Investing in Love

As a basic human need, investing in love seems like it would have great possibilities. No matter your age, gender or preferences everyone, at some point or another in their life (sometimes more than once) is “available’ and looking for love.  Technological advances make it so much easier now to meet people and avoid the “bar scene”. Match.com, MTCH, is one of those that seems to have caught hold … well, at least the stock has.

Since its IPO in late 2015, MTCH is up more than 300%. As you can see in its chart below, it peaked in Sept of last year, fell more than 40% and has sense come roaring back. Most recent price action has seen the stock breakout from a cup and handle pattern, pointing to a much higher price target above.

It would not be unexpected if MTCH were to back-test the breakout level (rim of the cup) before resuming its climb higher. Those that missed the breakout can look for a great, low risk entry if this were to occur as the risk could be $2 or less with an upside of more than $20, provide a fantastic 10:1 reward to risk opportunity.

A Contrarian Indicator

Here's the theory behind the magazine cover indicator. By the time a something’s success or failure reaches the cover page of a major publication, it is so well known that it is fully known by everyone and those who want to capitalize financially have already done so. For example, once all the good news is out and a company makes the cover of business week, the stock is destined to underperform. The reverse holds for negative stories. It doesn’t have to just be about businesses, it can be about social themes too … remember the 2007-08 housing boom.

An academic study by three finance professors at the University of Richmond put the magazine cover story indicator to the test -- specifically as it focuses on coverage of individual companies. The professors culled headlines from stories in Business Week, Fortune, and Forbes for a 20-year period to examine whether positive cover stories are associated with superior future performance and negative stories are associated with inferior future performance. "Superior" and "inferior" were determined in comparison with an index or another company in the same industry and of the same size.

Here's what the professors found. The research supported the use of magazine cover stories as a contrarian indicator. The most negatively portrayed companies managed to beat the market by an average of 12.4%, whereas the outperformance of the media darlings fell to just 4.2%. The conclusion? Positive stories generally indicate that the stock's price performance has topped out. Negative stories often come right at the time of a turnaround.

The study confirms that it is better to bet against journalists than alongside them. It would be easy to jump to the self-congratulatory conclusion that journalists are incompetent. But that conclusion misses the point. Journalists aren't writing cover stories to make investors money. They are writing cover stories to sell magazines. And "hot topics" sell. But it also means that when a company or financial trend is featured on a magazine cover, the chances are that the trend is already widely known, and universally accepted.

With that in mind, this weeks Business Week cover should raise some eyebrows….

Just because the Government’s measured “version” of inflation, CPI, has been in stall speed for years, doesn’t meant it will always be. Additionally, and most importantly, not everything tracks the inflation rate. Health care is a great example as it has been rising almost 2x the annual “measured” inflation rate. For a what that means over time, take a look, and try not to laugh, at the hospital bill below for what it cost to have a baby in 1958. I think the total bill would be less than the cost than the charge of 2 ibuprofen in today’s medical reality (those that have had a recent surgery can attest to what I say)

The Bullish Case

Strongly trending markets don’t care about P/E ratios, inverted yield curves, the Presidents latest tweet or most everything else for that matter. Which is why it pays to watch price movement only and put everything else on "ignore". The semiconductor index, SMH, has always been my canary in the coal mine. It tends to lead stocks both up and down which is why it is a critical reticle into the US stock market and investors willingness towards risk. If its price is in an uptrend, risk is on and investors should be long stocks, very long. Of course, the opposite is also true. With that in mind let’s take a look at a price of SMH and see what it may be telling us.

After falling, like the rest of the market to its Dec 24th lows, price rallied impulsively higher, with only a few small, minor pullbacks before testing the prior high (resistance/overhead supply) made in June of last year (red horizontal line). After pulling back 4 days, price resumed its move higher eventually gapping above that prior level of resistance on high volume (~40% greater than average daily volume). The gap was the first sign and when confirmed with high volume let us know institutions (almost $1B traded on that breakout day) were buying. I don’t need to repeat it but higher probability profitable investments come in the direction of the current trend and when institutions are accumulating. Both of which the current chart of SMH is signaling. For those already in this ETF, the good news is you now have a very clear, simple and well-defined exit plan. If price in the short term cannot hold above the recent breakout, that would be an ominously bearish signal warning it’s time to take profits and watch from the sidelines.

Sure, the market is richly valued, sure it is overbought on virtually every level but the semis are telling us buyers are in control. Don’t fight the trend.

$8 Trillion

Global bond yielding less than zero (yes, that means lenders are paying the Government to let them hold their paper) now exceed 8 Trillion dollars. In total, there are 18 countries with negative bond yields ... in the 10th year of one of the largest global economic expansions no less.

Central banks only tool left in their toolbox in an attempt to counter slow or negative growth is to stimulate the economy by lowering interest rates. At some point all that want to borrow have done so and keeping rates so low harm only those who require bond income (retirees). With this going on since the 2008-09 crash and not having the desired effect one has to wonder why continue and then immediately brings to mind this quote

The definition of insanity is doing the same thing over and over again, but expecting different results – Albert Einstein

You need to look no further than the chart above to the reason why I am a firm believer Europe is winning the race …… to the bottom and the next economic crisis will begin from that region of the world.

Q1 2019 Charts on the Move Video

Impressive moves from Christmas eve lows have the worlds stock markets very extended.. Typcially, prior highs act as formidable resistance, will they again? Or, will this be the mother of all rallies that ignore those levels and slice right through? Something to ponder as you listen to my most recent charts on the move video.

https://youtu.be/jZ_m4tYgOAk