The U.S. Stock market and most of its sectors continue to rally. As happy as we are to see this, and as much as we expect this to continue through February, these are only counter-trend rallies within larger structural declines. The good news is that counter-trend rallies in bear markets historically tend to be the most powerful kind of rallies. I think there is still room to the upside in many different sectors with very well-defined risk.
In this week’s members-only letter we discuss the following topics:
- How Much Further Can U.S. Stocks Rally
- What Is The Best Way To Profit From Higher Oil Prices?
- Which Emerging Markets Will Do The Best This Month?
- Why “no one” Saw This Yen Rally Coming, But We did?
- How Low Are Interest Rates Going and How Can We Benefit?
- Structural vs Tactical – How to Make Money In This Environment
Today I want to point to a chart that a really smart friend of mine has been sending me for months. He prefers to remain nameless, you know how these sell side guys roll, so we’ll just call him Mr. T. In this Chart, Mr. T has been telling me since the Fall that the Regional Banks vs REITs ratio is suggesting that U.S. Interest Rates are heading lower, specifically the U.S. 10-year yield.
On the top frame, we’re looking at the Regional Bank Index ETF $KRE over the REITs Index ETF $IYR. In this case, the numerator, Regional Banks, do relatively well when the market thinks rates will rise, while the denominator, REITs, do relatively well when the market thinks that rates [Read more…]
In this week’s members-only letter we discuss the following topics:
- How Is The Santa Claus Rally Coming Along And What Does It Mean?
- Which Markets To Buy Dips And Which To Sell Rips
- How High Can Natural Gas Go?
- Japanese Yen and U.S. Equities
- Gold vs Copper Ratio Still Trending
- U.S. Interest Rates and the Yield Curve Narrowing
We have to trade and invest in the market that we have in front of us, not the one that we want. Therefore we have to be able to approach the market from a completely unbiased perspective. We don’t care if the market doubles in price or if it gets cut in half. We want to try to take advantage of moves in both directions. This is America after all.
I know it’s not sexy, but since October 23rd, we have wanted to approach the major U.S. stock market averages from a more neutral perspective. This is the day that both the S&P500 and the Dow Jones Industrial Average first got above what was then, and still is, a flat 200 day simple moving average. Securities in that sort of environment create headaches, for both the bulls and the bears. The reason is because [Read more…]
Regional banks are a space that I’ve been watching very closely for several months. The underperformance out of this sector has been atrocious, which is something that really stands out to me as the S&P500 has been hitting all-time highs as recently as last month. Back in August I was looking at the Regional Bank ETF KRE specifically, as it looked like a potential head and shoulders pattern was developing. It never confirmed by breaking the neckline so there really hasn’t been anything to do here. But after some further consolidation, an even more bearish pattern has formed.
Here we are looking at a weekly candlestick chart of the regional banks KRE. Notice this symmetrical triangle formation that has been setting up since the rally that kicked off last summer and peaked this Spring. This type of pattern is normally a continuation pattern that should resolve itself in the direction of the underlying trend, which in this case is up. The problem is that it’s breaking down:
When patterns that are supposed to do one thing, end up doing the complete opposite, the market is speaking. I think we should really listen here. If prices break the May lows, marked here by the dashed line in blue, an aggressive short position is probably best. I would only want to be short below this level because if we’re above it, a more neutral outlook is most appropriate.
What I like most about this is the well-defined risk and the easy to calculate target. With base about 8 points high, it gives us a measured move target down just under 30. This level was also resistance back in 2012 and support in 2013, so there is a cluster of support here.
Over the last few weeks I’ve been getting more and more emails asking me about this head and shoulder topping pattern in the Regional Bank Index. I think it’s worth discussing because there actually is a pretty high likelihood that it will be completed which would lead to much lower prices in the regional banks. By definition, this is a reversal pattern, so as a technician who tries to find trends, looking for these types of patterns isn’t exactly what I like to do. But I’m not blind to them either.
