ChartWatchers Newsletter Blog Archives

November 2017

High Yield Bond ETF is Bouncing Sharply Off Support, Telecom Weakest Sector

The recent selloff in high yield junk bonds has attracted a lot of attention in the financial media. My Tuesday message showed the iBoxx High Yield Corporate Bond iShares (HYG) headed down for a test of chart support at its August low and its 200-day moving average. Chart 1 shows the HYG scoring an upside reversal day yesterday after touching its 200-day average (green circle). That positive action is being followed by a gap higher today. Those are encouraging signs that the selloff in high yield bonds may have run its course. The 14-day RSI line (top of chart) also shows that the HYG had fallen into an oversold condition below 30. One encouraging sign for the junk bond market is that most of its recent selling has been contained mainly in one sector. And that's telecom.

The weekly bars in Chart 2 show the U.S. Telecommunications iShares (IYZ) falling to the lowest level since the start of 2016. Its relative performance looks even worse. The gray area in Chart 2 shows a ratio of the IYZ divided by the S&P 500 also plunging throughout the year. The telecom sector has lost -16% this year, making it the market's weakest stock sector. When a sector's stocks are under that kind of downside pressure, some of that selling can spill over to bonds issued by those companies. And telecom accounts for about 25% of high yield bonds. That's what's been causing most of the recent selling in high yield bond ETFs. Fixed income analysts are encouraged by the fact that most of the recent selling in high yield bonds has been limited to that one sector. Stock analysts may be encouraged by the fact that telecom has the smallest sector weighting in the S&P 500 (1.8%). That may explain why stocks in general haven't been that negatively effected by weakness in the telecom group and their bonds. In addition, several of those individual telecom stocks look oversold.

Focusing on Solid Earnings can Boost your Risk Adjusted Returns

One by-product of focusing on stocks that beat earnings handily is the opportunity to boost overall returns. I know this for a fact as we studied the performance of almost 40 stocks that were trade alerts to EarningsBeats members over the past six months and found that on a risk adjusted basis, returns were almost 5 times that of the S&P.

For example, when we issue a trade alert to our members we provide them with entry prices, price target and stop loss levels. If a stock hits a price target or stop loss it is moved out of the active category and we can then calculate how it has done. What we found was that the actual number of winning trades barely outpaced the losers. But the average gain on the winners was over 6% while the average loss on the losers was just over 2%. So by allocating capital on an equal basis on all of the stocks, taking profits on the winners and minimizing losses on the losers, the risk adjusted returns were lofty compared to the S&P.

What this points out is traders are attracted to stocks that beat earnings expectations and if you are patient you can put yourself into position to profit. Our formula goes like this: We scan for companies that beat bottom and top line expectations, watch the market reaction, zero in on those that have a strong, positive response, then wait for them to pullback to key price or technical support. So when we issue a trade alert, our stops are going to be based upon levels that should hold, and if they don't, we exit positions while minimizing overall damage.

As an example, we issued a trade alert on IBM early last week. The entry price was $148.89, the price target was $158 and the stop loss was any close below the 50 day moving average. Within two days the stock closed below the stop loss level so was removed as an active alert with a loss of just over 1%. 

On the flip side, we issued a trade alert on PETS on October 31 at an entry price of $34.82 with a price target of $39 and a stop loss of any intra day move below $33.96. So when we issued the alert, we had a reward to risk ratio of about 4 to 1. The stock never hit the stop loss and in fact hit our price target this past week, resulting in a gain of 12%. In fact, if you want to see some more results of recent trade alerts at EarningsBeats, just click here.

Not every stock is going to be a winner but if you key in on the "best of the best", enter near key price or technical support and exit those that go against you quickly, you can minimize your losses. Combined with locking in nice profits on the winners can boost your risk adjusted returns. 

At your service,

John Hopkins
EarningsBeats 

Here Are Five S&P 500 Stocks Poised To Rise Through December

I'm a big historian and a fan of the "history repeats itself" theory.  But I'm a bigger fan of technical analysis where price action simply doesn't lie.  You can listen to all the CNBC "hype" if you'd like, where their "experts" provide their favorite picks.  I look at the charts of some of these "can't-miss" trades, shake my head and change the channel.

Continue reading "Here Are Five S&P 500 Stocks Poised To Rise Through December" »

What Does a Flat Yield Curve Look Like Anyway?

I hear talk that the yield curve is flattening and that this is a problem for the stock market. While it is true that the spread between the 10-yr T-Yield ($UST10Y) and 2-yr T-Yield ($UST2Y) is the lowest since 2007, the yield curve itself is by no means flat. The chart below shows the 10-yr yield in black and the 2-yr yield in red (top window). Notice that the 10-yr yield has been flat since 2012, and I mean really flat. Meanwhile, the 2-yr yield turned up in 2014 and moved to its highest level since 2008. 

Continue reading "What Does a Flat Yield Curve Look Like Anyway?" »

Currencies Are At An Important Inflection Point

The Yen ($XJY), the Euro ($XEU) and the US Dollar ($USD) are all at important inflection points this week. Stay tuned as this could really decide the direction of Gold, Silver and other commodities this week.

Starting with the Yen, this is a critical one to watch, Gold tracks it quite closely. With this close tracking, a break to the upside in the Yen could lead to a big move in Gold.

