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Treading Cautiously

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Treading Cautiously

Something’s cooking and although I’m not sure what exactly is going on, my Spidey senses are tingling and that usually means that it’s best to tread cautiously and assume a wait and see position. It’s either that or someone spiked that mushroom soup I had last night, in which case I hope you’ll enjoy my very last post ever. Now all joking aside, my suspicion is that we may be approaching at a temporary bounce in the USD, which may just be the reason why several of my open campaigns are currently in the process of reversing. Let’s take a look:

2017-08-04_DX_Hades

The USD has now descended to a crucial inflection point I highlighted a few days ago. The weekly panel on the left shows you long term support produced by our lower 100-week BB plus two spike lows in the 92.1 vicinity. I hate to be a drama queen but if the Dollar continues straight lower from here then a whole boat load of stops will be triggered and we may just descend all the way into hades with no hope for a bounce until around 87.

By that point you’ll be using Dollar bills as toilet paper or wallpaper if your house is really small. By the way, why is it toilet paper but wallpaper (together)? English doesn’t make any sense and every Spaniard I ever met seems to agree. Anyway, I am somewhat exaggerating of course as the Dollar was just fine in the 80 range between 2011 to 2015 but those were different times and I have an inkling that Draghi and his ECB cohorts weren’t prepared for a 20% increase in the EUR/USD exchange rate when predicting sunny days ahead across the European Union.

Either way, if the Dollar drops this low I’ll be in a very very crappy mood, so you better hope it doesn’t happen. By the way, about the featured image: it is literally this hot here in Valencia right now, except that it’s also humid as hell. When turning on the cold water faucet late in the evening we need to watch out as to not burn our hands – no joke. And they always claim that building standards are so much better over in Europe. Bullpucky…

Campaign Updates

2017-08-04_ZB_update

Alright, let’s observe the damage. Bonds are probably going to be stopped out today as it’s nose diving and is now trading only a few ticks away from my trail. On the upside that would lock in about 2.2R and that’s ain’t bad. Alright, please stop reading now – the rest of the post is not very interesting… have a good weekend!

schneider_weisse

2017-08-04_gold_update

Damn it, you just couldn’t help yourself, could you? Well, gold just gave me a yikes and here I was thinking that the express elevator was waiting. Which apparently it was but it’s going the wrong way. Not stopped out yet but seeing futures drop like this across the board isn’t exactly promising.

2017-08-04_crude_update

Crude has been sickly since my entry and odds of survival are now pretty low. This definitely was worth a shot however as the general setup is extremely juicy until about 48 plus minus a few ticks. There’s a bunch of daily support accumulating there and although it may not help us with with this campaign it seems we at least may get a chance for revenge (yes, I’m joking – never trade your emotions – only trade technically sound setups).

2017-08-04_copper_watch

Now copper has me fascinated right now but clearly today isn’t the right moment to strike. What I would love to see here is a fast drop toward that upper 100-day BB which scares all the children and gives us adults a chance to buy in cheap. I know being long after such an advance may ‘feel’ risky but that’s just an illusion. Statistically trend break outs like these (see 100-week BB) have a good chance of continuation *after a retest and breach of the previous highs*. To be clear – the entry is a coin toss but once it breaches the previous highs the odds of success not only jump to 75% or higher but you often also see big trend moves. Which means that if you aren’t greedy a small position pays off handsomely. Hope that makes sense – if not please do not ask in the comment section  **

One entry however I cannot refuse today:

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** It’s already happening! The lower the Dollar drops the more abusive I get.

Published at Fri, 04 Aug 2017 13:21:20 +0000

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Q&A: Canada tries trading marijuana in new ETF

 

Q&A: Canada tries trading marijuana in new ETF

NEW YORK (Reuters) – You can smoke it or eat it, and now in Canada, you can trade it in your stock portfolio.

The $120 million Horizons Marijuana Life Sciences ETF (HMMJ.TO) – the first exchange traded fund in North America that focuses on the legal marijuana market – launched in April on the Toronto Stock Exchange. There are no U.S. competitors, at least initially, as federal law prohibits the drug, making it difficult to set up a fund.

Canada is on track to legalize recreational marijuana by July 2018 after the government put forward legislation in April that will allow it to regulate production but leaves the details of how the drug will be sold up to the provinces.

At least one detail of the new ETF has already changed: in June, its Canadian-based fund sponsor dropped “medical” from the fund’s name in anticipation that recreational marijuana will soon be legal in Canada.

With positions including marijuana grower Aurora Cannabis Inc (ACB.TO), medical marijuana companies such as GW Pharmaceuticals Plc (GWPRF.PK), and fertilizer company Scotts Miracle-Gro Co (SMG.N), the fund attempts to capture the full extent of the Canadian marijuana industry, which Deloitte expects could grow to $22.6 billion if the recent bill to legalize recreational use is successful.

Reuters spoke with Horizons Exchange Traded Funds President and Co-Chief Executive Officer Steve Hawkins recently about what is next for the firm’s marijuana ETF.

Q: With few pure plays for medical or recreational marijuana, how do you decide what goes into the fund?

A: We didn’t want to make this one actively managed, even though we are the biggest provider of actively managed ETFs in Canada. This is more index-rules based. It’s a very new and growing industry and we expect to add new constituents with every quarterly rebalance. With the full legalization news in Canada, there’s a lot of strong growth prospects for this industry.

We worked with Solactive, a German index provider, to create an index that fits in all aspects of the industry. Scotts Miracle-Gro is a part of it because they have been extremely public about their investment in the growth of the marijuana industry going forward with respect to hydroponics and specialized fertilizer. Then there are biopharm companies which are not specifically marijuana growers or distributors but are involved directly or indirectly in a derivative.

Q: Do you have as sense of the fund’s ownership base? Is it mostly Canadian, or are there U.S.-based investors as well?

A: More than 95 percent of the fund unit owners are Canadian. It’s very difficult for Americans to trade Canadian ETFs. That’s just the way that the SEC (U.S. Securities and Exchange Commission) set things up.

Q: Do you expect to launch a U.S.-listed fund?

A: We do have a sister company in the U.S. and we are looking at it but there are number of regulatory issues. It’s only at the state level in the U.S. where marijuana is approved and it creates a lot of legal concerns with respect to banks and stock exchanges. The fact that no large U.S. stock exchange has listed a marijuana stock is very telling. How could we list a marijuana ETF if they won’t list a marijuana stock?

Q: The fund is trading about 8 percent below its level in April. How do you expect to attract more investors to the fund?

A: We launched very quickly and raised $120 million in the first week and a half. Unfortunately from there we saw marijuana stocks themselves take a substantial hit from a performance perspective. We haven’t really seen any outflows from the fund. We are extremely pleased with the progress of the fund.

Editing by Beth Pinsker and Matthew Lewis

 

Published at Thu, 03 Aug 2017 16:01:52 +0000

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Will Gold and Gold Miners Break Out?

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Will Gold and Gold Miners Break Out?

By Alan Farley | August 3, 2017 — 10:00 AM EDT

Gold and gold miners have lifted to seven-week highs, underpinned by a Federal Reserve put on hold by mixed economic data as well as geopolitical catalysts that have attracted incremental fear bids. The rallies have occurred without much fanfare because neither futures nor equities have set off long-term buy signals that predict much higher prices. However, it is time to get these instruments onto watch lists because breakouts could catch the complacent crowd by surprise.

The precious metals group is trading close to price levels in place at the time of the presidential election. Precious metals were sold aggressively after Donald Trump won because it was assumed that higher growth rates would signal higher inflation and a long period of Fed rate hikes. Neither of those outcomes has unfolded so far in 2017, allowing these instruments to claw back their losses and shift into neutral mode. (See also: ETFs: Trump Prompts Flood to Precious Metal ETFs.)

Weekly ranges have been contracting for the past seven months, while trading volume has fallen, with the precious metals crowd forced to shift its attention to more active markets. However, a steady trend higher or lower could replace quiet price action in coming months, offering unexpected opportunities. A wait-and-watch strategy makes more sense in this bilateral scenario rather than jumping in with both fists because these fickle markets often fool the majority. (For more, check out: The Industry Handbook: Precious Metals.)

GLD Weekly Chart (2011 – 2017)

The SPDR Gold Trust (GLD) topped out at $186 in 2011 and entered a severe downtrend that continued into the December 2015 low at $100. It bounced strongly into the second half of 2016, stalling at the .386 Fibonacci sell-off retracement level above $130 in June 2016. A decline into December found support at the .786 rally retracement level, giving way to a bounce that stalled just above the midpoint of the sell swing in March 2017.

The fund has been crisscrossing the 200-day exponential moving average (EMA) since that time, carving a narrow range pattern between $114 and $123, while on-balance volume (OBV) holds near 2017 highs. The Oct. 4 gap between $125 and $123 looks like the critical price zone in this setup because that price bar broke the top in place after the 2016 recovery rally. In turn, a buying surge above $125 should set off a reliable buying signal ahead of a trend advance that tests last year’s high. (See also: Gold, Silver and Oil Heading Into Resistance.)

GDX Weekly Chart (2011 – 2017)

The Vaneck Vectors Gold Miners ETF (GDX) topped out with the futures contract in 2011 and fell to the lowest low in the fund’s history in January 2016. The subsequent recovery wave ended the five-year string of lower lows in place when it reached the August 2013 swing high at $31.35 in August 2016. That also signaled the rally’s end, ahead of a proportional pullback that found support in the upper teens in December.

A vertical bounce into February 2017 stalled at the 50% sell-off retracement level at $25, with that horizontal barrier still in place six months later. Contracting highs and lows since that time have carved the outline of a descending triangle pattern across the 200-day EMA, with trendline resistance near $23.50 highlighting a narrowly defined breakout level while support at $21 needs to hold in order to avoid a steeper slide. (For more, see: GDX: Market Vectors Gold Miners ETF.)