Today we’re looking at shares of $KRE – the S&P Regional Banking ETF. Here is a weekly chart showing a clear head & shoulders pattern being formed with a bearish momentum divergence in the relative strength index (RSI). I believe this divergence increases the likelihood that we will break the neckline:
Look at the left shoulder to start the new year, the head in March and right shoulder throughout the summer. We’re now about 80 cents from breaking the neckline which is well-defined by the lows in January and May. The neckline really is the key here. We constantly find head and shoulders patterns that never confirm, so patience is important. But based on all of the evidence, I think there’s a very good chance this one breaks.
Here is a closer look at regionals on a daily time frame. The pattern is very symmetrical which we like. This means the left shoulder and right shoulder are both about the same height and took around the same amount of time to develop. The measured move based on the size of the pattern is roughly 6 points. So the target here upon completion is just under $31.
Another interesting thing about this ETF is how diversified it is. A lot of the ETFs we look at and trade have huge components that really bully around the fund. But in this case, its top holdings like $CIT $HBAN $UBSI and $WTFC each only represent less than 2% of the entire fund. We prefer that.
So as far as $KRE is concerned, we want to see a close below $36.80 for confirmation. But remember that we would only want to be short below that level. These types of patterns are notorious for whipsaws, so keep that in mind. I really think this one breaks. We’ll see.
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Of all the TV and Radio that I do every month, this is without a doubt one of the most enjoyable for me. I really appreciate a show that is dedicated to analyzing the behavior of the market and market participants. They get it.
Here is the interview in full:
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Tags: $SPY $IWM $ES_F $SPX $EUFN $FEZ $XLF $KRE $SI_F $SLV $DB $BCS $PA_F $PALL $SWC $TWTR $TNX $TYX $TLT $IEF $XLE $TAN $GDX
It’s been well documented by now that Financials, the most important sector in the United States Stock Market, has been the worst performer since the end of last summer. Year-to-date, only the Consumer Cyclicals have managed to do worse than Financials. Unfortunately for the US Stock Market, I have to put Consumer Cyclicals in a similar category as Financials in terms of their importance. But today I just want to focus on the weakness we’re seeing from the banks.
Below is a daily chart of the Financial Sector ETF $XLF relative to the S&P500. Here we’re looking at a line chart since the relative lows 2 years ago. After peaking last summer, Financials have struggled hard and are now flirting with very important support. Not only has this been a key level of demand since the beginning of last year, but it also represents the 38.2% Fibonacci retracement from the entire 2012-2013 move:
With regards to Financials as a group, this would be a devastating break for the space. But the implications for the rest of the US Stock Market are even worse. This is supposed to be the leader in a bull market, not the laggard.
So what’s the likelihood that we break? At this point it’s anyone’s guess, so I would prefer to err on the side of the underlying trend. To do this I like to lean on the direction of the moving averages. Here is the same chart shown above, but this time with the 50 (blue) and 200 (red) day simple moving averages overlaid:
For now, this market is still guilty until proven innocent. It’s the worst perfomer out there since last summer, we’re flirting with incredibly important support levels, and the trend is clearly down. From where we sit today, I find it hard to imagine a scenario where this doesn’t break. I’ve been bearish about this space for a while, especially with how much the permabulls love it. When I put out a bearish note on Bank of America earlier this year, I got a ton of hate mail. We saw a nice 20% decline in shares of $BAC and structurally it looks like lower prices are still coming.
This is a terrible sector that has a lot of work to do in order to reverse course and turn bullish. I see this is as the lower probability scenario, and continue to lean bearish. If we do indeed break this key support on a relative basis, it will be very difficult for things to improve any time soon. Whether you’re positioned in financials or not, I believe this one is still worth watching. In all likelihood, this resolution will have major market implications.
Look out below.
