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Technical Analysis

Breadth is waning


Breadth is waning – there’s no question about that. Yet selling appears to be discriminate, so far, as if there’s a reason behind which stocks get hit, not the indiscriminate “sell-button.”

But even with waning breadth, the weight-of-the-evidence still supports further upside. And combined, these two factors favor stock-pickers. Our top-down and bottom-up observations support this. Looking through Sectors and Groups, we find stocks with attractive set-ups neighboring those with deteriorating technicals. For instance, in our Life & Health Insurance Group, AFL is pulling back to support while PRU exhibits a possible, multi-month top. In Large-Cap Tobacco: PM is a buy at support, MO is a sell following a trendline violation. In Banks: BK looks great, less so for CFG (and many small-cap names).

In short, assuming the market’s long-term uptrend continues – our stance – this dip in breadth is a favorable sign for stock-pickers, creating an environment where selectivity can aid in outperformance.

With that in mind, there’s still plenty to like about this market, technically speaking:

  • Tech continues to lead. Its tenure remains intact. And XLK’s relative strength uptrend sits just below all-time highs. If this market was rolling over, leadership should exhibit swift breakdowns in relative strength. Not so... see page 3.
     
  • Foreign markets look great. Of course, they are benefitting from a slow rotation out of the U.S. But again, if the U.S. is rolling over, we wouldn’t expect to see the MSCI Emerging Market Index break out above a 10-year resistance level to all-time highs. That’s definitely a sign of risk-on ... see page 3.
     
  • Many cyclical Groups remain attractive. Casinos are Exhibit A. Names like LVS, WYNN, MGM, MLCO, and PENN have pulled back to base support levels. (Hong Kong-listed Macau names look good too.) Other Groups holding up well include: Homebuilders (DHI), Chemicals (FMC), Miners (FCX), Asset Managers (despite pullbacks; STT), Truckers (KNX), Semis (TSEM), Software (VMW), and Biotechs (GILD), where recent pullbacks have created opportunity. Also, though still a laggard, Retailers, surprisingly, are exhibiting latent strength in the form of improving internals; the % of the SPDR Retail ETF’s (XRT) holdings trading above their 50-day MA is bullishly diverging with the fund’s price downtrend -- typical action near a low. In today’s report we highlight actionable charts within these Groups.

Going forward, we continue to monitor events that could derail our outlook. Chief among these are: (1) major indices violating support; (2) the Financial Sector breaking down to 52-week lows; (3) foreign markets rolling over; (4) relative strength breakouts in defensive Sectors (this is partially visible in Utilities, though we saw a similar attempt that failed earlier this summer); and (5) relative strength breakdowns in leading Sectors like Tech.

 

 

Learn more about Vermilion and get a Free Trial of their research on TWS.

About Us

David Nicoski, CMT is Vermilion’s Chief Investment Strategist and is responsible for managing the firm’s research products and investment recommendations. David Nicoski was previously a Principal and Senior Technical Analyst in the Technical Research department of a global investment bank and has more than 20 years of technical research experience.  Mr. Nicoski attended college at the University of Minnesota in the Applied Business Program and the Carlson School of Management. Mr. Nicoski holds a Chartered Market Technician designation and is a member of the Market Technician’s Association.

John Betz, CMT is a Global Technical Strategist for Vermilion and has oversight and responsibility for managing the firm’s international research products and technical strategy. John joined Vermilion in 2008 and is currently a candidate for the CFA designation.

John graduated from St. Thomas University with a Bachelor of Arts degree in Business Administration with a major in finance. John holds a Chartered Market Technician designation and is a member of the Market Technician’s Association and the CFA Institute.

Vermilion Research was founded in 2006 and is based in Minneapolis, Minnesota. Vermilion’s research team has a combined 80 year of experience in the analysis and management of investment securities.

Disclaimer: The information contained herein is privileged, confidential and protected from disclosure. Any unauthorized disclosure distribution, dissemination or copying of this material or any attachment is strictly prohibited; such information, whether derived from Vermilion Vermilion Capital Management, LLC or from any oral or written communication by way of opinion, advice, or otherwise with a principal of the company is not warranted in any manner whatsoever, is for the use of our customers only and may be obtained from internal and external research sources considered to be reliable. It is not necessarily complete and its accuracy is not guaranteed by Vermilion Capital Management, LLC, its operating entity or the principals therein. Neither the information nor any opinion expressed constitutes a solicitation for the purchase of any future or security referred to in Vermilion research publications. Principals of Vermilion Capital Management, LLC may or may not hold, or be short of, securities discussed herein, or of any other securities, at any time. The foregoing also expressly applies to any trial subscription.