It makes sense to focus on this instrument rather than the gold fund because buying and selling levels are easier to visualize. Specifically, a breakout will target the 2016 top, offering the potential of a seven- or eight-point advance, while a breakdown opens the door to the December low at $18.58, which is unlikely to end selling pressure. Bulls hold the short-term advantage because the fund is now trading within a point of trendline resistance.

The Bottom Line

The gold miners fund has carved a better organized price pattern than the gold fund in recent months and is now testing an intermediate breakout level. However, a failure by bulls to lift the instrument above $24 could backfire, opening the door to a triangle support test that yields a sizable breakdown into the year’s end. (For additional reading, check out: Top 4 Gold Stocks as of July 2017.)

 

Published at Thu, 03 Aug 2017 14:00:00 +0000

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US Dollar Falls to Pivotal Support Level

 

US Dollar Falls to Pivotal Support Level

By Cory Mitchell | August 3, 2017 — 1:00 PM EDT

The U.S. dollar has been falling and is approaching a key support level. A breach of this key support level, which the price has traded above since the start of 2015, would indicate that a long-term downtrend in the U.S. dollar is under way. However, if the dollar is able to bounce off support, like it did in mid-2016, it would indicate that the current range is continuing and that the price could rally back toward the 2015 and 2016 highs.

The PowerShares DB US Dollar Index Bullish Fund (UUP) surged above $24 in 2015 and has not closed below that level since, despite a few attempts. The intraday low point over the past 32 months is $23.96. That was in mid-2016, and then the exchange-traded fund (ETF) surged higher from there until the end of the year. In 2017, the price has declined back to that pivotal $24 region. (See also: The PowerShares ETF UUP: An ETF for Dollar Bulls.)

The PowerShares ETF – which tracks the U.S. dollar relative to a basket of currencies – has been in a large range over the past 32 months, oscillating between $24 and resistance at $26.50 to $26.83. If the price keeps declining and closes much below $24, this would suggest that the range is over and that a long-term downtrend is under way. Based on the size of the range (subtracted from the breakout price), the approximate downside target is $21.50. On the other hand, if the price is able to bounce off support, like it did in mid-2016, traders could expect a rally to $25.50 or above (about the mid-way point of the range).

Technical chart showing the PowerShares DB US Dollar Index Bullish Fund (UUP) near a major long-term support level

The CurrencyShares Euro Trust (FXE) shows how the euro is moving relative to the U.S. dollar. While the dollar has declined in 2017, the euro has rallied. On Aug. 2, the CurrencyShares Euro ETF hit its highest level since early 2015. But this is also a resistance area for the euro – $112.70 to $114.81 is a resistance zone that has batted the price lower a number of times over the past two and a half years. (See also: Currency ETF Hits New 52-Week High.)

A breakout for FXE above that resistance zone would indicate that the euro is in a long-term uptrend, with a target between $122 and $128 (depending on the breakout point and the size of the range used, since the range is not uniform). To help confirm the uptrend in FXE, UUP should continue to fall. If FXE starts to retreat from this resistance area, traders could expect a decline back below $107.50 (about the mid-way point of the range). If FXE does begin to fall, confirmation would likely be provided by a rallying UUP.

Technical chart showing the CurrencyShares Euro Trust (FXE) near a major long-term resistance level

The Bottom Line

The U.S. dollar (relative to six major currencies) is at a critical level, and so is the euro relative to the U.S. dollar. The two ETFs can be used to help confirm trades in the other. If UUP declines below support, traders should expect FXE to keep rallying. If UUP bounces, FXE is likely to decline. The long-term implications are significant at these levels. A breakout means a new trend is under way, while a failure to break out means the long-term ranges could be continuing. (For additional reading, check out: ETFs to Buy or Avoid After Strong Q2 GDP.)

Charts courtesy of StockCharts.com. Disclosure: The author does not have positions in U.S. dollar or euro ETFs or forex pairs at the time of writing.

 

Published at Thu, 03 Aug 2017 17:00:00 +0000

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Biotech Correction Could Offer Buying Opportunity

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Biotech Correction Could Offer Buying Opportunity

By Alan Farley | August 3, 2017 — 11:20 AM EDT

The biotech sector has entered an intermediate correction following a high-volume June breakout that posted sizable gains. Pullbacks and sell-offs in component securities could generate low-risk buying opportunities in coming weeks, especially if the broad market continues to retreat from bull market highs. Highly liquid sector funds may offer the most reliable profits in this scenario, given the group’s enormous diversity.

The sector has underperformed badly since 2015, caught in a political maelstrom generated by a series of high-profile drug pricing scandals. Emotions have eased since Donald Trump’s election, with Congress now unlikely to establish price controls, as evidenced by its recent failure to reform the American healthcare system. Market players have rebuilt long exposure in the more benign environment, lifting major sector funds and securities to 52-week highs. (See also: The Reason for the Big Rise in Biotech Stocks.)

The iShares Biotechnology Index Fund (IBB) entered a strong uptrend following the 2008 low at $57.14, breaking out above the prior decade’s resistance at $91 in 2010 and carving a graceful series of new highs into the July 2015 top at $400.79. Volatility then expanded sharply, generating a multi-wave decline that bottomed out at $240 in the first quarter of 2016. The fund made limited progress for the rest of 2016, carving a broad trading range with resistance at $300.

A March 2017 breakout attempt stalled, yielding more than three months of narrow sideways action at resistance ahead of a mid-June breakout that added 23 points in just four sessions. The fund pulled back to the 20-day moving average in July and rallied to a new high at $330 last week but then turned south, undercutting the prior high in a small-scale failure that may signal the start of a larger-scale decline. (For more, see: Biotech Industry ETF Outlook for Second Half of 2017.)

Short-term range support at $309 has aligned with the 50-day exponential moving average (EMA), marking the only obvious floor ahead of a deeper slide that tests the 17-month base breakout. While the $300 level marks logical breakout support, a better buying opportunity could come on a decline that reaches $293 to $296 because that downswing would also take out buy and sell stops congregated below the big round number.

The SPDR S&P Biotech ETF (XBI) bottomed out in the mid-teens in the first quarter of 2009 and entered a healthy uptrend that broke out above the 2008 high at $23.28 in 2012. The subsequent trend advance added points at a rapid pace into the July 2015 all-time high at $91.10, ahead of a decline that continued into the first quarter of 2016 when selling pressure ended at a 19-month low above $44. (See also: ETFs With Major Recent Breakouts.)

XBI’s price action into 2017 carved a different pattern than that of its rival, reaching within two points of the November 2015 high at $73.80 in March and dropping into a narrow consolidation with support at the 50-day EMA and .618 Fibonacci retracement level. A June breakout stalled at the .786 retracement level just one week later, yielding a pullback to $77, followed by a reversal at resistance that has now broken range support and reached the 50-day EMA.

Breakout support at $72.50 should attract widespread buying interest, but this fund play looks less interesting than IBB because the recent downturn at the .786 harmonic level substantially lowers profit potential. As a result, a better trading plan would be to wait for a shakeout that cuts through support and drops the fund into the rising lows trendline, now centered near $67. That strategy would also require a timely effort if and when the price bounces into the upper $70s. (For more, see: The Rush to Biotech ETFs Is Back On.)

The Bottom Line

Major biotech funds have entered intermediate corrections that could offer low-risk buying opportunities. Cycle analysis indicates that pullbacks could last into mid-September while dropping these instruments into tests at the new support levels generated by high-volume June breakouts. (For additional reading, check out: Biotech Stocks Seen Fueled by Next M&A Wave.)

(Disclosure: The author held no position in the aforementioned securities at the time of publication.)

 

Published at Thu, 03 Aug 2017 15:20:00 +0000

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Renewing Our Trading And Regaining Our Passion

 

Renewing Our Trading And Regaining Our Passion

One of the most striking differences among traders I have encountered is their grounding in a problem-based mindset versus an opportunity-based mindset. The problem-focused trader is chronically frustrated, battling one challenge after another.  The opportunity-focused trader is inspired, finding meaning and direction in setbacks.  It’s easy to become problem-focused when losing money and it’s easy to perceive opportunity when things are going well.  The successful traders I’ve known look for problems when things are going well, because they are always looking for opportunities to improve.  They are also looking for what is going well during periods of drawdown, because that is where opportunities may be showing up.

In a recent article, I outline why I believe we could be on the cusp of important market opportunities. Yes, it’s been a challenging period for traders in terms of low-volatility market behavior and erratic trends.  But, as I outline in the article, there *are* strategies and approaches that are working; I *do* see people succeeding.  There is opportunity in current difficulty.

What has kept me alive in markets since the late 1970s, besides risk management, has been research.  Every week I update my database, explore ideas, and test out strategies.  Easily 80% of what I look at is either worthless or duplicates what I already have.  Another 10% is promising but ultimately has limited value.  It’s that final 10% that opens new doors and yields fresh opportunity.  I could become discouraged about the 90% of research that never finds its way into my trading, or I could be energized by the 10% that moves me forward.  

If I were not innovating, what would keep me interested, driven, optimistic, and energized during periods of drawdown?  Too often, we are mired in problem-based mindsets because our focus is solely on P/L.  So our focus and passion rises and falls with our equity curves.  When we approach markets with intellectual curiosity and a love of sharing ideas with like-minded colleagues, we create whole new sources of motivation.

Trading was fun when it was new.  The challenge is keeping ourselves re-newed.

Further Reading:  Why Trading Has A Future

Published at Sun, 30 Jul 2017 16:20:00 +0000

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Technical Buy Points for Strong Trending Stocks

 

Technical Buy Points for Strong Trending Stocks

If searching for trade ideas, one of the first places to consider looking is at stocks that have significantly outperformed the major indexes over the past six months, the past year or year to date (YTD). This can be done by sorting stocks by performance, from high to low, and then going through the stocks and looking for trade setups. The stocks toward the top of the list will likely be in strong uptrends (although not always, as they may have recently started trending lower), and the setups to watch for include pullbacks that have stalled out. Once the pullback has stalled out or consolidated, showing that selling has slowed, traders can watch for a breakout back to the upside.

