A Few Questions to Ponder

The average country ETF is now down over 10% year-to-date. US large caps continue to mask global equity weakness as you can see in the chart below. Diversified global investors are likely down for the year.

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If the take-away from this chart is a snapshot of investors global appetite for risk, what are the numbers telling you? Risk on or risk off? Do you think there is a higher probability to turn 41 countries into positive returns or 4 countries negative? With that in mind and in spite of the US holding on to year-to-date positive equity returns, this chart should be telling a tale of caution, at least for investors outside the US.

Un Investment Idea

While the dollar has been acting as a governor for the price of most commodities, there are a few exceptions which are doing quite well thank you …. most notably, oil. Another that has caught my eye is Uranium. Since it has limited uses, highly regulated but reasonably low demand (unless you are North Korea) at 70-80 metric tons per year, it should come as no surprise the market is very thin and can fly under the radar of most investors.

One of the largest publicly traded Uranium companies is Cameco, CCJ. Based in Saskatoon Canada, CCJ is licensed to produce up to 26 tons annually. Unfortunately, the market for Uranium from 2014 through 2017 was a tough one as the price of CCJ fell almost 70% during that period. Since 2014 though, as you can see in the chart below, the character of the stock has changed, setting up for a potential directional change.  It has gone from one in a downtrend to one that has made a higher high and higher low from its oversold low. Notice also, the inverse head and shoulders bottoming pattern whose neckline is now being tested from underneath. An argument for the validity of a new trend change can be seen in the amount of shares being traded (bottom volume pane), as it has been more than 2x the average while forming the right shoulder of the large, almost two-year pattern.

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A break and hold above the neckline points to a target at ~$18 above, a 50% potential gain.  50% gain opportunities don’t come along too often and when they do they should pique an investors attention. This one has mine. For those who find this setup compelling, keep in addition to the normal single stock risk this one comes with additional baggage.  When you combine that with the fact nuclear power and weapons can, for many investors can elicit a “third rail” type of reaction and it is on the cusp of not meeting liquidity requirements, Financial Perspectives clients are unlikely to find this in their portfolios regardless of the upside potential any time soon. But those investors who invest only to make money and without regard to morals or personal beliefs, this is one for your consideration.

Bonds Away

The most important development of the week (and maybe the year) took place in the bond markets. As such, it should come as no surprise that last week’s volatility in stocks was directly related to what was happening to bonds. As we see below in the chart of the 20-year bond ETF, TLT, it started the week right on the neckline (support) of the multi-year head and shoulders topping pattern. As the week progressed, the sell-off in bonds gained steam and eventually closed out firmly below support. Investors under 40 years of age, and possibly even 50 or older (depending upon when they started investing) have never experienced a declining bond market. So, for most a potential bond bear market is uncharted territory.

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As you know by now, all patterns are not relevant or meaningful until they have a confirmed close. A confirmed close we have but we need to see the neckline hold as resistance in the coming trading sessions. If so, the 20-year bond has a tough row ahead as the first target is down at T1, and the second is back at 2013’s lows, some 20% below where we started the week.

The table below shows an example of what bond holders across different types of bonds could expect with only a 1% rise in rates and why this potential breakdown is such a big deal. Not every rising rate period is exactly the same so your mileage may vary. What stays constant regardless of the period is the fact the longer the maturity, the greater the expected decline.

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September 2018 Charts on the Move Video

The bulls were out in force as we closed out the third quarter. With the expected year end rally, 2018 looks to be another strong year for the market…. the US stock market. Bonds, commodities and foreign investments continue to under-perform and act as an anchor to portfolios. Mean reversion will eventually show up but, based upon the charts, Q42018 seems like more of the same.

My Q3 recap video can be viewed in the link below.

Why You Trend Follow

Trend following is a simple concept that has proven itself time and again and across all different markets. In its simplest form, Trend following is a strategy whereby an investor should buy an asset when its price is trending higher and sell when its trend reverses down, in either case expecting price movements to continue. Why this works is because like most things, investments trend.  Of course there is the details to work out as to identify when trends start and end but that is for another post.

When looking at its chart, it’s easy to see why an investor would want to invest in the Russell 1000 stock index (the largest 1000 US stocks). It has been in a clear uptrend since its 2009 bottom, rising more than 420% over the past 9+ years.   

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It just so happens that some marketing genius has sliced the same Russell 1000 index into both a “value” and “growth” component thereby providing 3 of the same (but slightly different) flavors of the Russell 1000 index. I have plotted each in the graph below.

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The green line is Russell “Growth”, blue is the entire 1000 stock index and the laggard, red, is “value”. We know historically during strong bull market up-trends there is proven out-performance in owning a larger growth component in a portfolio which is holding true during this uptrend. As the bull market wanes and we get closer to the end an economic up cycle, “value” typically begins to lead “growth”. To put it in perspective, in the case of the Russell, so far “growth” has outperformed the overall index by 70% and “value” by 130% over the same 10 year period. The question an investor needs to answer is why own the broad index or value when Russell growth is leading the trend? Most of the time the answer investors use is because of diversification or they don’t know how to find those that are out-performing. In my mind, those is poor reasoning. Aren’t we investing for one reason and one reason only? To make the most amount of money.

So what we can learn from this very narrow (but representative) look at the US stock market is 1) we are still in a strong bull market 2) trends last longer than one expects (which is why we want to be trend followers) and 3) trend following can provide a clear out-performance advantage over general index investing.