$SPXA200 Archives | Opportunity Identified

February 11, 2016 | Posted by David Zarling, Head of Investment Research

The Yen’s Impact On Job Security And Your Portfolio

If you’re a fan of Kyle Bass, founder and principal of Hayman Capital Management, then you’re most likely familiar with his Japanese Finance Minister Index. If not, you probably should be. As a refresher, a Japanese Finance Minister is responsible for the foreign exchange policy of Japan. They carry similar responsibilities that the Federal Reserve Chair holds for the Federal Reserve. For the last decade, the job of Japanese Finance Minister has been tumultuous to say the least. How bad has it been? Let’s take a look at the Japanese Finance Minister Index (this version is from 2012 and doesn’t include two additional changes at this position in the past three years!):

screen20shot202013-05-0820at2012-35-5820pm — Source: Kyle Bass via businessinsider.com

The fact that Japan is on its 12th Finance Minister in the past 10 years should give you an idea of how difficult it’s been to manage their country’s currency during an ongoing deflationary cycle that started 25 years ago. For reference, the Federal Reserve has had two chairs during past 10 years: Ben Bernanke & Janet Yellen.

What does the aforementioned have to do with your portfolio? The Japanese Finance Minister Index lets us know that managing the Yen is more than a difficult job. Some (maybe a former Finance Minister?) might say impossible. And as we highlighted back in October, the Japanese Yen should be watched closely as it gives clues regarding the direction of U.S stocks. If the Yen were to start appreciating, which is exactly the opposite of what Japan wants, we should pay attention. And if the Yen has a strong negative correlation to U.S. stocks, we should be on the edge of our seats and very concerned about a deepening correction in U.S. equities. As we pointed out in our October article:

For many years now, the correlation between the yen and S&P 500 has been -0.9 to -1.0. Meaning, whichever direction one goes, the other goes equally the other direction. So as investors, we should definitely care which direction the yen is heading. If it is dropping in value, that is a positive for the S&P 500 while an increase in yen value means trouble for the S&P 500.

So what has the Yen been up to lately? Let’s take a look. Here is a 4-year chart of the Yen (using ETF FXY as our proxy) along with the S&P 500 (top pane):

We can see that two days ago, the Yen broke out over an area of supply that’s been in place since late 2014. In the past, buyers had stepped in near the 82-83 price level. But a little over 48 hours ago, this changed. Demand for Yen has driven its price to new 52-week highs. Correspondingly, U.S. stocks (represented by the S&P 500 in the top pane) have held up so far, holding near previous areas of demand (shaded gray area). If the Yen continues upward, we expect U.S. stocks to resume their descent. Nothing is guaranteed and as investors and market participants, we must not marry our opinions and keep an open mind. We only care about price. It’s still possible for buyers to step in at this level and save U.S. stocks from further downward pressure. If that takes place, we expect the Yen to rapidly reverse course.

We’ll make sure to provide updates to this scenario as it unfolds, with price targets for both the Yen and U.S. equities.

You can also follow me on Twitter here: @360Research

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 1, 2016 | Posted by David Zarling, Head of Investment Research

Make Sure To Look At The Big Picture

At 360 Investment Research, we study price to understand the interaction of supply and demand in the marketplace. When there is more demand than supply, price goes up. When there is more supply than demand, price goes down. This is a simple, but often overlooked, concept that all investors should pay attention to on a regular basis. Studying price is paramount because it gives us an edge in the market and is the only coincident, or even leading, indicator available. Nothing is more current than price.

In market environments such as the current one, it can be a valuable exercise to step back and review price from a big picture perspective. Rather than being shortsighted and look at the past few weeks, we can gather tremendous insight from looking at price over the past 30 years (or more).

Below is a monthly chart of the S&P 500 dating back to 1987. Overlaying the monthly price candlesticks are some proprietary moving averages that do a great job indicating when to be long or short U.S. equities. Check it out:

By function, moving averages lag price. Even though these averages lag price, they are still more actionable than any economic indicator the BEA, BLS, or Federal Reserve can provide (if you’re from any of those agencies and reading this, please don’t take offense). And upon reviewing the most recent crossover, we can see that the S&P 500 is not buyable or ownable right now.

We can look at the same chart, but from a different perspective, by removing the moving averages and studying previous areas of supply and demand. Going through this exercise, we can see that sellers appeared in a big way around the 2100 level on the S&P 500. Likewise, during the recent price correction, buyers stepped in near the low 1800s. Take a look.

Upon inspection, we can see that we’re in “no man’s land” – an area between 1812 and 2134 where buyers and sellers will determine the markets next big move. In order for the market to regain solid ground and not deepen the current correction, demand needs to keep price from breaking the 1800 level and eventually drive price on to new highs. From a historical perspective, a major trendline (in green) dating back to 1987 carries significance. If that trendline is broken, more sellers will step in. And if not enough buyers are available in the 1812-2134 window, selling will intensify and price will seek demand (aka price discovery) through further price declines until demand is reintroduced. The next most likely area of demand is near 1550-1600, which is an area of price polarity where previous supply (the tops in 2000 and 2007) became an area of demand.

We’re not predicting further price declines, but the study of price indicates that there are more sellers than buyers from this vantage point. Until that changes, and buyers step in to take the S&P 500 to new highs, we’re not interested in owning this market.

Until next time, trade safe.

