$SPX Archives | Opportunity Identified

October 2, 2017 | Posted by David Zarling, Head of Investment Research

Invaluable Market Signal From The Value Line Geometric Index

As market participants, we should be taking a scientific approach when putting money to work, always assuming our positions are wrong and need to prove themselves. As part of that process, one piece of evidence we want to look at on a consistent basis is the health of the overall market. One such way to gauge market health is studying market breadth. In other words, how many stocks are actually participating in any directional move. That’s why we’re writing today about an index you might not be aware of but should be familiar with if you follow our research. This index is great at providing insight into the current condition 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). If you want to geek out on the details, you can read more about this calculation here, page 4. In basic terms, the Value Line Geometric Index eliminates an illusion created by cap-weighted index components. Heavily weighted stocks within a cap-weighted index can pull it higher even as the majority of the stocks within the index are not following along. For example, in a cap-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.

The last time we wrote about this Index, we noted it needed to hold and advance beyond the $500 level. Here’s the chart of the Value Line Geometric and S&P 500 Indexes from that post.

Here’s an updated chart comparing the popular cap-weighted S&P 500 Index with the lesser-known Value Line Geometric Index:

The last few weeks have been confirming evidence for our bullish market thesis. XVG held the important $500 level and advanced swiftly to all-time-highs. You read that right. This is the highest Value Line Geometric Index has been. Ever. In fact, this move is confirming a breakout of a 19-year consolidation. Note that price broke above the 1998 highs just this past December. That’s almost 20 years of going nowhere! And last week’s move was a breakout of the more recent 10-month consolidation. Check it out:

From large bases come high spaces. This move is significant and is signaling broad market participation, which is not a bearish characteristic. The last time we covered this important index was back in May. Back then, large market cap stocks were leading the S&P 500 market higher. We wrote:

…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.

What have Energy and Financials done recently? We thought you’d never ask.

In conclusion, we have evidence right in front of our eyes showing broad market participation and lagging sectors getting bid. This is healthy and normal bull market behavior. We’re not saying that Energy and Financials continue to march straight upward. Trees don’t grow to the moon. But it is significant that lagging sectors are participating and the Value Line Geometric Index is breaking out. This evidence could be signaling another strong leg higher for the overall market.

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 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.

September 28, 2017 | Posted by David Zarling, Head of Investment Research

This Is How To Navigate Amazon

Much like its namesake, Amazon stock (ticker: AMZN) is difficult, yet rewarding, to navigate. Over the past two decades, this well-known retail (not technology) company has risen over 48,455%. That’s not a typo. $1,000 invested in AMZN back in 1997 would be worth $484,558 today. That same $1000 invested in the S&P 500 would be worth $1,999 today. Making money in the stock market is easy, right? Wrong. As much as we’d like to think we’re rational individuals, we’re our own worst enemy. When involved with markets, we tend to respond to gains and losses emotionally. Loss aversion is a real and present danger to many portfolios. Here’s a visual of this common emotional experience.

Many market participants experience twice as much pain during drawdowns than the joy experienced during equivalent gains. So what would it have been like to hold on to Amazon since 1997? How bad would the pain have been? Take a look:

Amazon Drawdowns [original chart source]

The upper pane (green) is the price appreciation of AMZN stock. Using hindsight bias, many think the tremendous gains in Amazon were a slam dunk and easy to come by. That couldn’t be further from the truth. The lower pane (red) are the drawdowns experienced by holders of AMZN stock. Talk about agony. For more than a third of its life as a public company, Amazon has been in a 50+% drawdown. For the buy-and-hold investor, it’s hard to imagine the discipline needed to hold on during 70-90% losses. It’s likely many capitulated under the duress. The good news is, we don’t have to be buy-and-hope investors. In fact, we might even call drawdowns a downtrend! Remember, our number one job as market participants is to manage risk and protect capital. Using supply and demand dynamics (aka price movement) to do so, there is zero reason to experience such massive drawdowns. Let’s take a look at the buying and selling going on with AMZN.

Here’s the weekly chart:

For a while now, AMZN has been making a series of higher highs and higher lows. This is normal behavior for uptrending stocks. This doesn’t mean Amazon doesn’t experience sideways consolidation from time-to-time. All of 2014 was an intermediate downtrend / consolidation prior to resuming its uptrend ways. Even then, we would’ve been able to recognize a price momentum change using a trendline dating back to 2012. And more recently, we saw AMZN break a price momentum trendline (green) back in August. This took place both on an absolute and relative (to SPY) basis. This was a clue to let someone else have AMZN. It doesn’t necessarily mean impending doom. A broken price momentum trendline just means the demand/supply dynamic has shifted. Back then, we tweeted (click here to follow real-time supply/demand analysis) AMZN would likely form a Head & Shoulders pattern:

Many people use patterns to confirm their biases rather than create if/then binary decision-making scenarios. For example, the Head & Shoulders pattern itself has gotten a bad reputation as a “Topping Pattern.” In reality, Head & Shoulder’s patterns are a compression in price as the disparity between buying urgency and selling urgency narrows. So here we are at the end of September talking about the Head & Shoulders pattern in AMZN. See the daily chart below:

Amazon has gone nowhere for five months. The battle between supply and demand has created a well-defined Head & Shoulders pattern. Is this a top? We have no idea. No one does. Don’t let anyone tell you otherwise. It could simply be a five-month consolidation. Afterall, consolidations tend to resolve in the direction of the primary trend. This could be a top. It could also be consolidation before heading higher. Our job is not be right or wrong. Our job is to be on the right side of the trade. Let’s a look a little closer to identify some important support levels.

Up close, we can see buyers have shown up before near the 935 price level. If they don’t show up at this level upon any retest of that price point, we have the evidence we need to make a decision and let someone else have AMZN. From an upside target perspective, Amazon will need to first clear the downtrend line (in green) and then sustain above the left shoulder highs near 1,011. If it can close above, and hold, those levels, it’s like a new series of higher highs and higher lows are upon us. Another possibility is price continues to be range bound between 935 and 1,000 through the end of the year (this would bring time symmetry to the right shoulder, matching the time duration of the left shoulder). Trade accordingly.

In conclusion, the game plan is simple. If Amazon closes below 935, we want nothing to do with it. Above that level, it makes sense to own one of the top three appreciating stocks of the past decade. Get yourself on the right side of the trade. We don’t need to experience capital crushing drawdowns. Trade at your own risk.

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 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.

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.

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.