$SPX Archives | Opportunity Identified

September 18, 2017 | Posted by David Zarling, Head of Investment Research

Simple Market Secret: Just Look Left

One of the most important jobs of a market participant is risk management. If you’re unable to identify when your position is wrong, then you shouldn’t be entering a position to begin with. Would we ever enter a crowded room without identifying where the exits are? I don’t think so. We have the same responsibility when entering a new position. At 360 Investment Research, when we enter a new position, we identify risk (and potential reward) by looking left. By looking left on a price chart, we can identify previous changes in supply and demand, which can give clues on where demand or support could appear. By looking left, we can identify when buying momentum wanes and when selling pressure has entered the market. For example, if over a certain time period, price is making a series of lower highs and lower lows, we know sellers have more urgency than buyers for that time period. There is more supply than demand and price is trying to discover where the buyers live. So by looking left, we are using economic law (not opinion) to guide our investment decisions, entries, and exits. Using price removes mystery (and emotion) from our trading process. Let’s go through this exercise with the S&P 500 on daily and weekly time frames to identify where we are with the current market.

First, here’s the daily chart of the S&P 500:

When we look left, we can see price made of series of higher highs and higher lows from November through March. On March 1st, this important index recorded a new all-time-high. A series of higher highs and higher lows is indicative of a bull market. However, for the remainder of March and most of April, the characteristics of supply and demandchanged. The S&P 500 recorded a series of lower lows and lower highs over that two-month period. This was a downtrend on the daily time frame until a new high was established in mid-May. With the exception of recording a lower high and lower low in August, the sequence of higher highs and higher lows in one the world’s most important indexes has been relentless. Relentless higher highs and higher lows are classic bull market behavior.

Now for the weekly timeframe:

When looking left at the weekly data, it’s clear the S&P 500 is currently in a series of higher highs and higher lows. So, can the market be in a downtrend on the daily timeframe and an uptrend on the weekly timeframe? Absolutely. That’s exactly what we had back in March / April. By looking left on both the daily and weekly timeframes, we can gain a better understanding of market trends. It’s not the only thing we look at, but it’s a big piece of evidence. And the current assessment has the S&P 500 in a daily uptrend within the friendly confines of a weekly uptrend. We’re not ones to argue with price. These higher highs and higher lows are normal behavior for a bull market.

With the bullish uptrend clearly outlined for both the daily and weekly time frames, we need to acknowledge trees don’t grow to the moon and markets don’t go up forever. So where would one look for clues this market is changing from an uptrend to a downtrend? You guessed it. Look left. If sellers were to drive price down from here, we can quickly identify buyers have shown up near the 2425 level. On both the daily and weekly timeframes, that’s an important level to watch. If the S&P 500 closed below that level, it would be a clue supply and demand are changing in an important way. That’s what we’ll be watching and you should too.

To conclude, as part of our every-day process as market participants, we need to identify sequences of lows and highs. This exercise provides valuable information to help us manage risk and remain 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 great 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.

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.

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.

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 8, 2017 | Posted by David Zarling, Head of Investment Research

Why The Hindenburg Omen Is More Than Just A Scary Name

Four days ago, on May 4th, a Hindenburg Omen triggered on the same day for both the New York Stock Exchange and Nasdaq Composite. Recording a Hindenburg Omen for both exchanges on the same day is a rare event. This chart, courtesy of SentimentTrader, shows just how rare this event is:

Before we dig into the market implications, let’s put the work in and get a big picture understanding of the Hindenburg Omen, how it came to be, what it is, what it’s not, and how we can use it to identify opportunity and manage risk.

Ironically, two days ago (May 6th) was the 80th anniversary of the tragic explosion of the Hindenburg, a behemoth airship which measured as long as the famous ocean liner, Titanic. Filled with hydrogen, the Hindenburg represented the aspirations of human flight only a decade after Charles Lindbergh became the first to fly solo across the Atlantic. The Hindenburg carried passengers during a time when very few had experienced human flight. It was a futuristic symbol of aviation and an icon of technological progress. However, on May 6, 1937, the Hindenburg exploded in flames, crashing to the ground, taking 36 lives with it. It was a catastrophe not only because of the loss of life, but because just like the Titanic, the Hindenburg had once projected invincibility. It was a tragedy which reverberated across the globe as new technologies of film, tv, and radio, carried the calamitous news far and wide. Are you familiar with the phrase, “oh, the humanity!”? These were Herbert Morrison’s famous words as he emotionally reacted to the disaster live on radio. Watch the 40-second clip below to hear the emotion in his voice and grasp the magnitude of this event:

To the world in 1937, this was a tragedy of immense proportion. And for decades following, the word “Hindenburg” was synonymous with catastrophe. Which brings us to the Hindenburg Omen, a technical indicator named after the aforementioned crash. If using the word “Hindenburg” wasn’t enough, adding the word “Omen” surely solidified the sinister connotation implied when labeling one of the most misunderstood indicators in the market today. If you were to Google “Hindenburg Omen,” you would receive a plethora of results providing the metrics for calculating it, yet none of them are in agreement. We’re not going to pretend this article has the final say on the specifics of the Hindenburg Omen. But, we’re hoping this post provides a tremendous amount of clarity (and sanity) regarding this legitimate approach for identifying market conditions during which there is an increased likelihood of a market correction.