This article is from Vermilion Capital Management, LLC and is being posted with Vermilion Capital Management, LLC’s permission. The views expressed in this article are solely those of the author and/or Vermilion Capital Management, LLC and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


14318




Options

What's Trading: 10,000 Bullish Calls For Aluminum


CBOETV - Peter Lusk, Senior Instructor, CBOE Options Institute, discusses theta and vega in a size call trade in Alcoa.

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker, or at www.theocc.com. The information in this program is provided solely for general education and information purposes. No statement within the program should be construed as a recommendation to buy or sell a security or to provide investment advice. The opinions expressed in this program are solely the opinions of the participants, and do not necessarily reflect the opinions of CBOE or any of its subsidiaries or affiliates. You agree that under no circumstances will CBOE or its affiliates, or their respective directors, officers, trading permit holders, employees, and agents, be liable for any loss or damage caused by your reliance on information obtained from the program.

Copyright © 2016 Chicago Board Options Exchange, Incorporated.   All rights reserved.

This video is from CBOE and is being posted with CBOE’s permission. The views expressed in this article are solely those of the author and/or CBOE and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


14317




Options

Volatility 411: SPX Near Record Highs


CBOETV - Kevin Davitt, Senior Instructor, CBOE Options Institute, discusses the VIX below its 200-day moving average.

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker, or at www.theocc.com. The information in this program is provided solely for general education and information purposes. No statement within the program should be construed as a recommendation to buy or sell a security or to provide investment advice. The opinions expressed in this program are solely the opinions of the participants, and do not necessarily reflect the opinions of CBOE or any of its subsidiaries or affiliates. You agree that under no circumstances will CBOE or its affiliates, or their respective directors, officers, trading permit holders, employees, and agents, be liable for any loss or damage caused by your reliance on information obtained from the program.

Copyright © 2016 Chicago Board Options Exchange, Incorporated.   All rights reserved.

This video is from CBOE and is being posted with CBOE’s permission. The views expressed in this article are solely those of the author and/or CBOE and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


14316




Macro

Market complacency could bolster case for gold


Equity valuations are extremely high and complacency stalks markets; we explain why this could be a time for gold to shine.

 

Despite significant US dollar weakness, gold price performance has been muted recently.

It has been held back by factors such as a rebound in real rates and increased stability in the Chinese yuan, which has dampened Chinese near-term investment demand for gold.

But these are short-term factors, which do not change our view that gold has entered into a new bull market. As we have discussed previously, there are four main reasons for our stance:

  1. Global interest rates need to stay negative
  2. Broad equity valuations are extremely high and complacency stalks financial markets
  3. The dollar might be entering a bear market
  4. Chinese demand for gold has the potential to surge (indeed, investment demand in China for bar and coin already increased over 30% in Q1 2017 according to the World Gold Council)

Right now it is the second of these factors which we think is particularly pertinent.

At this time of heightened geopolitical risk, when Venezuela is on the brink of chaos and tensions are growing between North Korea and the US, there is the possibility of an event in the coming months which causes investors to seek to reduce their risk exposure.

In such circumstances, we strongly believe gold could turn out to be an under-owned and well-priced insurance policy.

Why do we think there are high levels of complacency? 

Complacent (definition) – “pleased, especially with oneself or one's merits, advantages, situation….often without awareness of some potential danger or defect” (dictionary.com).

Let’s start with the US equity market. The S&P500 made an all-time high of 2478 in July and is now up just under 11.5% year-to-date (source Bloomberg, 17 August 2017).

The valuation of this index is expensive on a variety of measures. Whether we look at simple price/book, trailing price/earnings or enterprise value/cashflow (each of which are different ways to value a company), the index is trading on valuation multiples which are 60% to 100% higher than the historical median over the last 90 years.

Whichever your preferred metric, historical regression analysis suggests expected returns for equities, from today’s starting point, are very low.

The latest justification for current high valuations include President Trump’s drive to cut corporate tax and the belief that companies’ cost of capital being at an all-time low supports future earnings growth.

US companies may well receive a welcome reduction in the corporate tax rate, but the low cost of capital argument is flawed. Increasing interest rates are not supportive for equity valuations that are already high (versus history) as companies’ cost of capital increases. As unemployment continues to fall, inflation will start to pick up at the margin, regardless of the lag. Like it or not, we are firmly in a cycle of increasing nominal (not real) interest rates.

