International Archives | Opportunity Identified

May 15, 2017 | Posted by David Zarling, Head of Investment Research

This Is How South Korea Could Lead Emerging Markets Higher

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.

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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.

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.

April 3, 2017 | Posted by David Zarling, Head of Investment Research

Use This Secret Key To Unlock Latin America

At 360 Investment Research, we take a top-down, weight-of-evidence approach to markets. One key feature of this method is looking at relationships across asset classes to identify opportunities and manage risk. This intermarket analysis allows us to gain a big picture perspective of demand and supply in markets across the globe. After all, this is 2017, we have access to markets and investment vehicles our parents only dreamed of. With a click of a button, we can own commodities, currencies, sectors, industries, regional markets, you name it. Never before have individual investors had so much available to them for gaining investment knowledge, finding great investment opportunities, and the ability to take advantage of them at such a low cost. With the advent of ETFs, common investors can invest in pretty much whatever they want. Want to buy timber? Go for it. There’s an ETF for that (CUT). Is that ETF ticker not clever enough? Try WOOD. How about palladium? Got you covered (PALL). Want to invest in foreign markets like South Korea? Be my guest (EWY). Need it currency hedged. Got that too (HEWY). Do you really like coffee? Try JO. With sugar? Sure! (SGG). Before we get too carried away, investors also need to understand that ETFs are not a holy grail for accessing certain investment themes. In the words of investing legend, Peter Lynch, “Know what you own, and know why you own it.” The “why we own it” is easy: we’re here to make money. It’s the first part of the equation that can be a bit tricky. “Know what you own.” Investors need to understand that ETFs are notorious for tracking difference and tracking error. If you want to get into the minutiae, you can read up on those here. And since this article is focusing on a commodity, you should read this piece to understand the effects of contango and backwardation on commodity ETFs. Even with the aforementioned limitations, we can use ETFs to our advantage. Now, let’s dig into the main focus of this article, the secret key to unlocking Latin America: Copper

First, we need to acknowledge the weakness in Latin American stocks from April 2011 – January 2016. For five years, Latin America was a hot mess. Using the ETF for Latin America (ILF) as our proxy, we can witness this classic downtrend first hand.

While U.S. equities were rallying, Latin American equities were getting crushed. Not until early 2016, did the trend of lower highs and lower lows reverse into a series of higher highs and higher lows. Recently, demand has pushed Latin American prices to levels not seen since 2015. Not only did ILF breakout on an absolute basis, it accomplished the same on a relative basis to U.S. stocks. Take a look.

Since the beginning of 2016, Latin America via ILF has been outperforming the United States via SPY (proxy for S&P 500). This is an important development and as long as Latin America continues to make higher highs and higher lows above a 40-week simple moving average on both an absolute and relative basis, it makes sense to own Latin American stocks.

What does Copper have to do with all of this? Awesome question. There are 19,100,000 metric tonnes of Copper mined each year. Two of the top three, and four of the top 15, producers of Copper are within the Latin American region: Chile, Peru, Mexico, Brazil. Roughly 40% of the world’s Copper originates from the four aforementioned countries. [1] It would make sense that if the demand for Copper increased, it could bode well for these important players in LatAm. The opposite would also apply. Here’s the weekly chart of Copper using JJC, which tries to track the Bloomberg Copper Subindex Total Return. It’s not a perfect instrument, as we previously highlighted, but it’s good enough for our analysis here.

Look somewhat familiar? It should. The visualization of supply and demand (aka chart) looks very similar to that of Latin America. To make it easy on you, here’s the weekly chart of Copper placed directly over the same timeframe for Latin America.

It’s quickly apparent there is a strong relationship between the supply and demand for Copper and the supply and demand for Latin American Equities. They are not 100% correlated, but the tops and bottoms (aka changes in supply and demand) mirror each other. It’s not clear whether one asset class leads the other. At a minimum, however, they’re significantly coincident. Never discount coincidence. By studying the price of one, we can gather insight into the price of the other. If we’re long Latin American equities, it makes sense to pay close attention to Copper as well. And if Copper were to breakdown from its recent consolidation, it wouldn’t make much sense to have a long position in Latin American equities.

Since the large move in November of last year, Copper has been consolidating its gains. This can be productive. However, if Copper were to breakdown from this consolidation, the message of supply and demand would be clear. If selling pressure pushes Copper below the lower trendline (in green) or the major support near 28.50, Latin America would likely be in lockstep, dropping below 30 itself. Either of the aforementioned scenarios would likely mean even lower prices for both during the next few months.

Watch Copper carefully here. There’s no need to fight the tape. Higher prices in Copper likely mean higher prices in Latin American stocks. The opposite also applies. Make sure you’re 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.

[1] Source: https://minerals.usgs.gov/minerals/pubs/commodity/copper/mcs-2017-coppe.pdf

March 13, 2017 | Posted by David Zarling, Head of Investment Research

This Is How European Stocks Could Lead Global Markets Higher

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.

April 1, 2016 | Posted by David Zarling, Head of Investment Research

Red Dragon Awakes: Chinese Equities On The Move

It’s no secret that Emerging Markets have been outperforming U.S. Equities since mid-January. We get it, the financial media loves to look at U.S. equities. That’s their problem. We aren’t myopic. Instead, we like to look globally across all asset classes to find opportunities. Why would we ever want to limit ourselves? There is so much opportunity outside the U.S., it would be negligent to ignore it. That brings us to today’s research release regarding Chinese equities.

Chinese equities have been hit hard for the past 11 months, dropping 45% during that time frame. Recently, however, the trend has changed. Buyers have stepped into the market, creating demand for Chinese stocks and moving prices off of their mid-February lows. Using FXI, an ETF that seeks to track the investment results of an index composed of large cap Chinese equities that trade on the Hong Kong Stock Exchange, we can take see the change in demand and take advantage of this potential opportunity.

Here’s a daily chart of FXI going back two years:

We can easily see the dramatic depreciation over the past year. We can also see that price and momentum (14-period RSI) diverged for over a month. We like that. Subsequently, buyers created enough demand to cause price to breakout of the year-long downtrend. This, combined with the aforementioned momentum divergence, is a great set-up for a well-defined risk/reward trade. After all, investing is not just about buying blindly and hoping for the best. Rather, our job as market participants is to minimize risk while investing in high reward scenarios. FXI fits our asymmetric risk/reward profile.

We think FXI is worth owning above 32.70. Below that, and we’re no longer interested. We’re not gamblers. We’re investors. We’re decision makers. After all, if we wanted to gamble, we’d head over to Macau.

March 18, 2016 | Posted by David Zarling, Head of Investment Research

Bursa Malaysia Changes Direction

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.