SPY – Page 2 – Adaptiv

Tag: SPY

Use This Simple Technique To Make Better Trade Decisions

April 24, 2017April 13, 2022

One of the most important jobs of a market participant is risk management. If you’re unable to identify when your position is wrong, then you shouldn’t be entering a position to begin with. Would we ever enter a crowded room without identifying where the exits are? I don’t think so. We have the same responsibility when entering a new position. At 360 Investment Research, when we enter a new position, we identify risk (and potential reward) by looking left. By looking left on a price chart, we can identify previous changes in supply and demand, which can give clues on where demand or support could appear. In a previous post, we used this simple technique to identify important levels on the S&P 500, one of the most watched indices and favorite proxy for discussing the U.S. stock market overall. By looking left, we can identify when buying momentum wanes and when selling pressure has entered the market. For example, if over a certain time period, price is making a series of lower highs and lower lows, we know sellers have more urgency than buyers for that time period. There is more supply than demand and price is trying to discover where the buyers live. So by looking left, we are using economic law (not opinion) to guide our investment decisions, entries, and exits. Using price removes mystery (and emotion) from our trade book. Let’s go through this exercise with the S&P 500 on daily and weekly time frames to identify where we are with the current market.

First, here’s the daily chart of the S&P 500:

When we look left, we can see price made of series of higher highs and higher lows from November through March. On March 1st, this important index recorded a new all-time-high. A series of higher highs and higher lows is indicative of a bull market. Since then, however, the characteristics have changed. They S&P 500 has recorded a series of lower lows and lower highs. Until this sequence is broken, the S&P 500 is in a downtrend on a daily timeframe. There’s no sugar coating it. Facts are facts and we’re not entitled to our own facts. Until the S&P 500 records a higher high and higher low, it’s in a downtrend on a daily timeframe. A good start towards this effort would be a close above the downward momentum trendline (in solid green). In addition, a close above 2368 would lock in a higher high with only a lower low needed to confirm an uptrend sequence.

Now for the weekly timeframe:

When looking left at the weekly data, it’s clear the S&P 500 is currently in a series of higher highs and higher lows. Can the market be in a downtrend on the daily timeframe and an uptrend on the weekly timeframe? Absolutely. In fact, that’s exactly what we have here. By looking left on both the daily and weekly timeframes, we can gain a better understanding of market trends. It’s not the only thing we look at, but it’s a big piece of evidence. And the current assessment has the S&P 500 in a daily downtrend within the friendly confines of a weekly uptrend. In essence, we’re in a correction within a larger uptrend. Price is moving downward in search of buyers. This is normal market behavior. Trees don’t grow to the moon and markets don’t go up every single week without periods of correction.

Where could this market potentially find buyers? Simple. Look left. We can quickly identify buyers have shown up near the 2330 level. On both the daily and weekly timeframes, that’s an important level to watch. Below 2330 and the next level of support for the S&P 500 resides somewhere between 2235 and 2265 (note: 2235 is also the value of the 200-day simple moving average, a common area of institutional support). Further correction into this area would still fall within the framework of a normal pullback in an uptrending market. On the other side of the equation, if buyers can provide enough demand here to break the sequence of lower lows on the daily timeframe (pushing the S&P 500 to a daily close above 2369), this makes an attempt at the weekly high of 2383 more likely.

As part of our every-day process as market participants, we need to identify sequences of lows and highs. This exercise provides valuable information to help us remain 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.

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.

Breakdown

This Is How The Relationship Between Lumber And Gold…

April 10, 2017April 13, 2022

Many investors tend to focus on asset-class specific study to gain an edge. They attempt to obtain outperformance based on factors directly related to the asset class being studied. This is an appropriate practice and can provide valuable insight. But in this post, similar to last week’s article on the relationship between Copper and Latin American equities, we’re going to look at the relationship between Lumber and Gold. Specifically, we’re going to follow-up on previous research showing the relationship between Lumber and Gold contain insights into risk-seeking and risk-averse behavior in stocks. The Lumber/Gold relationship is not a novel idea. This important connection was brought to the fore by Charlie Bilello and Michael Gayed in their 2015 NAAIM Wagner Award Winning Paper, “Lumber: Worth Its Weight In Gold.” Charlie and Michael are extremely smart asset managers with strong thought leadership when it comes to actively managing funds. We can’t hold their intellectual jocks, but we can use their research and look into the current state of Lumber and Gold to find another piece of evidence for managing risk in today’s market. In their research, they find:

As Lumber outperforms Gold, equities tend to exhibit an upward bias and have lower volatility. These are conditions that are conducive towards maintaining higher exposure to risk assets. As Gold outperforms Lumber, the opposite tends to be true, whereby the inclusion of lower beta assets in a portfolio increases overall return and lowers volatility at the time it is needed most. The relationship between Lumber and Gold helps to answer the most critical question for active asset managers: when to take more risk (“play offense”) and when to take less risk (“play defense”) in an investment portfolio – before it’s too late.

