Ask us anything Answers: Part 1

Welcome to the Ask Us Anything: Answers blog! We’ll post at least two blogs to get through your questions. This first blog reflects the questions I have addressed. The next blog will be questions that Craig, or Craig and I, have addressed. Thanks to all who submitted questions. I’ve grouped a few of them together under broad categories – all in the name of keeping the answers orderly and logical in sequence. Here goes!

 

Energy

Q: Jim asks for my opinion on the timing surrounding the energy trade – seeing that the sector has had a good run of late. Is it time to sell?

A: I recently posted a video on the sector rotation model, where I addressed that very question.

Readers unfamiliar with the sector rotation model should consider taking my Online Technical Analysis Course. I consider the sector rotation model as one of the more pragmatic ways of spotting new market opportunities.

My bottom line for the energy trade is this: The sector began showing new leadership in the past 2 months or so. This, as money rotates out of the irrationally priced tech stocks, and into materials. I like being in a leading sector, and readers know I have promoted the trade since the beginning of the year. However, oil, like most sectors, is now a bit overbought. It will also be facing the seasonally unfavorable time of the year for the sector in the summer.

My thoughts are that oil, and the producers, will pull back a bit, but such a pullback will represent opportunities. I’ve indicated the neckline on the oil chart below. I will personally look to be adding positions if as when this point is reached.

BTW-I present the fundamental reasons for owning oil and gas in many of my videos and blogs—just type those words into the search engines on either venue. I anticipate a return to $100 or more on WTIC crude at some point in the not so distant future

Producers

Here’s the iShares TSX capped energy XEG ETF. It broke out recently. Momentum indicators (except longer termed MACD) indicate approaching overbought. It might pull back a bit, probably to the neckline.

WTIC chart

Here’s the WTIC crude oil chart. Not as overbought as the producers. Oil has yet to stay above $85 resistance. Obviously, producers are anticipating a breakout. We’re in that camp. We view pullbacks in the producers or oil as a time to add to positions.

Index investing & VectorVest

Q: Douglas asks about investing passively via an index trade such as the XIU ETF. He compares passively investing in that ETF – or any index ETF, to using the VectorVest (VV) system.  VectorVest is a low cost quantitative factor model geared towards retail investors. VV, and others, are known as “Black Box Systems”. The service claims to combine the best aspects of fundamental and technical screening with a buy/hold/sell rating system using those factors. Douglas notes that VV doesn’t have the accurate timing of my calls. Why might that be?

A: Many, many years ago (in the 1990’s) I subscribed to VV as a budding Investment Advisor. In a nutshell, I found the system ineffective – just as Douglas has been experiencing. As Douglas notes, it lags. And that’s not a great thing in todays fast moving markets.

Douglas – this is honestly why I created my Online Trading Course. Its a one time investment that isn’t much difference in cost from a years subscription with VV. And, quite frankly, its far more effective, timely and proactive than ANY quant model available to retail investors. The only downside to my course is that you have to do some work by following my step-by-step process. Its not plug n play system. But, as you’ve noted with VV – such systems rarely work. Trust me, its worth the little bit of time to follow the steps I outline in the course. Here’s the link to read more about it:

The Power of Technical Analysis

Anything that actually works is going to involve some effort.  Sorry folks, there’s no lazy way out of investing. You need a systematic approach. And you need to stick with it.

 

Two quick questions

Volatility

Q: Sam asked how I reached the average daily volatility that the VIX implied for the coming rally – back when I predicted the rally on April 20th. Of note: this rally occurred as anticipated, and is now likely to at or near its end. We raised more cash today in our Equity Platform.

A: The volatility calculation was provided by an options and trading expert Larry McDonald, who’s research I have subscribed to for many years. Honestly, this man is far more sophisticated than I in such analysis, so I rely on his reports to provide me, and pass onto you, such tidbits as they appear relevant to my own research.

Mining stocks

Q: Maulik asks for my thoughts on some mining stocks and ETF’s.

A: We can’t provide individual stock or ETF recommendations. However, we do feel that the materials are in a temporary overbought situation that begs a pullback. Mid-long term, we anticipate strong upside in the sector as sticky inflation remains in place. That, and growing demand from emerging markets for materials. we reduced our exposure to metals slightly last week, although we remain mid-long termed bullish.

XME ETF chart:

 

 

Sectors to watch

Q: Bob asks me what sectors I like as a likely pullback, as I have been noting for a month now, plays itself out. He is interested in opportunistic plays as the market reaches lower levels.

A: I’ve made no secret of the fact that energy – which includes oil, nat gas, and all things nuclear – will be a hot spot for the coming years. See my various videos on this subject. We are also cyclical bulls on commodities in general. We feel that commodities may outperform financial assets for the coming years. This, based on perma-inflation, and a natural cycle – which suggests that the time for a period of commodity outperformance is due.

 

 

For more neartermed sector rotations, I run my sector rotation model frequently.  I sound like a broken record here, but I recommend taking my Online Course to get a handle on that methodology. Also—keep reading this blog. As you know, I am pretty transparent and timely in my buy/sell views.

There’s a reason why BNN producer once noted that I’m among “the most accurate Technical Analysts” they’ve worked with. The methodology I use to be accurate is no secret. Its in my course!

 

Indicators for Overbought/ Oversold, Crowded or Uncrowded Trades

 

Q: Mark notes that a TA recently noted a chart has the potential to break out – it might be a crowded trade. He asks me to comment on this.

 

A: I think I understand what he is referring to. If you look at the Metals chart under “Two Quick Questions” heading above, you’ll note that the ETF is at big technical resistance. It moved nicely to that point – so this might be considered a crowded trade. My way of addressing this is as described to Maulik in the above question. I wont buy right at resistance! In fact, the sector may pull back.

But if it does break out, its a different story.  I wait and see if it settles a bit after the breakout, and then buy higher. That’s because the crowd has found enough evidence to take out all of the myriad of sellers that are sitting in wait trying to unload their stocks at the recent highs. Once those guys are gone, you can have lots of blue sky ahead. I do like to see some volume, per your comment, on the move if it breaks out. And I often wait a while (3 days to 3 weeks ) to prove it’s legit—per your comment. But breakouts are good news most of the time!

Bollinger Bands

Jeff asks if I use Bollinger Bands to determine oversold/overbought positions.

Jeff—if you read my April 20th “sell the rip” blog, and the recent “rally” blog—you’ll see a timing system that I have used for some 15 years of my career to refine trade entry exit points. And to make short termed trading decisions. That system employs the coinciding signals from three common indicators on a daily chart. Bollinger Bands is one of them. So, yes, I use BB’s!

Here’s the daily chart of the SPX with my “neartermed timing system” on it. I look for coinciding overbought/oversold signals on BB, RSI and stochastics.

It might be noted that we raised more cash today in our Equity Platform as we see the recent rally struggling at the 20 day SMA (middle line of BB). The three indicators are NOT signaling a sell, but we don’t trust this rally to last as we come into the seasonal sell period. In a bear trend, you can see markets roll over as that SMA and RSI reach their middle lines. So we legged out some more.

 

Back later this week with more “Answers”. Stay tuned.

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