ETF 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.

*****

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 17, 2017 | Posted by David Zarling, Head of Investment Research

Here’s Why You Should Be Long The Long Bond. (Are You Shorting Them Right Here, Right Now?)

Disbelief is not an investment plan. I have yet to come across a successful investor or trader whose main investment philosophy is solely, “this won’t end well.” We can have all the strong opinions we want, but I’ll let you in on a little secret. Markets don’t care what we think. Markets are going to do what markets are going to do. We cannot bend them to our will. The faster we check our opinions (and pride) at the door and humble ourselves to the all-knowing market forces of supply and demand, the sooner we can begin to profit from objective facts and avoid losses generated by subjective opinions. Over the past few months, a very popular subjective opinion has reached a crescendo: higher rates/yields are all but certain going forward. As usual, this narrative became popular after the objective facts were already in motion. Beginning in July 2016, long bond yields (aka 20+ year U.S. Treasury yields) were rocketing upward as long duration bonds were selling off hard. Only after this move did the media begin touting lower bond prices and higher yields. Prices drive narratives, not the other way around. For example, with a solid bond sell-off already in motion, the financial media informed the investing public that higher yields were all but certain for the foreseeable future. Take a look at their helpful timing below. You can’t make this stuff up.

See how that works? Price first. “News” second. As soon as you realize how this sequential relationship works, the more you’ll be able to filter the “news” you consume. Is there a better way? Absolutely. Study objective facts instead. In other words, study price. It knows more than we do. In this case, the price of bonds knows more than we do. Conversely, yields know more than we do. As a refresher, yields work inversely to bonds. When bond prices rise, their corresponding yields drop.

What does supply and demand for 20+ year Treasuries look like right now? Here’s the weekly chart of TLT, an ETF that does a good job performing similarly to 20+ year Treasuries.

As you can see, after reaching all-time highs in July 2016, bonds began selling off in earnest. Because of the inverse relationship between bonds and their yields, this move caused yields to rise sharply. Only after this took place did financial news pundits begin pounding the table regarding higher yields and the consensus become rates would continue to move higher in 2017.

But after the rapid selloff in bonds, we’ve seen them stabilize sideways for several months. Meanwhile, consensus public opinion is loud: “higher rates during 2017 are a certainty!” This strong opinion has been matched with strong positioning. An especially high amount of investors are shorting long duration bonds. This means they are placing wagers that bond prices will continue to fall. With record short bond positions, this important credit instrument is sitting on upside jet fuel. What do we mean? Basically, if bonds rose enough in price it could trigger a short squeeze, a scenario in which shorts are forced to cover their losing position by buying bonds. This causes a feedback loop in which bond prices rise quickly while short-sellers continually scramble to cover their positions. Here’s the daily chart of TLT:

Three days ago, it broke above an area of supply, which acted as resistance four times before. This breakout is significant and is taking place when most are not expecting it. If this recent breakout requires short sellers to cover their positions, it’s going to throw jet fuel onto the demand fire. Above 122 on TLT, it makes sense to own long duration treasuries. Below that level, we’d be on the wrong side of the trade. The longer demand pushes and holds TLT above 122, the more likely we revisit the gap breakdown near 129.

Right now, chances are, if you asked your financial advisor, banker, friend, grandma, or typical TV pundit, they would all say they’re expecting higher rates going forward. Anecdotally, I have it on good authority during this year’s Market Technician Association’s Symposium in New York, they asked for a show of hands when asked: “do you think rates will be higher at the end of this year?” I was not there but the entire room raised their hand. This room is filled with incredibly smart people. And all of them raised their hand. All. Of. Them. Don’t take what I’m implying here as a slam on the consensus demonstrated or the intellect of those in the room. Rather, I’ll go out of my way to highlight the intellectual horsepower of any one of the individuals in attendance is multiple factors above of my two-cycle excuse for gray matter. These are extremely smart people and their collective opinion is higher yields are on their way. Are they right or are they wrong? I have no idea. It’s not about being right or wrong anyway. It’s about being on the right side of the trade. Price has the final say. Accordingly, we should be watching long duration treasuries with a simple game plan: own TLT above 122 (and watch the corresponding yield drop). Below that, it’s hands off while the rise in yields continues to fuel consensus.

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.

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.

March 6, 2017 | Posted by David Zarling, Head of Investment Research

Sector Rotation Provides Clues About Current Market Environment

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.