#$ewp

Here are some of the most noteworthy trendline developments across the markets for Wednesday, January 1, 2020.

30-Year Yield $TYX Testing Post-2018 Down Trendline

Energy SPDR $XLE Testing Broken Post-2018 Down Trendline

Swiss Franc ETF $FXF Testing Post-2011 Down Trendline

Spanish Stocks Testing Post-2017 Down Trendline

UK’s $FTSE-100 Index Testing Post-2018 Down Trendline

If you’d like to see these charts as they come out in real-time, follow us on Twitter and StockTwits. And if you’re interested in the daily “all-access” version of all our charts and research, please check out our site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Plus, we’re holding our Holiday Sale right now with Annual Memberships at 20% OFF — so it’s a perfect time to sign up! Thanks for reading!

_____________

The following post originally appeared on The Lyons Share on December 11, 2018.

Highlighting even more important trendline tests currently underway across the financial markets, a development which suggests this is a key juncture.

Last week, we took the occasion to publish the set of charts from our weekly #TrendlineWednesday  Twitter feature in a blog post. The reason being — the present number and importance of major trendline tests throughout the financial markets suggested that a key juncture in the markets may be at hand. After a week of chopping around (albeit, in a very volatile fashion), most of those key trendline tests are still in play. Furthermore, there are numerous other key trendlines being tested at the moment that either emerged this week or which we didn’t get a chance to share last week. So, we’ll share them now.

First off is our pick for trendline of the week from one of the most heavily watched sectors in the U.S. market. Namely, it is the KBW Bank Index (BKX), which is testing its post-2009 Up trendline.

As we mentioned last week, it’s not just the domestic trendlines being tested right now. Many international markets are undergoing key trendline tests of their own. Not the least of these is the MSCI ACWI ex-US Index, which is testing an intersection of 2 major, longer-term trendlines — the post-2009 Up trendline and the broken post-2007 Down trendline.

Numerous individual country markets are also testing key trendlines as well, including the Australian ASX-200 which is testing its post-2009 Up trendline.

Also testing its post-2009 Up trendline is the Indian Nifty 50 Index.

And reaching back further, Spain’s benchmark IBEX-35 Composite is testing a multi-decade Up trendline, stemming back to 1992.

It’s not just equities either. The bond market is also exhibiting some interesting trendline action at the moment. Last week, we looked at the bond yields testing uptrend support. This week, we look at bond prices testing downtrend resistance. Specifically, the popular iShares 20+ Year Treasury Bond ETF (TLT) is testing its post-2016 Down trendline.

Like we suggested last week, “the message behind all of these important tests is that this is likely a critical juncture in the market. If, in the case of the stock indices, the tests are successful, a solid rally may finally take hold after the recent correction. If not, it could be a long way down.”

If you are interested in an “all-access” pass to our research and investment moves, we invite you to further check out The Lyons Share. FYI, we are currently holding our HOLIDAY SALE offering big savings for new members. So considering the discounted cost and the current treacherous market climate, there has never been a better time to reap the benefits of our risk-managed approach. Thanks for reading!

_____________

World markets have been blazing but some moving faster than others.  And there are some places like Spain where the political drama may be keep investors appetite at bay.  Catalonia's Declaration of Independence has muddied the waters in Spain.  Questions abound as to whether Spain will just let it happen or use force to make sure it does not happen.  

I do not have any idea how this will play out.  But what I do know is that the Spanish stock market, measured by the IBEX Index, has been lagging other European markets and is now starting to move higher.  The chart below tells the story.  It shows the IBEX over the last 2 years.  

Notice that it stabilized against resistance for most of 2016 after a pullback.  In December 2016 it started higher off of its 200 day SMA and moved through that resistance only to consolidate, holding the break out, through March.  It shot higher again then reaching a peak in May.  Since then it had pulled back in a channel to that 200 day SMA in September, and bottomed below it in October.  

A composite of the so-called “PIIGS” markets in Europe is testing 7-year highs.

