Ratio Analysis Archives | Opportunity Identified

September 28, 2017 | Posted by David Zarling, Head of Investment Research

This Is How To Navigate Amazon

Much like its namesake, Amazon stock (ticker: AMZN) is difficult, yet rewarding, to navigate. Over the past two decades, this well-known retail (not technology) company has risen over 48,455%. That’s not a typo. $1,000 invested in AMZN back in 1997 would be worth $484,558 today. That same $1000 invested in the S&P 500 would be worth $1,999 today. Making money in the stock market is easy, right? Wrong. As much as we’d like to think we’re rational individuals, we’re our own worst enemy. When involved with markets, we tend to 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 experience twice as much pain during drawdowns than the joy experienced during equivalent gains. So what would it have been like to hold on to Amazon since 1997? How bad would the pain have been? Take a look:

Amazon Drawdowns [original chart source]

The upper pane (green) is the price appreciation of AMZN stock. Using hindsight bias, many think the tremendous gains in Amazon were a slam dunk and easy to come by. That couldn’t be further from the truth. The lower pane (red) are the drawdowns experienced by holders of AMZN stock. Talk about agony. For more than a third of its life as a public company, Amazon has been in a 50+% drawdown. For the buy-and-hold investor, it’s hard to imagine the discipline needed to hold on during 70-90% losses. It’s likely many capitulated under the duress. The good news is, we don’t have to be buy-and-hope investors. In fact, we might even call drawdowns a downtrend! Remember, our number one job as market participants is to manage risk and protect capital. Using supply and demand dynamics (aka price movement) to do so, there is zero reason to experience such massive drawdowns. Let’s take a look at the buying and selling going on with AMZN.

Here’s the weekly chart:

For a while now, AMZN has been making a series of higher highs and higher lows. This is normal behavior for uptrending stocks. This doesn’t mean Amazon doesn’t experience sideways consolidation from time-to-time. All of 2014 was an intermediate downtrend / consolidation prior to resuming its uptrend ways. Even then, we would’ve been able to recognize a price momentum change using a trendline dating back to 2012. And more recently, we saw AMZN break a price momentum trendline (green) back in August. This took place both on an absolute and relative (to SPY) basis. This was a clue to let someone else have AMZN. It doesn’t necessarily mean impending doom. A broken price momentum trendline just means the demand/supply dynamic has shifted. Back then, we tweeted (click here to follow real-time supply/demand analysis) AMZN would likely form a Head & Shoulders pattern:

Many people use patterns to confirm their biases rather than create if/then binary decision-making scenarios. For example, the Head & Shoulders pattern itself has gotten a bad reputation as a “Topping Pattern.” In reality, Head & Shoulder’s patterns are a compression in price as the disparity between buying urgency and selling urgency narrows. So here we are at the end of September talking about the Head & Shoulders pattern in AMZN. See the daily chart below:

Amazon has gone nowhere for five months. The battle between supply and demand has created a well-defined Head & Shoulders pattern. Is this a top? We have no idea. No one does. Don’t let anyone tell you otherwise. It could simply be a five-month consolidation. Afterall, consolidations tend to resolve in the direction of the primary trend. This could be a top. It could also be consolidation before heading higher. Our job is not be right or wrong. Our job is to be on the right side of the trade. Let’s a look a little closer to identify some important support levels.

Up close, we can see buyers have shown up before near the 935 price level. If they don’t show up at this level upon any retest of that price point, we have the evidence we need to make a decision and let someone else have AMZN. From an upside target perspective, Amazon will need to first clear the downtrend line (in green) and then sustain above the left shoulder highs near 1,011. If it can close above, and hold, those levels, it’s like a new series of higher highs and higher lows are upon us. Another possibility is price continues to be range bound between 935 and 1,000 through the end of the year (this would bring time symmetry to the right shoulder, matching the time duration of the left shoulder). Trade accordingly.

In conclusion, the game plan is simple. If Amazon closes below 935, we want nothing to do with it. Above that level, it makes sense to own one of the top three appreciating stocks of the past decade. Get yourself on the right side of the trade. We don’t need to experience capital crushing drawdowns. Trade at your own risk.

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 great 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.

