ChartWatchers Newsletter

Bank Profits Soar But Bank Stocks Sour

At the time of the last ChartWatchers article, I didn't really see a whole lot to be nervous about.  However, the bullish picture certainly is getting a bit murkier based on developments since then.  After a very strong ADP employment report on April 5th, most everyone was expecting a solid nonfarm payrolls report two days later.  That never materialized, though, as the consensus was for 175,000 jobs to be reported.  Estimates ranged from 125,000 to 202,000, yet the actual number reported was 98,000.   That disappointment occurred when the Volatility Index ("VIX") had closed at 12.39 the previous day.  A low VIX reading (and a VIX in the 12s is a low reading historically) means the market is not expecting much volatility looking out the next month or two.  Bad news in a low VIX environment typically is ignored.  That's one reason that the S&P 500 closed down just two points on the day of the awful jobs report.

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Earnings Take Center Stage

It's that time of the year, a time when all attention is turned to the bottom line of corporate America. It happens every quarter and it always has a major impact on the direction of the market. And the bottom line almost always trumps everything else.

Of course there are other factors that impact the market including economic reports, geopolitical developments, Federal Reserve policies, as examples. But investors mostly care about the performance of stocks they own, including how they hold up in times of adversity, including market turmoil.

As an example, we issued a trade alert on one of the stocks in our "Candidate Tracker" that includes companies that beat earnings expectations and have strong charts. That stock was Apollo Global Management (APO) that crushed its earnings last quarter when it earned $0.98 per share versus $0.69 estimate. And it had revenues of $685 million versus estimates of $477 million. That is quite a beat and you can see in the chart below how the stock has performed:

We ended up with a very nice winner and you can see that even with the overall market struggling mightily at the moment APO has held up extremely well. This shows you the power of strong earnings even when the market is weak.

Of course if the market is in a free fall it becomes tough for even the best of the best to hold up. However, why not key in on those stocks with the strongest earnings and going forward guidance, especially when things are dicey?

We've currently got 200 stocks in our Candidate Tracker and as earnings season progresses we will be adding many more. If you would like to see a sample just click here.

Trading takes place all year long, no matter the market conditions. You're going to have your share of winners and losers. But you need to go out of your way to get whatever edge you can when things are so you might want to pay even more attention to earnings results this quarter than usual.   

At your service,

John Hopkins

How to Track ETF Tracking Errors - Examples for USO and GLD

Most of us are aware of the tracking error between oil and the US Oil Fund. There is indeed a tracking error, but a few charts reveal that this tracking error is subject to fluctuations and can even remain stable for extended periods. Today I will show how to measure tracking errors between ETFs and the underlying asset. Gold and oil will be used for examples, but these techniques can be applied to any ETF and its underlying asset, be it an index or commodity. 

There are two ways to chart the tracking error between an ETF and the underlying asset. Chartists can use a Performance SharpChart to compare the percentage change over time or chartists can plot a ratio to measure the relative performance. We must also choose between the most active futures contract and the continuous futures contract. As a general rule of thumb, I would defer to the most active futures contract when making a comparison. Continuous contracts work well for most metals and currencies, but do not work well for energy-related commodities, such as oil and natural gas. Note that continuous contracts are created by stitching together individual futures contracts. 

Comparing the Percentage Change over Time

The chart below shows the performance for the Gold SPDR (GLD), Gold Futures April 2017 (^GCJ17) and Gold Continuous Contract ($GOLD) over a six month period. All three lines are quite close together and this reflects a very small tracking error. 

Chartists can create this chart by adjusting the settings in the chart attributes section. GLD is the main symbol and it is plotted using “Performance” as the chart Type. This shows the percentage change for GLD over the last six months. I then added Gold Futures April 2017 (^GCJ17) and Gold Continuous Contract ($GOLD) by using “Price (same scale)” as an Overlay. This plots all three symbols using the same scale and makes it easy to compare performance. 

