Breakout Archives | Opportunity Identified

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

Check Out The 4th of July Fireworks For This Fashionable Stock

We hope this post finds our Canadian and American readers enjoying their Independence Day weekend. It’s important to step back and remember the freedoms we often take for granted. Not everyone is so fortunate. May we always cherish the sacrifices made (and be willing to do the same) to ensure a free society. Because of the holiday, this update will be as brief as possible. We’ve found a fashionable stock on the verge of a firework-like breakout: VFCorp (ticker: VFC). Let’s get down to business.

For many years, VFCorp (the parent company of Lee, The North Face, Jansport, Vans, you get the point) was a leader of markets. More specifically, from late 2008 thru mid-2015, VFC outpaced the S&P 500 (including dividends) 4-to-1*. Over those 7 years, VFC gained 230% while the S&P 500 gained only 50%. Since July 2015, however, VFCorp stock price has been recording lower highs and lower lows, the very essence of a downtrend. But last week confirmed the possibility this downtrend is over and outperformance is back in a big way for this stock.

Here’s the weekly chart of VFC:

It’s easy to see the drawdown from July 2015 through the February 2017 bottom, which filled the price gap from October 2013. The February 2017 low was also the 38.2% Fibonacci retracement of the entire move from the November 2008 low to July 2015 high. Price discovery is not random guys. We see price work like this over and over again across any liquid investment vehicle with a tremendous amount of memory from the past.

We can also clearly the see the breakout on an absolute and relative (to the S&P 500) basis. Not only that, but this momentum breakout is coinciding with a breakout from a horizontally configured inverse head and shoulders pattern. This is a bullish set-up with a confluence of characteristics supporting higher prices for VFC. Specifically, this set-up is targeting $66, +14.5% from here. Let’s get a little more tactical with a daily chart of VFC:

Whenever we enter a trade, priority number one is risk management. We need to know when we’re on the wrong side of the trade. For us, it makes sense to own VFC above $55.75. Below that, and we’ll let the market have it. This particular set-up has a reward to risk ratio of almost 5 to 1. The reward is asymmetrically skewed in our favor. We like that.

To conclude, the weight-of-evidence suggests higher prices for VFC. The simple yet prudent game plan is to own this fashionable stock above $55.75. Trade at your own risk.

*For those who are wondering what the respective returns were from the March 2009 low of the S&P 500, they were 592% (VFC) and 225% (S&P 500)

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

By the way, we created this free tool for you, The Ultimate ETF Cheat Sheet. It’s an easy-to-use ETF resource guide. We think you’ll like it.

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 5, 2017 | Posted by David Zarling, Head of Investment Research

Check Out This Major Sector Returning To Health (And Ready To Lead Market Higher)

If you bring up the topic of Health Care for discussion in the United States, it’s likely to generate a wide variety of opinions that invariably revolve around one’s political or world view. Thankfully, we don’t need to let politics into our portfolio. After all, the market doesn’t care about our political views. The market is going to do what the market is going to do. It’s going to reflect the balance between supply and demand of all market participants. It’s based purely on the economic law of supply and demand: more supply than demand, price goes down; more demand than supply, price goes up. This is a simple market reality often lost by the daily noise factories of financial media and academia. We can argue with price all we want, but it is the final arbiter of value. And for the past two years, it’s a fact that the U.S. Health Care sector, from a price standpoint, has gone absolutely nowhere. That is, until last week. Take a look:

Since July 2015, Health Care has gone nowhere. For 2 years, this important U.S. sector has been correcting through time. During this time frame, Health Care (represented by ETF XLV here), experienced a 16% drawdown. But when we look at it from a long-term perspective, the sideways price consolidation is most prevalent. And when we look at it compared to the overall market (using the S&P 500 as our proxy), we can see market participants had no business owning Health Care during the past 2 years:

Health Care represents approximately 14% of the S&P 500. When we look left, we see that from 2011 through mid-2015, Health Care was a major factor in leading the S&P 500 higher. Of the major market sectors during this time frame, Health Care was one of the best. That changed in 2015 as the Health Care selloff affected the broad market overall. Since mid-2015, Health Care has not been a sector worth owning. With the recent breakout of Health Care on an absolute basis, this relative underperformance could be changing and would be an important development in leading the overall market higher.

We can make money in Health Care (using XLV) with proper entry and risk management. Using the daily chart below, we can tactically identify risk, our number one priority as market participants.

The $73.50-74.50 level is an important one. In 2015, and again in 2016, sellers showed up at this level to drive price back down. The recent break above this level is important, as polarity is now in play. Meaning, once an area of former supply is broken, it should now serve as an area of support. Of course, nothing is guaranteed, which is why every market participant needs an exit plan prior to entry. When is this trade wrong? If price moves below 73.50-74.50, it no longer makes sense to own XLV. A sustained amount of time above this level will signify buyers are in control and an initial target of $90 is on the table. That’s a 16% gain and represents a reward:risk ratio of 5:1. We like that.

In the end, it’s quite simple. It makes sense to own XLV above 73.50-74.50 (depending on your risk tolerance). Below that, it can be someone else’s problem. As always, trade at your own risk. It’s our responsibility to stay on the right side of the trade regardless of our opinions.

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 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.

May 1, 2017 | Posted by David Zarling, Head of Investment Research

One Important Divergence Bulls Need To See

Last time we checked, new all-time-highs are not a characteristic of bear markets. While all bear markets start from all-time-highs, not all-time-highs start a bear market. With many U.S. Indices recording new highs last week, we see uptrends still intact. And new all-time-highs have a tendency to make traders and investors nervous. In the end, we don’t need emotions involved in our investment decisions. We need to use hard data and the weight-of-evidence to guide us. And since we’re students of the markets and use intermarket relationships as part of our approach, we can look across sectors, industry groups, regions, and asset classes to get a top-down, big-picture view of market health. As part of that exercise, we want to see what areas are not making all-time-highs. Simply, as all-time-highs in U.S. markets are recorded, are there any important areas not currently joining the uptrend party? This is called divergence. Once such divergence market bulls need to keep an eye on is the Transportation sector. Take a look.

For many logical reasons, the Transportation sector is a bell-weather sector. This means it gives important clues about overall market health. This is due to its economic importance. If there is no demand to transport goods and commodities, it is logical that overall demand for those goods and commodities is to be desired. Many reading this will identify this relationship in regards to Dow Theory. For brevity’s sake, we’re not going to get into the nitty gritty of Dow Theory. We’ll save that for another post as it’s an important tenet of technical analysis. For now, we’ll observe the relationship in the chart above. Right away, we notice the Transportation industry giving important clues to market health in late 2014 through 2015. As U.S. markets were making new highs (using the S&P 500 as our proxy here), the Transportation sector was not. It was diverging. Making lower highs and lower lows. By very definition, this was not an uptrend. Rather, it was a downtrend. A downtrend that signaled caution for the overall market, which ended up selling off hard in July 2015. It came as no surprise when the S&P 500 bottomed exactly when Transports did the same. Together, they recorded higher highs and higher lows, the most significant new high coming in early November 2016. Since then, U.S. equities have been ripping. However, with last week’s new high across many U.S. indices, the Transportation sector recorded a divergence as it did not follow suit with new weekly highs. This is an important divergence bulls will want to see resolved to the upside. A breakdown here (below $160 using IYT, an ETF for the Dow Jones Transportation Average), would be problematic for broad market health. Conversely, if bulls are going to see this market continue to rip higher, we need the Transportation sector to participate. A new closing high above 170.74 would clear this divergence and indicate ongoing health for the overall market. Keep your eye on this one.

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 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.