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

This Stock Market Rotation Has Some Energy Behind It

It’s always good to take some time off, step back, and refresh. During our short leave, we received inquiries on when our next blog post would be released. Your feedback and demand for our work are appreciated. The idea that we’re providing valuable information is motivating. Our break is over and we’re back with some more market insights you might find useful. Today’s update involves a major industrial sector that has been underperforming for a long time: Energy. For over 9 years, the Energy sector has underperformed the broad market. Don’t believe us? Take a look.

Above is a weekly chart of Energy (using ETF, XLE) versus the S&P 500 (using ETF, SPY). Simply put, when the ratio rises, XLE is outperforming. When the ratio falls, SPY is outperforming. Since mid-2008, Energy has been nothing but a hot mess. From June 2008 through today, if you were involved in Energy, you lost 7% of your capital while the broad market represented by the S&P 500 appreciated 114%. Talk about opportunity cost.

Within this 9-year period, however, there have been countertrend moves worth participating in. For example, Energy outperformed the S&P 500 +29% versus +12% in calendar year 2016. Not too shabby. But as the chart above highlights, the bigger trend is down. So what we’re shedding light on here today is NOT an opportunity with the winds of a larger trend at its back. What is notable, however, is the recent breakout of Energy on an absolute and relative basis.

We can clearly see buyers have changed the trajectory of price with XLE breaking out on an absolute basis and on a relative basis versus the S&P 500. This development is in conjunction with a divergence between price and momentum and buyers stepping in a logical support level near $63. In addition, price has recorded and higher low and higher high on this time frame. That’s the very definition of a trend change. As long as XLE can hold and sustain above $66.17, this countertrend move in energy will have legs. With an upside target near $70, this set-up has a friendly reward-to-risk ratio of almost 8-to-1.

To conclude, while we’re not in the business of picking a bottom in Energy, it’s quite possible this recent move is something worth participating in. The game plan is simple. Above $66, own XLE. Below that, it can be someone else’s problem. Trade at your own risk.

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.

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.

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

Here’s The Skinny On Long Bonds

Back in mid-April, we posted about Why You Should Be Long The Long Bond. Back then, we noted the extreme pessimism regarding US Treasuries (aka Long Bonds) due to skewed short positions and anecdotal evidence that too many were confident yields would go higher. This long bond pessimism, and more importantly, the price action of Long Duration Treasuries (ticker: TLT), had us more than just liking long bonds. In fact, we became rather obnoxious about them on Twitter:

A little over 2 months and +7% later, and we’re back writing about long bonds. Why? Not because we love bonds so much. Rather, if you’ve been long the long bond since our Tweets and subsequent post, we think it might be time to take some of those gains off the table. In our April post, we wrote:

The longer demand pushes and holds TLT above 122, the more likely we revisit the gap breakdown near 129.

Yesterday, TLT quickly reacted to the high of 128.57. Close enough fro us. There is a reason for using price targets. These measured moves define our potential reward when determining whether a trade opportunity exists. What’s our risk? What’s our reward? The answer to these questions will determine whether or not it makes sense to enter a new position. After all, everyone should have an exit plan prior to entering a trade. That’s sound risk management and our number one priority as market participants. Yesterday, the ETF for Long Duration Treasuries (ticker: TLT), hit our upside target. Not only that, but we have this important new development: Last week alone, TLT received more inflows than all domestic equity mutual funds, and all domestic equity ETFs combined year-to-date [1]. Think about that for a moment. In only one week, TLT exceeded the total incoming purchases of all domestic equity mutual funds and ETFs made in the past 6 months! Talk about a sentiment shift. Everybody and their grandma is now piled into Long Duration Treasuries. Sounds like a crowded trade to us. Large crowds make for small exits. Can Treasuries move higher from here? Absolutely. However, without price sustaining 129 (and above) on TLT, we would be very skeptical of any further upside in this move. Keep in mind, this move from March until now is countertrend in nature. Price is above a falling 200-day simple moving average. A falling 200-day simple moving average is a hallmark of downtrends. As a friendly reminder, bonds and yields have an inverse relationship.

And if long bonds are reversing here, it means higher yields are on their way. And if higher yields are on their way, it will include ramifications for some other important sectors [cough *Financials* cough], which we’ll cover in another post. For the time being, TLT needs to regain 129, or at a minimum, stay above 124 to ruin our “higher yields from here” thesis.

In conclusion, with TLT reaching our price objective in a countertrend trade and inflows reaching extreme levels, we think it makes sense to take some off the table here. What applies to us may not apply to you. Trade safe.

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.

[1] Source

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.