RingCentral, Inc. (RNG) stock is up 72% YTD after a nearly uninterrupted run higher between February and early June. Since June, the price has been oscillating in a range. Based on the upside momentum prior to the range forming, probabilities favor an eventual upside breakout. Some traders will be watching for a rally above the $39 high to signal an entry, while others will be watching the short-term descending trendline that connects the June high and July swing highs. A daily close above $36.25 would break the trendline and indicate that the price is heading back toward the high and potentially above it over the longer term. For the latter entry, a stop-loss order would be placed near $34. An initial profit target could be placed at $39, but based on the size of the range (added to the top of the range), the longer-term target is $44.50 if the price moves above $39. (For more, see: The Anatomy of Trading Breakouts.)

Technical chart showing RingCentral, Inc. (RNG) stock in an uptrend near support

Shares of OraSure Technologies, Inc. (OSUR) are up 102% YTD, and pullbacks throughout the year have typically been 10%. After peaking at $19.33 on July 18, the stock has once again pulled back almost 10% and has been consolidating for three days near rising trendline support. Traders will be watching for a rally above the consolidation high at $18.03 to indicate that the pullback may be over. A stop-loss could be placed below the consolidation low. If the price moves slightly lower, before triggering a long trade, it is advisable to wait for another consolidation to form (and then a breakout above it) before going long. The upside target is $20 to $21, based on the size of prior waves and the top of the rising trend channel. (See also: OraSure Technologies in Focus: Stock Jumps 8.2%.)

Technical chart showing OraSure Technologies, Inc. (OSUR) stock in an uptrend near trendline support

DuPont Fabros Technology, Inc. (DFT) stock just pulled back to (near) its descending trendline after reaching a high of $66.18 in late June. The stock is up 44.5% YTD. The pullback in February/March saw the price decline approximately 10%, and the June/July pullback was near that magnitude as well. The price fell, consolidated, moved up a bit, consolidated again and then rallied aggressively on July 31 and Aug. 1. With the initial entry points (at either of the consolidation breakouts) having already passed by, another option is to wait for another pullback to $60. Traders could wait for the price to consolidate and break to the upside, showing that the pullback (if it develops) has slowed and that upward momentum is reasserting itself. For those already in the trade, the upside target is the top of the rising channel at $70. (See also: Opinion: Data-Center Reality Disconnects From Tech Reality.)

Technical chart showing DuPont Fabros Technology, Inc. (DFT) stock in an uptrend near support

The Bottom Line

Looking to top performers for trade ideas can be a rewarding strategy. Top-performing stocks have already shown they can move higher and that there is a lot of buying interest in them. That does not mean that these stocks will go higher forever. Eventually, even strong stocks crack. That is why a stop-loss (or an exit point for a losing trade) must be set prior to the trade. That way, if the trade does not work out, the damage is kept to a minimum. (To learn more, check out: The Stop-Loss Order – Make Sure You Use It.)

Charts courtesy of StockCharts.com. Disclosure: The author does not have positions in the stocks mentioned.

 

Published at Wed, 02 Aug 2017 17:00:00 +0000

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Apple Stock Unlikely to Break Multi-Year Resistance

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Apple Stock Unlikely to Break Multi-Year Resistance

By Alan Farley | August 1, 2017 — 10:34 AM EDT

Tech icon and Dow component Apple Inc. (AAPL) reports fiscal third quarter earnings after Tuesday’s closing bell, with the confessional gathering the customary undivided attention of Wall Street and the trading public. However, the news is unlikely to please long-term bulls or bears because the focus has already shifted into this fall’s iPhone 8 release, offering a timely excuse if Apple fails to meet expectations while reducing upside potential if it issues a solid report.

The stock reached four-year channel resistance in May and dropped into a trading range that could mark a long-term top. Price action since that time has been inconclusive, but the failure to post new highs since May 15 waves a red flag that supports the topping thesis while telling long-term shareholders to take defensive measures to protect profits ahead a potential decline that could reach $110. It is possible that the fall iPhone rollout will generate bearish catalysts for that decline. (See also: Apple in ‘Panic’ Mode Due to iPhone 8 Software Bugs: Report.)

AAPL Long-Term Chart (1987 – 2017)

The stock topped out at a split-adjusted $2.13 after the 1987 crash and entered a long period of underperformance, drifting sideways for more than a decade ahead of an ill-timed 1999 breakout that stalled at $5.37 in March 2000. The dotcom bubble then burst, dumping the price back within multi-year range resistance in the second half of the year and into a sideways drift that persisted into a 2004 breakout.

Apple stock reached 2000 resistance a few months later and took off in a powerful trend advance that surprised many market watchers of that era, lifting in multiple waves into the 2007 top at $29.00. A double top into 2008 yielded a breakdown that coincided with the economic collapse, but the stock held up relatively well compared with its peers, holding support in the low teens. That decline marked the first of three support tests in nine years at the 50-month exponential moving average (EMA). (For more, see: If You Had Purchased $100 of Apple in 2002.)

The subsequent uptrend exceeded the 2007 high in 2010, allowing the market leader to continue the string of higher highs and higher lows in place since 2003. A correction starting in 2012 reached 50-month EMA support for the second time in 2013 while completing the outline of a broad ascending channel that is still in force more than four years later. The 2015 high and 2016 low also reversed at channel boundaries, reinforcing a long-term pattern that now predicts another steep downturn.

AAPL Short-Term Chart (2015 – 2017)

The uptrend topped out near $130 in the first half of 2015, giving way to a correction that tested the will and pocketbooks of long-term shareholders, grinding lower in a volatile pattern that tested support at $90 four times in nine months. A bounce into the second half of 2016 caught fire following the presidential election, lifting the stock above 2015 resistance and into a series of new highs that peaked at $156.65 in mid-May. It then reversed at channel resistance, carving a trading range that still shows no signs of yielding a new trend wave – higher or lower. (See also: Apple Stock Could Fall to $110 in Coming Months.)

On-balance volume (OBV) topped out in May 2017 at the same time as price and entered a minor distribution phase that shook out weak hands into early July. The bounce into August has attracted healthy buying interest, but the price and the indicator have failed to reach their second quarter peaks, signaling a holding pattern that may not break higher or lower following this week’s quarterly report. (For more, see: Thinking About Apple’s Upcoming Results.)

The Bottom Line

Apple CEO Tim Cook could announce the date of the iPhone 8 release during this week’s earnings report, shifting attention away from second quarter results. Bulls and bears may need to lower their expectations, given this deflection, because the news might not attract the buying or selling power needed to lift the stock above multi-year channel resistance at $160 or drop it though two-month range support at $140. (For additional reading, check out: Why You Can’t Be Emotional About Apple Stock.)

Published at Tue, 01 Aug 2017 14:34:00 +0000

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Snap Excluded From S&P 500 Indices

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Snap Excluded From S&P 500 Indices

By Donna Fuscaldo | August 1, 2017 — 12:42 PM EDT

Snap Inc. (SNAP), maker of the messaging app Snapchat, was dealt another blow after Standard and Poor’s announced it wouldn’t be part of the S&P 500 Stock Index.

In a statement, S&P Dow Jones Indices said it is no longer including shares of public companies that don’t give investors enough voting rights. The change takes effect on Aug. 1 and existing companies on the S&P will be excluded from the new rule. “Companies with multiple share class structures tend to have corporate governance structures that treat different shareholder classes unequally with respect to voting rights and other governance issues,” S&P Dow Jones Indices said in a statement. “Therefore, S&P DJI’s U.S. Index Committee will no longer consider these company structure types as future replacement candidates for the S&P Composite 1500 and its component indices, including the S&P 500.” The S&P isn’t the only index to exclude the social media network operator because of voting rights concerns. The FTSE Russell, which is a unit of the London Stock Exchange Group, has already kicked Snap off of its indices. (See also: Snap Loses Top Lawyer as Stock Continues to Sink.)

Centralized Power

Snap has faced pressure from corporate governance watchers ever since it went public in March because of the lack of voting rights going to shareholders. A few days after its IPO debut, the Council of Institutional Investors, which represents big institutional investors such as pension funds, voiced concerns about the voting structure given essentially all the publicly available shares of the company have no voting rights, leaving almost all of the voting power in the hands of the company’s founders and insiders. At the time, the council reached out to MSCI​ and S&P Dow Jones regarding its inclusion in indexes provided by those firms. Hedge funds have also criticized the voting structure, contending it will put too much power in the hands of management and leave it unaccountable to its investors. Its voting structure has also raised concerns it may not be able to join big-name exchanged traded funds (ETFs). (See also: Which Hedge Funds Bought Snap Last Quarter?)

The S&P’s move comes at a time when the social media company is struggling with lackluster user growth, concerns that it won’t be able to boost advertising revenue growth and a stock price that now trades below its IPO price of $17 a share. Its prospects have gotten so bad that it prompted Morgan Stanley to lower its rating on the stock to equal weight from overweight and slashed the price target to $16 from $28 in July. What makes Morgan Stanley’s call noteworthy is the fact the investment bank helped take Snap public in March.

 

Published at Tue, 01 Aug 2017 16:42:00 +0000

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Dow at record on strong earnings; Apple earnings awaited

 

Dow at record on strong earnings; Apple earnings awaited

Tanya Agrawal

(Reuters) – U.S. stocks were higher in late morning trading on Tuesday, with the Dow coming within spitting distance of the 22,000 mark, helped by strong corporate earnings.

The Dow pierced through the historic 20,000 milestone in January and the 21,000 mark barely one and a half months later.

All eyes will now be on the quarterly performance of Dow-component Apple (AAPL.O), which reports after the closing bell. The iPhone maker’s shares were up 0.25 percent.