The PIIGS have been the topic of our Charts Of The Day and blog posts periodically over the past few years. Of course, “PIIGS” is the not-so-affectionate acronym for “Portugal, Italy, Ireland, Greece and Spain” -- the countries at the root of the Eurozone economic and debt struggles in recent years. Typically, the occasion of one of our PIIGS posts is to point out potential problems based on the behavior of the countries’ stock markets. Today, it is a different story as we are actually highlighting a potentially positive development among the PIIGS. Of course, as with most inflection points, a potential positive is often also a potential negative as well should prices inflect in the opposite direction.

So what is this potentially positive action in the PIIGS? Years ago, we constructed a “PIIGS Composite” by combining the main stock indices of the 5 countries in a equally-weighted manner. Unlike much of the world in which equity markets have, for the most part, rebounded substantially since the financial crisis, the PIIGS have continued to flounder for the past 8 years since the 2009 low. And, in fact, as measured by our Composite, the PIIGS actually went to substantial new lows during the teeth of the Eurozone crisis in 2012.

At the moment, things are looking brighter, however, as we mentioned. Specifically, we see the PIIGS Composite presently testing 7-year highs, marked by peaks in 2011, 2014 and 2015.

So what will the PIIGS do next? Will they be rejected here at the former peaks -- or will momentum propel the PIIGS to new multi-year highs? We will cover our thoughts on this topic in a Premium Post at The Lyons Share, including what this current action means for European equities in general. And we will break down the 5 individual PIIGS markets in order, from least to most attractive. If you’ve been considering subscribing to The Lyons Share, now is the perfect time to join as our Spring Sale is offering members BIG savings.

_____________

After a several year reprieve, the stock markets of Europe’s “PIIGS” countries are breaking down again.

Precisely 4 years ago, in the summer of 2012, the financial world was fixated on the European continent. At the time, risks posed by the economically-challenged countries affectionately known as the “PIIGS” (i.e., Portugal, Ireland, Italy, Greece and Spain) threatened to bring the Eurozone’s financial system to its knees. And just as the continent appeared to be on the brink, ECB president Mario Draghi delivered his infamous “whatever it takes” speech, pledging the bank’s resources in fighting the financial crisis. That moment turned the tide for European equities as they would stave off collapse and stage a furious rally (more realistically, the markets were simply ready to rally as Mr.Draghi had certainly uttered plenty of supportive remarks previously).

As it happens, the PIIGS markets would enjoy the strongest rallies, not surprisingly, as they were the most beaten down. What may be surprising is the fact that the rally would last 3 years, an inconceivable notion at the time. However, that’s the nature of markets. They will more often than not surprise most people as the positioning of “most people” often dictates that the path of least resistance is to move away from that crowd.

Last summer, however, it became clear that the honeymoon was over. The Portuguese and Greek stock markets had topped in 2014 and Italy and Spain would peak in the spring-summer of 2015. By far the most resilient of the 5 was Ireland, which saw its stock market hang tough until the start of 2016. Collectively, the group would put in essentially a double-top in the summers of 2014 and 2015. At least they did based on a composite of the PIIGS markets that we constructed several years ago in order track the group’s behavior.

Currently, this PIIGS Composite has folks experiencing flashbacks of the events of 4 years ago. That’s because the index has just fallen back down to levels last seen near the end of 2012. Furthermore, on a relative basis versus the more stable Dow Jones Europe STOXX 50 Index, it has also suffered an unambiguous breakdown recently. 

Interestingly enough, the 61.8% Fibonacci Retracement of the 2012-2015 rally sits precisely at the level of the post-2012 lows in April and June 2013 and February of this year. This is only one example, but considering this PIIGS Composite is an untraded creation of ours, it does suggest that patterns such as Fibonacci are naturally occurring forces in markets, rather than merely self-fulfilling phenomenons.

So what are the ramifications of these developments? Rather than reinvent the wheel, we will close by repeating what we said in a post during similar circumstances last February.

The PIIGS Composite weakness is not just significant on an absolute basis. As the chart shows, it is also breaking down on a relative basis versus the DJ Euro STOXX 50, a proxy for the more established, “blue chip” stocks in Europe. Like all higher-beta sectors, stock market bulls want to see the PIIGS outperforming the lower-beta blue chips. That can be an indication of a willingness of investors to take on risk, a healthy condition for a bull market. In other words, when the PIIGS are outperforming, it is symptomatic of a “risk-on” environment. Conversely, when they are lagging, it is a sign of “risk-off”.

