The Investing Climate

Transcription

1 November 18, Volume 14 The Investing Climate It has been a wild ride in the stock market these past couple of months. While history usually points to a wild October, a wild November is surprising many investors. The challenge for me is trying to determine if this is the top, or if this is another correction. I have been looking for a top since the peak in January. When stocks corrected earlier this year, my prediction was that we have basically seen the top, and if prices were to make new highs, they wouldn t be much higher. So far, that prediction has remained accurate. The challenge now is determining whether the stock market is predicting a recession, or if it is just being jumpy because the economy is not as strong as many thought it would be, heading into The downward guidance from company earnings and outlooks has been a problem for the markets. This quarter we are seeing stocks drop after releasing earnings, even if they beat investor expectations. The trouble comes from future expectations. Many companies are predicting slower growth over the next few quarters, causing the stock to sell off. New to the Technical Portfolio Newsletter? BR Technicals uses technical analysis to build and maintain two all stock portfolios. The portfolios are tracked using real market data, and they both began with $100k. As a subscriber to the newsletter, you will receive our monthly publication and analysis. In addition, you will have access to our subscriber content on our website - this includes our supporting charts and analysis - and you can also subscribe to receive alerts of all our trades in real time! This is an interesting situation for the markets. Investors are beginning to wonder if weaker growth is an early sign of a recession. After 10 years, we are getting late into this economic cycle and 2019 is going to be a tough year for the economy. The trade war with China is going to ramp up with increased tariffs, and the effect from the tax cuts is going to wear off. In addition, international stock market performance is pointing to a global economic slowdown. Investors have largely brushed off the trade war, because the effects have not hit the U.S. yet. In fact, the trade deficit has increased this year because Chinese importers are front-running tariffs by importing as many goods as they can, before the 25% tariffs 1

2 go into affect. The U.S. has benefited from this, and tax cuts, but these economic booms are going to stop in In fact, the trade war may grow to more countries and goods. President Trump is still looking to put autos on the tariff list, as he continues to look for a national security reason that will allow him to impose tariffs on vehicles and auto parts. The economy is going to struggle as these downward pressures weigh on growth. When you look at the economy in this context, it really isn t a mystery why the stock market is struggling. We haven t even mentioned rising interest rates and lower liquidity in the economy. The risks are starting to swing to the downside. I still believe the best case scenario is that the major indices stay in a range, while the worse case scenario is a bear market. Our Portfolios Right now, I am looking at the Russell 2000 to guide the rest of the stock market because small-cap stocks tend to lead. These stocks act as a barometer of the U.S. economy because they do not have a lot of international economic exposure. Unfortunately, this has the worst performing index. We have held mostly cash over the last month. This has helped us dampen the volatility in our portfolios. However, I am concerned with being too cautious and missing out on a late cycle rally off of a support/bottom. I am extremely cautious because of the state of the economy, but I try to let the charts decide when and where we buy new stocks. Last week I made some purchases, but immediately sold the next day. At first, I bought because stocks were showing signs of life again. They had broken above some resistance levels, and the S&P 500 even gapped above its 200-day moving average. I assumed many stocks had moved above their own 200-day moving average as well. Later that evening however, I saw the data, and it was not pretty. I immediately wanted to sell our new positions because breadth was not there. It is true 52% of the S&P 500 was above their 200-day moving average, but only 18 of those stocks were NOT above their 50-day moving average. This tells me that half of the stocks were responsible for this recovery, but only because they had really grown rapidly, while the other half was still weak. A trend like that is not sustainable, and thats why I sold the next day. Its a good thing I did too, because the following day stocks took another tumble, and AAPL and ATVI (two of our purchases) had huge drops. The Buy List In this environment, we are looking for opportunities in ETFs. These are diversified investment vehicles, and in theory, they should be less volatile than individual stocks. There are three entry trades I am looking for. First, my gut tells me there is another drop before stocks find a bottom, if they do. So, I am looking for ETFs that can hit a bottom, 2

