This One’s for Bruce!

One of my dear clients who had a personality that had its own zip code (and sadly is no longer with us) used to call me up regularly and remind me there was a ton of money to be made in “sinner” stocks and to make sure he owned a lot. To him, “sinner” stocks were those companies providing “booze”, “gambling” and “cigarettes”. He also mentioned “prostitution” but I never had any luck finding a public company to fit that bill for him.

Today’s post is about a Melco Resorts and Entertainment, MLCO one of Asia’s biggest gambling/entertainment companies serving Hong Kong, Macao and the Philippines.  As you can see in the chart below, after forming a double top with divergent momentum back in early 2014, its stock was relegated to the unloved investment bin by traders as it fell more than 70% (peak to trough) over the next two years. But since that time it has had a chance to form a very nice, wide base indicating a relief in selling pressure. Price is now above a rising 200 day moving average and sits just under a major resistance zone, while momentum is in the bullish zone.  IF this breaks out to the upside, it looks as if it could have a long way to run, assuming the broader market cooperates. I have some reservation as It is very extended from its 200 day moving average and as such I would love to see it pullback/consolidate soon. The fact price sits just under a major resistance zone makes this a logical place for it to rest. Either way, I find this a compelling opportunity and would be looking to enter it on a “confirmed” move above major resistance.

If you are particular in the types of investments you own, “sinner” stocks like MLCO may not pass the screen.  If not, this one’s for you Bruce (R.I.P).

The Wider the Base …

The Dow Jones Transportation index apparently was not invited to the all-time high stock party and as has been both lagging and dragging on the overall market. Stock market bulls would like to see some of the lagging sectors begin to participate and catch up to technology which has been doing most of the heavy lifting pushing the market higher. A good place to start would be the transports and it looks as if the airline stocks may be setting up to cooperate and pull the transports higher.

As you can see in the chart below, the airline index, $XAL, rallied strongly, peaked last December and has been in a tight consolidation for the last six months, forming a bullish cup and handle continuation pattern. This consolidation has allowed the December overbought high to unwind. Notice also how far price got extended beyond the red 200 day moving average in December, another indication it needed a breather. 

\While the pattern’s upside, if played out, points to a 10-12% gain which isn’t bad, what has me more interested is the width of the consolidation base. The old saying the wider the base, the higher in space indicates the potential for a much bigger run, should the market have more gas left in the tank and the transports play catch-up.

Major Changes for Investors Ahead?

Is the secular US stock performance trend coming to an end. If so it has major implications for investors. I tackle this possibility in the latest video

https://youtu.be/9xHrx5sYTQg

Are Global Stocks Poised to Run?

Almost 9 years later it appears as if global stocks are ready to break out above their 2008 highs. As you can see in the chart of ACWX below, an aggregate index of global stock markets, excluding the US, is sitting just under prior highs. This area has acted as resistance and was rejected the past 3 times it tested it from below.

It is said the more times price tests a certain level the more likely it is to break through. If the 4th time is the charm, it would add another feather in the hats of stock market bulls. While the US broke out years ago, most countries around the world have not. As such a breakout would send a strong message and confirm investors strong risk appetite.

The Wall of Worry

It is said the stock market climbs a “wall of worry”. This expression was coined in the 1950's and depicts a sustained stock market rise during a time of economic, financial or political stress in which stock prices are said to be ascending a "wall of worry".  What greater stress is there than having a nuclear-armed, narcissistic nutcase as your nearest northern neighbor?

It appears as if South Korea has been able to overcome this wall as you can see in my chart of their stock market ETF proxy, EWY, below. It had been trapped in a huge 7 year, 35% sideways range, going nowhere offering buy and hold investors little to no stock market gains. But all that may have changed 3 short weeks ago.

As you can see, price gapped above long term resistance on more than a 50% increase in volume (lower pane) on the breakout which also pushed momentum (upper pane) into the bullish territory for the first time in many, many years. This is all very constructive and opens the door for additional and possibly significant future gains.

Even with the very positive outlook the charts are telling us as a backdrop, do your inner spidey-senses continue to tingle knowing you could be one bad hair day away from “a merciless sacred war” that will turn Seoul into “a sea of fire” or “reduce it to ruins with weapons of absolute justice”? If this were to happen I would guess it just might be one wall their stock market might not be able to climb. I don’t know about you but for now I am going to err on the side of caution and watch this all unfold from the sidelines in spite of the opportunities it presents.