Tech has been the best performing sector this year, despite recent bouts of volatility on rising valuation concerns. The tech index’s .SPLRCT 0.49 percent rise on Tuesday led the major S&P sectors.

Amazon (AMZN.O) provided the biggest boost to the S&P 500 and the Nasdaq with its 1.5 percent rise.

“While valuations overall and for the tech sector isn’t cheap, some of the most powerful earnings growth has come from large-cap technology names,” said Bill Northey, chief investment officer at U.S. Bank Wealth Management.

Investors have been counting on earnings to support high valuations for equities. The S&P 500 is trading at about 18 times earnings estimates for the next 12 months, above its long-term average of 15 times.

S&P 500 earnings are expected on average to have grown 10.8 percent in the second quarter, according to Thomson Reuters I/B/E/S.

“We are two-thirds through the earnings season and estimates are going only higher, including for the full year, which is helping support the fundamentals-driven market.” said Northey.

At 10:58 a.m. ET (1458 GMT), the Dow Jones Industrial Average .DJI was up 89.92 points, or 0.41 percent, at 21,981.04 and the S&P 500 .SPX was up 5.6 points, or 0.22 percent, at 2,475.90.

The Nasdaq Composite .IXIC was up 16.49 points, or 0.26 percent, at 6,364.61.

A 0.22 percent fall in healthcare .SPXHC led the laggards. Pfizer (PFE.N) was down 1.10 percent after the drugmaker’s quarterly revenue missed expectations.

Regeneron (REGN.O) fell 3.58 percent following a rating downgrade by a brokerage. The stock was the top drag on the Nasdaq.

Economic data showed U.S. consumer spending barely rose in June as income failed to increase for the first time in seven months.

The core PCE numbers – the Federal Reserve’s preferred metric to gauge inflation – for June edged up 0.1 percent following a similar increase in May.

In the 12 months through June, the so-called core PCE price index increased 1.5 percent after advancing by the same margin in May, remaining below the Fed’s 2 percent target rate.

Under Armour (UA.N) fell 6.41 percent after the sportswear maker cut its full-year sales forecast.

Sprint (S.N) jumped 9.78 percent after swinging to a quarterly profit for the first time in three years.

Advancing issues outnumbered decliners on the NYSE by 1,599 to 1,113. On the Nasdaq, 1,376 issues fell and 1,282 advanced.

Reporting by Tanya Agrawal in Bengaluru; Editing by Anil D’Silva

Published at Tue, 01 Aug 2017 15:37:05 +0000

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GoPro Stock Back on Bulls’ Radar After Upgrade

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GoPro Stock Back on Bulls’ Radar After Upgrade

By Alan Farley | August 1, 2017 — 11:44 AM EDT

Perennial laggard GoPro, Inc. (GPRO) awoke from its latest slumber on Monday morning following a Morgan Stanley upgrade to “equal-weight.” While the 14-cent rally did not break any records, it could signal the start of an optimistic period that carries through the company’s Aug. 3 earnings report. A positive reaction to the earnings release is not guaranteed, but it appears likely given exceptionally low expectations.

The stock has struggled near all-time lows through most of 2017, despite one of the strongest tech bull markets in history, after breaking multi-year support above $9.00 in March. Three breakout attempts have been sold aggressively since that time, generating a narrow sideways pattern that could yield a short squeeze into the double digits if reform programs outlined in the first quarter show progress and discipline. (See also: GoPro to Report Q2 Earnings: A Beat in Store?)

GPRO Weekly Chart (2014 – 2017)

The stock came public on June 26, 2014, opening at $28.65 and trading as high as $33.00. It topped out near $50 three sessions later and settled into range-bound action between that resistance level and support at the IPO opening print. A late August breakout attracted a sizable momentum crowd, generating a high-volume parabolic rally that topped out at $98.47 just six weeks later. That peak marked the all-time high, ahead of a three-month double top pattern that broke to the downside in December.

The decline found support in March 2015 near the IPO opening print, while a bounce into August posted a lower high. The subsequent decline completed a larger-scale double top ahead of a September breakdown that posted a long series of new lows into February 2016. Bulls and value players then stepped in, building a base that failed in the first quarter of 2017, dropping the stock into March’s all-time low at $7.14. The stock price has carved a narrow range between that low and $9.40 in the past four months, while average volume continues to fall, signaling apathy that has the power to generate greater technical damage than fear-driven selling pressure. (For more, see: The Reason for GoPro’s 5.6% Fall Since Its IPO.)

Long-term price structure off the 2014 high carved an Elliott five-wave decline that should signal the end of the downtrend, but the stock has failed to issue a notable buying signal since the deep March low. At this point, a new uptrend will require a buying impulse that reaches the 2016 high at $17.68, which seems unlikely. As a result, hopeful bulls need to lower their expectations and focus on a breakout above $9.40 that sets off a 2B buying signal, denoting the failure of bears to defend a new resistance level.

GPRO Daily Chart (2016 – 2017)

On-balance volume (OBV) topped out with price in 2014 and posted a lower 2015 high ahead of a plunge into 2016. The subsequent base-building phase continued into the fourth quarter of 2016, when intense distribution took control once again, dropping the indicator to the lowest level since the stock came public. Slight improvement since March 2017 has been insufficient to signal a new accumulation phase. (To learn more, see: Uncover Market Sentiment With On-Balance Volume.)

The first quarter decline between $11.10 and $7.14 provides useful levels for short-term traders looking to buy or sell the stock following this week’s earnings report. A Fibonacci grid stretched across that price swing highlights longer-term support/resistance at $8.70 aligning at the .386 retracement level while revealing a symmetrical triangle base with resistance at the same price level. This tells us that the stock needs to build support in the $8.70 to $9.20 price zone to form a foundation for a rally back into the double digits.

The Bottom Line

A Morgan Stanley upgrade had a limited effect on shares of lowly GoPro, which will report earnings after the Aug. 3 closing bell. Adverse sentiment into the report raises the odds for higher prices, but the company will first need to report progress on its new cash management initiatives. (For additional reading, check out: GoPro Brings First Fusion Pilots, Launch Slated for Year-End.)

Published at Tue, 01 Aug 2017 15:44:00 +0000

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Roth Feature Boosts Benefits for 401(k) and 403(b) Plans

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Roth Feature Boosts Benefits for 401(k) and 403(b) Plans

By Mark P. Cussen, CFP®, CMFC, AFC | Updated August 1, 2017 — 6:00 AM EDT

Roth 401(k) and 403(b) plans available since January 2006 offer substantial benefits to employees who are looking for ways to shelter income from taxes on a permanent basis. However, it can be difficult for employees to know whether they will come out ahead by selecting the Roth option in their plans instead of the traditional pretax contribution features.

Let’s take a look at some of the benefits of the Roth feature and compare them to traditional retirement plans. (For background reading, see An Introduction to the Roth 401(k).)

How Does the Roth Feature Work Inside a 401(k) or 403(b) Plan?

Plans that offer the Roth alternative work much the same as traditional plans, except that the Roth portion of the plans is taxed similar to a Roth IRA, and only after-tax contributions are allowed in the Roth account. Similar to Roth IRAs, employees can withdraw their balances tax free, provided distributions are qualified. For this purpose, a qualified distribution is one that is taken after five years, with the five-year period beginning the first year that the Roth plan receives a contribution. The employee must also be either at least 59-1/2 years old or disabled. There are also rules for taking distributions after the IRA holder is deceased (see Inherited IRA and 401(k) Rules Explained).

The maximum contribution that can be made for 2017 is $18,000, plus the additional $6,000 catch-up contribution for employees who are at least age 50 by the end of the year (total: $24,000). However, only the employee’s salary deferral contributions can be allocated to the Roth account; any matching contributions by the employer must be done as traditional pretax contributions.

Benefits (and Not) of the Roth Plan Feature

No income Limitations. One of the main advantages that Roth 401(k) and 403(b) plans offer is the freedom from income limitations on contributions that apply to Roth IRAs. These plans effectively provide a tax-free shelter for high-income earners that cannot be matched. In 2017, a corporate executive making $300,000 per year can shelter up to $18,000 ($24,000 if 50 or older) in a Roth 401(k) or 403(b) – but he or she would not be eligible to make any kind of contribution to a Roth IRA with such a high income level.

An $18,000 Roth contribution made annually for 20 years with a growth rate of 5% comes to more than $616,000. This is likely the largest tax-free pool of cash that the employee could accumulate under any circumstances. But the benefits of the Roth plan are not limited to high-income earners.

Lower-salaried employees can both contribute to their Roth 401(k) or 403(b) plans and still make contributions to a Roth IRA as long as their incomes do not exceed the threshold amount. For example, a rank-and-file employee earning $70,000 annually could contribute $18,000 to a Roth IRA and still put another $5,500 per year ($6,500 if 50 or older) into a Roth IRA. Given the same time horizon and return on capital as the executive, this employee would have more than $1 million tax-free to spend! There are few other types of investments or savings plan that can even come close to offering this kind of tax-free accumulation.

Your company must offer them. A real drawback to Roth 401(k) and Roth 403(b) plans is that they are only available for employees of companies that offer them.

If you’re self-employed.Self-employed individuals can use these plans, too – and contribute even more each year: in 2017, the self-employed can contribute up to 25% of their net earnings from self employment up to $54,000, plus $6,000 more if age 50 or over) in a one-participant 401(k) account. Only $18,000 of this amount – $24,000 if making catch-up contributions – can be Roth contributions; the rest are traditional contributions, with different tax treatment at retirement. Work with a financial advisor on this to make sure you get this right and that you do the right kind of record-keeping. For more, see Retirement Plans for the Self-Employed.

Tax Treatment. Roth 401(k) and 403(b) plans have the same disadvantage as Roth IRAs: Their contributions are made on an after-tax basis so there’s no initial tax saving.

