S&P 500 Archives | Opportunity Identified

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.

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 20, 2017 | Posted by David Zarling, Head of Investment Research

Fake News And The Truth About This Bull Market

There’s fake news permeating the current market narrative: this bull market is over eight years old. For whatever reason, people are willing to regurgitate this inaccuracy over and over again until many market participants believe it’s true. Yes, there was a significant bottom to the U.S. stock market (using the S&P 500 as our reference point) on March 6, 2009. Your math is correct to calculate 2009 as being eight years ago. However, we don’t determine the length of bull markets from a bottom. We determine bull market length based on new highs. For example, we don’t say the 1980s/90s U.S. bull market began in 1974. Rather, that a U.S. bull market began in 1982 after going nowhere for over 10 years.

Similarly, the S&P 500 did not exceed the 2000 and 2007 highs until 2013. So, in reality, the U.S. stock market went nowhere for 13 years. Not only that, we’re also a year removed from a pretty significant bear market. Sure, the surface of the water (via S&P 500) didn’t look too bad:

But when we look underneath this market of stocks, there were plenty of sectors and regions down over 20% from 2014 into early 2016. The flat S&P 500 in 2015 masked a ton of turmoil underneath. Here’s the data:

Biotech -35% Jul 2015 – Jul 2016
Consumer Good -21% Jul 2015 – Feb 2016
Energy -64% Jun 2014 – Feb 2016
Financials -22% Jul 2015 – Feb 2016
Healthcare -18% Jul 2015 – Feb 2016
Industrials -29% Jul 2015 – Feb 2016
Materials -27% Jul 2014 – Feb 2016
Technology -26% Jun 2015 – Feb 2016
Russell 2000 -26% Jun 2015 – Feb 2016
NYSE -20% May 2015 – Feb 2016

Basically, this was a large-scale correction, which bottomed in February 2016. Yet, many don’t recognize this due to bias and fake news narratives. These corrections lasted anywhere from 7 to 19 months. And we didn’t even cover what was going on globally. Looking at different countries, emerging or developed, it was carnage:

Australia -20% in 10 months
Brazil -50% in 6 YEARS
Canada -22% in 1.5 YEARS
China -50% in 10 months
France -25% in 10 months
Germany -28% in 10 months
Hong Kong -35% in 10 months
India -24% in 1.2 YEARS
Italy -50% in 5 YEARS
Japan -28% in 10 months
Mexico -45% in 4 YEARS
Russia -74% in 8 YEARS
South Korea -17% in 6 YEARS
Spain -36% in 10 months

These are just some examples, but they’re a good representation of what was going on globally. Large-scale bear markets. Not a month long, but double-digit months to years long. Many of these have not even made new highs yet, which is over 2 years of going nowhere.

But you know what’s interesting? Almost every single market we track bottomed simultaneously in February 2016. No doubt about it. This was an important low for stocks across the globe. February 2016 could very well mark a generationally significant low. Even with these facts in hand, many seem to be waiting for the current market to crash or roll over. The great investor, Sir John Templeton, said,

“Bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria.”

We would argue we are far from euphoria and somewhere closer to skepticism and optimism. Without a doubt, we will have more corrections along the way, but there’s a real chance that February 2016 marked a major and significant low for the foreseeable future. As always, we’ll use price, not fake news and market narratives, to guide our decisions.

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 30, 2017 | Posted by David Zarling, Head of Investment Research

The Index You Never Heard Of Is Giving Important Insight

For our readers in the United States, we hope this update finds you refreshed after the long weekend and remembering those who gave their life to ensure their fellow countrymen remain free. The U.S. Markets were closed for this important observance, with trading resuming this morning. If you’re a regular reader of our work, you know it’s important to take a look at price, markets, and trends from different angles. Any edge we can gain in identifying opportunities is valuable. In this week’s post, we want to show you an important index you’ve probably never heard of that can provide valuable insights regarding the health of the U.S. stock market: the Value Line Geometric Index (XVG). This index tracks the median move of stocks within the index using the assumption that each stock has an equal amount (for example, $1,000) invested in them. The daily average move of this index is calculated geometrically (rather than arithmetically). I don’t want to bore you with the details, but if you need more info, you can read more about the methodology here, page 4. More simply put, this index eliminates an illusion created by weighted index components. Weighted stocks within an index can pull it higher even as the majority of the stocks within the index are not following along. For example, in a weighted index like the S&P 500, it’s possible for the top 100 weighted stocks to carry the index higher while the remaining 400 stocks lose value. As an investor, it might be helpful to identify when this is happening.