Does gold really perform well in weak equity market environments?

If we look at history for guidance, then we see gold has the potential to perform very well in periods of stockmarket weakness.

Gold’s perceived “safe haven” status is well-supported with hard evidence. For example, if we look back at gold price performance between 1961 and July 2017 (see chart 1 below), it is very clear that gold price annual returns were positive, particularly during periods of high inflation, while stockmarket returns were negative.

We see no reason why this relationship should not continue in the future; an argument for holding a minimum weighting in gold or gold equities in a well diversified portfolio. It is important to remember, however, that past performance should not be used as a guide to future performance.

 http://www.schroders.com/en/sysglobalassets/digital/insights/2017/charts/gold-august-2017/gold-aug-2017-chart-1.jpg

High equity valuations alone are not a reason to bang the table hard to promote the upside in gold prices, but when overall market complacency is high, the risk reward looks compelling.

It is a known fact that the best time to buy insurance is at a time when the insurers don’t think it is very likely that the “risk event” will happen. For example, in the UK, household insurance premiums to cover flood risk increased by as much as 550% post the flooding in 2007 and again in 2014.

Which brings us onto the VIX; an index which illustrates the implied volatility of the S&P500 over the next 30 days. The VIX is based on the implied volatility priced in to the exchange traded options of the equities underlying the S&P500.

http://www.schroders.com/en/sysglobalassets/digital/insights/2017/charts/gold-august-2017/gold-aug-2017-chart-2.jpg

At the moment the VIX is trading at a 27-year low. Investors are currently pricing in not just a stable pricing environment for the S&P500 for the next few months, but basically the most benign risk environment in the history of the index.

To us, this is odd from many angles. Not least because current extreme equity valuations are set against the startling fact that global central banks are moving towards an attempt to reverse the most extreme set of policies in the history of monetary policy. More visceral external factors are also lurking in the background.

From our perspective, it is difficult to see how the market’s implied volatility does not pick up over the coming months as any external shocks will result in implied volatility increasing, given that valuations of broad equities appear overstretched. Not gold equities though; we believe they are cheap and our holdings are currently discounting gold prices of less than $1,200/oz. At the time of writing the gold price is $1291.

Please remember that past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

 

Schroders is a truly global asset management firm with a proud 210-year history with over $543.3 billion in assets globally (includes assets under management and administration) as of June 30, 2017 and professionals across 27 countries. Schroders provides a full range of actively managed domestic, international and emerging market investment products: from equities to fixed income, and multi-asset- to alternatives. Our firm structure and investment philosophy are focused on strengthening the partnership with our clients over the long-term. Schroders offers innovative solutions by intelligently challenging global market practices in anticipation of what’s ahead. Schroders is also deeply committed to acting responsibly through its ESG initiatives and seeking to make a wider contribution to society. For more information, please visit us at:  http://www.schroders.com/en/us/distributor/.

This article is from Schroders and is being posted with Schroders' permission. The views expressed in this article are solely those of the author and/or Schroders and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


14310




Technical Analysis

SPDR Gold Shares $GLD - Technical Breakdown


 
Gold has been catching investors’ attentions again as more and more talk of the USD being over valued and a market pullback continues to circulate. Shares of GLD are back above their 200-day moving average and tapping into a major resistance level in the $124 range. This is the third time it has hit that level in the past few months so we will want to keep a close eye on how it reacts to it. 
 
It prices can break through on volume we could be in for a nice run on gold prices. However, I think there will need to be some kind of macro-economic catalyst that gives people more of a reason to buy precious metals.
 
Gold and Silver have been popular hedges for portfolios so when we see gold breaking out we can assume that people are losing trust in the markets ability to go up and that is something you need to pay attention to. 
 
If prices break can maintain a breakout over $124 the next spot we will want to watch is around $125 and $130 which are both big pivot levels. We expect support to come in around $120 and further down at the most recent pivot in the $115 range.
 

Ross Cameron is an active trader and owner of Warrior Trading which he founded in 2012 as a live trading chat room emphasizing education and idea generation. In 2014, he began teaching trading classes, taking a break in 2015 to write a best-selling book How to Day Trade, which can be found at Amazon, Barnes & Noble, and other booksellers. Trading allows Ross to travel and bring his work with him. Today he continues to trade in his chat room and teach trading courses, and lives with his family in Vermont.

This article is from Warrior Trading and is being posted with Warrior Trading’s permission. The views expressed in this article are solely those of the author and/or Warrior Trading and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

 


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Informative

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