However, the flip side to this is that employees can then take a distribution of any size from their Roth balances in retirement without paying income tax on that money. Distributions from traditional IRAs and 401(k)s are taxed at the account holder’s ordinary income tax rate, which can affect the taxability of their Social Security benefits and raise their tax bracket.

No RMDs. Furthermore, employees who roll over their plan balance into a Roth IRA will not have to worry about taking any kind of required minimum distribution (RMD). This simplicity is worth something in and of itself, especially for retirees who are not financially savvy and may struggle with understanding how their plan distributions impact their taxes in other areas. Read up on 6 Important Retirement Plan RMD Rules to get ahead of the game.

Beyond these issues, Roth accounts provide a deeper assurance that the employee has a future hedge against taxes, which becomes even more valuable if taxes increase. Roth accounts are quickly coming to represent the promised land for many retirement savers – a haven where the tax man cannot reach them, a place where government bureaucracy is shut out, an area of their lives that they alone control. (For related reading, see When Is a Roth IRA Conversion the Right Move?)

So Which Is Better: Roth or Traditional Accounts?

Some pundits would say that it is important to know whether you will be in a higher or lower tax bracket at retirement before you choose between a Roth or a Traditional plan. In many cases, though, this may not matter.

For example, Sally Saver is in the 28% tax bracket and works for an employer that offers a Roth 401(k). She dutifully saves $15,000 a year in her Roth account for 30 years. But because she is making after-tax contributions, her contributions are actually costing her $19,200 a year ($15,000 plus $4,200 in taxes because the amount is not tax deferred). Therefore, at the end of 30 years, she will have paid a total of $126,000 in taxes on her Roth contributions.

Meanwhile, her friend, Nancy Now, makes contributions to a traditional 401(k). Nancy is also in the 28% tax bracket and enjoys an annual tax reduction of $4,200 on her contributions, because they are made on a pretax basis. Therefore, she reduces her taxes by a total of $126,000 over 30 years. Assuming that both women earn an average of 9% on their investments, they will each have slightly more than $2 million in their plans by the time they retire.

Now assume that both Sally and Nancy begin drawing money from their plans at the end of the 30-year period, that they both drop down to the 15% tax bracket in retirement and draw $50,000 per year from their plans. Nancy must pay $7,500 per year on her distributions, while Sally pays nothing. If both women live for another 30 years, Nancy will have paid a total of $225,000 in taxes on her 401(k) distributions alone. Of course, these distributions will also likely trigger at least a partial tax on her Social Security benefits and may raise the rate at which any other income she receives is taxed. If Nancy has enough other income to stay in the 28% tax bracket, her taxes will soar to $420,000.

The Bottom Line

This scenario is a telling example of the benefit that can be reaped by biting the bullet and paying taxes now instead of later. Although such variables as changes in tax brackets, longevity and investment performance must also be taken into account, the Roth account tends to beat the traditional plan in most scenarios.

Disciplined savings can change outcomes. By putting her money in a traditional 401(k), you’ll remember that Nancy Now saved $4,200 a year in tax reductions. If she had invested those savings every year, she would have about $600,000 in additional after-tax savings after 30 years, assuming the same 9% rate of return.

So when you’re deciding which type of 401(k) to invest in, one consideration is what you would do with the tax savings you get from making pretax contributions. To figure all this out and project future income, consult a financial advisor.

Published at Tue, 01 Aug 2017 10:00:00 +0000

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Groupon, Grubhub Shares Climb on Partnership

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Groupon, Grubhub Shares Climb on Partnership

By Donna Fuscaldo | August 1, 2017 — 7:26 AM EDT

On Monday, deal website Groupon (GPRN) and food delivery service Grubhub (GRUB) inked a new strategic partnership that will allow U.S. customers to order food delivery from Grubhub’s 55,000 restaurant partners on the Groupon platform.

Grubhub will acquire certain assets in 27 company-owned OrderUp food delivery markets from Groupon and will power the food ordering and delivery capabilities of Groupon’s To Go markets.

“We’re thrilled to join forces with Grubhub to vastly expand the number of food delivery options available through our marketplace,” said Rich Williams, CEO, Groupon in a statement. “This partnership connects two of the biggest players in local commerce and is a win for both consumers and restaurants by providing people with more savings and access to the food they want, when they want it.”

Investors seem enthused as shares of Groupon and Grubhub were 3% and 2% higher, respectively, in pre-market trading.

In addition to being able to order food from one of the restaurants Grubhub delivers for via the Groupon platform, users will eventually be able to redeem deals. Grubhub’s Chief Executive Matt Maloney also touted the partnership in a press release, saying it is always looking for ways to make it easier for people to eat and that Groupon’s “massive, active mobile audience – and great savings opportunities – will help drive new customers and more order volume for our restaurant partners.” (See also: Groupon Stock Rises on Alibaba M&A Rumor)

Groupon has long offered discounts at local restaurants as part of its service, and its deal with Grubhub is a part of its effort to boost its U.S. business. But for Grubhub it may be a saving grace with concerns mounting about the impact Amazon (AMZN) will have on its business once it completes its deal for Whole Foods Market (WFM). (See also: 5 Companies Amazon Is Killing)

It is worries about new competition that sent shares of Grubhub down nearly 10% late last month. In a research report, Morgan Stanley analyst Brian Nowak warned that the online delivery service could face stifling competition from the ecommerce giant and cut his rating on the stock to equal weight from overweight and lowered his price target to $43 from $47. He sees the food delivery app’s marketing costs surging even higher as its piece of the pie slips and Amazon ramps up its own restaurant delivery service. Further, Nowak expects Amazon to leverage its base of 59 million Prime service subscribers along with operations at Whole Foods. Nowak says that while “GRUB’s food delivery awareness continues to rise (up 500bp​ yoy) and is still ~2x larger than everyone else, the gap is narrowing.”

Published at Tue, 01 Aug 2017 11:26:00 +0000

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U.S. Steel Stock Back in Rally Mode After Solid Quarter

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U.S. Steel Stock Back in Rally Mode After Solid Quarter

By Alan Farley | July 27, 2017 — 11:50 AM EDT

United States Steel Corporation (X) delivered surprisingly strong second quarter results, handily beating earnings and revenue estimates while substantially raising fiscal year 2017 guidance. The bullish news triggered a 7% rally that lifted the stock above the 200-day exponential moving average (EMA) for the first time since April 25 while reawakening speculative fervor throughout the underperforming industrial metals sector.

The steel group is caught in the crossfire of trade protectionist rhetoric that could yield tariffs and quotas in the coming months. While this sounds like a positive for U.S.-based operations, the sword cuts both ways, and regressive trade policy could trigger retaliation that closes off profitable foreign markets. As a result, sidelined market players need to consider geopolitical risks prior to taking exposure. (See also: The Basics of Tariffs and Trade Barriers.)

X Long-Term Chart (1991 – 2017)

U.S. Steel stock topped out at $46 in 1993 and entered a secular decline that continued into the 2003 low at $9.61. That low marked a superb bottom fishing opportunity, ahead of a strong uptrend that aligned perfectly with the mid-decade bull market. The rally reached the prior decade’s high in the fourth quarter of 2004 and broke out into 2005, generating a vertical trajectory that accelerated into a parabolic rally climaxing at the June 2008 all-time high near $200.

The shares plunged during the economic collapse, losing ground at a more rapid pace than the prior rally added points, giving up more than 90% of its value in just eight months. The subsequent recovery wave made little progress, stalling in 2010 at 50-month EMA resistance well below the .386 Fibonacci sell-off retracement level. Two breakout attempts into February 2011 also failed, building a triple top ahead of an August 2011 breakdown. (For more, see: U.S. Steel’s Q2 Earnings and Revenues Top Estimates.)

The subsequent decline reached the 2009 bear market low in 2013, triggering a bounce that reversed at 200-month EMA resistance while continuing the long string of lower highs off the prior decade’s parabolic peak. The bottom dropped out in 2015 when the stock broke long-term support and plummeted into the January 2016 all-time low at $6.15, ahead of a recovery wave that also reversed at the long-term moving average in February 2017.

X Short-Term Chart (2014 – 2017)

The rally off the 2014 low unfolded in multiple waves that stalled at the .786 Fibonacci sell-off retracement level in the first quarter of 2017, while the subsequent decline found support at the .618 rally retracement. The bounce failed to end the string of lower highs, keeping the long-term downtrend fully intact, while the harmonic turns have generated a complex resistance zone between the lower and upper $20s. (See also: Is It Time to Buy U.S. Steel?)

This price structure dovetails nicely with the huge April gap between $24 and $31. The stock entered this price zone following this week’s bullish earnings and is now attempting to fill the big hole. However, this is no-man’s land for long or short positions, vulnerable to multiple whipsaws and shakeouts until accumulation builds enough strength to carry bulls or distribution generates enough fear to benefit short sales.

On-balance volume (OBV) peaked in 2013 and entered a persistent distribution wave that continued into the first quarter of 2016. A steady uptick topped out at a multi-year high in December 2016, two months ahead of the price, while a decline into the third quarter stalled near the panel’s midpoint. It is too early to proclaim a new accumulation phase, indicating that intermediate and long-term positions taken at these levels carry relatively high risk for failure. (To learn more, see: Exploring Oscillators and Indicators: On-Balance Volume.)

The Bottom Line

U.S. Steel stock surged back above the 200-day EMA and entered the huge April sell gap after the company reported strong second quarter results and raised fiscal year guidance. This is a tough price zone for long or short position traders, who should leave the arena to the fast-fingered crowd until volume signals a winning side. (For additional reading, check out: Opinion: U.S. Steel Forges Best Argument Against Trade War.)

