Risk Management 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.

May 22, 2017 | Posted by David Zarling, Head of Investment Research

This Important Piece Of The Market Puzzle Will Impact Your Portfolio

Back in February, we highlighted some important developments which could impact the months ahead. One of those developments was the consolidation of the U.S. Dollar. Back then, we wrote:

Another important development is the consolidation of the U.S. Dollar… the US Dollar broke out above previous resistance in the 4th quarter of 2016. On the daily chart of the U.S. Dollar, we’re compressing between $99 and $101. A break above the upper green trendline would signify a resumption of the uptrend started in 2014. And if price moves below $100, there is no reason to own the greenback. If the Dollar moves down through this important level, we could have a false move on our hands…

Here’s the U.S. Dollar back on February 27th:

The power of using price charts is we can identify where demand and supply dynamics change and use these levels to manage risk, the most important part of being a market participant. We identified the $99-100 level as important support. Here’s the updated chart:

While recording new highs in early January, the U.S. Dollar Index was also logging lower highs in 14-Period RSI (our favorite momentum indicator). New highs and lagging momentum can sometimes signal limited upside continuation. In this case, the divergence in momentum was an important tell for the demand of U.S. Dollars. This was confirmed when buyers could not keep the Greenback from breaking $99, a significant level over the past 2.5 years. You can see this important level better when we step back to a bigger picture timeframe. It’s always important to look at the bigger picture. Here’s the weekly chart of the U.S. Dollar Index dating back to 2010:

The importance of the $99-100 level can be clearly seen. Sellers showed up twice at that level in 2015 making the breakout at the end of 2016 notable. However, since the highs in January, selling pressure has returned. The increase in supply has created a false move. From false moves come fast moves in the opposite direction. The fast move in the opposite direction is taking place right now. We don’t need to predict. Price shows us there’s no need to be a buyer of U.S. Dollars right now.

In conclusion, the Almighty Dollar, an important piece of the market puzzle, needs to prove itself before we’d consider a long position. If the selling continues, we’d expect buyers to show up near the $92-93 handle, an area where they showed up in the past (see green annotated arrows in the chart above). Since many market pieces are priced in Dollars, this current move could have an impact across a variety of assets, including commodities and foreign equity markets.

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. Click this link to get your FREE easy-to-use resource guide for all your ETF needs.

April 10, 2017 | Posted by David Zarling, Head of Investment Research

This Is How The Relationship Between Lumber And Gold Will Impact Your Portfolio

Many investors tend to focus on asset-class specific study to gain an edge. They attempt to obtain outperformance based on factors directly related to the asset class being studied. This is an appropriate practice and can provide valuable insight. But in this post, similar to last week’s article on the relationship between Copper and Latin American equities, we’re going to look at the relationship between Lumber and Gold. Specifically, we’re going to follow-up on previous research showing the relationship between Lumber and Gold contain insights into risk-seeking and risk-averse behavior in stocks. The Lumber/Gold relationship is not a novel idea. This important connection was brought to the fore by Charlie Bilello and Michael Gayed in their 2015 NAAIM Wagner Award Winning Paper, “Lumber: Worth Its Weight In Gold.” Charlie and Michael are extremely smart asset managers with strong thought leadership when it comes to actively managing funds. We can’t hold their intellectual jocks, but we can use their research and look into the current state of Lumber and Gold to find another piece of evidence for managing risk in today’s market. In their research, they find:

As Lumber outperforms Gold, equities tend to exhibit an upward bias and have lower volatility. These are conditions that are conducive towards maintaining higher exposure to risk assets. As Gold outperforms Lumber, the opposite tends to be true, whereby the inclusion of lower beta assets in a portfolio increases overall return and lowers volatility at the time it is needed most. The relationship between Lumber and Gold helps to answer the most critical question for active asset managers: when to take more risk (“play offense”) and when to take less risk (“play defense”) in an investment portfolio – before it’s too late.

The relationship between Gold and Lumber can give us valuable insight into U.S. stock market volatility and risk. As market participants, we can use this relationship to give us an edge. Simply put, their findings highlight when Lumber is outperforming Gold, it is a risk-on (offensive) characteristic for stocks. In this scenario, investors can be more aggressive with their equity exposure. Oppositely, when Gold is outperforming Lumber, this is risk-off (defensive) behavior and investors should take a more protective stance. Accordingly, it makes sense for us to dig into how Lumber and Gold are performing and conclude with a review of their relative strength to each other.

Here’s the weekly chart of Gold:

Gold remains in a downtrend from weekly perspective. Since 2011, everyone’s favorite precious metal has been making lower highs and lower lows, the very definition of a downtrend. That is, until recently. In early 2017, Gold locked in a higher lower. This was a productive step towards trend change. If it can break through the upper green trend line, we’ll have a break in trend momentum. A close above $1,375 would establish a higher high and a potential new uptrend underway. For now, it remains within compression (two converging trendlines). Out of this compression will come a move that most likely will determine Gold’s future in the weeks and months ahead.

As for Lumber, here’s its respective weekly chart:

Lumber broke out of a downtrend in early 2016. In fact, Lumber’s higher low in February 2016 coincided with a bottom in U.S. stocks. Never discount coincidence. Since then, Lumber has continued to establish higher highs and higher lows in price. Just last week, it broke from a month’s long consolidation to make an attempt at the early 2013 highs. A break above the $400 level would be extremely productive for Lumber overall.

Now, here’s what you’ve been waiting for. The weekly chart of Lumber : Gold. As a friendly reminder, when Lumber is outperforming Gold, the ratio rises. When Gold is outperforming Lumber, the ratio falls.