As the chart indicates, risk-off is decidedly the case at present as the PIIGS:STOXX 50 Ratio just broke sharply lower, through a shallow multi-year uptrend. Looking at prior trend breaks in the ratio, e.g., mid-2008, late-2009, and mid-2014, we see that substantial bouts of weakness ensued throughout European markets, particularly in the PIIGS. These also led to scares among some or all of the PIIGS pertaining to their economic viability.

This is not a pretty situation shaping up for the Eurozone once again. Whatever benefit that accrued as a result of “whatever it takes” may have largely run its course. Again, it will not be a straight line lower. However, the absolute and relative breakdowns in the PIIGS Composite suggests that the post-2012 run-up is over. Thus, while the PIIGS rally of the past several years may have tasted like Jamon Iberico and Prosciutto di Parma to investors, they may have to settle for scrapple and spam from any rallies in the near future.

__________

More from Dana Lyons, JLFMI and My401kPro.

The stock markets of the so-called PIIGS are breaking down on an absolute and relative basis -- not a positive development for global markets.

The PIIGS are starting to squeal again in Europe. No, not the kind that produces pancetta or linquica or bangers. We are talking about the continent’s debt-laden, economically-challenged countries known by the acronym PIIGS, namely, Portugal, Ireland, Italy, Greece and Spain. These nations are essentially economic dead weight for Europe considering their plight. That said, all financial markets are cyclical -- nothing straight-lines. And indeed, despite the apparent inevitable downfall that awaits the Eurozone as a result of the PIIGS, the associated equity markets have actually been quite buoyant for the better part of the last 4 years. Not so anymore.

We have posted before a composite that we constructed consisting of equally-weighted portions of each of the PIIGS’ stock markets. We call it...the PIIGS Composite. The composite starts in 2006 and hit an all-time low in June 2012, amid the Europe/PIIGS near-meltdown. Following Mr. Draghi’s “whatever it takes” moment, the PIIGS Composite shot up off the mat, rallying nearly 75% in 3 years before peaking in May of last year. Since then, the composite has gradually leaked lower. Around the start of the year, the leak turned into a gusher. As of this week, the PIIGS Composite is at near 3-year lows, approaching levels last seen in 2012.

The Composite weakness is not just significant on an absolute basis. As the chart shows, it is also breaking down on a relative basis versus the DJ Euro STOXX 50, a proxy for the more established, “blue chip” stocks in Europe. Like all higher-beta sectors, stock market bulls want to see the PIIGS outperforming the lower-beta blue chips. That can be an indication of a willingness of investors to take on risk, a healthy condition for a bull market. In other words, when the PIIGS are outperforming, it is symptomatic of a “risk-on” environment. Conversely, when they are lagging, it is a sign of “risk-off”.

As the chart indicates, risk-off is decidedly the case at present as the PIIGS:STOXX 50 Ratio just broke sharply lower, through a shallow year-long uptrend. Looking at prior trend breaks in the ratio, e.g., mid-2008, late-2009, and mid-2014, we see that substantial bouts of weakness ensued throughout European markets, particularly in the PIIGS. These also led to scares among some or all of the PIIGS pertaining to their economic viability.

On an individual basis, the PIIGS markets are each sucking wind to varying degrees, from hyperventilation to suffocation.

By far, the winner has been Irish stocks. The Irish ISEQ Index was at a 52-week high as recently as early December. It then ran into, and bounced precisely off, the 61.8% Fibonacci Retracement of the 2007-2009 decline. It has fallen since, recently accelerating to the downside to near 52-week lows. Should the global equity selloff get worse, this market is in danger of playing “catch-down” as investors sell what they can instead of what they want.

Since breaking its post-2012 Up trendline, Italy’s FTSE MIB Index has dropped to almost a 3-year low now, recently breaking the key 61.8% Fibonacci Retracement of the 2012-2015 rally.

