Russia Archives | Opportunity Identified

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

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

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)

December 9, 2014 | Posted by David Zarling, Head of Investment Research

Risk Management. A Must For Every Investor. [Weight of Evidence, Part 7 of 7]

If price is the most important piece of evidence in identifying opportunities, then risk management is the most important part of taking advantage of those opportunities. From a risk management perspective, technical analysis is ideal for identifying when any trade thesis is wrong. Knowing when you’re wrong or knowing when to exit is crucial to successful trading. We don’t care about being right. We care about being on the right side of the trade. Technical analysis allows us to do that on a consistent basis.

Technical analysis allows us to identify logical entry and exit points to maximize gains and limit loss. Every time we enter into a trade, we must have an exit plan – both for locking in gains and stopping any losses. Too often, investors will enter into a trade without a game plan. That is, without targets and stop losses. This is like entering an unknown and crowded room without identifying any exits or escape routes. Not wise. At 360 Investment Research, we try to identify the most logical entry and exit points before entering any trade. For each investor, entry and exit points will vary based on risk tolerance and individual styles and preferences. Regardless of the aforementioned, all traders, including you, should know exactly when your current trade is wrong. We don’t want to get into a psychological game of chicken with the investment of choice. If/then game planning allows us to remove emotion from the trading process and eliminate as much bias as possible. How do we this? Some examples of setting up if/then scenarios can be found in two great trades we shared with our readers this year: Nike (NKE) and Russia (RSX).

For another example of game planning and risk management, we can look at the current state of the S&P 500. We like to use ETFs to capture markets, sectors, or segments. In this case, we’re long the S&P 500 using the ETF, SPY, as our vehicle. As we’ve previously highlighted in parts 1-5 of this series, we’re seeing some negative evidence appear that is causing us to watch price (the most important piece of evidence) very closely. So we’re long the S&P 500 with some warning signs that need to resolve. What’s our game plan? Where is our exit (which can also be an entry going short)? Let’s take a look. The chart below is of SPY. As you can see, price has been steadily making higher highs and higher lows within the green upward channel. The exceptions being lower lows in February and October, which were subsequently countered with new higher highs. So the trend is up and we are long this market. What will it take to change our long stance? Simple. Breakdowns below previous areas of likely demand (aka previous highs) and below the green price channel. As annotated on the chart, our game plan is to change from long to short (using SH) with a daily close below 204.00. This is our if/then line. We are long above it, short below it. If price moves below 204.00, we would add to our short position with a close below 200.00. Each of the shaded areas and the lower green trend line would be logical places to reassess what price is doing and either add to our short position or change back to long. At each of those levels, we’ll analyze price and make adjustments as needed. With risk management, no game plan is static. We continually reassess our game plan to minimize loss and maximize gain. This game plan is not for everyone. We’re not saying going short is right for you. But, cash is a position too. And for right now, the lines in the sand are pretty clear.

Trade safe and stay curious, investor.

October 20, 2014 | Posted by David Zarling, Head of Investment Research

Russia (RSX) Reaches Downside Targets

Back on June 23rd, we identified the opportunity to short Russian equities with very little risk and very good reward. It paid off. Russian equities (using RSX as our proxy in our post) sold off after hitting (and failing to breakout from) a downward trend line that dates back to 2007. This downward trend line, along with a common Fibonacci retracement ratio, provided stiff resistance and a well defined risk/reward scenario. -19.6% later, we’ve reached our 2nd target of 21.00. Accordingly, we’ve closed our short trade and will re-evaluate Russian equities for further weakness. We would consider going long Russia here, but the breakdown in oil has us investigating this thesis more thoroughly. We also could consider re-entering a short position in Russia if there is more downside follow through past 21.00. Quite frankly, if that latter scenario unfolds, there may be bigger sell-offs happening across many major financial markets.

This trade is specifically why 360 Investment Research uses technical analysis. We can identify robust risk/reward opportunities in any market across the entire investment universe.

June 23, 2014 | Posted by David Zarling, Head of Investment Research

Shorting Russia

When the Ukrainian/Crimean crisis first evolved, Russian equities sold off hard. We like to use ETFs to capture full sectors, markets, or countries. The ETF for Russia is RSX. Since the March panic sell off, RSX has rebounded to a trendline that has provided resistance for the past 7 years. This meeting with the upper trendline coincides with a Fibonacciretracement level of 61.8%. This, along with confirmation of several momentum indicators, make shorting RSX a low risk / high reward trade. Stop-loss = check. Targets = check. Our risk/reward profile is well defined. We like that. A break above the upper trendline would be bullish for Russia (RSX) and would change our stance. We’re not concerned with being right. We’re concerned about being on the right side of the trade.