DB vs XLF, 1 month in

About 1 month ago a work colleague asked whether I thought DB was a good buy, and answered her with this post. 

At the time I said that I liked financials in a rising rate environment but I would go with the market leader XLF instead of DB. What has played out since then?

Total return, 10/27 close to 11/23 close
DB: 14.49 to 15.79, +9.0%
XLF: 19.86 to 22.38, +12.7%

Drawdown
DB 10/28 high to 11/4 low, 14.74 to 13.32, -9.6%; if entered 10/27 close, then still -8.1% on capital invested. Yikes!

XLF 10/27 high to 11/4 low, 19.95 to 19.40, -2.8%; if measuring from 10/27 close, then -2.3%.

More gain with a lot less pain on XLF! 

The smaller drop is hugely important psychologically speaking if you have a position that matters in size or leveraged ie hedge fund trading. For example, considering interest rates, one could make a justification to have financials be extreme overweight in a portfolio, even 50% in an individually managed IRA at this point. Why not? From 2011-15 all you really needed to own was biotech and tech. Thus far from the election, all you need is financials and USA small caps. But if you enter positions that drop -9% in a few days, it is extremely difficult to go big.

There are many ways to win in this game (and even more ways to lose), but the way I saw it happen at a fund that ran ~75MM and produced +100% return in one of two funds in 2013 was to go big on leaders and hold. This doesn't mean piling on after that fact - which is a recipe for disaster. It means catching the leaders in an early stage and playing that move as large as one can take. Then one can adjust the portfolio though rough patches in the futures market. If one has read my posts for a while, you will see this view underlying most of the strategy recommendations. Buy what is going up, instead of trying to buy what has been down the most or shorting tops. When the market is making a real long term trend change, like bonds and gold in January 2016, or Brazil EWZ in February 2016, pivots will make that very obvious. 

 

Interest rates, TLT and XLF

Aside from biotech jump this is the biggest story in markets. In July I was noticing how historically stretched the RSI's were getting on multiple timeframes and did two special posts here on 7/2 which said very stretched but should see a bit higher, and here on 7/9 which said a turn was starting to be possible. On 7/6 in the SPY daily I made the one and only counter-trend short recommendation on this site ever and picked off the level within .02 using pivots.

From 8/15 big picture thoughts: "So far my top call on TLT is still holding. I'm not totally certain that it does, but with TLT below the AugP then hold your shorts if you took that trade. Regardless, if TLT can rally again, then I think this will be a *very* key high. It might be higher, perhaps a double top, maybe lower; but after this, I will be quite bearish TLT and bullish rates. I am basing this opinion on the Bollinger band and RSI action on TLT across timeframes, some timing work, and the aforementioned perspective on government intervention in markets." 

Q4 as started very bearish for bonds as written up here, and each safe haven section from mid October on has pointed to bond weakness. Now what?

Let's start with long term charts. I usually refer to TLT, but for even greater long term perspective let's check out TYX. This has been under the 10MA (aqua) since 2014 Q3 until just now. I think the momentum move is to stay above, and the next level to test will be the 20MA at 3.03. While ultimately I think higher, maybe some reaction from this level and round number area. Longer term, if correct on the rally idea, a move to the upper BB and falling 50MA is not out of the question. Currently these are up near 3.8.

Going back to TLT for the monthly chart, it has broken both the 10MA and 20MA with 50MA at 120.91.

Now the weekly long term pivot chart shows a break of 2HP and resistance from there, and straight down to the YP at 124.65.

TLT daily pivots only (no support or resistance) shows the entry 10/3 with rejection of Q4P and OctP, falling MAs, MACD rolling over. The 2HP really never bounced and the move stayed under the falling 20MA (orange) the entire time. TLT is breaking the YP at 124.57 with no attempt to bounce! Now we might see a break and recovery (like IWM & QQQ recently) but let's watch this key level. Below this means below all pivots for bonds! This is the first time since July 2015 we have seen bonds this weak.