By looking at the Value Line Geometric Index alongside the S&P 500, we gain valuable insight into what is currently taking place in the market. Looking at the chart below, the Value Line Geometric Index is in the upper panel and the S&P 500 in the lower.

Notice the equal-weighted Value Line index is holding steady above the highs of 1998, 2007, and 2015 while the S&P 500 has continued higher (divergence). This condition has been persistent since December 2016. This means the market is thin: money is flowing into large cap stocks and leaving the rest behind. This is a stock picker’s market and can be a hallmark of market tops, but is not a guarantee a price correction is upon us. It should be noted when looking at the chart above that this condition can persist for quite a while before there is an overall resolution to the market (aka a correction in price). In the past, a noticeable divergence developed between the Value Line Geometric Index and the cap-weighted S&P 500 before the S&P 500 corrected in price. This doesn’t mean the S&P will correct in price right now or at all. But, it does mean that it is getting harder to find U.S. stocks that are trending up. If the majority of U.S. stocks are flat or down, what stocks are carrying the market higher? Awesome question. Let’s take a look at the data. Here’s a great visual from Financial Times using data from Bloomberg:

This chart shows while most stocks within the S&P 500 have been flat, it’s Technology pulling this major index higher. Many assume when the S&P 500 records new highs, it means everything under the surface is participating. This couldn’t be further from the truth. In fact, many sectors are currently underperforming the overall index. Because of tech’s large weighting (over 20%) in the S&P 500, it’s been carrying the water for other sectors currently struggling to gain traction for the past few months.

While the condition persists, market participants will need to be diligent in their stock selection. In addition, we’ll want to watch for clues from the leading sector, Technology, on whether this current run can continue. It’s a positive when economic bellwethers like Apple (AAPL), Amazon (AMZN), Facebook (FB), Google (GOOGL), Nvidia (NVDA), Adobe (ADBE), Microsoft (MSFT), and Netflix (NFLX) can lead. At the same time, it would be healthy if more sectors start to participate. If and when laggards like Energy and Financials find demand, it could signal another strong leg higher for the overall market. But if Technology start to sell off and the Value Line Geometric Index fails to hold these recent highs, it likely means a decent correction will be underway. As always, we don’t need to predict to invest. Price is the only fact that matters. And as long as this condition is in place, we’ll be watching the price of the S&P 500 closely. You should be too.

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 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.

March 6, 2017 | Posted by David Zarling, Head of Investment Research

Sector Rotation Provides Clues About Current Market Environment

The move in U.S. stocks over the past few months has been impressive. The rapid move has talking heads on TV proclaiming, “we’re overbought” and chances are, you or your neighbor think “this won’t end well.” Unfortunately, “overbought” is an ambiguous, bias-confirming adjective and “this won’t end well” is not an investment plan. Frankly, markets can stay “overbought” for a very long time (see 1995-2000). And those who lament, “this won’t end well”, will eventually be right; five weeks from now or five years from now. Neither of the aforementioned adds any value to the decision-making required to participate and profit in markets. If we’re going to make money in the markets, we need to understand how they operate and have an if/then plan ready to go. One of the more important aspects of understanding a market is looking underneath the surface and identify the undercurrents impacting supply and demand. An important exercise we can implement is studying sector rotation, which takes place as money moves from one industry sector to another. This process can give us clues and insights into the current market environment. Let’s put the work in.

At 360 Investment Research, we like to take advantage of Relative Rotation Graphs (RRG) Charts™ [1]. These charts show you an investable asset’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 in observing sector rotation and you should too.