3 and rally off of it. However, it is possible stocks move up for a last ditch rally, without falling to supports. In this case, I am looking for strong breakouts. Lastly, I want to prepared in case the indices look like they are going to enter a bear market. If key supports are broken, I will look to buy positions in inverse ETFs. These are designed to go up when the underlying index goes down. QQQ - $177.50, $ If stocks are going to recover, this index will likely need to lead the market higher. This tech heavy index looks like it is in a symmetrical triangle, which is normally a continuation pattern. This means it is more likely to fall towards $ than go to $ If stocks are going to have one more spike higher, it is likely to start at $ However, if we see QQQ meaningfully fall below $152.50, we will buy PSQ, an ETF that bets QQQ will keep falling. KBE - $47.00, $40.00 This bank ETF has not had a great year, but it does have two solid trend lines we can try to take advantage of. I think the index is more likely to fall to $40, so if it hits it, we will enter with a target to $ Of course, it is possible that the index hits $47 first, so we want to be prepared in the event that it does. This ETF is more value oriented, which could give it an edge in this environment. XPH - $48.00, $36.85 If we see a downturn in the economy, pharmaceuticals may be a good play. These companies have the benefit of being needed regardless of economic conditions. People still need medicine in a recession. We will be looking to enter at the $36.85 support, or a breakout above the $46.50 resistance. 3

4 XLV day Moving Average, $79.50 Like pharmaceuticals, healthcare is a sector that does not necessarily rely on the economy. People still need a doctor when they are sick or hurt, and they still need insurance. The 200-day moving average acted as a support in the prior drop, but if it fails, we would look to enter at the $79.50 support. XLK - $60.00 If technology is going to make a comeback, the $60 support is where it will likely start. By the time the ETF hits this level, valuations would have become very cheap, and if investors believe the economy can persist a little longer, then this is a great spot to enter. However, this would be a 20% drop from the highs, so it may be risky to try and enter right at the cusp of a bear market. SH - $31.00 This is an inverse ETF of the S&P 500. If the ETF can hit our entry point past $31, then the stock market is likely to enter into a bear market. This is a resistance caused by the February lows. Past that, there doesn't seem to be many options for another support for the S&P 500, or resistance for SH. 4

5 Conclusion I am very skeptical of the current market environment. U.S. stocks remain volatile, and have wild intraday swings. Trade is big issue, and its really a toss up on whether Trump and China can come up with a deal before Trump increases tariffs to 25%. At the same time, company forecasts are showing slower growth than investors originally expected. At best, stocks are likely to remain within a range. At worst, we could see a bear market. Because of this our watch list consists of ETFs, with multiple entry points. In addition, we have added inverse ETFs to our watch list, in case stocks enter a bear market. We are prepared for three different scenarios. First, if stocks continue higher from here. Second, if stocks fall, but find a support and rebound. And third, if stocks enter a bear market. I would not mind holding cash for the next several months. I still believe stocks have likely seen their highs, and they won't get much better from here. There is a lot of risk out there, and we are more likely to hit a recession than another economic boom like we have seen in The risks are more to the downside. However, I always look to the charts, and we must try to seize any good opportunities that come our way. Thanks for reading, and happy trading! The Current Portfolio Holdings, Return Comparison, and Buy List are on the following pages. Written by Brandon Ross for BRTechnicals.com November 18, August 19, Disclaimer: 1. Various BR Technicals newsletters (collectively, Newsletters ), are published by BR Technicals, and offered for sale to the general public. 2. The Newsletters are impersonal and do not provide individualized advice or recommendations for any specific subscriber or portfolio. 3. Investing involves substantial risk. Neither the Author, the publisher, nor any of their respective affiliates make any guarantee or other promise as to any results that may be obtained from using the Newsletters. While past performance may be analyzed in the Newsletters, past performance should not be considered indicative of future performance. No reader should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing the prospectus and other public filings of the issuer. To the maximum extent permitted by law, the Author, the publisher and their respective affiliates disclaim any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations in the Newsletters 5