Plotting Ratios to Compare Performance

Chartists can also compare performance by using ratio charts. The ratio rises when the numerator rises more than the denominator and falls when the numerator falls more than the denominator. The top window in the example below plots the GLD:^GCJ17 ratio to compare the performance of the ETF with the futures contract (GLD is the numerator). The bottom window plots the GLD:$GOLD ratio to compare the ETF to the continuous contract. 

Notice that both of these lines are flat, which is not surprising after seeing how close the performance lines were in the Performance Sharpchart above. These three track each other quite closely and there is not much of a tracking error with the Gold SPDR (GLD). There were a few spikes, but we cannot expect perfection. Overall, both ratios were flat over the last six months and this reflects a low tracking error. 

Oil ETF Does Not Track as Well

The next chart compares the percentage change for the US Oil Fund (USO), Light Crude Futures May 2017 (^CLK17) and Light Crude Continuous Contract ($WTIC). This chart looks a little different than the gold chart above and we can immediately see some tracking issues. First, the continuous contract (red) shows a bigger gain than the other two. Second, USO (black) underperformed the May futures contract most of the period. Notice that the black line was below the gray line the last five months. There is clearly a tracking issue between USO and the underlying commodity. 

The next chart shows two ratios to plot relative performance over time. A flat ratio means flat performance and a stable tracking error. The rising ratio means the ETF outperforms over time and a falling ratio means the ETF underperforms over time. Either way, it is a tracking error. The US Oil Fund (USO) tracked the May futures contract quite well because the ratio was flat from mid November to March. This is a bit of a surprise and shows that USO tracks the individual futures contract pretty well. USO did not track the continuous contract very well at all. I am not concerned because the continuous futures contract is stitched together and it often not the best representative for the underlying asset price. 

Tracking Error Can Stabilize

I am not going to get into the reasons for the tracking error in many energy ETFs. In short, it is related to contango and contract rollovers. You can Google “oil ETF tracking issues” for more information. It is important to note that the tracking error is not constant and can stabilize. The chart below shows performance for the US Oil Fund, Light Crude Futures October 2016 and the Continuous Contract. Once again, the Continuous Contract did not track well and should not be used for comparison. As of 19-Sep-16, USO was down 9.27% and the Futures Contact was up 1%. This is clearly a large tracking error, but perhaps it is not as large as it seems. The bottom window on the chart shows a ratio plot to put this into perspective. The USO:^CLV16 ratio bounced around from January to March and this reflected tracking volatility. Notice that the tracking error was quite wide in February and remained about as wide the rest of the time. USO mostly lagged the futures contract. This tracking volatility, however, stabilized from April to September as the ratio flattened. The tracking error was still there, but remained stable for six months. This is just one example and the tracking error will not doubt be different for different time periods and different ETFs.  


Chartists do not need to worry about tracking errors for metal and currency ETFs, but should keep an eye on the tracking error for energy-related ETFs. Similarly, chartists can use the continuous futures contracts to compare performance with the metals ETFs. The situation changes with the energy-related ETFs. Chartists should not use the continuous futures contracts for comparison. Choose instead a near-by futures contract. Even so, there are likely to be tracking errors with energy-related ETFs Traders can minimize these tracking errors by trading short-term, a few weeks to a few months. The chances of a tracking error increase along with the holding period. Anything longer than six months is likely to generate a sizable tracking error.  Thus, energy-related ETFs are definitely not for long-term investors. You can find a symbol list of futures contracts here and a list for continuous contracts here

Follow me on Twitter @arthurhill  - Keep up with my 140 character commentaries.

Thanks for tuning in and have a good day!
--Arthur Hill CMT

Plan your Trade and Trade your Plan

Scoreboard Weekly PMO SELL Signals Approaching Fast!

One look at the DP Scoreboards and it is apparent there are problems in the short term. It appears that the intermediate term is sitting comfortably on BUY signals. That is true for the IT Trend Models (20/50-EMA crossover signals on daily chart), but momentum had already starting waining on the weekly charts for these indexes and now all of them are vulnerable to IT Price Momentum Oscillator (PMO) SELL signals this Friday.

