Tuesday we posted a mystery chart and asked you all to let us know what you would do. Buy, sell, or do nothing?
As we expected there weren't any bearish responses, instead most of you were buyers at current levels or on a pullback. We think the evidence is clearly pointing in that direction too, which is why we put the question out there in the first place. What, if anything could we be missing?
Now that we're all on the same side of the boat, let's get into the chart and why we feel it's relevant.
This week's Mystery Chart Reveal was focused on Japan's breakdown to new lows versus the S&P 500. This one chart is part of a much larger theme, so in this post we're going to discuss the best reward/risk pair trades present in this space.
The latest Chart of the Week is actually 4 charts! Today we're looking at Emerging Markets and comparing them to the S&P500. When money managers are bullish and positioning themselves for higher stock prices, they tend to invest in more speculative, higher beta names. When PMs are positioning themselves for lower stock prices, EM gets killed, particularly relative to developed markets.
These 4 charts represent divergences between Emerging markets and the S&P500 over the past couple of decades. When the S&P500 is making lower lows but Emerging Markets are simultaneously making higher lows, it's been evidence of risk appetite for stocks and markets have continued to rally for years after the divergence.
When it comes to strategies, I've noticed that some investors try to force their approach on to the market, even if we're not in the type of environment where that strategy works. The first thing we want to do is identify what type of environment we're in, so that we can then create strategies to try and profit from it. To think we can build a system for a future environment that doesn't exist yet is foolish.
When it comes to buying stocks, I'm a bigger fan of buying things that are already working rather than getting cute and trying to be the first one in hoping others agree with me quickly. Rarely does bottom fishing work out in our favor. The probabilities are against us from the start.
One way to see if something is already "working" is to recognize how it is behaving compared to its peers. In the case of U.S. Stocks, how are specific groups doing compared to the rest of the market? I like to think of it like holding a basketball in a pool under water. You can feel the pressure, similar to overall selling pressure in stocks. Once you let go, the ball explodes out of the water and into the air. Stocks behave the same way once the overwhelming selling is complete.
I'm in Vancouver for a few days. While I'm here, I need to meet with Gold Bugs and ski Whistler. That's what you do around here right? I'm good with both.
It's hard to have a serious conversation with the true yellow metal cult followers. These clowns are bullish at all times and have been expecting Gold to make a huge move every day since their last big move that ended in 2011. "This is it", I've been hearing for years. But Nope. Not only have they not made any money, but the opportunity cost (what else could they have done with that cash) is through the roof. It's been painful to watch them.
For our purposes, open minded investors, in other words, we don't care if Gold doubles or goes to zero. We could not care less. Our jobs aren't dependent on them. Our "investment strategy" is not tied to rising prices for precious metals and since we don't have "a narrative", we don't need to make things up to justify our existence.
In today's Chart of The Week we've outlined a name that's breaking out to new highs, offering a great entry on the long side. In this post, I'll outline a few more names that we need to be buying as they break out as well.
For the last few weeks I've been writing in our notes to Institutional clients and internally to our team about the slow rotation into Cyber, and last week we saw that trend accelerate to the upside.
