I was down at the Nasdaq on Tuesday morning chatting with Frances about the recent action in the coal sector. This is a hated group, which I love. So it’s something we’re following very closely.
It was a short segment today:
Source:
Expert technical analysis of financial markets by JC Parets
by JC
I was down at the Nasdaq on Tuesday morning chatting with Frances about the recent action in the coal sector. This is a hated group, which I love. So it’s something we’re following very closely.
It was a short segment today:
Source:
by JC
I’ve been obsessing over this Coal chart for the last few months watching this healthy consolidation take shape. I first pointed out this development in March, and although we were up a few percentage points since then, it wasn’t really until last week that we finally got going. The bigger the base, the stronger the breakout tends to be. In the case of coal, we had 4 months of a tight consolidation. I love that.
Just to review what’s just occurred, let’s go over the thought process behind the trade. The first thing that stands out is the overwhelming anecdotal evidence of hatred towards the coal stocks. Who’s pounding the table on Coal? Very few if any. Second of all, I’m not a pure Elliottician, far from it, but I’m not blind to a beautiful five wave pattern either. We have that here in $KOL and often times a solid bounce develops from the end of a 5-wave move like this. The 3-of-3 is text book:
So Elliott wave tells me to pay attention and sentiment says to pay attention. Okay, now you have my attention. What is momentum doing? Well, here is the daily chart of KOL showing a massive bullish divergence developing. This is not just at last summer’s low, but once again on the retest of that low earlier this year. Some might even call this a double bottom, but that won’t be confirmed until we take out 20.50, which are last Septembers highs. So although not really relevant yet, the potential is certainly there:
Wow, so momentum looks great. Is the relative strength also improving? Not only is it improving, but we have bullish divergences in momentum on the relative strength daily chart as well as the weekly. That combination reminds a lot me of Apple’s epic top in September 2012; we had the same thing. Look at this weekly chart of KOL/SPY showing the improvement in relative strength:
Now look at the daily chart. Nice right?
Check. Check. Check. Check. Now what? We wanted to see a breakout in price right? Well we just got it:
Looks great to me. We only want to be long above this 4-month consolidation. If it falls back into it, then the chart is not as clean. I only like clean charts. Funny we’re talking about coal in this way, the dirtiest of energy sources.
Love it. The first target is $26; the highs from 2012, which in my opinion was wave 4 of the 5-wave declined that first got my attention. Take a look at the $KOL holdings and there are some more interesting setups in there as well. Look at a name like $CLF where 35% of the float is short, it has a 10 day short ratio, and only 4 of the 24 sell side analysts who cover it have a buy recommendation on it. We really love that. Do a little homework and you’ll probably find more of them in a similar situation.
I think this is a great example of incorporating many of our tools to come to form conclusion. I know I’ve mentioned this trade a few times recently, but figured that going over the entire thought process could add some value. I hope I accomplished that.
Go get ’em!
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Tags: $KOL $SPY $CNX $JOY $WLT $ACI $CLF
by JC
I’m excited to announce that we are currently beta testing our new product and will be launching within a few weeks. As you guys know, my passion is in money management and that will always be my number one priority. But after countless requests from readers all over the world, plus the fact that we unfortunately have to turn down non-accredited investors, we have found a solution that allows us to reach a different type of investing community.
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I wish it didn’t have to take this long, but I’m not a web developer (far from it) and we want to do this right. I really appreciate your patience and all of your support. Thousands of you have already signed up and that means so much to me. We will have some exciting announcements coming very soon. I promise.
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by JC
It seems like every day I hear or read about someone’s opinion on interest rates. The funniest answers typically revolve around the fact that, “interest rates will eventually go up”. Yea? Thanks, that really helps. You mean the Federal Funds Target Rate won’t stay at zero forever? Brilliant analysis.
So now that we know rates will “eventually” go up, we can move on. Because that obviously doesn’t help anybody. What does help is trying to figure out what rates will do in the meantime before they start to rise. Coming into the year, consensus sentiment towards rates was that they were going much higher this year. In fact, the sentiment was at such an extreme that we hit levels not seen since early 2011, just before the 10-year fell from 3.7% down to 1.4%. This led to a 50% rally in shares of $TLT that year, the US Treasury bond ETF. We’ve seen a similar sentiment unwind so far in 2014 as bonds are the top performing asset class and interest rates do nothing but go down.