Published at Thu, 27 Jul 2017 15:50:00 +0000

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Gold, Silver and Oil Heading Into Resistance

Gold, Silver and Oil Heading Into Resistance

By Cory Mitchell | July 27, 2017 — 1:00 PM EDT

Gold, silver and oil have been rallying in July, but the overall outlook does not appear so rosy. The rally has pushed prices into descending channel resistance levels, which have sent prices lower in the past. With all three of these markets making some good-sized swings in 2017, traders will be watching to see if these commodities can break to the upside or if the pattern will result in prices sinking once again.

The United States Oil Fund (USO) has been in a very well-defined descending channel going back to March. The top of the channel can be drawn across the last three price peaks, and each time the price has reached that level, a lower low (move to bottom of channel) has followed. On July 26, the price reached the top of the channel once again. The trendline should not be used as a trade signal – instead, traders will be watching for signs of a reversalnear the trendline. These could include a strong bearish engulfing pattern or a consolidation followed by a downside breakout. If those develop, the target is the bottom of the channel, currently at $8.30. (See also: Why Oil Prices Are Headed Even Lower.)

Even if the price rallies above the trendline, that isn’t a major concern at this point. As long as the rally stays below the prior peak (May) of $10.70, the downtrend remains in effect. Only if the price rallies above $10.70 would that indicate a possible reversal, at which point the bias would shift to the upside, making the next pullback a buying opportunity.

Technical chart showing the United States Oil Fund (USO) in a downtrend near resistance

The iShares Silver Trust (SLV) made a significant lower swing low in May (relative to March), which kick started a descending channel. The estimated resistance area based on the descending trendline is $16. Traders should watch for a reversal signal near $16 – if the signal occurs slightly above or below the trendline, that is fine. Signals include a bearish engulfing pattern or consolidation followed by a downside breakout. If the swing lower develops, the target is $14.30 (currently the bottom of the channel). (For more, see: One Way Investors Are Betting on Silver.)

The downtrend remains intact as long as the price stays below the previous swing high (June) of $16.80. If the price rallies above that, the outlook becomes more bullish, making the next pullback a likely buying opportunity.

Technical chart showing the iShares Silver Trust (SLV) in a downtrend near resistance

The SPDR Gold Trust (GLD) made a major lower swing low in July (relative to May) but has not yet made a confirmed lower high. The lower low indicates that gold has entered a potential downtrend, meaning the price is unlikely to rally above the prior peak (June) of $123.31 before dropping. An estimated resistance area is $121 to $122. Since silver is in a defined channel, if silver starts heading lower at its resistance, then it is also likely the time to sell gold. If gold starts heading lower, the target is $114 (trendline along the previous two swing lows). (See also: Gold Has Broken Down: Here’s What Comes Next.)

A rally above the June high would shift the bias back into the bulls’ hands, making the next pullback a buying opportunity.

Technical chart showing the SPDR Gold Shares (GLD) in a possible downtrend near resistance

The Bottom Line

Gold, silver and oil are heading into a technical resistance area. The descending channels – which are present in USO and SLV, and could be forming in GLD – indicate that prices could be heading into another swing to the downside. As it stands, the edge favors the bears for a price decline toward the channel bottom. However, if the prices rally aggressively above prior highs, that would shift the edge back into the bulls’ hands, making the next pullback a buying opportunity. (For additional reading, check out: 3 Chart That Suggest Bears Are Taking Aim at Commodities.)

Charts courtesy of StockCharts.com. Disclosure: The author does not have positions in these ETFs and will not be initiating positions (in the ETFs or futures contracts) for at least 48 hours.

Published at Thu, 27 Jul 2017 17:00:00 +0000

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Data Storage Stocks in Retreat After Seagate Miss

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Data Storage Stocks in Retreat After Seagate Miss

By Alan Farley | July 26, 2017 — 12:00 PM EDT

Shares of data storage companies took a hit on Tuesday after Seagate Technology plc (STX) missed fiscal fourth quarter earnings and revenue estimates by a wide margin while lowering full-year guidance. A CEO replacement and restructuring plan that includes job cuts failed to stem intense selling pressure that dumped the stock more than 16%. Rival Western Digital Corporation (WDC) fared better, with shares gapping down more than three points but closing well off the early low ahead of the company’s July 27 report.

This specialty hardware sector has failed to keep pace with the strongest tech market in decades, held down by the continued implosion of PC sales as well as steep competition from foreign rivals that include Samsung Electronics Co., Ltd. (SSNLF). According to industry think-tank Gartner, worldwide PC sales fell 4.3% in the second quarter of 2017, continuing a multi-year exodus into mobile devices that favor flash storage manufacturers over traditional disk drive and SSD companies. (See also: Component Shortages Hurt PC Shipments in Q2.)

STX Weekly Chart (2011 – 2017)

A post-IPO rally topped out at $31.35 in 2003, yielding multiple breakout attempts that carved a triple top pattern into a 2008 breakdown. Selling pressure accelerated during the economic collapse, dropping the stock to an all-time low at $2.98 in January 2009, ahead of a bounce that broke out above the prior decade’s highs in 2013. That uptick caught fire, generating a multi-year rally that posted an all-time high at $69.40 in December 2014. (For more, check out: Top Mutual Fund Holders of Seagate.)

The stock lost ground through 2015, giving up two-thirds of its value into the May 2016 low in the upper teens. The subsequent recovery wave stalled at the .618 Fibonacci sell-off retracement level near $50 in the first quarter of 2017, allowing aggressive sellers to generate a steep downtick that has cut yearly gains in half while opening the door to a test of the downtrend low. At the same time, bearish price action has drawn a tough resistance zone in the $40s.

On-balance volume (OBV) offers hope for beaten-down bulls, entering an impressive 2016 accumulation phase that reached an all-time high just two months ago. This thrust generates a bullish divergence that indicates loyal institutional sponsorship despite meager performance so far in 2017. At a minimum, this impressive shareholder base predicts that the current downdraft will end quickly, ahead of a bounce that is likely to determine the stock’s long-term fate. (See also: Seagate Misses Q4 Earnings and Revenues, Appoints CEO.)

WDC Weekly Chart (2011 – 2017)

Western Digital stock topped out in the mid-$50s in 1997 and rallied within 15 points of that level in 2008, ahead of a steep decline that bottomed out at a four-year low near $11. The subsequent bounce unfolded at the same trajectory as the prior decline, carving a V-shaped pattern into the 2010 high just above $47. The stock spent the next three years hovering below multi-decade resistance, finally breaking out in 2013 and heading into a powerful trend advance that more than doubled the stock’s price into the December 2014 top at $115. (See also: What’s in Store for Western Digital in Q4 Earnings?)

A steep downtrend gathered force into 2016, finally hitting bottom at a three-year low in May, ahead of a persistent recovery wave that stalled within two points of harmonic resistance at the .786 Fibonacci sell-off retracement level in June 2017. Slightly higher highs since that time still have not tagged the magic level, which will be tough to break if its rival’s bearish results accurately reflect current business conditions.

Technically oriented market players looking for post-earnings guidance should watch the edges of a rising wedge pattern under construction for the past six months (red lines). A wedge breakout above $96.50 would open the door to the triple digits, while a wedge breakdown through $88 would also break a rising channel in place since October 2016, exposing continued downside into the 50-week exponential moving average in the upper $70s. (For more, see: Why Western Digital’s Soaring Stock May Stall.)

The Bottom Line

Seagate reported a weak quarter while reducing forward guidance, putting a dead weight on the data storage sub-sector, which has underperformed broad tech benchmarks in recent years. The bearish results could signal a long-term top for the group, ahead of cyclical declines that could post multi-year lows. (For additional reading, check out: 5 Chipmakers That Will Win as Smartphone Sales Slow.)(Why?)

Published at Wed, 26 Jul 2017 16:00:00 +0000

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Short-Term Breakouts Point to Higher Prices in These Stocks

 

Short-Term Breakouts Point to Higher Prices in These Stocks

By Cory Mitchell | July 26, 2017 — 1:00 PM EDT

As the S&P 500 continues its uptrend, these stocks also look poised for another rally. All in uptrends and having experienced a slight pullback, these stocks were consolidating until recently, when the price started moving up again. Swing traders will be looking to capitalize on the next wave higher in the uptrend. These stocks have all been confined to a relatively tight rising channel recently, which means that the trades are likely to be short term, as the price should quickly reach the top of the channel/profit target.

Bank of America Corporation (BAC) stock fell toward major support near $22 in June, but since then, the price has been making higher swing highs and higher swing lows. The most recent pullback looks to have ended when the stock jumped 2.38% on July 25. The short-term rising channel indicates that the next move up will test the vicinity of the March high ($25.80). A stop-loss could be placed near $23.55. Based on the July 25 close of $24.48, that leaves about $1.32 of short-term upside potential versus about $0.93 of downside risk. That risk/reward isn’t great, but it could be improved by waiting for a slightly lower entry point or holding the trade for a higher target price (don’t let a winning trade turn into a loser if the price fails to move materially above the $25.80 region). (See also: Bank of America Profit Rises as Consumer Bank Hits Profit ‘Milestone’.)

Technical chart showing Bank of America Corporation (BAC) stock in a short-term rising channel

Shares of The Allstate Corporation (ALL) have been charging higher since late 2016. Pullbacks have been shallow, so traders have had to be aggressive if they want in. In late June, the price started consolidating, and that consolidation remained intact until July 19. On that day, the bias shifted back to the upside. With the uptrend so strong, traders should look to enter near the breakout point between $90 and $89.25. Stop-losses could go below $87.60. An estimated upside target based on the rising channel is $92.40, although the price has had a tendency to move beyond the channel high, so a target of $93.40 is still reasonable. (For more, see: Allstate Announces May Cat Loss, Weather Woes Linger.)