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

March 31, 2015 | Posted by David Zarling, Head of Investment Research

Internal Weakness Means Caution Is Warranted

As curious investors, we need to know that the performance of stocks within an index is just as important as the performance of the index itself. And when the two aren’t confirming each other, it is time to sit up and take notice. For the past six months, if not longer, we’ve been witness to that scenario. While the S&P 500 (a major U.S. Stock barometer) has been gaining ground since July 2014, the individual stocks within this index are not participating at the same pace. This is called a thinning (or stock pickers) market and could be a harbinger of a change in direction for the overall market. This is just a warning sign. Something to be aware of. We don’t need to take action… yet. We just need to be aware that things are not as they seem. This symptom can resolve itself with an increase in stock participation. If that happens, it means great things for the upward trajectory of the market. However, if this symptom does not resolve itself, any downturn in the market could be significant (a 10 to 30+% correction).

Let’s take a look at what’s happening. The chart below is pretty simple. The line above is the percent of S&P 500 stocks that are above their 200 day moving average. Notice that a less and less percentage of stocks are above their 200 DMA. The line below is the S&P 500 itself. Price is near new highs, but fading. I’ve annotated (in 360 green) where past divergences have taken place. Notice the eventual reaction of the market. It doesn’t tell us when, but simply, that a resolution must take place. As you can see, the current divergence has been in place for a significant amount of time when compared to similar occurrences in the past eight years. We’re taking notice as we weigh the evidence. Do we think a major correction is upon us? Maybe. We don’t trade on maybe, but caution is warranted. We trade on price and we’ll be watching it closely to see what our next move should be.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security.

December 2, 2014 | Posted by David Zarling, Head of Investment Research

Want to Make Great Investment Decisions? Just Look Left. [Weight of Evidence, Part 6 of 7]

Using a weight-of-evidence approach is valuable for making quality decisions on desired or current investment positions. As technicians, we have a wide variety of tools at our disposal to anticipate potential rough spots, corrections, or buying opportunities. But that is all they are – tools of warning or anticipation. They give us an edge in identifying when and where to take on risk with limited downside. Finding asymmetric risk/reward opportunities is the epitome of what we do at 360 Investment Research. We don’t care about being right. We only care about being on the right side of the trade.

Over the past 5 posts, we’ve identified some warning signs for the overall U.S. equity markets. All of the posts carry weight as we analyze our long exposure to U.S. stocks. But none is more important than what we write about today – price. Price is the most important evidence. It carries the most weight. We can have all the common and proprietary indicators in the world and they mean nothing without the confirmation of price. Below is a diagram so you can visualize what we’re saying.

As you can see, we like to look for evidence to support our investment decisions. The best piece of evidence is price. What is it doing? What’s its direction? If price is making higher highs and higher lows, the trend is up. If price is making lower highs and lower lows, the trend is down. By analyzing price itself, we can determine the general trend and the potential change thereof. Using the diagram above, which shows the current status of the market, we can see that price moving to the right side of the scale would cause it to tip dramatically to the right into a new and potentially strong downtrend. In the same light, if the evidence on the right shifted to the left side of the scale, the swiftness of the uptrend would increase. So at this point in time, we are watching price like a hawk. How do we do this in reality? Simple. Just look left. When we analyze price using charts, we find the current price and look left. See the daily price chart of the S&P 500 below. Notice that price has been steadily making higher highs and higher lows. It is a beautiful staircase upwards, hallmarking an uptrending market. The exceptions are back in early February (SPX made a lower low and tested the trendline from the 2007 top) and back in mid-October (SPX made a lower low and tested previous highs/lows near 1825). Each time, the market recovered by subsequently making new higher highs without recording a lower high. When we consider this most important piece of evidence, the scale is easily tipped towards an uptrending market. All the other evidence only provides perspective in the event price changes and makes lower lows and lower highs. All the other evidence indicates caution is warranted. But, that doesn’t mean we need to short or be out of the market. Right now, price is telling us to remain long this market. As for the future, we’ll let price dictate what we should do next.

Look for our series finale on game planning and risk management soon.

November 12, 2014 | Posted by David Zarling, Head of Investment Research

Headlines Sell [Weight of Evidence, Part 1 of 7]

“This isn’t a stock market. This is a market of stocks.”

The quote above is a common phrase in Wall Street circles and it is absolutely true. You don’t have a stock market without the stocks. However, financial media will never present it that way. How many would read an article that says, “Individual Stocks Refuse to Participate in Broad Index Rally”? It is so much easier to click on headlines that read, “Market Rallies to All Time Highs” and, “S&P 500 at New Historic High”. After all, why let the facts get in the way of a good story? [thick sarcasm]

As curious investors, we need to know that the performance of stocks within an index is just as important as the performance of the index itself. And when the two don’t jive (this is called divergence), it is time to sit up and take notice. Now is one of those times. While the S&P 500 and DOW are making new historic highs (awesome!), the individual stocks within each index are not participating at the same pace (not awesome!). Less and less stocks are making new highs while the indexes themselves are at new highs. This is called a thinning (or stock pickers) market and could be a harbinger of a change in direction for the overall market. This is just a warning sign. Something to be aware of. We don’t need to take action… yet. We just need to be aware that things are not as they seem. This symptom can resolve itself with an increase in stock participation within this rally. If that happens, it means great things for the upward trajectory of the market. However, if this symptom does not resolve itself, any downturn in the market could be significant (a 10 to 30+% correction).

Now, on to the eye candy to show you what’s happening. The chart below is pretty simple. The line above is the percent of S&P 500 stocks that are above their 200 day moving average. Notice that a less and less percentage of stocks are above their 200 DMA. The line below is the S&P 500 itself. Price is at new highs. I’ve annotated (in 360 green) where past divergences have taken place. Notice the eventual reaction of the market. It doesn’t tell us when, but simply, that a resolution must take place. We’re taking notice as we weigh the evidence.