Here is an awesome chart showing long-term rates in the United States going back all the way to 1790. The point here is that although we “know” interest rates will eventually go up, the process can take a lot longer than some expect. Look at other times throughout history where rates bottomed out. This can take 10-15 years easily and still be a very normal and traditional bottoming process:
We could be having this same time-wasting conversation about interest rates “eventually” rising years from now. We have no way of knowing. So we’ll continue to analyze price behavior and sentiment levels to allocate assets towards fixed income, and treasury bonds specifically. Worrying about what the Fed is going to do or not do, worrying about how to take advantage of a “rising rate environment” and wondering how rates can keep falling in the face of whatever inflation we may or may not have seems like a complete waste of time from a money allocation perceptive.
I believe the best thing to do here is simply to stick with the trend and not over think it. Rates are getting slammed, money is flowing into treasury bonds hard and we don’t see any evidence yet that this trend is reversing. This chart up above tells us to be patient, give it time, and let it play out on its own. If we’ve learned anything over the years it’s that when interest rates do turn, they will likely trend higher for a long time. So we’ll have plenty of opportunities to worry about a rising-rate environment whenever it does come. For now we’re just not in one. Appreciate it.
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Source:
The Foundation for the Study of Cycles (via @PaulCiana)
Tags: $TLT $TNX $TYX ZB_F $ZN_F $TBT
by JC
Whenever I bring up coal stocks to my smart friends, they laugh at me and tell me to order another drink. I kid you not. I’m lucky that I live in New York City and get to hang out with some of the smartest minds in the business. I’ll never take that for granted. But anecdotally, it allows me to throw out feelers on some of my ideas and get feedback on what I’m thinking. It’s funny, no one I know agrees that coal stocks look interesting here.
So we can start there. It’s not data driven evidence of hatred, but through my experiences I can’t say it’s not a good starting point. The reason I’m bringing it up today is because of the incredibly tight consolidation taking place since March. Almost five months ago I put up a note suggesting it was time to own Coal stocks for a variety of reasons. Since then, the $KOL exchange traded fund is only up 2-3%, but it’s the consolidation that’s taken place since then that really gets me excited.
Look at this weekly chart of $KOL. It’s rare to find a tight range like this for such a prolonged period of time. We’re going on almost 4 months of this action:
The best way to execute, in my opinion, is to wait for the breakout. Eventually, there will be a resolution. In my opinion it’s going to be to the upside, which could present a monster rally that would return 40-50% in a very short period of time. I would consider a confirmed breakout to be a weekly close above any of these others 19-19.15ish. It really all depends. I would love to see a gap higher out of this range. Some might call it a, “gap and go”. It’s hard to predict at this point. But this consolidation can’t be ignored. Epic moves have been born out of this type of pattern. So I’m waiting patiently.
I thought it would be prudent to bring up this recent development. It has nothing to do with who our president is or who he isn’t, it has nothing to do with alternative energies and even less to do with any geopolitical turmoil. This is strictly based on supply and demand dynamics. And looking at this chart, if demand can exceed supply just enough to break this out of it’s range, look out!
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Tags: $KOL $CNX $BTU $JOY
by JC
One of the more interesting developments since March began has been the severe underperformance out of the small-cap stocks. Coming into the week, the Russell2000 was actually in negative territory year-to-date. This compares to the large-cap S&P500 which is up 7% for 2014 and Dow Industrials up over 3%. This is a big difference. But the problem is what’s happening behind the scenes to this former leadership group.
Here is a chart of the Russell2000 relative to the Dow Jones Industrial Average. After really leading the way off the 2008/2009 bottom in US Equities, this ratio has potentially put in a deadly failed breakout:
I recall earlier in the year, this “breakout” was getting a lot of attention, especially from the bulls. But in recent months, these guys have been crushed on a relative basis. Since the March 3rd closing highs, the Russell2000 is down 5% with the Dow Jones Industrial Average up over 5% during the same period.
Look at the 2006 and 2011 highs in the ratio serving as important resistance. It looks to me like the ratio is failing hard to stay above those highs. As we know, from false moves come fast ones in the opposite direction. So unless this ratio can get back above 69, the benefit of the doubt has to go to the bears on this one.
As far as market implications go, we want to see leadership out of the small-caps for evidence of risk appetite. We’re seeing some other divergences in the Bond market warning of the same thing. Seasonal studies suggest a week period for Stocks with higher volatility (see here). So this shouldn’t really come as much of a surprise.
I think a more neutral stance in stocks as an asset is likely to be the better position for the rest of the summer. We have some strategies in order to execute that (see here). So I’m going to continue to be cautious with small-caps, particularly on a relative basis. And this recent development to me is just another feather in the hat for the bears, at least for now.
