By David Rogers. August 3, 2015. BLOWING ROCK, NC — Longtime stock market investors know that prices in any market are usually cheapest when nobody else wants that product, service or (in the case of the stock market) those shares. The opposite is true for market highs: when everyone wants something — when demand is high — then prices are most dear, indeed.
Graph constructs by David Rogers of Blowing Rock News using Worden Bros., Inc. TC2000 stock market charting service.
As part of a new service to readers focused on the financial markets, Blowing Rock News today introduces The Rock Street Journal and “A Contrarian’s View.” We are not registered investment advisors, so there will not be any sort of “buy” or “sell” recommendations. Those decisions are up to the individual investor and his or her investment advisor after taking into consideration such things as suitability, investor experience, risk tolerance, available resources, tax consequences, etc.
Instead, we’ll just point out where opportunities MIGHT be developing in various industry classes. It is up to the reader to evaluate the underlying fundamental considerations of the subjects discussed in relationship to their technical or charting circumstances.
The key objectives in contrarian investing is to help better manage — not eliminate — stock market risk, while prospectively enhancing investment returns. Because we use WEEKLY charts, this is not day-trading. There are always risks of short-term adverse fluctuations to a position, but the return potential in the intermediate- to longer-term can be significantly greater. So an investor should be willing to commit to a position for at least six months and possibly longer than a year — IF he or she determines that a position is right for their special circumstances.
Key to our studies is a proprietary technical analysis tool developed by Blowing Rock News that we simply call, “BRN Sequential Period Index” (BRNSP). It uses statistics to evaluate intermediate-term “overbought” and “oversold” conditions that contrarian investors generally seek. When BRNSP reaches a level below -0.50, in general terms it means that the share prices are “washed out,” that there are few buyers and lots of sellers.
Let’s take a look at FXI, which is the iShares FTSE/Xinhua China 25 Index Fund exchange-traded fund (ETF).
On a weekly chart (which is what we use for intermediate-term decision-making), at -0.79 FXI’s Sequential Period Index is nearly as deeply oversold as it has been since late 2008 when it was beginning to etch out a significant “bottom.” It required about six months of backing and filling before the intermediate-term advance could begin in earnest, but when it did, the price appreciation was more than 100% from the bottom in a little more than a year. In looking at other statistical tools, our proprietary Accumulation Index (not pictured) is above 50% for both the long-term and mid-term periods, and the short term is just slightly below 50%. So as promising at this appears in our technical model, there is nothing to guarantee that prices cannot go lower, still, in either the short or intermediate-term.
Another technical factor: share prices for FXI have fallen to a support area not only just outside our Dynamic Trading Channel, but also to its rising exponential 200-day moving average.
To make a decision to “buy China” at this juncture, in the final analysis, is going to depend on an investor’s confidence level whether or not the world’s largest trading power (international trade value of $3.87 billion in 2012, according to an article appearing in the London-based Daily Telegraph in February 2013) is going away any time soon, whether because of economic or political concerns.
Now let’s look at an industry sector that is more on the “rich” side: Technology. Our chart is of the price action in SPDRs Select Sector Technology ETF.
The move to higher prices began to stall in late 2014 as our Sequential Period Index moved again into statistical territory about +0.50. The upward stabs to higher prices got less and less convincing — even as our BRNSP failed to confirm the new highs. When you consider the distance that XLK’s actual share prices were above its 200-day moving average, it’s not surprising that this issue stalled — and even became vulnerable to significant price correction.
So this issue is giving conflicting views. On the one hand, it has had a great intermediate-term run. On the other hand, our Accumulation Index rankings remain relatively strong. Keep in mind that market prices can “correct” through extended periods of sideways consolidation.