Monthly Investment Compass Charting The Course Of The Markets November 11 th, 2017
Monthly Investment Compass 1) Executive Summary: November 11 th, 2017 U.S. Stock Market: Unmet upside targets in several positively correlated foreign indexes and US sector related ETFs target an additional 2% to 4% rise in the US broad market between now and year end. However, recently widening corporate bond spreads, deteriorating market breadth, and contracting ETF asset flows warn of the market s vulnerability to a countertrend decline first. We would view a sustained decline below 2550 in the S&P 500 as evidence that this decline is underway. Should this decline emerge, we would view it as being countertrend and a potential buying opportunity as long as it does not exceed 6% to 8% off the all time highs. Bigger picture, unmet upside targets in several additional US stocks and foreign indexes suggest the potential for an additional 9% to 16% rise, overall, into 2 nd Quarter 2018, when US stocks seasonally peak for the summer months. Size: Large Cap stocks are amid favorable conditions to continue outperforming, potentially into year end. We are also watching Small Cap for an overweight opportunity by early next year. Style: The January trend of relative outperformance by Growth stocks remains intact. US Market Sectors: We are currently overweight Technology and Financials, and are outright positive on Financials and Health Care. Industry Groups: We have unmet upside targets in Banks and Homebuilders. Individual Stocks: We have existing long ideas in FITB, CF, NFLX, and NDAQ. US Interest Rates: 2.34% is a major inflection point in the yield of the 10 Year Treasury Note. The latest asset flows data suggest a near term move toward lower rates and rising Treasury prices, perhaps through year end. 1
About Asbury Research Correction Protection Model (CPM): When To Be Invested Purpose & Key Features: The model is a defensive hedge against market corrections and bear markets that can decimate investor portfolios. The model utilizes 4 quantitative inputs. The model uses the S&P 500 as a proxy for the market. The model is binary: either in the market (Risk On) or out of it (Risk Off). There are no short positions, leveraged longs, or hedging via derivatives. The model was designed to: 1) be in the market as much as possible, 3) exit on meaningful declines, and 4) quickly reenter as soon as a positive trend has been reestablished. Since 2007, the model has been in the market 74% of the time Since 2007, the model has averaged 4.6 signals per year or approximately 1 per quarter. 2
About Asbury Research Stock & ETF Ideas: Where To Be Invested Our model utilizes many quantitative and technical inputs to screen the entire S&P 500, plus ETFs that track US sectors and industry groups, foreign stock indexes, and commodities for special low risk/high reward opportunities. The table above displays and breaks down our 35 most recent closed out trading ideas, through 05 04 2017, along with some performance related information in the table at right. Our methodology produces: 1> a high percentage of winning trades, 2> significantly larger winning trades than losing trades, and 3> very small drawdowns. 3
Price & Trend (1): No Signs Of A Top For The US Broad Market This 10 year weekly chart of the S&P 500 shows that the US broad market index is above its major trend proxies. All upside targets in US indexes have been met. This monthly chart of the S&P 500 since 1980 shows the June 2013 move above the 2000 and 2007 highs established a new, higher long term price range. 4
Price & Trend (2): Semis Closing In On Formidable Resistance, Watch SPX Support The market leading PHLX Semiconductor Index is just 4% away from a test of its March 2000 all time high of 1362. This is the US market s next major upside obstacle. Minor underlying support in SPX is2% below the market at 2534. Major support is 6% to 8% below the market at 2432 to 2401. 5
Intermarket Analysis (1): March Breakout In India Targets Additional 9% Rise The March resumption of the 2016 uptrend in the ishares India ETF targets an additional 9% rise to 38.00, or a total advance of 26%. The long term positive correlation between the INDA and the S&P 500 suggests that as goes India, so is likely to go the US broad market. 6