Using RRG™ analysis, we’re going to look at the relative strength of the U.S. Market’s largest sectors, using the S&P 500 as our benchmark. Basically, we want to see where in the U.S. Market money is moving and where we should be focusing our attention. We want to observe sector rotation from a momentum point of view. Accordingly, we’re going to use the following ETFs representing the 9 largest U.S. sectors and compare them against the S&P 500:

XLP (Consumer Staples)
XLY (Consumer Discretionary)
XLE (Energy)
XLF (Financials)
XLV (Health Care)
XLI (Industrials)
XLB (Materials)
XLK (Technology)
XLU (Utilities)

In the RRG™ below, the long tails represent the movement of each sector’s ETF over the past 7 weeks in comparison to the S&P 500 ETF, SPY. What do we see? The first thing to notice is the chart of SPY in the upper right corner. U.S. stocks have been moving upward in a positive trend. A series of higher highs and higher lows is about a simple as it gets in identifying an upward trend. Accordingly, when we analyze this chart, we want to be cognizant of the fact U.S. stocks as a whole have been a pretty good place to be.

Over the past 7 weeks, we can see there’s been some decent sector rotation. Right away, we notice three sectors in the blue upper left quadrant improving together. They used to be laggards during the strong push upward in the S&P 500. Over the past month and a half, these laggards have shown quality improvement. The three sectors are Consumer Staples (XLP), Health Care (XLV), and Utilities (XLU). Is there anything these sectors have in common? I thought you would never ask. These three sectors are considered defensive (or low beta) sectors. Money managers will move money into these sectors if they are undervalued or to protect assets during a decline in the market. After all, people get sick, need toilet paper, and buy electricity regardless of economic conditions (for the most part). So this improvement could simply be a healthy rotation, providing further fuel to the upside, or a warning that a decline in the market may be upon us. Before we go jumping to conclusions, it should be noted that a decline could be anything from -1% to -100%. As humans, we have this weird quirk where we assume the worst. It’s part of our fight or flight survival instinct. There’s nothing wrong with it unless this reaction clouds our vision so badly we make poor investment decisions. In order to get more clarity, let’s look at each of these three sectors individually from a price perspective.

First, Consumer Staples. Here’s the weekly chart:

Demand for Consumer Staples since late 2016 has driven XLP up to an area where sellers have shown up in the past. Interestingly, we notice XLP broke above a similar area of supply (the lower shaded area), which turned into support. That breakout took place in February 2016. You guessed it, while the S&P 500 was bottoming after the worst start to a year on record, Consumer Staples was breaking out. If XLP can break above the current level of supply near $55, it might not necessarily be a bad thing. This sector could be signaling the next leg up and be a leader in the overall market.

Next up, Utilities. No electricity = no wi-fi = armageddon.

Similar to Consumer Staples, Utilities were breaking above prior resistance (middle shaded area) in February 2016. Further back, we can see Utilities were a relatively safe place to be during the market upheaval taking place in late 2015. In fact, from late 2015 through early 2016, the Utility sector outperformed the other 8 major sectors. And just like Consumer Staples, XLU is at a very important level. The $51 handle marks an area where sellers have shown up in the past.

Finally, Health Care’s weekly chart:

This one is both the same, yet different, from the aforementioned sectors. Hwut? I know. Mind blowing.

First, let’s stick with the similarities. Health Care (XLV) bottomed via a false breakdown (price moved below previous demand and quickly reversed up) in February 2016 along with the rest of the market. That’s where the similarity ends. Looking further left on the chart, it’s apparent demand for this important sector was high for several years in the past. In fact, XLV outperformed the S&P 500 each year from 2011-2015. That’s five years of market leadership. If this important sector could retake its leadership title, it would be a tailwind for the broad market. And just last week, it showed signs of doing just that as buyers drove price through an area where sellers had shown up urgently twice before. This breakout is significant. The longer Health Care can stay above $74, the more likely this sector will recapture its market leadership title. Keep an eye on this one.

In conclusion, the last few weeks have seen defensive sectors improve dramatically. This sector rotation could be a harbinger of an incoming broad market decline or a sign of healthy undercurrents for this raging bull market. We don’t need to predict what’s next. We’ll watch price instead. Price keeps us on the right side of the trade and knows more than we do.

As always, you can see our daily market thoughts on Twitter @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.

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

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.