Let's get something straight: being a market participant is not a right, it is a privilege. You have a responsibility to yourself, or your clients, to manage risk appropriately. Our goal is to profit while systematically having protection in place to adjust risk according to the environment. Not only is it not easy, the smartest minds in human history have failed in their attempts to profit from the market. See: The Market Owes You Nothing
A long time ago Mike Bellafiore, from SMB Capital, engraved in my mind that we need to be grateful for the opportunity to participate in the market. This isn't a right. We need to be humble and know that Mr. Market is here to take it all away at any given moment. The worst trade of your life could be the next one if you're not careful.
In the final Chart of the Week for 2018, we looked at the US Dollar reaching a key upside objective and then rolling over to finish the year on a sour note. I started out my Q1 2019 Playbook emphasizing the importance of the US Dollar Index in 2019 and I think we're already seeing the implications of a weaker Dollar. I also think this trend is likely to remain in place.
The way we saw it, if the US Dollar were to just break through these levels, without even acknowledging it, then there is most likely a severe flight to safety away from stocks and that's why the Dollar is getting bid up. The counter-argument there is that if the Dollar is weakening, stocks would most likely do well in that environment. That has been our thesis coming into the year.
Earlier today we uploaded a post outlining the case for some mean reversion in Canadian Equities, as well as the stocks we're buying to take advantage of that thesis. The same pattern that can potentially drive those stocks higher is also present in the IBD 50 ETF FFTY, so in this post we're outlining the IBD 50 stocks with the best reward/risk.
First let's take a look at the ETF itself, which has fallen 35% since October and recently undercut support as momentum diverged. If prices are above 26.75, this failed breakdown and bullish momentum divergence setup remains intact, targeting former support near 32.
In late November we wrote about the best long and short setups in the TSX 60, and our winners offset those trades that were quickly proven incorrect. In today's environment we're seeing potential for mean reversion in several areas of Canada's stock market, so we're going to focus on the best reward/risk setups on the long side.
First let's start with the sectors and indexes to identify what areas of the market we're likely to find individual stock ideas.
At the broader-market level, the Equal-Weight TSX 60 is attempting to confirm a failed breakdown and bullish momentum divergence by closing above 135.05, which would signal potential upside toward 143.25.
USD/INR is at an important inflection point that should set the tone for this pair in 2019. Here's what we're watching for clues into its next major move.
Since early October, a big question for us has been, "How low can US Stocks go? Obviously no one knew then, and no one knows now, so all we did know was that we did not want to own stocks. We wanted to be sellers, not buyers. Go to cash and ask questions later, type of mentality.
We've looked at declines in Crude Oil and widening credit spreads as a gauge for what to expect out of stocks. We've been monitoring market breadth for evidence of confirmations of declining indexes or whether they're diverging from them. These internals studies and intermarket analysis techniques are great and incredibly helpful in any environment. But today I want to focus on specific prices levels for the two most important indexes in America.
Autos were some of the worst performers in 2018, and new lows on a relative basis to start 2019 suggest the first quarter may bring more of the same for this sector. This post will outline why we want to continue to sell strength in this sector, as well as the best ways to express this theme.
Below is a chart of the Nifty Auto Index hitting new 52-week lows relative to the Nifty 500. This trend of under-performance has been intact since early 2017 and appears to be heading back toward the lows it set in 2012-2013.
This is going to be a quick post, but I noticed a chart during my analysis that was too nice not to share. It just so happens that it's a great example of how a stock should act when transitioning from a downtrend to an uptrend.
I spent the New Year in Lake Tahoe, which is one of my favorite and most beautiful places in the world. Heading up to the lake with family and friends for a few days (and leaving my laptop at home) really helps clear my head and let's me focus on the environment we're currently living in. I see again and again people trying to compare today's market to "the average" of a dozen or so bear markets in the past. It's painful to watch.
It's hard to remember a time where I saw this much irresponsibility among investors, especially the pros who should know better. These "asset managers" are so busy dealing with investors, compliance, operations, marketing, regulations and whatever else they're busy doing, that they've completely underestimated the amount of risk in the stock market. It's like they forgot that risk is a real thing.
And what are they doing to justify their actions, or lack thereof? They're relying on a tiny sample size of prior market declines to "wait and see" what happens. They think they're "Portfolio Managers", but they should be "Risk Managers". There's a huge difference.
It's been a great couple of months for Bond bulls. As unprepared investors worry about their portfolios and financial media outlets irresponsibly call this market "crazy", we've been happy to watch the destruction of stocks and new flow of money into safer, fixed income assets. Interest rates have gotten slammed with stocks and bonds ripped. One for the good guys!
So the question now becomes, how low can rates go?
While we couldn't be happier that U.S. stocks got destroyed this quarter, let's not forget about all of the other markets out there. US Treasury Bonds have had a very nice rally during this stock market correction, which is another move we're ecstatic about. And Gold and Silver have started to make moves to the upside as well, which is something we haven't seen in what feels like forever.
But today, it's the US Dollar that I think stands out and the recent move lower could just be the beginning.
