One of the most valuable tools we have as technicians is the ability to go through every single stock in the Dow Jones Industrial Average and every sector and sub-sector in the S&P500 so that we can weigh all of the evidence. It might take some time, but I promise you that there is no better way to gauge the strength or weakness in a market, than by going through them all. Since most people don’t have the time to do this work as regularly as I do, my annotations and notes can easily be referenced in the Chartbook.
Today I wanted to share some of my conclusions after running through all of the Dow Components and S&P Sectors on both weekly and daily timeframes. This analysis consists of over 120 charts and all of them have been updated today in the Chartbook. [Read more…]
In this week’s members-only letter we discuss the following topics:
- Our Focus Is On Japanese Yen and Ignoring Any Federal Reserve Commentary
- Which U.S. Stock Market Indexes Have Hit Our Upside Targets?
- What Do We Need To See To Get Short U.S. Stocks?
- The List Of Commodities That Are Now In Play
- Why Financials Will Keep Outperforming
- What Do Semiconductors and Industrials Have In Common?
- Which Sectors Are Benefiting Most From Higher Interest Rates?
You guys know that I prefer to incorporate more of a weight-of-the-evidence approach to markets rather than basing my decision making on a single indicator. We look at stock markets all over the world to find themes, both bullish and bearish, and then take advantage of them within U.S. markets. I then take a similar approach and go sector by sector in the U.S., including a series of sub-sectors, to break it down even further and find themes within the U.S. As you guys well know, the reason we were bullish since January was because of the weight-of-the-evidence internationally, not because of what we saw in the S&P500 or Dow Jones Industrial Average. [Read more…]
In honor of Superbowl 50, we created a countdown of what we consider to be the most important 50 charts in the world. These include U.S. Stocks and Sectors, International Indexes, Currencies, Commodities, Interest Rate Markets and Global Intermarket relationships. Some of these are more actionable than others, but collectively I think they truly tell the story of global market risk, or risk aversion for that matter.
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Here is the video in full (audio begins immediately, video gets going after 30 seconds)…..Enjoy! [Read more…]
From the desk of Tom Bruni @brunicharting
Telecom Threatening A Structural Breakdown
When I read about the Telecom sector or speak with colleagues about it, I find many people often think of it as a collection of companies with strong balance sheets, great cash flows, and shareholder friendly actions like juicy dividends and share buybacks. While that may be true in many cases, that doesn’t necessarily mean that the sector can be utilized as a bond proxy to boost a portfolio’s yield. As we saw in recent years with sectors exposed to high-yield, and MLPs, there’s no such thing as a free lunch. In addition to that, simple math shows that Telecom hasn’t been correlated with bonds (TLT) at all over the past ten years, with the correlation being 0.29, 0.19, and 0.08 over the past one year, three years, and ten years, respectively.
If you had adopted the above philosophy, stuck this sector in your portfolio and hoped for the best, you’ve seen that [Read more…]
Risk is something that I think about constantly. It’s what I lose sleep over. There are many different types of risk, but today I want to focus on one that I think gets left out of the equation way too much. I’m referring to Opportunity Cost. Long-time readers of the blog and people who follow me on the Stocktwits and Twitters of the world or see me on TV & Radio often hear me refer to this type of risk on a consistent bases. Sometimes I choose to call something, “Dead Money”, but as my buddy Jonathan recently pointed out, I sound smarter if I call it “Opportunity Cost” instead. I don’t really care about sounding smarter, but he says it helps people understand this concept much better than if I just call something “dead money”. I think he has a point there.
When calculating risk some of the figures I like to consider are 1) Price – at what price to I throw in the towel and admit that I am wrong, 2) Time – how long is this going to take to work out and what kind of margin interest or option premium am I going to pay to wait for this to play out, 3) Overnight/Over-weekend Risk – What might happen over night or over a weekend that can force a gap down (up) through my stop that can increase my risk (like an earnings release for example), 4) Correlation Risk – How is adding this new position going to increase my portfolio’s exposure to a given asset class or particular market, etc.
Most of these risk factors I just mentioned are in most people’s formulas for calculating risk. I don’t think I’m reinventing the wheel with any of these types of risks. There are more of these as well but I would consider these to be some of the more obvious ones. Opportunity cost, however, is one that I rarely see or hear mentioned by market participants, but is a risk factor that I actually think is one of the most important and can arguably be one of the most expensive. By this I mean: what else could I be doing with this money that I am allocating to this particular trade or investment that can make me more money in the meantime. What is the opportunity that I am missing out on by using this money to own XYZ?
One of the ways that I try and avoid opportunity cost is by not owning or shorting securities that are trading anywhere near a flat 200 day moving average. This to me is generally the sheer definition of a lack of trend. Who wants to own something that is not going anywhere? You’d be surprised how many people do. I prefer using a 200 day moving average because it basically gives you the average price over the past 3/4 of a year but when looking longer-term, a 200-week moving average works well also. Staying away from securities with a lack of trend is one of my favorite ways to avoid this type of risk. Breakouts to the upside tend to fail and breakdown also tend to fail. Securities trading near flat 200 period moving averages cause a ton of headaches in my experience. Who needs that?
