A Hundred Times

Baidu (BIDU) which literally translated means “A hundred times” is one of the largest internet companies in the world and China’s search engine leader.  Since reaching an all-time high in late 2014, found a bottom a year later. Since that time it has been making a series of lower highs but higher lows essentially going nowhere. This, as we know, creates a symmetrical triangle pattern. A break out of the pattern can occur in either direction and because of its unreliability, an investor who took a position in the direction of the break needs to be alert for the possibility the break was a fake and price quickly reversing in the opposite direction. With all this uncertainty and potential management headache many investors will be better off ignoring these patterns and move onto something with a higher probability.  But those willing to take the risks see the upside targets these patterns offer well worth their hazards and Baidu is no different. 

After last week’s breakout from the pattern on some 20% increase in volume combined with momentum above 50 and rising, provides some level of comfort this move is real. Baidu’s (BIDU) first conservative upside target is back up to prior highs at $250, some 30%+ higher.  Beyond that is anyone’s guess as once price has moved onto new highs and it gets into rarefied air, reasonable target estimates become fuzzier. An investor who wants to wait for a confirming move higher this week could buy the breakout and place a stop just under the breakout level. A move back into the pattern would invalidate it and provide the reason to exit the position. Using this management framework offers the investor an excellent opportunity to make $4 for every $1 invested. Personally, I would take an opportunity offering this risk to reward ratio a hundred times out of ahundred.

$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

Change

It is not necessary to change. Survival is not mandatory. ~W. Edwards Deming

The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails. - William Arthur Ward
 

While one could quarrel with whether Amazon is a technology company or a retailer, it would be very difficult to argue the investment world has not dramatically changed.

Eyeing Small Caps

With the recent methodical (and much needed) pullback in the US stock market, I have been amazed at how orderly it has been. There has not been the type of volume patterns or fearful unloading of stocks that normally occur …. Yet.  The couple of days where the indexes were down big early in the day, the bulls stepped in at the end and rallied prices.  The question I keep asking myself is this due to the unusually strong market (and is this as bad as its going to get) or are we biding time waiting for the other shoe waiting to drop to kick off the next, much deeper correction?

No matter where I look when I scan the market, I see the same story, overbought conditions combined with negative divergence warnings and sitting right on or just above support. Small cap stocks are no different as you can see in my chart of IWM below. At the price high in March, RSI momentum registered a divergent lower high (negative divergence). Since that time, price has formed lower highs and lower lows as it slowly grinds lower and sits slightly above (blue horizontal) support. It shouldn’t take much imagination to see this topping action is/has formed a head and shoulders pattern. Additionally, In the bottom pane, the ratio of small cap stock performance to the SP500 index shows it too, sits right on the supporting uptrend line.

If the bears take control and price breaks support with conviction to the downside, the first level of support is the 200-day moving average (T1), after that the head and shoulders pattern target (T2) is a potential place where we could find buyers reversing the trend. Beyond that if we really get a head of steam south, T3, last November’s low is where I would be looking for a counter trend bounce. I am not saying we are in for a much deeper pullback here because no one knows, but the current setup and market conditions (divergent overbought highs) almost always lead to a correction. What we won’t know until after the fact is if that negative divergence will be worked off over time (price holds support and we chop sideways) or via price (we see prices experience a much deeper pullback).

Whether it be first out of the gate higher after a selloff or the first to top out after a strong bull market run, small cap stocks can be the proverbial canary in the coal mine which is why I watch them so closely.

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.