INVESTMENT EDGE
Yawwwwwwwn. Sideways chop within the Jan -Feb consolidation range until we see a catalyst. I thought maybe trade war fears would be enough to break the trend but apparently not. Bulls are still in charge. I don't expect to see a resolution for months so until then, sit back, enjoy the summer and check out this month's Charts on the Move video at the link below ...
When economist talk about the “yield curve” they are really just referring to a plot of yield versus varying bond maturities. An inverted curve is when the difference between the yields of long term bonds (usually 10 year) rates to short (usually 2 year) is negative (short term yields are higher than long). This is a very closely watched benchmark by knowledgeable investors because we know every recession that has occurred in the US over the past 60 years has been preceded by an inverted yield curve, according to research from the San Francisco Fed. Curve inversions have correctly signaled all nine recessions since 1955 and had only one false positive, in the mid-1960s, when an inversion was followed by an economic slowdown but not an official recession, according to the Fed’s data.
While the US yield curve is still positive (NOT inverted) the global curve just recently inverted for the first time since 2007 where its inversion lasted briefly (less than 6 months). I have not seen any studies that show if global yield curve inversion has the same strong correlation to economic slowdowns (recessions) as it has in the US, so the implications of the crossover may or may not be of significance.
As a minimum though, it raises a warning flag for investors to take the portfolio off autopilot and have a plan. There is no question, a recession, if it were to ensue around the world would likely drag the US along. Economic slowdowns are rarely ever good for stock prices and when combined with us being in the latter stages of the 2009 economic recovery cycle while stock prices are at very extended valuations, next year looks like it could be shaping up to present challenges investors have not had to face in many years.
Those that have followed me for a while know I frequently use the 200-day moving average (DMA) in my analysis to assess the direction of the trend. If the average is rising, we are in an uptrend and want to stay in that investment as it will likely bring higher prices (and further gains). On the contrary, if the average is falling we want to avoid the investment as it will likely lead to continued lower prices and losses (unless you happen to be short the position).
But what about the other option where the average is moving sideways? A good example of this can be seen in the chart of Starbuck’s, SBUX, below. You can see the (red) 200 DMA flattened out in April of 2016 and has gone nowhere since (a more than 2-year period). The stock is actually down more than 12% since that time, mostly due to last week’s double-digit decline. The US SP500 index, in comparison, is up more than 35% during that same period.
As investors we are risking capital for one reason only, to make money. A rising or falling 200 DMA identifies environments in which investors can do exactly that. A flat one, on the other hand, is one to avoid as investment capital becomes dead money
As a side note on SBUX, if price breaks and holds below that very significant green horizontal line of support, a new downtrend will have begun and the first likely target of the decline will be at T1.
US bond returns are now negative over the past 2 years. The last time that happened was 1981. While there will likely be bumps along the way, I don’t think it will take another 37 years before we see another negative rolling 2 year return, do you? If not, it’s a good time to be thinking about how to immunize your portfolio.
If any of you saw James Cameron’s film, Avatar and were blown away by the graphics and visual effects, then you have seen what Autodesk’s software can do in the hands of experts. Centered smack in the middle of the red hot technology sector, Autodesk’s stock, ADSK, is setting up for a breakout to all-time highs.
As you can see in the chart of ADSK below, price sits well above a rising 200 day moving average and is consolidating just under the $139 resistance zone. Each of the past 3 attempts buyers tried to push through that level it was rejected, indicating an overwhelming supply available for sale. On the positive side, these past 3 months of sideways chop, a nice-looking cup and handle pattern has developed. A confirmed breakout and hold above the current $139 resistance points to an upside target in the area of $155.
Cup and handle patterns that have their handle bottoms no greater than 50% of the depth of the cup provide higher probability setups, this one is slightly greater. More importantly shallow handles provide a much higher reward to risk ratio. In the case of this ADSK opportunity, using the handle bottom as the exit point if wrong, the ratio sits at 1.7 (meaning a $1.70 return for every dollar invested). I like the setup but don’t like the ratio as it is less than my preferred target of 3. When it comes to a less than perfect setup, an investor has 3 choices 1) deviate from the investment plan (accept a ratio less than target) 2) move on to the next opportunity or 3) tighten up the exit point. Hmmm. Decisions. Decisions.
