foot! The Fundamental Analyst screams in pain at the Technician, asking him why he didn’t catch the knife. “You know Technicians don’t catch falling knives!,” the Technician responded. He then asks the Fundamental Analyst why he didn’t move his foot out of the way? The Fundamental Analyst responds, “I didn’t think it could go that low.”

By now, we’ve all read about, watched, or heard about the most recent market action. Or if you’re like me, you see it in the charts as you game plan future trades and exits. As the joke above illustrates, the power of technical analysis is that it helps us identify when to be in or out of any liquid, chartable security. Our whole goal is identifying low risk / high reward trades. We don’t care about being right. We only care about making money in the market so we appreciate knowing when we’re wrong.

For example, when we look at the price action of the S&P 500 on the chart above, we can see that the U.S. equity market had been moving sideways for quite a while. And recently, it broke its lowest upward trend line. Once this trend line broke, there was too much risk inherent in this index. In fact, I would argue that this was a great low risk / high reward scenario to short the S&P 500 using an instrument such as SH or SPXU.

We have an intermediate time bias when we look for opportunities – our time horizon is weeks to months. Our approach does not necessarily match the approach of day traders or long term investors. However, one would think it is beneficial for all investors to know when a 10% loss outweighs the probability of any short term gains. As a reminder, it takes a 11.1% gain to recoup a 10% loss. We think it makes sense for all investors to avoid a 10% loss, even if your time horizon is 10 years.

Trade safe.

Disclosure: The author is long SH.

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.

Equity

Fear Breaks Out. Market Highs To Be Tested.

March 4, 2015April 13, 2022

Since mid-February, the S&P 500 has broken out to new all-time-highs. As anticipated, during this breakout, market volatility (as measured by the VIX) has subsided. That is until today. The fear index (VIX) has broken out of a bullish falling wedge that took a little over a month to form. Not coincidentally, this breakout is taking place right near an expected resistance point, an upward trendline connecting previous VIX lows of July and December 2014 (marked with a green trendline on the chart below). As you might recall, we pointed out back in January that the VIX has been rising along with the S&P 500. With this new breakout in the VIX, this concerning market condition still exists. 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. From false moves, come fast moves. We’ll know we’re in that environment if the S&P 500 takes out the support area highlighted in gray below. This area marks where previous supply should turn into new demand. Those long this market want to see that area of demand hold. If it doesn’t, market participants will need to be nimble. Remember, “the market moves up the escalator, down the elevator.” Downward price movements are almost always more rapid and violent than any upward move. We need to be ready for this scenario. On the other hand, it would be extremely healthy for this market to test previous highs and move on to exceeding the February highs. If that takes place, we should see smooth sailing in the market for the intermediate future.

Trade safe. Don’t trade what you think. Trade what you see.

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click chart to enlarge