Even going back to 2011, we can see the ratio bottom in August of that same year. Do you know what also bottomed at the very same time? The S&P 500. The ratio broke out of a long-term downtrend in late 2012, which preceded the S&P 500 breaking to fresh all-time-highs in August 2013. Similarly, this important ratio broke down in late 2014, which preceded an S&P 500 breakdown in July 2015. More recently, we’ve seen Lumber outperform Gold and establish a higher low in February 2016 and breakout of an intermediate downtrend in November 2016. Since then, the ratio has been continuing its movement upwards signaling risk-on behavior in stocks and diminishing volatility overall. We’ve definitely seen stocks take off since then and volatility crushed with one of the calmest markets in history during this time frame. Just last week, as Lumber broke towards its 2013 highs, this ratio also broke out to a level not seen in eight years.

The next few weeks will be crucial for this relationship and the significance it carries for equities overall. Lumber needs to break through the $400 level in order to ratio to hold onto its recent breakout. If Lumber : Gold can hold onto these recent highs, it will likely mean further upside for equities (especially high beta equities) and suppression of volatility. On the flip side, if Lumber falters here while Gold continues to move upward, the ratio will roll over, signaling a need to take a defensive stance in your portfolio.

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.

September 11, 2016 | Posted by David Zarling, Head of Investment Research

Summer Vacation Is Over: The Return Of Volatility

Stocks sold off hard this past Friday, with the S&P 500 down -2.5% in one day on the largest trading volume in over two months. Summer vacation is over. The major market players are back at their trading desks. Time to get back to work. As market participants ourselves, this recent volatility should not surprise us. We knew our environment before Friday’s selloff. A week before, we shared the following market characteristic with our followers on Twitter (@360Research):

The following day, we released an article addressing this subject, highlighting important downside support levels on the S&P 500. In that article, we wrote:

If you are aware of your market environment, you know the week leading up to Labor Day is a notorious snoozefest in U.S. Equity Markets. With many large institutional money managers taking the week off, volume is extremely light and percentage moves slim. And if you study market seasonality, like we do, then we also know the next two months have an increased probability of volatility and downside risk.

And since we’re busy patting ourselves on the back, we also shared the following fun fact with our Twitter followers on September 6th:

Three days later, global equity markets and indices saw impressive one-day losses on heavy volume. Bonds were major losers in the global selloff with 10+ year Treasuries and Corporates being hit hard. Correspondingly, yields jumped. In addition, the VIX (a CBOE index which shows the market’s expectation of 30-day volatility) shot up 39%. That, my friends, is increased volatility. The tightest price range in 20 years has been followed by an increase in volatility. Not surprising.

Also not surprising are the nauseating, click-bait headlines. You know what we’re talking about: “Stocks Routed Due To Janet Yellen’s Bad Hair Day.” You never see headlines like, “Stocks Drop Due To More Sellers Than Buyers.” You won’t see that because it doesn’t make financial media money to report the simple truth. They require sensationalism in order to make money. Talk about a conflict of interest!

Thankfully, we don’t focus on headlines. We focus on buyers and sellers, supply and demand. We focus on price.

So where to from here? As always, let’s watch price to determine important levels of supply and demand. Here are the same charts provided last week, but updated with prices through last Friday.

It’s clear the S&P 500 ($SPX) is immediately challenging an upward trendline dating back to February 11, 2016. Also apparent is price testing an important resistance level, which was previously an area of supply between 2100 and 2150. Based on the rule of polarity, this is likely an area where buyers could step into the market.

Below is the daily chart updated from last week’s release.

Again, we see the S&P 500 has entered an area that should provide some resistance/buyers. If the area between 2100 and 2150 does not see buyers step in, a visit to 2000 is likely.

In conclusion, the recent explosion in volatility should not come as a surprise due to the strong seasonal tendencies of September and October. And we don’t need to click on fancy headlines to manage risk. Rather, we have price in front of us to help guide our decision making. Let’s use 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.

September 2, 2016 | Posted by David Zarling, Head of Investment Research

U.S. Equity Markets Mark Clear Lines In The Sand

If you are aware of your market environment, you know the week leading up to Labor Day is a notorious snoozefest in U.S. Equity Markets. With many large institutional money managers taking the week off, volume is extremely light and percentage moves slim. And if you study market seasonality, like we do, then we also know the next two months have an increased probability of volatility and downside risk. One of our main responsibilities as market participants, if not our most important responsibility, is managing risk. With the aforementioned evidence in hand, we need to keep an eye on the most important piece of evidence: price. By observing price, we can keep an eye on previous areas of demand (and supply) in order to make risk-logical decisions. Here are the lines in the sand.

Below is a weekly line chart of the S&P 500 (our proxy for the overall US Equity Market). After moving sideways for approximately 18 months, with buyers and sellers battling for supremacy, this important index broke out to new highs this past July. This was a significant event as it proved that there were enough buyers to push the S&P to new all-time-highs.

Looking closer, we can see that since its strong breakout, the S&P has digested those gains through sideways consolidation. This is a tremendous positive development for US Stocks. Anytime buyers are able to push price to new highs after a large period of sideways consolidation (such as the aforementioned 18 month period), it carries significance. The old adage, “the longer the base, the higher the space” gains more and more weight, the longer price can remain above the 2015 highs.

Using the chart above, we can see there will be buyers ready to defend important levels near 2150, 2134, and 2110. If September seasonality shows up in its most bearish form, we should see these levels tested. If 2110 breaks, then the next level of support is near the Brexit-panic-lows at 2000. None of the aforementioned guarantees a September/October pullback. In fact, the characteristics of how traders impacted July and August opens the door for the opposite scenario, but you’ll have to wait for another post from us on that development. 🙂

In conclusion, we have our lines in the sand. We can use them to manage risk, our number one priority as market participants.

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.