Technical chart showing The Allstate Corporation (ALL) stock in a long-term uptrend and breaking out of consolidation

Globus Medical, Inc. (GMED) stock had a short but swift decline at the start of July, followed by a consolidation. The price has been attempting to break out of the consolidation since July 17, and the strong surge higher on July 25 helped confirm the breakout. This signals that another wave up, in alignment with the long-term uptrend, could be commencing. Throughout the year, when the price has broken higher out of a consolidation, it has typically moved up by 8% or more. That puts an estimated profit target just above $35. A stop-loss could be placed below $31.50. The risk/reward can be improved by trying to obtain an entry price between $32.65 and $32.50 (slightly better than the July 25 close of $33.10). (See also: Investing in Medical Equipment Companies.)

Technical chart showing Globus Medical, Inc. (GMED) stock breaking out of consolidation in an uptrend

The Bottom Line

These stocks are setting up for short-term swing trades. The profit targets are based off technical patterns that have been repeating throughout the year. These trades will likely end up lasting a few days to a few weeks. One thing to keep an eye out for is earnings. Allstate and Globus Medical report on Aug. 1 and Aug. 2, respectively. Short-term swing traders may wish to exit trades before earnings, as the other option is holding through some potentially volatile price moves. If there is a surprise in those earnings announcements, the price could blow through the target or stop-loss levels. Traders should risk only a small percentage of account capital on any single stock trade. (For related reading, check out: The Daily Routine of a Swing Trader.)

Charts courtesy of StockCharts.com. Disclosure: The author does not have positions in the stocks mentioned.

Published at Wed, 26 Jul 2017 17:00:00 +0000

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Exclusive: Goldman Sachs retreats from ETF lead market making

Exclusive: Goldman Sachs retreats from ETF lead market making

Trevor Hunnicutt

NEW YORK (Reuters) – Goldman Sachs Group Inc is pulling back substantially from trading that helps backstop the fast-growing use of U.S. exchange-traded funds, giving smaller firms an opportunity to grab market share.

Goldman has told fund providers it is scaling back its role as a top lead market maker (LMM) for ETFs and has already slashed the number of funds it supports in that capacity, according to disclosures, fund managers and other trading firms this month.

Relatively high regulatory and other costs of operating as an LMM prompted the pullback by Goldman, one of the few large banks remaining in that role, some people said.

A spokeswoman for Goldman declined to comment on the bank’s market-making business.

The move signals the shifting landscape of making markets in many assets away from traditional broker-dealers towards smaller, electronic-focused upstarts.

LMMs are critical to keeping ETFs trading smoothly. While brokers-dealers can typically trade as they please, firms acting as LMMs must consistently offer competitive buy-and-sell quotes in their assigned ETFs, and they receive rebates on exchange fees. Some also provide start-up financing for the funds.

The LMMs risk some of their own capital to buy and sell ETFs to help maintain their liquidity. Unlike smaller rivals, big banks like Goldman Sachs are subject to strict capital requirements by regulators, putting them at a disadvantage when it comes to costs in an already low-margin business.

ETFs attracted a record $348 billion globally in the first half of this year, compared to $123 billion at the same point last year, according to research service ETFGI LLP.

Despite the skyrocketing growth in ETFs, it can be hard to translate the LMM business into a high-margin operation.

Market making is a technology business as much as a trading enterprise, and involves finding the right price for funds holding dozens of stocks or bonds in a split second while making other trades to manage risk.

One industry veteran described the business as “scraping fractions of pennies all day.”

Goldman continues to make issuing its own ETFs through its asset management unit a priority, however, even as it steps back from providing the infrastructure to keep such funds trading.

Bowing Out

Since last year, the number of ETFs backed by Goldman as a LMM on Intercontinental Exchange Inc’s NYSE Arca trading venue has plunged to 178 from 380, according to documents published by NYSE.

Goldman is no longer the lead market maker on major ETFs including the $78 billion iShares MSCI EAFE ETF, $14 billion Guggenheim S&P 500 Equal Weight ETF and $8 billion WisdomTree Japan Hedged Equity Fund, according to NYSE data.

NYSE Arca is the largest exchange for ETFs by number of listings. Other exchanges offer similar programs to encourage market making.

Bill Belden, head of ETF business development for Guggenheim Investments, said Goldman is no longer lead market maker on several of their ETFs as of last month, “as they have largely stepped out of the LMM business.”

Goldman continues to be a force in ETF trading even as it withdraws from LMM assignments at exchanges. It held a 9 percent market share for U.S. ETF trading at the end of the second quarter, up about 20 percent over the same period last year, according to exchange traded volume from NYSE Arca and Nasdaq.

Stepping in

One of Goldman’s competitors, speaking on condition of anonymity, said the bank had “a very attractive book of assignments,” adding that “there is high demand for [exchange-traded products] that Goldman is dropping.”

Lesser-known but deeply experienced trading firms, including New York-based Jane Street Group LLC and a subsidiary of Amsterdam-based IMC BV, have picked up some of Goldman’s former LMM assignments, NYSE data shows.

Despite Goldman’s exit, some bank-owned trading operations see value in the business, such as RBC Capital Markets, part of Royal Bank of Canada, which has stepped into new LMM roles.

Douglas Yones, NYSE’s head of ETFs, said that while some of its liquidity providers “have narrowed their presence, it has opened the door for many more firms to enter the marketplace with positive results.”

Goldman reported overall trading revenue of $3.1 billion during the second quarter, a drop of 17 percent from the year ago period and the worst start to a year since Chief Executive Lloyd Blankfein took the helm of the bank.

The bank’s once-massive LMM franchise was partly the inheritance of its $6.5 billion acquisition in September 2000 of Spear Leeds & Kellogg LP, which served as lead for the first U.S.-listed ETF, the SPDR S&P 500, in the early 1990s.

In 2014, Goldman wrote down the value of the market making operations, including its ETF lead market making rights, and signaled a broader change in its strategy when it sold some related trading operations to IMC.

Reporting by Trevor Hunnicutt; Additional reporting by Olivia Oran and John McCrank; Editing by Jennifer Ablan and Meredith Mazzilli

Published at Tue, 25 Jul 2017 10:16:01 +0000

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What To Do With Your Cash?

 

What To Do With Your Cash?


Have you moved a material percentage of your financial portfolio to cash? Have you become so concerned about the meteoric ramp upwards in asset prices that you find it wiser instead to move to the sidelines, build “dry powder”, and wait to re-enter the markets at saner valuations?

If so, you have my sympathies.

The past 5+ years have been brutal for savers pursuing this strategy. I know this well, as I’m one of those folks, too.

The Mother Of All Financial Bubbles

As we’ve chronicled for years here at PeakProsperity.com, the global central banking cartel started flooding the world with liquidity (aka, money printed from thin air) in response to the arrival of the Great Financial Crisis in late 2008. And they never stopped.

The chart below shows how the combined balance sheets of the major world central banks (Fed, ECB & BOJ) are 3.5x higher today than their pre-crisis levels less than a decade ago. (And if we included the PBOC in this chart, the cumulative total would be 18.8 Trillion!):

(Source)

All that liquidity has to go somewhere. And, as hoped by the central banking cartel, it has found its way into the financial markets, pushing the price of nearly every asset class to record extremes. And then higher still.

Equities have shot the moon, and are now nearly twice as high as they were at the apex of the past two stock market bubbles, as this below chart of the S&P 500 shows (in fact, the S&P price/revenue ratio just hit the highest level in history, aside from the week of the March 2000 bubble peak):

(Click to enlarge)

Similarly, bond prices have continued their 30-year march higher, powered by record-low interest rates around the world:

(Click to enlarge)

(Source)

And home prices have returned back to the same level seen right before the last housing bubble viciously burst (in many high-demand markets, home prices are well in excess of those 2007 highs):

(Click to enlarge)

We’ve written numerous articles about the dangers of the current central banking policies responsible for today’s nosebleed asset prices. But the gist is this: we are currently living within the mother of all financial bubbles. These prices are in no way sustainable.

Why not? While the reasons are legion (and we’ve spilled plenty of ink writing about them all), the big reason is revealed in this chart:

(Click to enlarge)

To support the current level of asset prices, we have been growing our debts more than twice as fast as our national income (GDP). Any household knows that you can’t do this for long before insolvency occurs. Nations — even those with a printing press — can’t escape this same fate in the long run.

See that little wiggle in the debt line from 2008-2009? That’s the wiggle that almost destroyed the world during the Great Financial Crisis. Look at those asset price charts above again. See how much higher we are today than we were back in 2008?

So… are you one of those people wondering how much more painful the next downturn will be, when we fall from even loftier heights this time? Are you one of the few folks who haven’t already forgotten that the S&P declined over 50% in the short time between the end of 2007 and the beginning of 2009?

If you are, and you’ve decided not to participate in today’s Ponzi scheme markets and instead build cash, it’s been a painful ride watching the prices of nearly every other asset vault higher year-over-year while your cash pile simply sits there.

And if the feeling of “missing the rally” isn’t bad enough with the mainstream media and your brother-in-law constantly rubbing your nose in it, there’s a host of new threats besieging cash these days.

The All-Out War On Savers (aka Financial Repression)

Again, as we’ve written about often here at PeakProsperity.com, those running today’s economy are doing their utmost to keep prudent savers like you from keeping their cash safely on the sidelines. They desperately want your savings pushed out into the economy so that their over-leveraged casino can continue operating a little bit longer.

We discuss this in depth in our recent report Less Than Zero: How The Fed Killed Saving, which explains how the Financial Repression playbook is very intentionally designed to transfer the burden of the government’s orgy of debt onto the public. It seeks to do so in a way that is just opaque enough to just enough people that the general public doesn’t catch on to what’s happening.