Here is a good example. This is a the Telecom sector ETF $IYZ over the past year. I highlighted some of the failed breakouts and breakdowns that have quickly mean reverted as this lack of trend continues. This has been a difficult sector to be involved with since last year:
Securities in a sideways range also create expensive opportunity cost. Like in the example with flat 200 period moving averages, when something is in a sideways range, it also has a lack of trend. Why not wait for the range to resolve before getting involved? A good example of this has been Apple since February. As soon as Apple hit our $130 target, there has been no reason to be involved as it continues to trade in this 11-12 point sideways range. Both longs and shorts have been frustrated for most of the year:
There are other ways to avoid opportunity cost, but I wanted to bring up the conversation today because I don’t think it gets talked about enough. Whenever we are putting on a trade, we want to consider, “Is this the best thing I could do with my money right now? Or is this just a waste of time/money that can be better allocated elsewhere in something that is actually trending?”
There is no right or wrong answer. No one said this was easy. In fact, making money consistently in the market is one of the most difficult tasks where even some of the smartest participants in the world consistently fail. Including opportunity cost as part of the risk equation I think gives us a leg up over other participants. Let’s try to consider this going forward before putting on new positions. I really believe it’s a huge advantage to keep this in mind.
Members of Eaglebaysolutions.com that receive our research see constantly that we want to stay away from most things that lack a trend, except when they reach extremes and we are potentially looking for that mean reversion. To start to receive our weekly research reports, Click Here to find the package that is best for you.
Tags: $AAPL $IYZ $STUDY
Thursday morning I was on the Benzinga pre-market radio show discussing our current market environment. I’ve been in a heavy cash position since March 20 so I am approaching this market from a very unbiased perspective. We get into a lot of intermarket behavior and sector rotation as we enter the second quarter.
Here is the audio in full:
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Tags: $T $IYZ $SPX $IWM $RSX $RUSL $USO $CL_F $XLU $IYR
One of the exercises that I find really valuable is comparing the relative performance of each of the S&P sectors to each other. Today we are breaking down 3-year daily line charts of each sector vs the S&P500. I also include a 200-day simple moving average to not only help define the trend, but also to see where prices are compared to the long-term smoothing mechanism.
The next two: Staples and Utilities look like bearish to bullish reversals. These were previously in downtrends relative to the S&P500 but now appear to be turning up and trading above upward-sloping 200 days:
Financials are just kind of there. The lack of trend tells us that they are trading with the market and are right near the mean. So not much to do here, although I would argue that they look better than the previous two above.
The last three are easily the worst of the bunch: Energy, Materials and Telecom. Each of them on a relative basis are well below downward sloping 200 day moving averages and other than perhaps a brief mean reversion, the trends here are still down. I would not trust these at this point to maintain a sustainable rally relative to the S&P500:
I like to do this periodically to get a good perspective on where money is flowing. I don’t really care what the sell side thinks in terms of over-weighting and under-weighting sectors. To me, price is what pays and the trends here (or lack there of) can be seen very clearly in the charts above. That’s enough as far as I’m concerned.
Members of Eagle Bay Solutions receive weekly updates on each of these charts along with the absolute price action itself. We have 5 different products from Commodities, to US Sectors, Dow Components, Global Equities and the Major US Averages. Click here to see which package is best for you.
Tags: $XLY $XLF $XLI $XLE $XLB $XLV $XLP $XLU $XLK $IYZ $SPY
With most of the major US stock market averages at or near all-time highs, I can’t think of a better time to take a look at how its sectors are rotating in strength. One of my favorite Bloomberg functions is the RRG, or Relative Rotation Graph. The x-axis represents the relative strength for each S&P sector and the y-axis shows us the momentum in that relative strength. They rotate clock-wise with the upper right quadrant showing the leaders, lower right shows the weakening areas, then lagging, improving and so on and so on.
What stands out to me here is the Financials entering the lagging quadrant as it leaves the weakening group. This chart I built uses a weekly time frames in order to represent what I consider to be the bigger picture. I can’t say I’m surprised since Financials peaked relative to the S&P500 over three months ago and looking worse and worse every day. In a strong bull market you want these guys leading, not lagging. (click chart to embiggen)
Another sector that stands out here is the Materials space. You see this one in light green on the upper right? That’s probably not where we want to lean short. Also, with rates getting hit lately, we see the price action in Utilities and Telecoms perking up a bit. But the RRG still has them in the lagging group. We’ll be watching these guys to see if they can improve going forward.
As a quick note, when we look at this particular function, we mostly want to pay attention to the sectors plotted around the outside of the graph and ignore the noise towards the middle. If they are around the outer edges, we can trust that it is a much more sustainable trend.
If you’re interesting in learning more about the Relative Rotation Function, here is a quick post a did about it back in January.
Tags: $SPY $XLB $XLF $IYZ $XLU