Intermarket Analysis (2): Switzerland Index Targets Additional 4% Advance The September resumption of the 2017 advance in the ishares MSCI Switzerland Index ETF targets an additional 4% rise to 35.70. The tight positive correlation between EWL and the S&P 500 suggests that as goes the Swiss Index, so is likely to go the US broad market. 7
Intermarket Analysis (3): United Kingdom Index Targets Additional 3% Rise The September 11 th breakout in the ishares MSCI United Kingdom ETF targets an additional 3% rise to 35.75 or a total advance of 4%. The positive correlation between EWU and the S&P 500 suggests that as goes the UK Index, so is likely to go the US broad market. 8
Trade Ideas: FITB, CF Target Additional 16%, 32% Advances The late September resumption of Fifth Third Bancorp s 2016 advance targets an additional 16% rise to $32.40 per share. Positively correlated to the S&P 500. The 2017 major bullish trend change in CF Industries Holdings targets an eventual, additional 32% rise to $49.00 per share. 9
Trade Ideas (2): NDAQ, NFLX Target Additional 9%, 13% Advances The Oct 5 th resumption of the April advance in Netflix targets an additional 13% rise to $215.25 as long as $189.63 holds as support. Positively correlated to SPX. Nasdaq Inc. is in a major price advance and testing major support at $71.80. If support holds, it targets an additional 9% advance to $80.00. Also positively correlated to SPX. 10
Stock & ETF Ideas: Trending Stocks With Good Risk/Reward Parameters The top portion of the table includes our current trade ideas with risk parameters. The middle portion lists our current price targets for global stock indexes. The bottom portion lists our 15 most recent closed out ideas with performance data. 11
Momentum: Near Term Positive, Peaking? SPX s 1 month rate of change, a near term momentum gauge, has been positive (bullish) since September 8 th and will remain so above 2561 to 2551. However, the MACD, an intermediate term momentum gauge, appears to have peaked at a previous extreme in positive momentum. Pullback coming? 12
Dow Theory: Near Term Negative The Dow Transports (DJTA) peaked and turned lower on October 12 th while the Dow Industrials (DJIA) have continued to new all time highs. According to Dow Theory, this non confirmation of a new high is a bearish warning signal. 13
ETF Asset Flows: Near Term Negative The total net assets invested in the SPDR S&P 500 ETF (SPY) have just declined below their 21 day MA to indicate a trend of monthly contraction. Negative for SPX. The daily total net assets invested in the ishares Russell 2000 ETF have also contracted below their 21 day MA for the first time since August. Negative for Small Cap. 14
Volume: Near Term Positive On balance volume in the S&P 500 has been rising on a monthly basis since late August. Volume measures investor urgency. Rising volume indicates day to day urgency to buy and typically accompanies a healthy price advance. 15
Corporate Bond Spreads: Near Term Negative High yield corporate bond spreads shifted to a trend of monthly widening on October 31 st, which is near term negative for the US stock market. This chart shows the shift to monthly widening in the spread began from 30 year narrow extremes, warning this could be the start of a larger decline. 16
Relative Performance: Near Term Positive Junk bonds (JNK) have been underperforming the US broad market (SPY) since August 31 st (note the inverse scale in the upper panel). This has historically coincided with near term strength in the S&P 500 (lower panel). 17
Volatility: Near Term Negative This chart shows that the VIX is rebounding slightly from a low extreme of 10.00, indicating an extreme in investor complacency, and that previous instances of this have closely coincided with most minor declines in the S&P 500 since April. 18
Investor Sentiment: Near Term, Intermediate Term Negative A survey of near to intermediate term oriented futures traders has reached most bullish extremes on the S&P 500 that have previously led near term market declines. Meanwhile, a survey of intermediate to long term oriented brokerage/advisory firms is hovering at most bullish extremes, warning of an intermediate term peak. 19
Market Breadth: Near Term, Intermediate Term Negative The percentage of NYSE Composite stocks trading above their 40 day MA has been declining since October from frothy extremes while SPX has continued higher. Negative. The percentage of these constituents trading above their 200 day MA has been declining from frothy extremes since late 2016, indicating a weakening major price trend. 20