Spain’s IBEX 35 is telling a similar story.

In the suffocation category, Portugal’s PSI 20 Index is within spitting distance of a 20-year low.

And the biggest loser among the PIIGS? It’s Greece, whose Athex General Index is at a 25-year low.

This is not a pretty situation shaping up for the Eurozone once again. Whatever benefit that accrued as a result of “whatever it takes” may have largely run its course. Again, it will not be a straight line lower. However, the absolute and relative breakdowns in the PIIGS Composite suggests that the post-2012 run-up is over. Thus, while the PIIGS rally of the past several years may have tasted like Jamon Iberico and Prosciutto di Parma to investors, they may have to settle for scrapple and spam from any rallies in the near future.

__________

More from Dana Lyons, JLFMI and My401kPro.

I’ve been bullish on European stocks for the past year based on their vastly cheaper valuations relative to the American market. I’m not quite willing to jump into the Greek market just yet, as there aren’t many liquid stocks to choose from, and those that are available aren’t quite as cheap as I’d like to see, given the macro risk. But, European stocks as a whole are a fantastic bargain, and the recent selloff presents a great buying opportunity. 

I’ll start with a broad play on developed Europe, the Vanguard FTSE Europe ETF (VGK). 

VGK gives you exactly what you want from a Vanguard index fund: instant diversification, tax efficiency and rock-bottom fees. VGK holds a basket of 540 stocks spread across the major economies of the eurozone, as well as non-eurozone countries Norway, Switzerland, and the United Kingdom. As a passive index investment, VGK only turns over about 7% of its portfolio per year, and its expense ratio is a negligible 0.12%. 

VGK’s largest country weighting, at 31%, goes to the United Kingdom. France, Germany and Switzerland each chip in 14%, and after that the weightings trail off. “Problem children” Spain and Italy make up only 5.2% and 3.7%, respectively. Looking at industrial sectors, VGK has a pretty conservative bent. About half the portfolio is invested in financials, health care and consumer staples. 

If you’re looking for instant exposure to the major markets of Europe, this is it. But, if you’re looking to play a rebound in the markets hardest hit by the Greek fiasco, you might find that VGK is a little too conservative. 

For more aggressive investors, my next recommendation is the iShares MSCI Spain ETF (EWP). There are relatively few Greek stocks that trade as ADRs, and any investment in Greece should be viewed as a coin toss in this environment: Heads, Greece really does stay in the eurozone and Greek stocks rally; tails, we eventually get a Grexit and Greek financial assets drop by another 50% or more. The returns potential is huge, but there is simply too much downside risk for me to get comfortable. 

Spain, however, represents a nice risk/reward trade off. While Greece’s economy remained depressed, the Spanish economy is expected to grow 2.8% this year. Regional unrest is a problem, and Catalonia may very well push forward with a referendum on independence. Spain has had regional unrest since the Franco dictatorship, yet life seems to have a way of moving on. 

Looking at Spanish stocks, there’s a lot to like. By Research Affiliates estimates, Spanish stocks trade at a cyclically-adjusted price/earnings ratio (“CAPE”) of just 12, which is less than half the CAPE valuation currently being sported by American stocks. 

Spanish stocks also have relatively little exposure to the Spanish economy. Spanish multinationals are active across Europe, and taking advantage of common language and cultural ties, they also have an outsized presence in Latin America. 

EWP gives a nice basket of Spanish stocks, including household names like Banco Santander (SAN), Telefonica (TEF) and Zara’s parent company Inditex (IDEXY). 

Finally, let’s drill down to an individual stock that I expect to perform very well: German luxury automaker Daimler AG (DDAIF). 

Traditional auto stocks have been out of favor of late, as investors have flocked to sexier growth stories like Tesla Motors (TSLA). Yet, at current prices, Daimler offers a value that is hard to ignore. DDAIF stock trades hands at just 10 times earnings and sports a dividend yield of 3%. Furthermore, after lagging its German rivals for years, Daimler has done a nice job playing catch-up with a redesigned product lineup. 

