Silver Continues to Look Weak

I have had a number of inquiries and it’s been a while since I have looked in on the shiny metal so I thought I would give a quick update on what the charts are saying right now.  Unfortunately, it is screaming weakness. As you can see in Silver’s chart below, price is still below the red downtrend resistance line and its 200 day moving average.  It has been consolidating from its downward break out of last September’s consolidation finding support near the $15.25 level.  Notice too, the similarity of the two consolidation periods as each successive bounce higher off of (black horizontal) support has created a lower high. This is very bearish as it shows the buyers who step in have waning strength.  Now is a good time to remind readers the more times price of an investment touches a level, the higher the probability it will eventually break through that level. This goes for both prices that are trending higher and finding resistance and lower, finding support.

It seems likely we chop around here for a bit more before Silver has to show its hand on which way it wants to go. Based upon all the unfavorable chart indicators combined with the fact the current trend is down, I favor a move to the downside. If that occurs, my projected target for a break below current support would be just under $12/oz.

The precious metals market is one volatile animal and not for the feint of heart. If I were an investor in silver here (and I am not), I would be watching the lower $15.25 support line closely as a breach of that would tell me a rapid decline to the next support level (~$12) is likely in the cards.

The Cramer Effect

Please don’t take me wrong, I am not picking on Jim Cramer here. In fact, I admire his transition from money manager to TV entertainer.  I am embarrassed to admit but I do find him entertaining. If you dig beyond the entertainment factor the success of his calls and recommendations has been less than what you would experience by just flipping a coin as you can read here.  An example of one of his less than successful calls was on Zulilly (ZU) just after their IPO last year.  We saw a nice initial “Cramer effect” when his disciples followed his recommendation pushing the stock immediately higher only to be left holding the bag as it plummeted nearly 80% (from peak to trough).   

One of the things I learned years ago is to not listen to others, even those with Jim’s credentials, but rather, rely on your own research and hard work. The second important take away here is that no matter where you get your ideas, it is critical to have an exit plan in case you are wrong.  No one gets them all right but long term investing success comes not only from your “win” percentage but keeping the loss on your “losers” to a minimum.

Follow the Leaders

On the longer time frame, as I said in last week’s video, it looks to me as if the markets want to go higher. The biggest question for me is will that move higher start from where we are at today, or some point lower as a result of a correction.  I don’t like to keep reminding everyone how long it has been since we have had a 10-20% pullback and as such we are long overdue, but the longer we go without one the bigger it will be once it finally arrives.  Think of it as a rubber band that we continue to stretch. Eventually it either breaks or we have a nasty snap-back.  The markets are no different.

As I said in my video there are a number of negatives that I see in the market right now and wanted to present one that I am watching closely.  Regardless of whether the market is going up or down, it’s important to closely watch the market leaders as they tend to give you a clue on what to expect from the broader market. In an uptrend the leader tend to be the first into a correction. There is no question the market leader since the 2011 bottom has been biotech. The biotech index has outperformed the SP500 by more than 70% during that same timeframe as you can see in the weekly chart below. Even to an untrained eye I hope we can all agree this chart represents an investment in a strong uptrend.

Drilling down to a daily view of the investment we use as a biotech index proxy, IBB, you can see in the chart below the picture is flashing a warning sign.  What should jump out at you is the fact the market created a divergent double top.  The double top alone is a warning sign but when accompanied by divergence (this is when the momentum is falling while price is rising) it makes the warning that much more significant. Also you should notice I have annotated a red horizontal support line where price has currently tested at least 4 times (illustrated by red arrows). I point this out because it is important to remember the more times price tests a line of support the more likely it will eventually break it. In my experience rarely does price hold more than 5 times, right now we have completed 4 and the next will be #5. So it should not surprise you it is my expectation that if price goes back to retest that line one more time it likely will not hold and will continue to fall further. To where you may ask. The first projected resting point for a break would be the second, lowest (red) horizontal line which is about a 10% decline. If the decline picks up steam the next stopping point would be the lower blue trend line in the first chart above, some 20% south of where we are today.  Projections are just that, and there are no guarantees it will reach the targets or will even stop once it does. What it does do is provide a high probability based upon prior share supply and demand history.  As we all know, the market is the final arbiter of if there will be a correction and where it may end, not me. I just report on what I see at a specific point in time.  