Overbought/Oversold: Near Term, Intermediate Term Negative SPX is hovering at monthly overbought extremes that have previously coincided with or closely led every minor broad market top during the past year. Meanwhile, SPX is also hovering at quarterly overbought extremes that have historically coincided with or closely led intermediate term market tops. 21
Seasonality: Near Term Positive, Intermediate Term Negative November and December are the 3 rd and 1 st seasonally strongest months of the year in the S&P 500 based on data since 1957, after which the seasonal trend weakens in January and February. This quarterly chart shows that the next two weeks (3 rd and 4 th weeks of November), and the 2 nd week of December, are thee of the four seasonally weakest of the entire 4 th Quarter 22
Size: Large Cap Poised For More Q4 Relative Outperformance, Watch Small Cap IVV (S&P 500) is rebounding from October quarterly oversold extremes vs. ITOT (S&P 1500) that have previously led multi month periods of relative outperformance by Large Cap. 11% outperformance so far. Meanwhile, IJR (S&P 600) is closing in on quarterly oversold extremes vs. ITOT that have previously led multi month relative outperformance by Small Cap. Watching for an emerging opportunity here. 23
Style: Growth Stocks January Performance Trend Still Remains Intact The S&P 500 Growth ETF (SPYG) has been in a trend of quarterly relative outperformance versus the S&P 500 ETF (SPY) since late January, and has recently made its fifth successful test of that trend since mid June. 24
Sectors (1): Investor Assets Moving Into Financials, Out Of Health Care Asbury s sector rotation model is currently overweight Technology (October 16 th ) and Financials (September 25 th ). The biggest inflows over the past 1 and 3 month periods went to Financials. The biggest outflows over the past month came from Health Care, and over the past 3 months came from Consumer Discretionary. 25
Sectors (2): Utilities, Energy Under Invested. Consumer Discretionary, Health Care Over Invested. This chart shows the historic daily average distribution of assets invested in the original 9 Sector SPDR ETFs since the series began in May 2006. This chart shows the current distribution of these assets through November 2 nd. The most under invested sectors are 1) Utilities, 2) Energy and 3) Consumer Staples. The most over invested sectors are 1) Consumer Discretionary, 2) Health Care,and 3) Industrials. 26
Sectors (3): Financials, Health Care Target Additional 5%, 18% Advances The SPDR Financial Sector ETF has an additional 5% to go before meeting our Sep 22 nd upside target of 27.50. Tight positive correlation to the S&P 500. The SPDR Health Care Sector ETF resumed its 2013 advance in May and targets an additional 18% rise to $95.50. Also positively correlated to SPX. 27
Industry Groups (1): Homebuilders Poised For More Strength This table displays our current upside targets for Sector and Industry Group ETFs, the date we made the target available to subscribers, and how the asset has performed since then. The February resumption of the 2012 advance in the SPDR Homebuilders ETF targets an additional 10% rise to $45.00. Highly correlated to the S&P 500. 28
Industry Groups (2): Banking Targets Additional 11% Advance, Oil & Gas Opportunity? The KBW Bank Sector Index resumed its 2016 advance in late September and is now retesting that breakout. A rise from $97.52 targets an 11% move to $109.20 The SPDR Oil & Gas Equipment & Services ETF is testing major overhead resistance near $17.00. Major decision point, watch for a bullish breakout. 29
US Interest Rates Long Term US Interest Rates At A Major Decision Point The yield of the benchmark 10 Year Treasury Note is edging above major yield resistance at 2.31% to 2.34%. Major decision point. Meanwhile, the SPDR Long Term Treasury ETF is testing major support at $36.84. Another major inflection point, a breakdown is necessary for higher rates. 30
US Interest Rates Investors Betting On A Near Term Decline In Long Term Interest Rates Smart money commercial hedgers are holding a record net long extreme in CBOT 5 Year Note futures. Represents an aggressive bet on declining interest rates. The current trend of monthly expansion in the total net assets invested in SPTL indicates near term conviction that Treasury prices are headed higher. 31
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