S&P 500 Archives | Opportunity Identified

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.

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.

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.

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

Lessons Learned From January

Back in January, we highlighted some seasonal tendencies for the market. We promised a follow-up to see what lessons were learned from January. The short-yet-sweet updates are in green font below.

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First Five Days in January

For 2017, the first five days of January ends today. And over the past 41 times where the first five days of the year were up, the subsequent full-year gains have been up 35 times. That’s a hit rate of 85%. The average gain during such years was roughly 14%. Not too shabby. On the flip side, the first five days in January are a less reliable indicator when negative. When this takes place, the positive or negative return for the remainder of the year is almost a coin flip (about 48% accuracy) with an average gain of just 0.2%.

The S&P 500 closed positive with a 0.49% gain in the first five trading days of January.

Down Januarys Warn of Trouble Ahead

Looking at the S&P 500’s performance in January going back to 1950, every down January with one exception (2016!) preceded a flat market, a 10% correction, or an extended bear market. Except for 2016 (which had one of the worst starts in market history), when the first month of the year has been down, the rest of the year followed with an average loss of almost 14%. (PS, when an indicator with such a strong track record results in an opposite outcome, market participants should pay attention to the significance. The fact that 2016 did not finish down is something to note.)

The S&P 500 closed positive for January. There’s nothing to see here.

The January Barometer

“As Goes January, So Goes The Year.”

When the S&P 500 records a gain in the month of January, history suggests that the rest of the year will benefit and finish up as well. Since 1950, this indicator has an amazing hit rate of almost 90%. Specifically, 88.7% of the time, when January records a positive return in the S&P 500, the year finishes positive as well. Pretty incredible.

The S&P 500 closed at 2278.87 for January, recording a 0.93% gain.

January Barometer Portfolio

This is a tendency for the Standard & Poor’s top performing industries in January to outperform the S&P500 over the next 12 months. As described by Sam Stovall of S&P Capital IQ, it’s an effective way to align your portfolio for the remainder of the year. If on February 1st, you invested equally in the 3 best performing sectors in January and held them until February 1st of the following year, you would’ve received a compound rate of growth around 8% as compared with 6.6% for the S&P 500. In addition, the opposite applies. If you bought the worst performers in January, you would’ve underperformed the market with about a 5% return. Since 1970, the compounded growth rate of the ten best performing sub-industries (based on their January performance) was roughly 14% compared to about 7% for the S&P 500. In addition, these ten best performing groups in January went on to beat the market in the subsequent months nearly 7 out of every 10 years, while the worst performing sub-industries outperformed the S&P only 38% of the time. Conclusion: we’re better off letting the January winners ride rather than trying to bottom pick from the January losers.

This one, we’ll have to come back and update. As of this writing, the Standard & Poor’s website that provides sector performance information was down and unresponsive. Once this site is back online, we’ll make sure to get you an update.

The January Effect

Different from the January Barometer, but just as significant, The January Effect is the tendency for Small Cap stocks to outperform Large Cap stocks in January. Many speculate as to why this happens. But we don’t need to get caught up in the why in order to benefit. And frankly, many us of already know that we could call this the mid-December Effect. From 1953 to 1995, small caps outperformed large caps in January 40 out of 43 years. However, about 30 years ago after the crash of 1987, this tendency shifted to mid-December. Even more recently, during the past five years, it appears this has shifted earlier to November. We’ll need a few more years of tendency before we can rename this The November Effect.

This was a mixed bag. Small Caps were down -1.09% during January. Mid Caps barely outpaced Large Caps, recording a +1.04% return during January while the S&P 500 recorded +0.93%. As noted in the original article, this is a market dynamic that seems to be shifting to December, maybe even November. We’ll keep our eye on it for you.

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So there you have it. Here’s to seasonality and being on the right side of the trade for the remainder of 2017.

As always, you can get free real-time updates and commentary about this opportunity and many more 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.