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Tags: $IWM $RUT $DJIA $DJI $INDU $DIA $YM_F $SPY
by JC
We do a lot of intermarket analysis on a day to day basis either for confirmation or to look for divergences. One of my favorite ways to gauge investor risk appetite is to follow a ratio between Junk Bonds and Treasury Bonds. If there is a real demand to put risk on the table, I want to see flow into Junk outpace that into Treasuries. If managers are worried, you would expect money to be allocated towards risk-free government debt at a faster rate than Junk Bonds.
Today we are taking a look at the Junk to Treasury bond ratio ($HYG vs $TLT) hitting a new 52-week low this week while the Dow Jones Industrial Average hits new all-time highs. We want to see the bond market confirming the action in stocks, not diverging by this much. The bond market is giving us a much different message:
There is an old saying on The Street that the bond market is smarter than the stock market. I don’t know if that’s true or not. I like to think so. But what’s more important here in my opinion is that one is not confirming the other. The flow into risk-free government debt is really outpacing the flow into the riskier Junk Bond market. That’s not a good sign of risk appetite, at least not to me.
The trend in this ratio is still lower. We’re hitting fresh 52-week lows this week as the headlines read, “Dow Jones Industrial Average Hits Another Record High”. Remember the market is not 30 stocks. There’s a lot more going on here. I’m sticking with a cautious stance in US equities as a group for a lot of reasons. There are some individual less correlated stocks out there that I would prefer to be in if we have to be in stocks. Pairs are also a valuable tool that allows us to maintain an equities neutral position.
This is a bearish time of the year. So this makes sense to us from a seasonal perspective as well. Feel free to read some of my recent posts about stocks:
FOX Business: Brazil Over Germany This Summer (July 12, 2014)
The Dog Days Of Summer Are Upon Us (July 8, 2014)
Radio: Winning On Wall Street (July 1, 2014)
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Tags: $DJIA $INDU $YM_F $HYG $TLT $JNK $ZB_F $TNX $TYX $IEF
by JC
There’s a common misconception out there that I feel somewhat obligated to clear up. You see, we pride ourselves here in analyzing the facts: price and what not. The problem with some in traditional (or even social) media is that they just repeat whatever they once heard. A great example is the notion that Gasoline prices rise this time of year due to the, “Summer Driving Season“. I don’t know who made this up, or why people continue to repeat this information. But most of us have heard this nonsense at one point or another.
Today we’re going to look at the facts and see if seasonally this actually is true, or if it’s all laughable. First let’s take a look at the past 10 years. As it turns out, not only is now NOT the time to be buying Gasoline, but it’s actually the worst possible time to be doing so throughout the entire year. The next 3 months are rarely ever positive and actually lose on average -8.4%, -4.3% and -3.8% respectively.
Here is the 10-year seasonal chart of Gasoline. It cannot possibly be more clear than this from a seasonal perspective. There isn’t a worse time to own Gasoline:
If you want to take it back further, here are the 20 and 30 year studies showing the exact same thing. Again, if someone tells you that this is the time to expect Gasoline prices to rise because of, “Summer Driving Season”, or whatever other excuse they want to bring up, feel free to bring up the facts.
So if you’re going to own Gasoline today, it should not be because of what time of the year it is. You better have a good reason from an actual supply and demand standpoint. Personally, I don’t see much of an edge here from a structural point of view. Here is the weekly chart showing Gasoline exactly in the middle of a three and half-year range:
Finally we can take a look at some shorter-term charts of Gasoline to see if there is any tactical advantage to being long here in the near-term and fight the seasonal trend. The first chart shows sentiment levels still relatively optimistic, although off the recent extremes. No reason to own this from a sentiment perspective either:
Here’s the daily candlestick chart. This is the one aspect of this whole thing that I can say something slightly positive about. After prices broke down at last year’s resistance, which is very normal, we’ve overshot the 200 day moving average and uptrend line from last Fall. These overshoots can often create short-term buying opportunities. In this case, if you have to be long I’d really only want to be above the 200 day moving average and or broken uptrend lines. This can create a nice reversal back up towards last month’s resistance. That’s not anything to brush off in my opinion.
But even still, I think we’re pushing it as structurally there isn’t anything there. At least not yet. So just to reiterate, I’m not suggesting to short sell Gasoline and I’m certainly not suggesting owning it on an intermediate term basis. All I’m saying is that if you want to own Gasoline, do it. Just please don’t let it be because of the seasonality of it. In fact, if you are buying this here, you are fighting the seasonal trend and are essentially swimming against the current. If you’re cool with that, go for it. Just don’t let a good story get in the way of the truth.
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Sources:
Gasoline Public Opinion (SentimentTrader)
RBOB Seasonal Charts (SignalFinancialGroup)
Tags: $RB_F $UGA