Continue reading "Currencies Are At An Important Inflection Point" »

Which Global Markets Have The Biggest Influence On The U.S. Market And Why?

When considering this question, I believe the correlation indicator tells us most of what we need to know.  After all, we're pondering which global market movements tend to be reflected in similar movements in the U.S. market.  For purposes of the U.S. market, I'll focus on the benchmark S&P 500.  Correlation measures how two asset classes, indices, sectors, stocks, etc. move in relation to one another.  Positive correlation suggests that the two move similarly, while negative correlation would suggest the opposite.  The time period used is a variable as is the degree of positive or negative correlation.

Continue reading "Which Global Markets Have The Biggest Influence On The U.S. Market And Why?" »

Uptrends: What to Ignore and What to Watch?

An uptrend means prices are advancing and higher highs are the order of the day. We do not know how long a trend will persist, but there is clear evidence that trends persist. Just look at the S&P 500 since early 2016 for a recent example. The 50-day EMA crossed above the 200-day EMA in April 2016 and this golden cross remains in play - some 19 months later and 25% higher. Dozens of stocks tell similar stories. Note that the 50-day EMA has been above the 200-day EMA for at least a year for 40 stocks in the S&P 100. Thus, 40% of stocks in the S&P 100 have been trending higher for at least a year. Trend identification is important because it dictates what we should ignore and what we should watch. 

Continue reading "Uptrends: What to Ignore and What to Watch?" »

Crude Oil is Trading Over $55 For First Time in Two Years

My Wednesday message showed Brent Crude Oil trading over $60 for the first time in more than two years. Brent is trading over $62 today. It also showed West Texas Intermediate Crude Oil (WTIC) trying to break through overhead resistance at $55. Chart 1 shows WTIC trading slightly above that resistance barrier today ($55.69). If it's able to hold above that level, that would mark its first close over $55 in two years. That would be an impressive upside breakout and would lend more support to energy shares.

My Wednesday message also showed the Energy Sector SPDR (XLE) on the verge of reaching a new six-month high. The XLE has actually been rising faster than the S&P 500 over the last two months. It should do even better if WTIC completes its bullish breakout. But there's another energy ETF that's doing even better than the XLE. Chart 2 shows the S&P Oil & Gas Exploration & Production SPDR (XOP) already trading at the highest level since May. And it just cleared its 200-day moving average. What caught my attention, however, was the fact that the XOP is rising much faster than the XLE. That can be seen by the XOP/XLE relative strength ratio in the top box which has experienced an upturn of its own. Since the start of September, the XOP has outpaced XLE by an 18% to 10% margin. Both have outpaced the 5% gain in the S&P 500 over the same two month period.

Energy Surges To New Two Year Highs

The price of oil closed above all the weekly closing highs for the last two years to kick off November. West Texas climbed on Friday above all the intraday highs and all the daily closes to put an exclamation mark on the breakout. A weekly close is more important than a daily close so Friday's action was a big positive for energy related trades.

Continue reading "Energy Surges To New Two Year Highs" »

New BUY Signals on DP Scoreboards for NDX and OEX - LTTM BUY Signal for USO

I've been expecting a new PMO BUY signal on both the SPX and the OEX. The OEX managed to wrangle the PMO above its signal line, but the SPX is struggling to garner its PMO BUY signal. Big news on Oil! We just got a new Long-Term Trend Model BUY signal which technically means there is a bull market bias in the long term for USO.

Continue reading "New BUY Signals on DP Scoreboards for NDX and OEX - LTTM BUY Signal for USO" »

Earnings Opportunities - No Chasing Allowed

 

Earnings Season is winding down. So far it's been quite positive. How do I know? Just look at the overall market.

We certainly saw strong earnings from the tech giants including Amazon, Apple, Facebook and Google. In fact all of these are ripe for nice trades IF you are willing to be patient.

As an example, take a look at the chart on Amazon below  which rose sharply on massive volume after they reported their earnings.

It would have been great to have owned the stock into the earnings report but we have found this to be a risky proposition; there's no telling how the market might respond to an earnings report. But the next best thing is to let an earnings event take place and then wait for a strategic place to get involved in a trade. In the case of AMZN it was higher by 15% within two days of its earnings report. It has pulled back some since then but could pullback even further where it could become a high reward to risk trading candidate.

There are MANY stocks that have beaten earnings expectations and risen sharply. So it becomes a matter of identifying the "best of the best", determining proper entry, price target and stop loss levels, then executing the trade while being very disciplined. This means taking profits on those trades that are successful and taking losses on those that do not work out. In fact I've decided to conduct a webinar this Monday, November 6, that will include StockCharts.com's Senior Technical Analyst, Tom Bowley, where I will be revealing specific stocks that beat earnings expectations and could become high reward to risk trading candidates. Tom will also discuss how you can create your own Chart Lists while identifying those characteristics you feel are most important when trading. If you want to join us, just click here for additional information.

Earnings season brings with it additional excitement while presenting many opportunities for those who do their homework. The first step is identifying those companies that beat earnings expectations and then exercising patience while getting involved in trades on your terms.

At your service,

John Hopkins
EarningsBeats

« October 2017 December 2017 »