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June 20, 2017 | Posted by David Zarling, Head of Investment Research

Fake News And The Truth About This Bull Market

There’s fake news permeating the current market narrative: this bull market is over eight years old. For whatever reason, people are willing to regurgitate this inaccuracy over and over again until many market participants believe it’s true. Yes, there was a significant bottom to the U.S. stock market (using the S&P 500 as our reference point) on March 6, 2009. Your math is correct to calculate 2009 as being eight years ago. However, we don’t determine the length of bull markets from a bottom. We determine bull market length based on new highs. For example, we don’t say the 1980s/90s U.S. bull market began in 1974. Rather, that a U.S. bull market began in 1982 after going nowhere for over 10 years.

Similarly, the S&P 500 did not exceed the 2000 and 2007 highs until 2013. So, in reality, the U.S. stock market went nowhere for 13 years. Not only that, we’re also a year removed from a pretty significant bear market. Sure, the surface of the water (via S&P 500) didn’t look too bad:

But when we look underneath this market of stocks, there were plenty of sectors and regions down over 20% from 2014 into early 2016. The flat S&P 500 in 2015 masked a ton of turmoil underneath. Here’s the data:

Biotech -35% Jul 2015 – Jul 2016
Consumer Good -21% Jul 2015 – Feb 2016
Energy -64% Jun 2014 – Feb 2016
Financials -22% Jul 2015 – Feb 2016
Healthcare -18% Jul 2015 – Feb 2016
Industrials -29% Jul 2015 – Feb 2016
Materials -27% Jul 2014 – Feb 2016
Technology -26% Jun 2015 – Feb 2016
Russell 2000 -26% Jun 2015 – Feb 2016
NYSE -20% May 2015 – Feb 2016

Basically, this was a large-scale correction, which bottomed in February 2016. Yet, many don’t recognize this due to bias and fake news narratives. These corrections lasted anywhere from 7 to 19 months. And we didn’t even cover what was going on globally. Looking at different countries, emerging or developed, it was carnage:

Australia -20% in 10 months
Brazil -50% in 6 YEARS
Canada -22% in 1.5 YEARS
China -50% in 10 months
France -25% in 10 months
Germany -28% in 10 months
Hong Kong -35% in 10 months
India -24% in 1.2 YEARS
Italy -50% in 5 YEARS
Japan -28% in 10 months
Mexico -45% in 4 YEARS
Russia -74% in 8 YEARS
South Korea -17% in 6 YEARS
Spain -36% in 10 months

These are just some examples, but they’re a good representation of what was going on globally. Large-scale bear markets. Not a month long, but double-digit months to years long. Many of these have not even made new highs yet, which is over 2 years of going nowhere.

But you know what’s interesting? Almost every single market we track bottomed simultaneously in February 2016. No doubt about it. This was an important low for stocks across the globe. February 2016 could very well mark a generationally significant low. Even with these facts in hand, many seem to be waiting for the current market to crash or roll over. The great investor, Sir John Templeton, said,

“Bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria.”

We would argue we are far from euphoria and somewhere closer to skepticism and optimism. Without a doubt, we will have more corrections along the way, but there’s a real chance that February 2016 marked a major and significant low for the foreseeable future. As always, we’ll use price, not fake news and market narratives, to guide our decisions.

You can get real-time updates and commentary about this development and many more opportunities here: @360Research

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

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.

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

The Correction In Tech Everyone Was Hoping For, But Won’t Take Advantage Of

Fear and greed are as old as the Garden of Eden. For many market participants, these are crippling emotions, often causing individuals to sell and buy at the wrong time. The market is extremely good at triggering these emotions, which can be valuable for survival, but detrimental when trying to make money in the market. Over the past two trading sessions, the U.S. Tech Sector has dropped in price. Some would call this price discovery, while others, such as our friends in the financial media, have dubbed it, “the tech tumble.” Alliteration always amuses (See what I did there?). It’s almost as if the financial media was in the business of entertainment. For sure, they’re not here to help us.

“Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” ~Jason Zweig

If the financial media is not interested in helping us but prefers to trigger emotions just to increase viewership, then it’s likely in our best interest to turn off the TV and stop getting hooked by click-bait headlines. But what can we use to fill the void? Where can we get unsensational, fact-based, and objective information? It’s called PRICE. We know… that’s not a very sexy answer. But it’s the truth. Price is factual data which reflects the interaction of supply and demand based on economic law (not theory). Price is objective and doesn’t care about your opinion nor mine. Even if you disagree with it, price doesn’t lie (some really hate this and fight with the market). The fact-based nature of price is exactly why we use it to identify opportunity in the marketplace. Let’s take a look at the price of Technology, using ETF XLK, to help us.

As you may recall, we use a simple technique to helps us make better trade decisions. When we look left on the daily chart of technology above, even after the recent price correction, price is still making a series of higher highs and higher lows, which is indicative of an ongoing uptrend. In fact, we notice sideways movement and drawdowns ranging from -2% to -4% are a natural part of trend progression. However, this is difficult to handle if we respond to gains and losses emotionally. Loss aversion is a real and present danger to many portfolios. Here’s a visual of this common emotional experience.

Many market participants experiencing twice as much pain during drawdowns than the joy experienced during equivalent gains. Not helping matters, and many times feeding the negative response, is the inundation of sensational media opinions during times of drawdown. TV Networks and Financials websites are touting “Tech Tumble” even though price is working well within the characteristics of an ongoing uptrend. This sensationalism is extremely unhelpful to market participants who need to manage (or better yet, remove) emotions during the investment decision making process.

As market participants, we don’t need to predict (media pundits will play this game, we don’t have to). We need a plan. We need to know when we’re wrong, which is the beauty of studying supply and demand via price. Using the daily chart above, we can see price moving in a sequence of equivalent higher highs and higher lows. These levels give us important clues on where previous battles between supply and demand have taken place. And this particular sequence has established a nice upward momentum channel (annotated in green). The first clue this trend in Technology is changing would be a breach of the lower green trendline on a daily closing basis. If/when price would close and hold below the lower momentum trendline, it would indicate a shift in the demand/supply dynamic with sellers able to change the trajectory of price. Secondly, and more importantly, a closing price below 54.30 would likely usher in price discovery towards the 52-53.50 level. And if that can’t hold, a much larger correction is upon us and the media aggrandizement would be at a fevered pitch, providing another excellent opportunity down the road.

For us, this one is pretty simple. A breach of the lower green trendline would be a warning and a close below 54.30 would indicate we’re wrong on XLK. Someone else can have it. Above these levels, the trend remains your friend.

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

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

May 8, 2017 | Posted by David Zarling, Head of Investment Research

Why The Hindenburg Omen Is More Than Just A Scary Name

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

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

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

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

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

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

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

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

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

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

AND, you’ve got FREE access to an investing tool we’ve created, The Ultimate ETF Cheat Sheet. It’s an easy-to-use resource guide.

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 27, 2017 | Posted by David Zarling, Head of Investment Research

Pay Close Attention To These Important Levels On The S&P 500

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.