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May 15, 2017 | Posted by David Zarling, Head of Investment Research

This Is How South Korea Could Lead Emerging Markets Higher

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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!

Weekly Chart of South Korean KOSPI

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.

Tweet about South Korea from March 2017

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.

Weekly Chart of KOSPI from 2011 thru 2017

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:

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.

Filed Under: Breakout, Emerging Markets, Equity, ETF, International, Market Environment & Structure, Supply and Demand, Trend Analysis Tagged With: $DBKO, $EWY, $FKO, $HEWY, $KOSPI, Asia, Emerging Markets, South Korea

January 8, 2015 | Posted by David Zarling, Head of Investment Research

Relative Rotation Shows US Equities Leading | Opportunities Possible in Europe and China

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We live in the golden age of investing. 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. Our parents could only dream of having investment communities like seekingalph.com, investment blogs like [shameless plug alert] opportunityidentified.com, almost limitless fundamental information online, and technical analysis tools like stockcharts.com only one click of a mouse (“what’s that?” says your grandpa) away. And with the advent of ETFs, common investors can invest in pretty much whatever and wherever they want. Want to buy timber? Go for it. There’s an ETF for that (WOOD). How about palladium? Got you covered (PALL). Want to invest in foreign markets like South Korea? Be my guest (EWY). Do you really like coffee? Try JO. With sugar? Sure! (SGG). Investors today have the investment world at their fingertips.

At 360 Investment Research, we like to take advantage of another amazing tool available to all who want to use it: Relative Rotation Graphs (RRG) Charts™ [1]. These charts show you a security’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 and you should too.

In this week’s RRG™ analysis, we’re going to look at the relative strength of the world’s largest markets, using the total world ETF from Vanguard (VT) as our benchmark. Basically, we want to see where in the world we should be focusing our attention. Accordingly, the following ETFs representing most of the world’s largest stock markets will be compared against VT:

  • SPY (S&P 500)
  • VTI (U.S. Total Market)
  • EWC (Canada)
  • EWQ (France)
  • EWG (Germancy)
  • EWI (Italy)
  • EWP (Spain)
  • FEZ (Europe)
  • PIN (India)
  • GXC (China)
  • MCHI (China)
  • EWY (South Korea)
  • EWH (Hong Kong)
  • EWJ (Japan)
  • EWA (Australia)
  • RSX (Russia)

Generally speaking, when looking at the ETFs above in the RRG™ below, those in the green leading quadrant are what you want to own; those within the yellow weakening quadrant should be on your watch-list (as they might be deteriorating), those within the red lagging quadrant should be avoided and those in the blue improving quadrant should be on your shopping list.

In the RRG™ below, the long tails represent the movement of each country’s ETF over the past 10 weeks in comparison to the world ETF, VT. So what do we see? The first thing to notice is the chart of VT in the upper right corner. Global stocks as a whole are down since July. Accordingly, when we analyze this chart, we want to be cognizant of the fact that maybe stocks as a whole are not where we want to be. That being said, if we are looking for stock opportunities, we see that we should be in the US (SPY and VTI have been leading the last 10 weeks) and looking for potential opportunities in Germany (EWG), France (EWQ), and Europe (FEZ) as they have moved from lagging to improving over the past 10 weeks. And finally, we should also look to China (GXC and MCHI) as they are subtly rotating from weakness towards leading.

In conclusion, if we have to be in stocks, we should be in the United States and looking for potential opportunities in Germany, France, Europe, and China.

[1]  Note: The terms “Relative Rotation Graph” and “RRG” are registered trademarks of RRG Research.

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(click chart to enlarge)

RRG Analysis of Global Stocks

Filed Under: China, Emerging Markets, Equity, Europe, International, Market Outlook, Other, Relative Strength Analysis, Rotational Regression Graphs, Techniques & Tactics Tagged With: $EWA, $EWC, $EWG, $EWH, $EWI, $EWJ, $EWP, $EWQ, $EWY, $FEZ, $GXC, $MCHI, $PIN, $VT, $VTI, Australia, Canada, China, ETF, ETFs, Europe, France, Germany, Global Stocks, Hong Kong, India, Italy, Julius de Kempenaer, Relative Rotation Graph, RRG, RRG Research, RSX, Russia, S&P 500, South Korea, Spain, SPY, U.S. Total Market

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