6 prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses. 4. The Newsletters commentary, analysis, opinions, advice and recommendations represent the personal and subjective views of the Author, and are subject to change at any time without notice. 5. The information provided in the Newsletters is obtained from sources which the Author believes to be reliable. However, the Author has not independently verified or otherwise investigated all such information. Neither the Author, the publisher, nor any of their respective affiliates guarantee the accuracy or completeness of any such information. 6. The Author is not a solicitation or offer to buy or sell any securities. 7. Neither the Author, the publisher, nor any of their respective affiliates is responsible for any errors or omissions in any Newsletter. Buy List Stock Breakout Bottom QQQ $ $ KBE $47.00 $40.00 XPH $48.00 $36.85 XLV N/A 200-day MA; $79.50 XLK N/A $60.00 SH $32.00 N/A HOW WE DETERMINE POSITION SIZING We use an equation to derermine position sizes so that each trade carries the same amount of risk. #1. Multiply your portfolio size by 0.50% - this will determine the amount of risk to take. #2. Subtract the Stop Price provided from the entry price. #3. Divide #1 by #2. This will give you the total amount of shares to purchase. 6

7 Portfolio Return Comparisons Regular Aggressive S&P 500 Date Change Change Change 9/22/2017 $100, $100, $ /27/2017 $101, % $102, % $2, % 11/24/2017 $101, % $102, % $2, % 12/29/2017 $104, % $105, % $2, % 2017 Returns 4.83% 5.89% 6.85% 2018 $104, $105, $2, /26/2018 $111, % $113, % $2, % 2/23/2018 $105, % $106, % $2, % 3/30/2018 $103, % $104, % $2, % 4/27/2018 $105, % $105, % $2, % 5/25/2018 $107, % $108, % $2, % 6/22/2018 $109, % $109, % $2, % 7/20/2018 $110, % $111, % $2, % 8/17/2018 $111, % $112, % $2, % 9/21/2018 $116, % $117, % $2, % 10/19/2018 $109, % $110, % $2, % $107, % $109, % $2, % YTD 2.91% 3.10% 2.34% 12-Month Return 5.77% 6.90% 6.01% Total Return 7.88% 9.17% 9.35% 7

8 The Regular Portfolio Holdings Symbol Description Qty Purchase Price Current Price Total Total Gain/ Loss Stop Risk GLD SPDR GOLD TRUST 138 $ $ $15, $84.18(-0.52 $ $ DIS WALT DISNEY COMPANY 59 $ $ $6, $18.88(0.28 $ $ NSC NORFOLK SOUTHERN CORPORATI ON 30 $ $ $5, $426.54(9.01 $ $ SBUX STARBUCKS CORPORATI ON 98 $64.73 $68.16 $6, $336.14(5.30 $68.16 $0.00 TJX TJX COMPANIES INC 94 $42.05 $51.49 $4, $887.36(22.45 $49.17 $ VXX IPATH S&P 500 VIX SHORT- TERM FUTURES ETN CLASS A 60 $28.10 $35.17 $2, $424.24(25.16 Stock $41, Risk Total $2, Cash $66, Portfolio $107,

9 The Aggressive Portfolio Holdings SYMBOL DESCRIPTION QTY PURCHASE PRICE CURRENT PRICE TOTAL VALUE TOTAL GAIN/ LOSS Stop Risk GLD SPDR GOLD TRUST 138 $ $ $15, $85.56(-0.53 $108.98$ DIS WALT DISNEY COMPANY 59 $ $ $6, $18.88(0.28 $107.51$ NSC NORFOLK SOUTHERN CORPORATIO N 30 $ $ $5, $425.07(8.97 $150.85$ SBUX STARBUCKS CORPORATIO N 98 $64.73 $68.16 $6, $336.14(5.30 $68.16 $0.00 TJX TJX COMPANIES INC 94 $42.05 $51.49 $4, $887.36(22.45 $49.17 $ VXX IPATH S&P 500 VIX SHORT- TERM FUTURES ETN CLASS A 61 $28.10 $35.17 $2, $431.31(25.16 N/A Stock Cash Portfolio $41, Risk Total $67, $109, $2,