Adding in support levels and momentum, either this YP area stabilizes or we could see Q4S3 at 121.89

This huge move in bonds and rates has turned financials into the leader of the market. XLF above Q4P the entire quarter! What else can say that? All USA mains broke at some point. Only EWZ Brazil and SMH/SOXX held up sideways above Q4P as other indexes dropped. On 11/7 XLF was above all pivots. The market gave plenty of time to spot this relative out-performance. 

Other financial indexes may differ a bit. IYF is the ishares version. It too jumped above all pivots on 11/7, but had a fractional break of Q4P 11/2-4. But both have made new highs for 2016 before anything else that I track. Are financials about to take over leadership like tech & biotech in 2011-15, and EWZ and SOXX in 2016? 

Is Deustche Bank a good buy?

This was the question I heard over lunch yesterday from someone interested in markets. This is my take.

About the chart: Using the NYSE listed Deustche Bank AG because this is what gives the most history on Trading View. This may not be the best version but with prices going back to 2002 it is good enough. For the best chart we'd probably want to check a Bloomberg. 

Sum
Although I like financials as a sector in rising interest rate environment, DB is already +30% off the lows and risk-reward for a bounce is not appealing. Significant resistance likely just above 14.71-78 (current upper daily Bollinger band which will change, and prior 2016 low), then all kinds of sharply falling moving averages on every other timeframe will make further rallies a struggle (moving averages with falling slope even more likely to be resistance).

Better financial buy: XLF. Holding up very well on drop, above all daily moving averages, and one of the few things still above all pivots (monthly, quarterly, half-yearly, yearly). Often what holds up best in drop is next market leader. 

Ultimately with either trading or investing we are playing a game of risk and reward, and it is only the time horizon that differs. Sometimes what is beaten up does become the better risk reward play - a great example of that is EWZ Brazil, one of the worst possible country ETFs to own in 2014-15, to be the star this year up 82% from 2015 close to now. That sounds great but everything depends on timing, because if you bought what appeared to be a decent and very beat up low in March 2015 at lets say 30 - a nice pick at the time - you had to suffer a -42% drawdown and over 16 months just to get back to even. Who would do that on any capital of size? 

Technical analysis does excel over fundamental analysis in spotting these moments when the long term trend is really changing, or what might be a turn to take a shot. This site has picked off the low of the year in oil and high of the year in bonds, without multiple attempts btw!. Both were huge turns on asset classes that had multi-year trends that seemed they would go on forever (search featured post section). I have also recommended GLD in late January, first mentioned EWZ & RSX in February, and more recently oil and $USD - these were not precise turns, but moments when trends seemed to be in early stages of changing (all these recs have given chance for gain with minimal or no drawdowns). I am not seeing that kind of movement on DB yet; or more accurately, it is too late to play the medium term bounce move, and long term trend is still negative. 

Generally it is far easier to go with trends, and this is why I am always looking for the leaders. Do you want a 10% chance of 50% rally and 90% chance of seeing your investment go red? Or 75%+ chance of higher prices? That is my take on DB vs XLF here. Buy the leaders, even better if they have an exciting story (interest rates!), and buy more. That is how the hedge fund I worked with crushed it in 2013. 

First standard technical charts in this order: quarterly (Q), monthly (M), weekly (W), daily.

Each chart has the same indicators: standard Bollinger bands (BB) in green, then simple moving averages. 10 (aqua), 20 (orange), 50 (purple), 100 (thin black), 200 (thick black), 400 (thick brown). Below the chart is standard RSI and then a tweaked MACD. 

Q
So far Q4 lifting back inside BB (Bollinger band, lower green line) after small red bar gives bounce a chance. But really anything under 2009 low (grey line) is pretty terrible. 

M
RSI picture slight divergence and shakeout followed by rebound "looks like" a decent low. But sharply falling 10 MA (10 period moving avg aqua line) and then resistance at 2009 high, and falling 20MA (orange). 