The relationship between Gold and Lumber can give us valuable insight into U.S. stock market volatility and risk. As market participants, we can use this relationship to give us an edge. Simply put, their findings highlight when Lumber is outperforming Gold, it is a risk-on (offensive) characteristic for stocks. In this scenario, investors can be more aggressive with their equity exposure. Oppositely, when Gold is outperforming Lumber, this is risk-off (defensive) behavior and investors should take a more protective stance. Accordingly, it makes sense for us to dig into how Lumber and Gold are performing and conclude with a review of their relative strength to each other.

Here’s the weekly chart of Gold:

Gold remains in a downtrend from weekly perspective. Since 2011, everyone’s favorite precious metal has been making lower highs and lower lows, the very definition of a downtrend. That is, until recently. In early 2017, Gold locked in a higher lower. This was a productive step towards trend change. If it can break through the upper green trend line, we’ll have a break in trend momentum. A close above $1,375 would establish a higher high and a potential new uptrend underway. For now, it remains within compression (two converging trendlines). Out of this compression will come a move that most likely will determine Gold’s future in the weeks and months ahead.

As for Lumber, here’s its respective weekly chart:

Lumber broke out of a downtrend in early 2016. In fact, Lumber’s higher low in February 2016 coincided with a bottom in U.S. stocks. Never discount coincidence. Since then, Lumber has continued to establish higher highs and higher lows in price. Just last week, it broke from a month’s long consolidation to make an attempt at the early 2013 highs. A break above the $400 level would be extremely productive for Lumber overall.

Now, here’s what you’ve been waiting for. The weekly chart of Lumber : Gold. As a friendly reminder, when Lumber is outperforming Gold, the ratio rises. When Gold is outperforming Lumber, the ratio falls.

Even going back to 2011, we can see the ratio bottom in August of that same year. Do you know what also bottomed at the very same time? The S&P 500. The ratio broke out of a long-term downtrend in late 2012, which preceded the S&P 500 breaking to fresh all-time-highs in August 2013. Similarly, this important ratio broke down in late 2014, which preceded an S&P 500 breakdown in July 2015. More recently, we’ve seen Lumber outperform Gold and establish a higher low in February 2016 and breakout of an intermediate downtrend in November 2016. Since then, the ratio has been continuing its movement upwards signaling risk-on behavior in stocks and diminishing volatility overall. We’ve definitely seen stocks take off since then and volatility crushed with one of the calmest markets in history during this time frame. Just last week, as Lumber broke towards its 2013 highs, this ratio also broke out to a level not seen in eight years.

The next few weeks will be crucial for this relationship and the significance it carries for equities overall. Lumber needs to break through the $400 level in order to ratio to hold onto its recent breakout. If Lumber : Gold can hold onto these recent highs, it will likely mean further upside for equities (especially high beta equities) and suppression of volatility. On the flip side, if Lumber falters here while Gold continues to move upward, the ratio will roll over, signaling a need to take a defensive stance in your portfolio.

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.

Breakdown

Pay Close Attention To These Important Levels On The…

March 27, 2017April 13, 2022

Whether we like it or not, if we participate in markets, we’re in the risk management business. If we don’t have a plan for when we’re wrong, it’s a problem. And if we don’t think it’s possible to be wrong, it’s an even bigger problem. The market is about possibilities, not guarantees. Markets owe us absolutely nothing and are brutally efficient at making us pay for poor decisions. As you know, we like to look for evidence to support our investment decisions. The best 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. How do we do this in reality? Simple. Just look left. When we analyze price using charts, we find the current price and look left. See the daily price chart of the S&P 500 below. Notice that price has been steadily making higher highs and higher lows. It is a beautiful staircase upwards, hallmarking an uptrending market. That is, until March 21st.

On March 21st, many U.S. markets, including the S&P500, broke down from consolidation. Keep in mind, consolidations typically resolve in the direction of the primary trend. In this case, an upward resolution would have indicated a healthy market and an ongoing uptrend. When consolidations resolve in the opposite direction of the primary trend, we need to respect the weakness (aka supply) hitting the market. If there’s not enough demand to keep the S&P 500 ($SPX) above 2363, it’s significant. Not only did selling pressure push price below 2363, it also caused a break of the momentum trendline (in green) that’s been in place since early December 2016. Consequently, a lower high and lower low have been locked in. Lower highs and lower lows are the very definition of a downtrend.