Let’s break down the Hindenburg Omen into bite-size factoids and illustrations for better understanding:

The Hindenburg Omen is meant to operate as a warning signal and was developed by the late James R. Miekka as an improvement to Gerald Appel’s Split Market Signal.
A man named Kennedy Gammage first named the indicator “the Hindenburg Omen” in his market newsletter, the Richland Report. The label stuck. And in our humble opinion, this was a terrible label meant to imply and sensationalize disaster ahead for the market. Case in point, in today’s financial media, when there is a Hindenburg Omen sighting (which may not even be accurate – see below), they sensationalize it (e.g. “This Indicator Just Signaled Market Disaster Ahead”), and then dismiss it as ineffective when the market does not sell off dramatically.
The Hindenburg Omen does not guarantee large market corrections. Rather, it highlights when the market being measured is showing signs of fracturing, which can lead to corrections large AND small.
The Omen can be calculated and tracked on difference indices such as the Nasdaq Composite and New York Stock Exchange.
The Hindenburg Omen’s basic function is to identify when significant bifurcation is taking place within any given market. Basically, think of it this way. Imagine you are driving down a two-lane highway with hundreds of other vehicles, all heading in the same direction. The traffic is flowing in sync at about 75 miles per hour. This is perfectly normal and expected behavior. We’re making great time and life is good. All of a sudden, the traffic in the left lane accelerates to 90 miles per hour and the traffic in the right lane slams on the breaks. What’s going on here? Is it an accident? Is there road construction? Has someone been pulled over by highway patrol? We won’t know until we travel further down the road. It could be nothing, but understandably, we may want to take heed and be on alert for something odd up ahead. It’s the same way with the Hindenburg Omen, which does a great job identifying when stocks are traveling at two different speeds (or more accurately, directions).
Here is the formula for triggering a Hindenburg Omen, as written by Jim Miekka himself:
1. First, the number of issues in a specific exchange hitting 52-week highs (left lane of traffic) and lows (right lane of traffic) must both exceed 2.8 percent of the number of issues in said exchange. (Many articles report a requirement of 2.2 percent, which is incorrect.)
2. Second, the benchmark index for the exchange must be above the value it had 50 trading days, or 10 weeks, ago. (Again, many sources get this incorrect, referencing an exchange must be above its 50-day moving average. This is not accurate.)
3. Once the two aforementioned events have occurred, the signal is valid for 30 trading days. During the 30 days, the signal is activated whenever the McClellan Oscillator (MCO) is negative, but deactivated whenever the MCO is positive. (This is an extremely important distinction that many publications inexplicably omit.)
There are many charts and articles on the internets which indicate the Hindenburg Omen is a “cry wolf” indicator that only “works” 30% of the time. Unfortunately, these articles use incorrect calculation methods (they do not use the parameters above, often omitting the McClellan Oscillator requirement) or use improper success metrics (e.g. since the market didn’t crash 20% – it only corrected 5% – the indicator doesn’t “work”). Garbage in. Garbage out. If the proper calculations are not used or improper means of measuring a successful result are taking place, then it’s no wonder there is so much confusion regarding the Hindenburg Omen.

To show just how important this signal is, here is a chart showing times when Jim Miekka’s Hindenburg Omen has triggered on the Nasdaq Composite:

Greg Morris, a 40-year market technician and acquaintance of Jim Miekka, was kind enough to use the correct methodology to create the signals in the lower pane of the chart above. It’s quite clear the Hindenburg Omen tends to be an important indicator of market fracturing. It’s not perfect. But even at first glance, it becomes obvious this indicator of market health has significance and should be recognized as a warning sign for the overall market. Does it guarantee an impending market correction? Absolutely not. But it does have the capacity to identify when markets are fractured and breadth is narrow, which are characteristics of an unhealthy market.

As always, price knows best. Higher highs in the overall market are still a possibility. Market bulls will want this bifurcation to resolve with increased participation and a reduction in new lows on each index. And whenever the Hindenburg Omen is referenced, make sure it’s Jim Miekka’s formula and not a clickbait garbage pushed by entertainment networks masquerading as financial news outlets. After all, data and facts matter. And when the real Hindenburg Omen triggers, market participants should pay attention to its warning.

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.