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Commodity Calamity? Steel And Copper Crack

The Industrial Metals have been on everyone's radar recently. The daily and weekly charts are showing big cracks.  Starting with the Steel ETF (SLX), this is on a train out of town. This contains a list of companies related to the Steel industry. Watch for a bounce at the 200 DMA and see if we get more than a bounce to the head/shoulders neckline in blue.

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5 Reasons Why This Isn't 2007

Many market pundits on CNBC continue to predict a market top, discussing how we've run too far too fast and that valuations are too high and blah, blah, blah.  Fear sells and CNBC is all about their ratings and advertisements.  There's an occasional nugget of solid information, especially if there's a worthwhile guest on to listen to.  But keep in mind what their end goal is - to make money, and usually at your expense.  I'll watch CNBC for guest appearances and streaming news, but it's typically muted and in the background.

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Percent of Stocks Over 200-Day Average Turns Back Up

My last two messages have stressed the importance of the 200-day moving average. It's what separates uptrends from downtrends. In order to sustain a bull market, more stocks have be above their 200-day average than below it. And that is currently the case. The red line in Chart 5 is the percent of NYSE stocks above their 200-moving average (which I also showed on Thursday). The line rebounded from 54% just prior to the November election to 76% during February. March's modest setback lowered the line to 64% where it bottomed. This week's upturn shows the red line rising again. That's a good sign for the market. It may also be a good sign for the stocks that are testing or trying to regain their 200-day averages. The blue line at the bottom of Chart 5 shows the percent of NYSE stocks above their 50-day average. That more volatile line fell from 80% to 45% during the first quarter which is a relatively mild setback. And it appears to be climbing again as well. Also good for stocks.

Trust Your Good Work

If you trade stocks you're going to run into situations where you question whether or not you are making good decisions. This could include identifying entry levels and setting price targets and stop losses. It could also include pulling the trigger on a trade, taking a loss or even locking in profits which is sometimes easier said than done.

At EarningsBeats we issue trade alerts to our members and every one carries with it potential risks and rewards. A trade can go against you quickly or it might work out just like you had imagined. But every trade alert issued has been studied carefully to help determine entry prices, stop losses and price targets. It then becomes a matter of trusting the work done and letting the trade develop.

A great example is a stock alert presented to members on March 15. The stock was Cambrex Corp (CBM) where we saw a solid reward to risk candidate with much greater upside than downside potential. Our entry price was $50.20 with a price target of $53.75 and a stop loss of any close below the 200 day moving average which at the time was $49.91. In this case it was over a 10 to 1 reward to risk; I like those odds.

You can see in the chart below that the stock hugged its 200 day for 9 trading days in a row. never hit the stop loss level. Still, it took some nerve to hang in! Then finally the stock made the move we were looking for as it moved back above both its 20 and 50 day moving averages.

The key to succeeding with this particular trade was to trust the work that was done to put it in play in the first place. The downside risk was quite low relative to the potential upside reward but it also required a lot of discipline and nerves of steel as the stock tiptoed on its 200 day.

As part of the EarningsBeats service we search for those stocks that beat earnings expectations and also have strong technical charts. These become part of our "Candidate Tracker" and some of these become trade alerts just like CBM did. If you would like to see a sample just click here.

There are many things to consider when making a trade, including identifying strong reward to risk candidates, setting entry, target and stop loss levels. But if you trust your work and remain disciplined throughout the process you will greatly increase your chances for success.

At your service,

John Hopkins

A Medical Marijuana ETF (HMMJ) Begins Trading This Week - No April Fools Joke

The Stock Market is a real-time place to see the true spirit of Greed and Fear come to the forefront. Technicians use the words Supply and Demand to study the market characteristics. Over the last few years, one of the most interesting areas of the market is the niche ETF for finding specific areas of investor interest. 

This week marks the rollout of the 'Horizons Medical Marijuana Life Sciences' ETF (HMMJ.TO). For anyone interested in the ETF, a look inside its contents would probably be more helpful than the buzz around the concept. 

As a technician, I have compiled my own list of 35 stocks into a marijuana Chartlist. Here is the performance for the last month. 80% of them were lower and half of them were lower by 10% or more. Notice all four of the big gainers had a closing price less than $3.00.

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