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Tags: $XLF $KRE $SPY $BAC
Earlier today I was down at the NYSE chatting with Jessica Menton from International Business Times. I sound like a broken record these days. I still like bonds, I still like commodities and the sector rotation continues to suggest that a more neutral or bearish stance is most appropriate right now for the US Stock Market.
Here’s the video in full:
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Tags: $SPY $QQQ $XLY $XLK $XLF $KRE $XLK $XOM $CVX $SLB $HAL $PSX $TLT $CCI $TNX $TYX $ZB_F $ZN_F $XBI
A funny thing happened in the US Stock Market last week that think is worth noting. I came into the year bearish US Stocks and felt that Treasury Bonds and Commodities were the better place to be. So far that has worked really well, but I think this is just the beginning and we’ll see a lot more of this going forward.
The first thing that I believe is worth mentioning is the horrible breadth in the market. It’s like onions and garlic and all sorts of nastiness. On Thursday 2/27 the S&P500 closed at a new record high, the highest level of all time. Now, remember this is just the index itself. How many companies actually participated in that and made new highs themselves? 6%
Only 6% of the 500 stocks in the S&P500 managed to close at a new 52-week high on a day where the headlines simply read, “S&P500 Closes at a New Record”. What the headline writers don’t want to tell you is that no one participated in that rally. Only a few names made new highs themselves. But that doesn’t sell. That doesn’t draw clicks. It’s not sexy. Fortunately for us, we don’t care about sexy. We’re not here to sell commercials or banner ads. We’re here to make money.
Bespoke did a nice job of breaking down the (lack of) new highs Thursday sector by sector:
Well I see major topping candles all over the place, especially in the momentum names. Key reversal days and reversal weeks all over that present excellent risk/reward opportunities where one can get short with a tight stop above last week’s highs. I’m not going to go over a list of these names, but you can do the homework and there are plenty out there you can find easily. FINVIZ has some good tools for this.
I suggested on Friday afternoon that short-sellers got a nice entry point. So far this is working well:
— J.C. Parets (@allstarcharts) Feb. 28 at 03:01 PM
Here is what I’m seeing right now in some of the major averages. We typically find candlesticks like these at tops. Some call them mouse tails, long wicks (they are candles after all) and long shadows (is what the Japanese call them). Either way, the consequences aren’t good. It tells us that the bulls, who were in control, could no longer support the price up there, hence the reversal. Here are two examples, S&P500 & Midcap400, but you can find many more out there in the individual stocks and sectors:
So far this year Treasury bonds are up almost 7%, Commodities (equal-weighted) are up 8%, and the Dow Jones Industrial Average is actually down 2% (coming into the new week). So when I hear how great this stock market is and how easy it is to make money, I have to chuckle. There are barely any names participating and the averages are down after 2 months of trading and underperforming other asset classes by a lot.
Shorts don’t just have to be focused on calling tops in the momo names either. There are plenty of underperformers out there that have not been participating for a while. If they’ve already been weak, in all likelihood those names/sectors will continue to underperform and likely to get hit harder than the rest. An interesting sector to note is Financials. These guys haven’t been doing a damn thing. While S&Ps race to all-time highs, Financials on a relative basis peaked last July. LAST JULY. So when the S&P500 closed at a new all-time high Thursday and not a single stock in the financial sector made a new high, I can’t say I’m surprised one bit. I would expect more underperformance here.
If stocks take out last week’s highs and continue to rock, you want to see participation expanding also. If this doesn’t occur, I think you just saw your short-term top. I still have the same mentality that I came in with to start the year. Sell stocks, do not initiate up here, buy bonds and buy commodities. Nothing I’ve seen so far tells me to change this thesis.
Note: If you’re going to be long US stocks I think the best bet is to stick with low correlated names. Run the math before you enter new positions. I think there’s a bunch of good ones out there. It’s the asset as a group that I don’t like. If you follow me on Stocktwits or Twitter @allstarcharts I’ve mentioned a bunch of these low correlation names lately.
Tags: $XLF $KRE $IAI $SPY $DJIA $DJI