January 9, 2017 | Posted by David Zarling, Head of Investment Research

January Seasonality and Its Impact on Your Portfolio

As market participants, we want to weigh evidence which will help us make money in the markets. After all, that’s why we’re in the market, right? We’re not in the market to have strong opinions or have bragging rights to say, “I’m right.” From experience, I can tell you that pride and market participation do not go together. We’re simply in the market to make money. We shouldn’t care about being “right.” We should only care about being on the right side of the trade. As we work hard to be on the correct side of the trade, one piece of evidence to consider is something called seasonality. Seasonality, in relation to markets, is simply the recurrence of similar price movements during certain periods of the year. It’s the tendency for stocks (or bonds or commodities) to perform better during some time periods and worse during others. For example, Yale Hirsh of the Stock Trader’s Almanac discovered the six-month seasonal pattern or cycle. Since 1950, the best six-month period for the S&P 500 runs from November to April. By extension, the worst six-month period runs from May to October. There are many more examples, but for today, let’s focus on January. Is there anything about January that can give us an advantage? Funny you should ask. You didn’t ask, but you read that question in your mind as if you asked. So let’s answer the question you didn’t, but wanted to ask. The answer to this question is a resounding YES. January can give us some key insights into the possibilities of performance in the year ahead. Nothing is guaranteed, but let’s dig in and understand the different ways January can give us an edge.

First Five Days in January

Down Januarys Warn of Trouble Ahead

The January Barometer

“As Goes January, So Goes The Year.”

January Barometer Portfolio

The January Effect

In about a month, we’ll revisit these indicators to see how they performed and what type of insight they might provide. Nothing is guaranteed, but with some impressive accuracy in play, it makes sense to add January seasonality to our process when identifying opportunities and working to get ourselves on the right side of the trade.

Here’s to enjoying another year in the markets!

As always, you can see our daily market thoughts on this and other opportunities 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.

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.

August 18, 2016 | Posted by David Zarling, Head of Investment Research

U.S. Equity Rally More Than Just Noise

For over 500 days, the broad U.S. Equity market moved sideways in a 15% range (fun fact: this was one of the tightest ranges since the inception of the S&P 500) with the most recent market low taking place in early February. More specifically, the lowest point of this 500 day period was on February 11, 2016. Was there any significance to this date? Other than being my very good friend’s birthday, we found another significant development on that date. Here it is:

“I wouldn’t take them [negative rates] off the table, but we would have work to do to make sure they would be workable.” ~ Janet Yellen | Feb 11, 2016

So on February 11, 2016, with U.S. Equities on the verge of a major breakdown, Janet Yellen decided to open her mouth and wish my friend, “Happy Birthday!” Not exactly true, but what a gift this experimental financial insight was to the broad market. Proven by buyers showing up en masse to buy U.S. Stocks since that date, the market has not looked back, gaining almost 20% in 6 months. Impressive.

As you know, we’re fans of avoiding noise and studying the facts, with price being the most important fact. That 2/11/16 low was significant. We know that by looking at price, not listening to Federal Reserve Chairs. We don’t need to guess what Janet’s words mean when we have the benefit of watching market participants (which is what we are, after all) put their money to work in the market. By watching price, we are watching the economic law of supply and demand. More supply than demand, price goes down. More demand than supply, price goes up. It’s simple. It’s fact.

Another such fact was the Industrial Sector making a higher low on February 11, signaling that the Industrial Sector could lead the market higher. And it did, outperforming the S&P 500 and leading both to new all-time-highs.

This was/is an important development as U.S. Equities perform best when the Industrial Sector leads. Don’t believe us? Check out the facts below.

By using ratio analysis, dividing Industrials (XLI) by the S&P 500 (SPY), and comparing it against the S&P 500 itself, it becomes very clear that when Industrials outperform the S&P 500, U.S. Stocks perform best.

In conclusion, as long as Industrials continue to outperform the S&P 500 while both sustain these recent all-time-highs, it means great things for the overall U.S. Stock market and your portfolio. Those long this market want to see Industrials lead the way. If Industrials cannot lead, then another correction below recent highs is likely. As always, we’ll ignore the noise and pay attention to the only thing that pays: PRICE.

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.