Another Punch to the Gut?

So much of the financial media’s recent attention has been focused on the impulsive rally in stocks. For those not aware, we have had an equally spontaneous rally in bond yields which means their bond holdings have declined. Since the election, the US Treasury 10-year note lost more than 5% while the 20 year has declined more than 8%.  Because we have been in a 35+ year falling rate environment this move has caught some investors off-guard as they have been conditioned to their bond positions only rising in value (falling yields)

Looking at the 5-year movement of the 10-year US Treasury yield we see some interesting developments. As you can see in the chart below, the election triggered a huge move, pushing yields higher out of the downward (blue) channel. After yield peaked just slightly above 2.6% it created an overbought condition and has since been consolidating sideways and digesting its gains. As we know consolidations either lead to 1) a reversal or 2) a continuation and this one, as of now, looks very much like a continuation as it has formed a bull flag suggesting we may only be halfway done.  

It’s too early to tell which way this consolidation will eventually take, patterns can morph, the FED can take action and of course, Trump can tweet so we have to be open to all options. But, as of now the charts are telling us market participants are expecting higher interest rates ahead. Unless investors have immunized the duration of their portfolios, they need to be open to the possibility of another punch to the gut in their bond holdings.

Listen to Dr. Copper

Scanning as many charts as I do, quite frequently there are “themes” that arise. One that continues to present itself since the Trump win is that of inflation. Interest rates have risen as are commodity prices and their related stocks. When you speak of inflation its always prudent to check in with Dr. Copper. Why? Because it is reputed to have a Ph.D. in economics because of its ability to predict turning points in the global economy. Because of copper's widespread applications in most sectors of the economy - from homes and factories, to electronics and power generation and transmission - demand for copper is often viewed as a reliable leading indicator of economic health. This demand is reflected in the market price of copper. Generally, rising copper prices suggest strong copper demand and hence a growing global economy,

As you can see in the 5-year chart of the price of copper below, price bottomed at the beginning of 2015 and formed a divergent momentum low which warned the extensive multi-year downtrend may be coming to an end. As typically occurs after a bottom, price chopped around for more than a year, trading within a tight 35 cent range and formed a symmetrical triangle. The week before the election it broke out to the upside on slightly higher than average volume. With triangles you always have to be concerned whether the breakout will turn out to be a fake out since they are so unreliable. The answer to that question came the following week (and Trump was elected) as it had its greatest weekly rise over the past 5 years on enormous volume.

Since that breakout and while the bulls caught their breath, price consolidated, successfully back-tested its (red) support/resistance line and appears to have broken out last week.

The chart is staying the short to intermediate term copper prices are likely higher and has the room to move potentially significantly higher if the trend continues.  Those not having futures accounts have limited investments to capitalize on this potential move. There is one ETN (JJC) that attempts to mirror its price but it is fairly illiquid and as with all ETNs has inherent contango issues. A better bet would be to look at the copper miners/producers as they typically do as well as, if not better than, the ETN in tracking its price. Keep in mind though, while prices do move in directional lockstep, they are a leveraged play and move significantly greater (both up and down) on a percentage basis than the base metals price.

Beat It

One of my favorite medical stocks Biotelemetry (BEAT) provides cardiac monitoring systems and cardiac core laboratory services across the US. They went public opening trading just above $17/share in Mar 2008 just before the market melted down. They found a bottom in July of 2012 at $1.85, some 90% below their IPO. Since then the ride has been just as crazy as they have risen almost 1200% since then, riddled with plenty of volatility to test an investor’s staying power.

I have actively been looking for a time to enter as the chart above looks as if it has a lot more upside … eventually. Buying now is not in the cards for me. Even though price has been staying nicely above a rising 200 day moving average, it is butting up against the top of a rising wedge pattern while concurrently creating negative momentum divergence. The school of hard knocks has taught me to avoid “opportunities” that share both of these negative characteristics. As such, I will wait for the pullback I expect to occur out of the wedge. Why? The downside target if the pattern plays out (and potential loss if I enter now) is back down around $13, more than 40% from where it closed today. The upside opportunity, is not worth the downside risk.

If I am wrong? It isn’t the first, nor will it be the last time. Opportunities are like buses though, hang out long enough and you will be able to catch the next one.

January 2016 Charts on the Move Video

It's really clear to me at this time, global investors are strongly favoring stocks and we continue to charge higher across the globe.  Of course. things can and do change in an instant so you need a plan, but until that happens we are in an equity bull market that cannot be ignored.

My latest video making this case is available for viewing at the link below

https://youtu.be/4FXgoOOuTQ4

Are you seeing the same?

Dollar Retest

I haven’t spent much time talking about retests in the past but because the dollar is in the process of one, I thought this would be a good time to do some teachin’ to ya’all. Quite often, after a long consolidation and breakout, an investment will struggle after the breakout and then fall back to retest the original breakout level. The reasons for this are numerous and I will leave them to another post but for now the key is recognition and the understanding this is a normal occurrence and provides an objective entry for those not already invested.

Using the US Dollar chart below you can see the dollar consolidated between the lower and upper blue (support and resistance) lines for almost 2 years before it broke out higher and peaked the first week of this year. Since that time it has fallen back to the original upper blue line which has flipped from resistance to now becoming support.

If you are a new reader you may be wondering why I spend so much time on watching the dollar. As investors we are very interested in what the dollar does because it can have a dramatic effect on other assets including bonds, stocks, commodities, energy, etc. Most global commodities are priced in dollars. Because the dollar is now sitting on support combined with the fact it is still in a long term uptrend, we must give the benefit of doubt that this will resolve to the upside.  But we also know there are no guarantees so you need to have a plan in case this thesis is wrong. 

If the dollar were to break down below support and move substantially back into the prior consolidation area, I would view this as a very bearish signal and the potential signal the uptrend is over (and my prior blog post declaration of our next stop for the dollar of 108 being wrong).  There is a saying in TA that states “from false breaks come big moves” and means that when an investment breaks out of consolidation, does not hold and falls back, it usually leads to big moves in the other direction. While the odds are not in stacked in the favor of that happening, if it does, the ramification for investors could be huge.