W
Not good from risk reward perspective here, because the upper weekly BB is resistance, then the sharply falling 50MA (purple). Risk is the lower BB. Buy was better end of Sept at the lower BB and huge divergence on RSI but already 30% off lows is just late. 

D
This is just unlikely to break outside of upper band and then falling 200MA not far away will likely be significant resistance. So bad risk reward here. Trying to pick off lows has better shot with RSI near oversold like end Sept when smart $ coming in. 

Pivot charts

W chart, pivots only (orange)
Long term pivots only on a weekly chart for clarity - this was something to dump, not buy after March 2014. If trying to buy into bounce 2015 that failed twice and there is just no long term decent buy after 8/2015. 

W with pivots, support & resistance
Now standard long term with pivots in orange, support in green and resistance in red.
Better above YS2 14.35 but given everything above on other charts not sure that holds.

D with pivots only
Smart $ above quarterly pivot for the first time in weeks 10-4-5 at 13.33-59. That was a decent risk reward setup but up to 14.49 may not sound like much but 8% higher than ideal entry. 

Compare all this to XLF, one of the few things holding up the best in market weakness from August - September. 

XLF W

XLF D with pivots only
Above yearly, half-year, quarterly and monthly pivots. There are only a few asset classes with this status right now. May not take out highs in current range bound environment into election but I like this chart here and would look to accumulate. Hold above Q4P means about -5% risk for the position at 10/27 close price. 

Quarterly and Monthly charts II

Nearing the quarter close it is an especially good time to remind ourselves of the larger moves and trends by checking quarterly and monthly charts. I covered the USA mains here, included these charts for oil in today's post, and here are some other USA ETFs I like to watch. 

Sum
IBB Q chart 2 bars with RSI 90 - an incredible parabolic move that had to have a dramatic end. This sector probably in a very long consolidation period, but M chart suggests bounce.
SOXX looks good especially above the M 20MA; another reason to hold longs.
XLF congested (between rising and falling MAs on both charts) but still relatively weaker index on many levels; another reason to keep on short candidate list. 
XLE bounced off M 200MA but 10MA still pushing down and looks to me like it could drop back down to form some higher low. 

IBB Q chart here. This had an amazing run and led the rally for years. 2 quarterly closes with RSI above 90! That is a parabolic move and anyone holding without any profit protection plan at that point was just delusional. A very long consolidation is due. 

This might be setting up for a bounce. Small red bar on the lower BB and just above a nicely rising 50MA. But I don't think the quarterly chart will zoom back up to highs anytime soon. 

SOXX Q chart looks pretty good with higher close (at current level) and RSI room to go up.

SOXX M above the 20MA which is another reason to be holding the long positions. 

XLF Q held 20MA but below flat or slightly falling 50MA. Glaring lower high compared to 2007 of course. 

XLF M held rising 50MA but stuck under 10, 20, and 200MAs.

XLE Q chart held the lower BB but under a rising 50MA.

And there is a bounce from a M 200MA with classic RSI and BB divergence too. But 10MA still pushing down and this may have to form some higher low. 

Financials

Financials have been the news recently as banks have been selling off. What is The Pivotal Perspective on this sector? 

First of all, take a look at the plain XLF chart without any pivots. See that spike low on 8/24/2015? Well that low goes into the calculation of the yearly and half yearly pivots for 2016. So I'm less certain than they will work as usual. 

Example: we are in a situation where XLF is down quite a lot, but unlike almost everything else it hasn't reached its YS1 yet. 

While we can watch to see if those levels activate any programs (the spike on 8/24 sure does), it may also be worthwhile to watch the S&P Financial Select Index or IXM. This did not have the same spike low, and I think the pivots "should be" more accurate. Its long term pivots are on the next chart below. As you can see, it is already below the YS1.

Here's the standard view including both long term and medium term pivots. The 1/20 low was on Q1S2.