Another Chance?

My April 5th blog post highlighted the compelling investment opportunity that was setting up in the Portuguese stock market using the proxy PGAL. At the time of writing price was at prior resistance, just under the red horizontal line, R1 in the chart below. As you can see, after a brief post blog report consolidation, price jumped strongly through resistance on substantial volume and climbed higher to the next logical resistance zone, R2. Like what occurred when PGAL approached R1, hitting R2 caused it to repel backward and consolidate.

The consolidation allowed the bulls to reload and make another attempt at breaking through R2. With volume patterns mirroring the ideal combined with the shallowness of the pullback, the probability is we see PGAL bust right on through resistance and eventually tag the first target, T1 above. A gain of 30% from my April post.  If the momentum continues in earnest, T1 won’t be difficult to attain and T2 would be next on the radar and maybe (be careful as my cold medications may be effecting my objectivity J) even a retest of prior highs at $16.5.

For those that took the original signal, congratulations. Hang on as it looks like there is a lot more in store. For those that missed out, a confirmed breakout above R2 offers another compelling (not quite as compelling as R1 was obviously) profit opportunity. As always, before any investment opportunity is taken, a position management plan need be created and adhered to. The good news is that breakouts are as easy as they come. A break back below the original breakout level provides an ideal “get the heck out of dodge” sell signal.  Good luck! 

An Invitation to China's Breakout Party

After more than a 45% decline China’s ETF, FXI, found a bottom early last year and has been moving higher ever since. Earlier in May of this year it retested October 2015’s prior high (~$40.5) and failed.  This should come as no surprise because prior resistance will continue to act as resistance until it is broken through in which case it becomes support.

Unlike what happened in Oct 2015, the bulls this time had enough in the tank to push strongly through resistance last week. Notice how this time price is above the (red) 200 day moving average which is now rising rather than falling. While not spectacular, volume was almost 20% higher than its average which helps confirm last week’s break out is likely the real deal and worth consideration in your portfolio.

After breakouts, investors want to see a follow through the next week preferably with a big white candle like the one that printed last week and on continued large volume. But the market does not always give us what we want so we need to be prepared for a pullback and retest of the prior $40.5 resistance line (which now should act as support). If that occurs and price holds, those that missed this breakout buy would be provided what I would consider a nice second chance on what looks to be an excellent opportunity.  The (ascending triangle) pattern upside target, if the market wants to go higher, is back near the 2015 prior high around $52 a 30% rise from the breakout level.

A Look at Real Estate

I received a request (thanks, Cheri) to give my view of the (securitized) Real Estate market. While I include it as a part of my weekly sector analysis top down look at the markets, I typically look to other areas for investment of risk capital. It’s not because I dislike it or have a bias but rather because almost all my clients live in California and have more than their fair share of real estate holdings when considering their homes. As such, adding more real estate into their portfolios (even though it may be a bit different --- commercial REITs vs residential) I don’t feel comfortable over-weighting a portfolio unless everything is perfectly aligned.  We are risk managers first and foremost.

Below is a 5 year chart of IYR (with no dividends reinvested so we can get an idea of movement of price appreciation). In the middle pane, the green bars are the weekly price movement of IYR. Over the past 5 years, the price, without dividends, is up around 20%. In the lower pane is the ratio of IYR to the SP500 stock index. Because the ratio is falling that tells us that real estate (using IYR as a proxy) has under-performed the broader market stock index, SP500.  It may be hard to tell from the chart, but the amount of under-performance has been more than 20% over this 5 year look-back.  And to insure I am comparing apples to apples I have it set up such that this ratio DOES take into account dividends for both holdings.

Finally, you will see behind the green bars (IYR price) in the middle pane I have included another plot of the 10 year bond yield with a purple dashed line. You can see the almost perfect inverse correlation that exists between bond yields and real estate. The relationship tells us that as interest rates rise the price of IYR falls.  And vice versa. Intuitively, hopefully this inverse relationship makes sense.

With the potential for higher interest rates in our future a real probability, if that were to occur one would expect real estate to struggle. When combined with real estate’s ongoing struggle against other risk assets options (ie. non-real estate global stocks) and my client’s existing exposure, I still find no compelling reason to commit risk investment capital to this part of the market. If and when the economy slows down and interest rates begin to reverse course or the FED changes direction, I will be more than happy to change my mind but until then, there are much better opportunities available for your investment dollar.

Good Morning, Vietnam

After peaking in mid-2014, the Vietnam stock market tracking ETF, VNM, went into a free-fall and declined more than 40%. It eventually bottomed in January of 2016. For the next 6 months it pushed higher climbing 20%, breaking above both the down trend resistance line and the 200 day moving average.  As with most bottoming patterns, the first push higher eventually runs out of gas and the sellers take control and retest the prior lows, which is exactly what occurred at the beginning of this year.

As you can see the chart has taken on a much more constructive look as price is once again above the (red) 200 day moving average which is now pointing up. In addition, RSI momentum is now in the bullish zone and, most importantly, price has broken above the prior highs. Hopefully the “W” bottoming pattern is easily recognizable because a confirmed breakout has a first target up around $18, almost 20% higher.

Its always important to keep in mind investing in small, emerging or frontier countries such as Vietnam equities is volatile and illiquid. As such, it adds greater risks than those you would normally experience in the more developed country markets. Some investors prefer to manage these risks by avoiding them completely.  Another solution, which is my preference as it allows you to diversify, is to ratchet down the size of your investment which in turn brings the risks down commensurately.

June 2017 Charts on the Move

With the first half in the books, where are we headed?

Let me know what you think. My current thoughts can be viewed in the video link below

https://youtu.be/jo5X7DBkJBE