The Smallest of the Small

The frontier markets are those countries/economies that are too small and unimportant to be considered even an emerging market. Their kind of like that weird sister you have but fail to mention when discussing your family to friends. Countries like Nigeria, Vietnam, Bahrain and even tiny Mauritius fall into the frontier market bucket. Investing in these markets is extremely difficult as access and liquidity (or lack thereof) are two major risks investors who stick to the “developed economies” don’t have to worry much about. 

Besides a limited number of mutual funds there are couple of ETF’s where investors can go to get exposure to the frontier markets, FRN is my favorite. As you can see in FRN’s chart below, it just recently broke out above an important, long-standing zone of resistance. Price is currently above a rising 200 day moving average, momentum is VERY overbought and in need of a rest and likely why price is currently in the process of back-testing the breakout zone. If it were to hold above it, the next upside target would be back at the prior $16 highs some 20% higher. And if the market really gets to rockin’ the prior 2011 highs could eventually be in view, an advance of almost 50%.

With any alternative investment we want to see its performance as compared to a benchmark before adding to a portfolio. In the second pane from the bottom is the ratio of FRN to the world stock index less US stocks while the bottom pane is the plot of FRN to the US SP500 index.  As you can see in both instances FRN has formed a rounded bottom and has formed a series of (slightly) higher highs and higher lows, an indication of a possible trend reversal.

Like the smallest of the small micro-cap stocks, investing in the frontier markets can be a wild ride but offers out-sized gains in addition to a lower correlation and beta to your typical stock index investment. As such, for those with a proper risk tolerance profile, the frontier markets should be considered for inclusion into a well-diversified portfolio. 

Two Notable Breakouts

While the broader indexes were choppy and non-committal, two markets broke out above long-term resistance to new highs last week. The first inside the US, the biotech sector, IBB, had tried to get above the $300 level at least 4 times in the past year and a half and failed each time. Apparently the fifth time was the charm as it surged almost 10% last week on huge (>3x) volume. This has room to run as it used a rising 200 day moving average as a trampoline.  $340 should provide near term resistance but if this has legs the rectangle pattern target is $360 and above that, the prior $400 high.

The second breakout occurred in the Taiwanese stock market. This chart below goes back 21 years so the fact their market broke out above this level on its fifth attempt is more confirmation of investors (current) desire for risk assets. Whether this is due to the lack of interest in bonds or just an extension of this bull market only time will tell. Regardless, a break to all-time highs in such an important financial market as Taiwan can be viewed as extremely bullish. 

When looking at alternative markets, it’s important to view them in context of the US and global indexes. It makes no sense to commit financial capital unless the alternative can outperform your current holdings. In the bottom pane of the chart below is the plot of the Taiwan market against the SP500.  As you can see it has been in a steep downtrend lagging the SP500 since 2009 by 50%.  What should stand out is the ratio has bottomed and has made (ever so) slightly higher highs and higher lows, signaling a high probability the downtrend has ended and a reversal is at hand.

The End of Fruity Pebbles?

Ok, I have to be upfront.  This post is not about the end of Fruity Pebbles cereal but I had to come up with something to grab your attention with a title that read “Lower Prices for Post Holdings Stock” (the maker of Fruity Pebbles, Shredded Wheat, Raisin Bran, Honey Bunches of Oats, etc.)

As you can see in the chart of Post Holdings, POST, below its stock has risen some 190% (peak to trough) since its last major bottom in Oct. 2014. After first topping in July of last year it made another attempt to break that $88 level and failed creating a double top in April of this year. Since then, price has broken below a (now) falling 200 day moving average and just last week has pierced the (blue) multi-year uptrend support line.  All of these point to the likelihood for ongoing weakness into the summer months. $71 is an important area of support where POST is likely to find at least a temporary bottom and the chance for a reversal if I am correct about weaker prices ahead. As always, if we were to get a correction in the overall market, POST be in for a much bigger decline and the $55-$57 zone (T2) would be its next likely home as that is the double top pattern downside target.

One last point of disclosure … I have a (negative) thing for POST. It’s nothing against the company or products (well, I never did like their Smurfberry Crunch) but rather its stock. You see back in 2014 I did an almost perfect call in identifying the bottom of the 2014 decline and went long the stock.  What’s not to like about that you ask? I eventually got shaken out of the position on its first major pullback and ended up with a measly 30% return for my efforts, missing out on most of its 190% gains. My mentorstaught me to never invest with emotions so hopefully I have demonstrated overwhelming evidence that my current short entry is based upon technical reasoning and not a desire to get even.

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.