Mo

There are a number of compelling academic studies including the Jegadeesh and Titman report published in the Journal of Finance which showed a portfolio of momentum stocks outperforms the broad-based SP500 index.  Other studies demonstrate it’s not required to put your entire portfolio into momentum stocks if you want outperformance. Just having portfolio exposure works too.

One of my go-to vehicles if I want to spread my risk across many momentum stocks is MTUM, the Ishares ETF. The chart below is a 5 year look at the ETF. In the upper pane is RSI which was massively overbought but after the recent double digit pullback, has been reset, is above 50 and rising. In the middle pane is price which is above both its blue uptrend line and the rising 200 day moving average. I would be remiss if didn’t mention, it is within 9 cents of breaking out to new, all-time highs.  

And if you are wondering how it has performed, the bottom pane is the ratio of MTUM against the SP500 index.  When looking at ratios remember a rising line says the ETF is outperforming the US stock index. Pretty easy to see this momentum play does very well during uptrends, but loses more in downtrends so keep that in mind when investing. Over the last 5 years, MTUM has outperformed the index by more than 35%, a 6% annualized rate of return greater than the benchmark.

May 2018 Charts on the Move Video

The US stock markets continue to consolidate and digest its huge 2017 year run-up and subsequent double digit correction. The lone exception being small cap stocks as they have moved on to all-time highs. Will the rest of the market follow suit?  The benefit of the doubt has to be given to the prior underlying trend but I don't think the answer will be resolved any time soon. Until then, check out this month's Charts on the Move video at the link below  ...

https://youtu.be/XQLqeDGpNCA

Cisco Bulls on Notice

One of old techs beloved companies, Cisco, has been on an 8-month tear. But its recent earnings announcement, while not bad, was not well received by investors and The Street. Price gapped down more than 4% the day after the call and has been consolidating sideways since. As you can see in its daily chart below, price sits right on a confluence of support, including both horizontal and its rising uptrend line which, just coincidentally, is the bottom of the (blue) bearish rising wedge. On a longer-term time-frame, price is well above its rising 200 day moving average telling me any short-term concerns are, well probably just that, short term. But risk is clearly elevated right here so CSCO bulls have a decision to make if support does not hold.

If price were to break support and hold below, I have identified likely downside targets on the chart as T1 and T2. CSCO shareholders have to be open to the potential for further downside as price sits below both its declining 10 and 50 day moving average, telling us in the short term, the sellers are in control. This is made obvious by perusing the lower volume pane where the big volume is dominated by the red (selling) bars. I would be remiss if I didn’t mention the slight bearish RSI momentum divergence and the head and shoulders top pattern which adds further caution to the stock continuing its move higher.

If the buyers can hold above the current support zone, it is likely we will see CSCO go on to make new, all-time highs. A break below and move to one of the lower targets would likely signal the (short term) end of its recent bull run and a much longer-term sideways consolidation, something most traders would prefer to avoid.

Bullish Demand Tailwind

Stock prices work like most other free market items, the greater the supply, the lower the price. On the flip side, the greater the demand, the higher the price. Corporate stock buy-backs have historically provided a tailwind for higher stock prices as companies retire shares (thereby increasing demand while reducing supply) but have been decreasing for the past 3 years. 

It looks like 2018 may reverse that decline. If the above repurchase forecast turns out to be true, it should provide a bullish backdrop for equity prices this year. While it may or may not be enough to push prices higher, it will surely provide a floor likely keeping a lid on the size of any decline.

Nesting

When looking for investment opportunities, some of the most interesting setups can only be found when looking across multiple time frames and is why I find it a critical step. If something looks interesting short term but is in a long term downtrend, it is likely that opportunity will only be a winner if managed as a short term trade.  But when something develops in a short term view and is in alignment with the longer term, it not only increases the probability of success but also the expectation of large gains. These are borne out when a short term pattern is nested inside a much larger pattern.  A good example is what is occurring right now with Jazz Pharma, JAZZ.

The daily chart below shows price is ready to breakout above the neckline of this almost 10 month inverse head and shoulders pattern. Notice how price has held above the 200 day moving average, when its support was tested twice in April and May. When combined with the fact that RSI momentum is rising and is within the bullish zone, the weight of the evidence says a break above the blue horizontal neckline provides a compelling upside target in the 191 area above, some 19% higher.  This looks like a great set up.

When looking at the same investment on a weekly time frame something very interesting stands out as you can see below. Nesting. The inverse head and shoulders pattern that I showed above (blue) is actually the right shoulder of the same but much bigger inverse head and shoulders (green) pattern. Notice how the blue (daily time frame) target just so happens to be at the prior 2015 high. This is not unusual. That is where resistance exists. Those that purchased at or near that level in the past and are still holding will provide a huge amount of share supply which will likely either slow or stop a quick move above that level. They are currently underwater and as such, the normal desire to “break even” will induce many to sell, even though now seems like a time to accumulate.

The upside target for the larger (green) pattern has an even more attractive target near 225, doubling the smaller pattern’s return. When nesting occurs like it has here, it sets up the possibility not only for greater returns for the opportunity but also extending its holding period, a benefit for those wanting to be less active.