Blockbuster or a Flop?

US bank stocks went on a tear after the Trump election. The promise of a pro-growth agenda combined with higher rates the FED was proclaiming set up an ideal environment for them to prosper and roll in the dough. Unfortunately, the promises and proclamations ran into political reality and as such that ideal environment is becoming a distant memory.  As you can see in my chart of the US bank sector ETF, XLF, below, banks ripped higher, topped and are close to breaking down out of a very symmetrical and almost ideal head and shoulders (topping) pattern. A breakdown below the blue horizontal neckline and hold, points to a downside target at, T1.  Since there is little support at that level, it is likely if T1 is hit, they continue lower down to the T2 zone as that is a level of major support.

On the flip side, some European banks which, many were on the precipice of default and setting up the potential for another 2008 banking-type crisis, look exactly like the US banks.  Except upside down.  A good example of this is represented in the chart of Deutsche Bank, DB, below. Like their US brothers, they have not broken out of their almost symmetrically ideal (inverse) head and shoulders (bottoming) pattern. A break and hold above the blue horizontal neckline points to an upside target at T1, some 40% higher. If it really has some legs and slices right through T1, the T2 zone represents a level of major resistance where it will likely struggle as supply is likely plentiful. I find this situation unique and interesting as investors are potentially setting their sights on Europe.  If so, this would be a major fundamental shift.

Patterns in development are nothing but a potential setup for a future investment.  Until either one of these confirms they should be viewed only as you would a trailer to an upcoming movie. Something to grab your interest but sometimes turn out to be the highlights of a studio flop.

$60 Trillion of World Debt

I saw this chart posted by visualcapitalist.com and had to forward it along. While it has little to do with investing, it is an obsession of mine. I am a firm believer that one day we will have to face the piper and have our day of reckoning.  While debt isn’t evil, the level of debt we (the US) have almost fits that description. But the interesting thing is, and maybe provides some solace, is looking across the global landscape it appears as if there are a few countries/regions that may have to face the piper before we do. Ultimately though, our day will come.

As you can see the chart breaks down $59.7 trillion of world debt by country, as well as highlights each country’s debt-to-GDP ratio using color. The data comes from the IMF and only covers public government debt. It excludes the debt of country’s citizens and businesses, as well as unfunded liabilities which are not yet technically incurred yet. All figures are based in USDollars.

The numbers that stand out the most, especially when comparing to the previous world economy graphic:

• The United States constitutes 23.3% of the world economy but 29.1% of world debt. It’s debt-to-GDP ratio is 103.4% using IMF figures.
• Japan makes up only 6.18% of total economic production, but has amounted 19.99% of global debt.
• China, the world’s second largest economy (and largest by other measures), accounts for 13.9% of production. They only have 6.25% of world debt and a debt-to-GDP ratio of 39.4%.
• 7 of the 15 countries with the most total debt are European. Together, excluding Russia, the European continent holds over 26% of total world debt.
• Combining the debt of the United States, Japan, and Europe together accounts for 75% of total global debt.  Yet, combining their population they account for less than 25% of the world’s total humans

Wow, That was Fast!

Back on March 1st I wrote about the inverse head and shoulders pattern developing setting the stage for a big rally in Beef prices in “It’s What’s for Dinner”.  At the time cattle future prices were hovering around $55/contract and the pattern’s upside target was some 45% higher at $80.  I am happy to say that last week that target was hit. While it is massively overbought, there is no divergence and as such looks like it may want to make another push higher after the current pullback is complete. Anyone who followed the call should consider taking at least partial profits. 

It’s important to remember pattern opportunities don’t always work out this well and when they do, it is rare they move this quickly.

Coal Is Dead: It's Time to Accept It – “The coal industry is on life support, and that's not changing anytime soon”

This article title appeared in Motley Fool in April of 2015. Apparently, coal stocks were given some get well medicine because they bottomed early last year and have been one of the best performing sectors since. As you can see in the coal sector ETF chart, KOL, below, it has risen more than 180% since that January 2016 low. In case you are wondering, yes, this is quite typical and more often than not, what happens. By the time “the story” makes it to mainstream media (this was also covered in WSJ, and other more well-known media publications after April, 2015), savvy investors know it’s time to load up … on the other side of the media story boat. And in the case of coal, fading the news outlets was again, a profitable outcome.

The interesting thing is, there is a lot more room to the upside if coal finds a cure. You can see in the above chart, the red smaller inverse head and shoulders pattern played out exactly as expected and hit its upside target, T1.  But as can happen when an investment goes through a substantial decline and begins to recover, it creates (smaller) patterns within (bigger) patterns. This time is no different as the completion of the smaller red inverse head and shoulders created a larger, purple, inverse head and shoulders which, if played out. has an upside target some 60% higher. What makes this compelling besides the upside potential, is last week’s confirming breakout from the pattern as it gapped on the open on more than average volume.

The Oldest Country in Europe is Breaking Out

Did you know that Portugal has had the same defined borders since 1139, making it the oldest nation-state in Europe? I didn’t either and knowing that fact is probably not going to make you money but the Portugal stock market just might if you play the chart right. After more than 3 years and an almost 50% decline in its stock market it looks as if Portugal is setting an attempt to reverse course.

The chart is a technicians dream as it has set up perfectly for a move higher.

1.      Multiple periods of positive momentum divergence have formed, the latest at its lowest price

2.      Price is currently above the 200 day moving average which has flattened and just begun to have a positive slope.

3.      Price has formed 2-higher highs and 1- higher low.

4.      Price broke above important resistance (blue horizontal line) with conviction (big candle)

5.      The breakout in 4 above was confirmed on more than 5x volume as seen in the lower pane (normally look for 30-50% increased volume as confirmation)

6.      Price is breaking out of a consolidation base of 6 months or more (period under blue horizontal)

You might be wondering as attractive as this set up is why I won’t be adding it to client portfolios. Unfortunately even if we were to only take a small position (say 2%) in each client portfolio that purchase would constitute more than 50% of daily market volume, making our clients “the” market. An amount more than 5% violates our investing rules so anyone reading who is managing their own money, consider this a freebie idea. I hope you make a ton!