No one wants to live through them but a correction of any magnitude is a healthy and necessary for the ongoing, long term uptrend of any market.  The biotechs, along with many of the other leaders are looking very tired at the time when stocks are beginning their weakest seasonal period. As such, pushing the limits to reach for return at this point in time is not something I find a prudent strategy and a main reason why we have been reducing client stock exposure.   Invest Safe! 

April Market Recap Video - Is the Top In?

Check it out and let me know what you think. Did Marc Faber's call have you exit stocks or do you think there is more upside? 

https://youtu.be/hb99G8gsbUE

Have a great week everybody

Do We Have Bad Breadth

You’ve heard it over and over again and I can tell you first hand that its true ... The trend is your friend.  While we have all heard it before what does it really mean? As a trend following disciple it means that until you have information otherwise, stay with those investments which are trending higher and avoid those that are not. While it sounds easy, it can create internal fortitude upheaval and play tricks on your mental state when upwardly trending markets goes through their normal consolidations/corrections.

As investors what we need to realize and accept is that you can’t catch a 20% move in a stock if you are not willing to lose 5-6%. This is often a normal pullback within 20% moves. Sometimes, stocks that pull back 5-6% from your entry won’t recover and you will have to sell them for a loss.  That is a part of investing. It’s ok because no one gets them all correct. Being wrong is often not a choice. Staying wrong though always is.

In the same line of thought – you can’t catch a 100% move in a stock if you are not willing to go through a 20% drawdown. Note that I say a drawdown, not a loss. They are two totally different things. If you time your entry properly, you should never let your position drop more than 5-10% below your purchase price. Once your position is profitable and on its way, 10-20% pullbacks are normal. Riding big long-term winners often requires going through deep pullbacks. Not everyone is willing or can stomach a 20% drawdown in individual positions. This is why not everyone can catch and hold 100% movers and why great returns are illusive.

While sticking with the trend sounds simple, the problem is of course, we all know trends eventually end so identifying when that occurs is critical. Since no one can predict the future and we won’t actually know when a trend ends until it can be seen in the rear view mirror (at which point it’s as clear as day) you have to rely on something other than intuition, gut or dart board.  In my case, price analysis (my process) tells me when that time is but I also rely on a number of indicators to confirm what I am seeing in price movement.  In this blog post I want to highlight one of these indicators I find extremely useful and enlightening and then look at what it is telling us today.

The NYHL is a plot of the number of stocks making new highs subtracting those making new lows (a measurement of market breadth). Intuitively it is pretty obvious the higher the number the stronger the market is. As this number starts to decline it is a sign of market weakness. Below is a 9-year chart of NYHL (upper pane) and the SP500 stock (lower pane). I have applied a 50 day moving average (red line) to the NYHL plot (black line) to use as a signal of market change. A simple, mechanical system to follow would be to reduce exposure to US equities when the NYHL (black line) crosses below the moving average (red line). In the past 9 years that signal has occurred 3 times which I have marked by the red dotted vertical lines. You can see while it is not perfect it does a great job of what it intended to do which is identify points at which a correction is imminent and when an investor should consider reducing risk.  

With the markets overly extended and seemly running on fumes struggling to move higher, what is the NYHL telling us right now? Below is the exact same chart as above but only looking at a 2 year time frame allowing us to zoom in for clarity.  As you can see the black NYHL line is clearly above the red moving average line which tells us that the current price weakness (as of right now) is just a period of normal consolidation in an ongoing uptrend.  Since the trend is our friend and we have nothing telling us otherwise, all pullbacks should be looked at as buying opportunities.

In spite of favorable indicators, a good investor always has their eyes on the market as a reversal can happen at any time. For this reason, now is not the time to become complacent. The Russian proverb President Reagan Russian used in his foreign policy of nuclear disarmament fits nicely in this investment environment, Доверяй, но проверяй, “trust but verify”.