What now? Buying urgency needs to pick up immediately to reclaim 2363 and reenter the sideways range established since the beginning of March. If buyers can’t accomplish this in short order, there is a very strong possibility for price discovery to take the S&P 500 down to an area of prior demand near 2277. A visit to the window of 2240-2277 would be a logical retest to see if buyers are serious there. It would equate to a 38.2-50% retracement (for you Fibonacci aficionados out there) of the rally since the November 6, 2016, low. More important, we need to understand this would equate to a correction within a bigger picture uptrend in place since mid-2016. A -5-6% correction from the March 1st high would be extremely normal behavior for a market that just broke out of a 2.5-year consolidation back in July, 2016. Any pullback here should be viewed as an opportunity to buy back into a strong bull market. If and when we visit 2277, we’ll revisit this information and see if there is additional evidence to consider.

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

This Is How European Stocks Could Lead Global Markets…

March 13, 2017April 13, 2022

Since the Great Financial Crisis (GFC) of 2008-2009, one of the few places to find return on capital was in the U.S. equity markets. Many other markets, including Europe, have been a hot mess since the GFC abated and U.S. Markets bottomed in March, 2009. Don’t get me wrong, you could’ve made money in European stocks from 2009-2014, but not at the same pace as in U.S. markets. For example, in 2013, while U.S. stocks were breaking the highs from 2007 and recording new 13-year-highs, European stocks were still 20% below their 2007 highs. We can clearly see this underperformance in the chart below.

It’s not a matter of opinion that European stocks underperformed for the last 8 years. Charts don’t lie. If you wanted to be part of strongly upward trending markets and generate return, you should have been in U.S. stocks. That may be about to change. Over the past few months, we’ve seen two important developments take shape which would underpin Europe’s potential outperformance over U.S. equities. The first, and possibly most significant development, is the recent breakout of the Financial Times Stock Exchange (FTSE). One of the world’s largest exchanges has broken out to new all-time-highs. The last time we checked, all-time-highs are not a characteristic of downtrends. Check it out.

After 17 years of going everywhere yet nowhere, the London Financial Times Index broke out to new highs in December 2016. This took place after financial media outlets told us the Brexit vote was a disaster. Rare was the pundit who thought the UK leaving the European Union was a positive development. Since then, the FTSE has rallied 25%. Markets know more than we do. And they certainly know more than the financial media. The break above 7000 on this important index should be respected. The longer we stay above that level, the more significant this move is. When there is enough demand to push prices out of a 17-year base, we should take heed. From wide bases come high spaces. The first initial upward target is 8000. If it can surpass that level, 10500 is on the table. A retest of 7000 is always possible. We’ll know this thesis is wrong if FTSE drops back below 6800.

The second development of the past few months is the improvement in European Financials. Without this important sector, it would be hard for Europe to muster a rally worth participating in. Higher prices in European Financial stocks bode well for Europe overall. Here’s the hard data:

Never discount coincidence. The “disastrous” Brexit vote marked a four-year low for European Financials, confirming a good-looking divergence between momentum (using 14-period RSI) and price. This is classic reversal behavior. Just when the media and investors think they have it figured out, sellers become exhausted with only buyers remaining. Similarly, the media frenzy over Deutsch Bank marked the beginning of a breakout from a downtrend (annotated with green downtrend line). As market participants, we need to turn off the TV and log off of financial media websites. Focus on price instead. It’s the only thing that pays. We don’t make money in the market by how many financial media articles we read or pundits we listen to. We make money by making decisions based on the economic law of supply and demand. More supply than demand, price goes down. More demand than supply, price goes up. Price knows everything we need to know. It pays to use it to make decisions.

When we look at European stocks using an ETF that tracks the S&P European 350 Index (ticker: IEV), we see it breaking out on an absolute basis. Back in early 2017, IEV broke through an important level of supply near the 39-40 handle.

The longer IEV can stay above 40, the better. The next level of resistance comes into play near the solid green trendline. There’s no reason to be involved with this one below $39.

From a relative strength perspective, IEV still has work to do when comparing it against the S&P 500 (proxy: SPY). Looking at the daily ratio chart of IEV:SPY, the downtrend in relative strength is obvious. This chart only goes back 1.5 years, but the downtrend versus the S&P 500 has been ongoing since 2008.

The ratio low in early March established a higher low above the December 2016 low. That’s a start, but not too exciting until the green down trendline is breached. A break above that level increases the likelihood of establishing a higher high above February’s high. That would confirm a change in trend.

In summary, nothing is guaranteed, but the aforementioned weight-of-evidence is compelling. Not just for high prices in European stocks, but for outperformance over U.S. stocks. Something investors haven’t seen in over eight years.

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

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.

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

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%.

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 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.

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.

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.

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.

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.

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.

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.