If China’s market rout slides into a real “hard landing,” Daimler will feel the pinch, as China makes up a good 13% of revenue. Yet, as recently as last month, Daimler announced that it expects to see sales growth of at least 10% this year in China. 

Disclosure: Long DDAIF, EWP, SAN, TEF.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. 

In what gradually became practically an anything but US equities market approach for us,  Japan's Nikkei succeeded in strongly outperforming the S&P 500 in the first half of the year; rising just under 16 percent - while the SPX barely remained in positive territory (0.20%) for 2015.  Along with China's Shanghai Composite Index, the Nikkei remained one of our preferred equity markets going into the year, with expectations that Japan was breaking free of the long tentacles of deflation that had constricted their economy and constrained its equity markets over the past twenty-five years.  On average, a quarter century is the generally accepted length by historians between generations. From the birth of a parent to the birth of a child, the timespan can encompass profound behavioral changes within society, many times greatly affected by shifts in economic prosperity or hardship. And while Japan's experience with perennial deflation and economic contraction was in fact much less austere than what the US experienced in the 1930's and early 1940's, similar to the US generation born during the Great Depression and World War II, historians might ironically refer to those brought up in Japan over the previous two decades as the "Lucky Few" as well.   Over the past two years we've followed the Nikkei in relation to the US equity markets across the 1930's to 1950's (see Here), with expectations that despite a more protracted regression decline in the Nikkei - would result with a similar equity market rebound (see Here & Here) as deflationary conditions subsided in its third decade since its secular peak in December 1989.

Click to enlarge images

Both the SPX and the Nikkei contracted ~80 percent below their secular peaks. However, in the US, the equity market collapse was acute and reached a cycle low less than three years from the 1929 high. For Japan, the contraction was more gradual - reaching a secular low ~20 years from its 1989 high. One could argue that this difference reflected the broader influence the asset declines had on each society, with the more severe decline profoundly impacting the US through the Great Depression.  That said, it's interesting to note that from a patterned perspective, by pivoting the performance regression trend of the Nikkei (~14 degrees) to the SPX, the respective cycles within the span correspond. 

Another pattern we've followed in the Nikkei over the past two years - and one that guided our expectations from the relative performance extreme reached at the end of 2013; extends from the long-term trend line resistance that begins as well at a relative performance extreme in 1987. Overall, the Nikkei continues to follow the performance trace from the 1987 retracement decline - a pattern trajectory we expect it will continue to loosely hold this year.   

In what has increasingly become en vogue for investors today, participants have flocked to novel currency hedged ETFs - such as Wisdom Tree's DXJ, that offers equity exposure to Japan, while at the same time hedging fluctuations between the value of the US dollar and yen. While these funds strongly outperformed non-hedged ETFs in 2014, their outperformance has been attenuating in the first half of this year. We maintain the expectation that a trend change is afoot in the yen/Nikkei relationship, which would reverse the prolonged inverse correlation extreme that's been in place since Abenomics was introduced at the end of 2012 - and shifts the equity hedge, in our opinion, in favor of a stronger yen.  The BOJ's Kuroda would appear to agree. 

With another bitter milestone approaching for Greece and Europe this weekend, we'd feel remiss in not mentioning once again the fragility of where some of the key peripheral markets such as Spain's IBEX are trading across this year - in relation to our Long Tails of Deflation performance series. 

As mentioned in previous notes, from a comparative perspective - you could argue that what the ECB is attempting to avoid with its more aggressive policy pivot this year, is the missteps that were compounded by each central bank in their respective cycles; both by the Fed in late 1936 into early 1937 and the BOJ in 1997. In both occurrences, the powers that be worsened economic conditions by tightening monetary and fiscal policy, where they very likely should have eased.

With the referendum vote on deck this Sunday in Greece, it's no coincidence that the ECB just today (see Here) added corporate debt to the list of assets eligible for purchase under its new QE program. And while the ECB's bazooka would help mitigate the fallout in the debt markets should conditions in Greece remain or worsen, we would still approach the lack of compromise and resolution that currently exists between Greece and the EU a broader failure and policy misstep - with unknown negative consequences to Europe's periphery.

As outlined in Game of Loans, we'd consider that more than just a Greek tragedy.