The key elements of Financial Repression are:

  • Negative interest rates:These reduce the servicing costs of debt, allowing the system to take on even more. They also destroy any incentive to save, as cash parked in the bank actually loses purchasing power on a real basis. This pushes capital out of savings and into the riskier assets (stocks, bonds, real estate, etc) that all the built-up debt is supporting.
  • Capital controls: These “ring fence” domestic capital, making it difficult for prudent money to avoid the measures of financial repression. Restrictive legislation on international holdings like FATCAand the higher taxes placed on “safe haven” assets like precious metals are examples of these. Other manifestations are bank bail-ins, banking restrictions on withdrawing more than $10,000 (and oftentimes substantially less), civil asset forfeiture, and outlawing bank notes as part of the “war on cash” and the move to a “less cash” or “cashless” economy — all of these serve to thwart and/or penalize savers who would just rather sit out the current insanity of the markets and accept no return over the risk of substantial loss.

So, with the reckless investors all around us gloating at their returns, with our banks paying us nearly 0.0% on our savings and treating us like criminals if we have the temerity to ask for access to it, and with the government talking about taking it all from us eventually anyways (replacing with Fedcoin, perhaps?) — is it time for us cash savings holders to throw in the towel?

Hussman’s “Choice”

In a word: No

We have to remember that we are living through a massive bubble market that has no precedent in history. Bubble markets are nefarious, as they prey on our mind’s hard-wired greed/fear drivers. It is very easy for us be manipulated into thinking “it’s different this time”. Even the genius Isaac Newton fell victim to the mania of the South Sea Bubble:

John Hussman has done perhaps more work than anyone else demonstrating that today’s elevated market pricing is due to pulling future value into today (through debt), and that the BEST investors can hope for going forward is a decade of 0% gains:

(Click to enlarge)

(Source)

But I think his real masterwork is his very succinct summary of the situation we are all in at this moment in history:

The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak. 

2008 is not so far in the past that we can’t clearly remember the panic in people’s eyes as they watched their retirement portfolios and home prices get cut in half within a matter of months. That’s what looking like an idiot after the peak feels like.

As oddball as it may seem to others, as uncomfortable as it may feel as the central bank liquidity party rages on, as painful as it may feel as the system tries its best to separate you from your hard-earned savings, there will come a time when this unsustainable system will falter and then proceed in collapsing on itself.

When that happens, those who decided to look like an idiot early on and refuse to join the party (i.e., positioning their capital defensively), are going to look like geniuses. They will avoid the heartbreak of loss, and they will have capital to deploy when the dust settles, purchasing quality assets at (potentially historic) bargain prices.

It’s not an easy choice to make, or to remain steadfast in. It takes foresight, courage, and resolve. But it’s a smart choice.

It’s unknowable exactly how much longer our unsustainable markets can remain at their record levels. But there is one thing we know for certain: we’re closer to their day of reckoning than we’ve been at any point over the past seven years. A recession is due soon by historical standards, and long overdue by fundamental ones.

When it happens, do you want to look like an idiot? Or would you rather choose to look like one now, so that you can look brilliant then?

Choose wisely.

By Adam Taggart for Safehaven.com


Adam Taggart

Adam Taggart
Peak Prosperity

Adam Taggart

Adam is the President and Co-Founder of Peak Prosperity. Basically, his job
is to handle the business side of things so that Chris is free to think & write.

Adam is an experienced Silicon Valley internet executive and Stanford MBA.
Prior to partnering with Chris (Adam was General Manager of the earlier site,
ChrisMartenson.com), Adam was a Vice President at Yahoo!, a company he served
for nine years. Before that he did the ‘startup thing’ (mySimon.com, sold
to CNET in 2001). As a fresh-faced college graduate, he got a first-hand look
at all that was broken with Wall Street as an investment banking analyst.
Most important, he’s a devoted husband and dad.

Copyright © 2013-2017 Peak Prosperity

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

Published at Mon, 24 Jul 2017 09:28:53 +0000

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Direct lending funds’ fading all-weather appeal

by geralt from Pixabay

Direct lending funds’ fading all-weather appeal

Lawrence Delevingne

NEW YORK (Reuters) – Miami-area money manager Bob Press appears to offer the ultimate all-weather investment: a “direct lending” hedge fund that does not require a long-term commitment and has produced nearly 90 straight months of positive returns not correlated to other markets.

Most funds invest in traditional financial assets like stocks or bonds, but direct lenders make high-interest rate loans, usually to fledgling or struggling businesses passed over by banks. Proponents say the strategy can produce smooth returns even in a low-growth economic environment.

But as money pours into offerings like Press’s TCA Global Credit Master Fund, there are mounting signs that such steady returns may be at risk.

More than 30 investment professionals canvassed by Reuters list various reasons for concern: the flood of new money pushing down lending standards, an increase in leverage and, sometimes, a mismatch between the duration of investments and lock-up periods.

A November survey by data tracker Preqin showed nearly 40 percent of direct lenders believe loan terms had become easier compared with a year earlier and nearly a third said it was harder to find attractive borrowers.

Returns are also starting to decline into the single digits, according to data trackers. (Graphic: tmsnrt.rs/2toxFGl)

Some of those investors have just grown more cautions and selective in their fund choices. However a small but growing group of those who embraced direct lending after the 2007-2009 financial crisis said they are now significantly reducing their exposure or avoiding direct lending investments entirely.

The rising risks, they told Reuters, could lead to much lower returns, or even a partial repeat of 2008, when a group of funds lost money and froze investor capital as borrowers failed to repay their loans and collateral seized up.

Those who have pulled back include $1.4 billion Balter Capital Management LLC, which included direct lending as one of its top three strategies a few years ago and now has no money in it, according to founder Brad Balter. Greycourt & Co. has significantly reduced its exposure to direct lending because the money coming in has made it far less attractive, according to Matthew Litwin, head of manager research at the $10 billion firm.

“With a few exceptions, it’s more risk for less return,” Litwin said.

Untested

Direct lending surged after the financial crisis when U.S. authorities tightened credit standards for banks and ultra-low interest rates drove investors to less conventional strategies in the search for higher returns. According to Preqin, U.S. direct lending funds soared from about $33 billion in late 2008 to around $100 billion in June 2016.

The strategy remains popular as high stock valuations and historically low bond yields have boosted demand for private debt strategies. A Preqin survey of 100 institutional investors in January showed that 58 percent expected to increase allocations to U.S. lower-middle-market direct lending in the next 12 to 24 months.

However, several lenders and their investors told Reuters that the strategy’s ability to deliver in tougher times has not been tested for years given relatively steady economic growth.

They say the flood of cash itself is driving down the returns and eroding lending standards by giving borrowers more options. The rising demand has spawned a slew of new funds, they add, that may lack experience with loan workouts in recessions and rely on deals sponsored by private equity firms, which tend to come with higher leverage and lower yields than those originated directly.

“There’s a lot of Johnny-come-latelies given all the new money. The inexperience hasn’t really shown yet, but it will,” said Mark Berman of MB Family Advisors, LLC, another fund investor who specializes in credit strategies.

Nearly 200 North American direct lending funds have launched since 2009, according to Preqin, compared to just 30 between 2004 and 2008.

Bob Press is seen in this undated photo released on July 17, 2017. Courtesy Peregrine Communications Group/Handout via REUTERS

Investment professionals interviewed by Reuters say lenders are more likely to do “covenant light” deals with fewer restrictions on the terms of the loan, or deals where they were not necessarily first in line to receive payments in the case of default.

Rising leverage is another red flag, a sign that both investors and target companies are trying to stem a decline in returns by borrowing more.

Thomson Reuters data on unregulated non-bank loan deals show leverage for middle market companies has risen by 16.6 percent over four years to an average debt-to-earnings ratio of 4.9 times.

TCA’s Press acknowledges double-digit returns could be a thing of the past. The 53-year-old sees risks to the strategy as more money comes in, but notes TCA does not use leverage and sources all of its own deals.

Press expects his business – situated next to a golf course in Aventura, Florida – will keep growing, given that banks remain reluctant to lend, allowing him to take profits on both loans and advisory fees. TCA started with a few million dollars under management in 2010 has grown to roughly $500 million and aims to raise another $300 million.

Quick Cash

A promise of fast access to cash has helped smaller firms like TCA and Brevet Capital Management grow rapidly.

Larger managers, such as Golub Capital, Czech Asset Management LP and Monroe Capital LLC, require investors to commit their capital for three years or more.

But about two-thirds of funds have lock-up periods of a year or less, including none at all, according to an eVestment review of 71 direct lending and asset-based lending funds for Reuters.

Those who offer generous cash-out provisions say the short duration of the loans and their diversity mitigate risks, and provisions that allow them to freeze funds are disclosed to clients.

“We work very hard to prevent mismatch and make sure that our loans line up with what we’ve promised investors,” said Brevet founder Douglas Monticciolo.

TCA’s Press said there was an inherent asset and liability mismatch in open-ended funds, even if the loans are short term. “You can’t make it go away. You minimize it the best you can,” he said.

Those who warn of increased risks often recall the 2008 financial crisis, when a combination of loose liquidity, high leverage and quickly-soured loans hurt direct lending firms such as Plainfield Asset Management LLC and Windmill Management LLC’s SageCrest.

Plainfield, a $5 billion-plus firm in Greenwich, Connecticut, ended up liquidating its portfolio and shutting down following heavy client redemptions and loan restructurings, even though it reduced leverage before the crisis. Investors ultimately got $0.60 for every dollar invested, according to HFMWeek.

Plainfield founder Max Holmes told Reuters that direct lenders today could be similarly exposed whenever the next downturn comes, especially those with insufficient capital lock-ups. “We have all the same symptoms,” he said, citing the loosening of lending standards and high leverage.

A former attorney for SageCrest, which went bankrupt in 2008, did not respond to a request for comment.

The similarities make some experienced investors urge caution even as money keeps flowing in and the economy continues to grow.

“We are ever more cautious about the returns direct lending is going to generate,” said Chris Redmond, global head of credit at investment consultant Willis Towers Watson and an early proponent of the strategy. “The risks are starting to add up.”

Editing by Carmel Crimmins and Tomasz Janowski

Published at Mon, 24 Jul 2017 10:08:22 +0000

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