A New Cyclical High

On Tuesday, the S&P 500 closed at 1,347, besting its previous bull market high of 1,343 set on February 18th (shown on the chart below). The last two days have seen the market improve upon that, with successively higher closes on Wednesday and Thursday. Stocks are trading higher again today, too, with the S&P currently at 1,364. Considering that there were some high impact events this week with a heavy flow of corporate earnings reports, an important Federal Reserve meeting followed by a first-ever press conference held by the Chairman, and the first quarter GDP report, it has been another impressive display on the part of stock investors.

This week’s market action makes it increasingly appear that the sideways pattern of the past two and a half months, which included a -6.5% decline and subsequent rebound, was simply another consolidation in this bull market. All of the angst regarding the Middle East, Japan, and Europe seems to have only been able to muster enough negative energy to cause the market to momentarily pause again, instead of sending stocks spiraling into the abyss as widely feared.

Of course, things can change quickly, so we have to remain on our toes. Next week investors are sure to be bombarded by reminders that it’s time to “sell in May and go away” simply because the calendar has changed, which might create a new round of jitters. But our base case at the moment (subject to change based on incoming evidence) is that the S&P should ultimately be able to carry somewhere above 1,400 before the bull pulls in its horns for good.

The Strange Language of Professional Investing

We are often cautioned not to use industry jargon when discussing investing with our clients. Deservedly so. Our role is not to baffle them with unintelligible words that make us seem like professionals by using a vocabulary that sounds impressive, even if the concepts that we are trying to explain are simple. But lately I’ve been marveling how many professionals routinely use language in our business that is understood in dramatically different ways by the pros that use them. Here are two examples that come immediately to mind.

Buy and Hold Investing: For most of the investing public buying and holding is understood in the context that Warren Buffet might use the term. As a value investor he attempts to buy firms at large discounts to their intrinsic value. This provides him with a margin of safety if things don’t go well for the company in the short-term. Buffet is prepared to hold the company’s shares as long as necessary to fully realize their full value in his estimation. For strategic, buy and hold portfolio managers, the term not only means something completely different, it implies something completely opposite to Buffet’s philosophy. In this context, investors believe that markets are efficient and therefore it is useless to try and buy securities at a discount to their fair value. The only choice is to buy and hold the asset classes (the term is not typically used to discuss individual stocks) until they earn their expected historical average returns. You see… one term and two completely different meanings.

Another favorite is “portfolio manager.” For most investors, a portfolio is built from two or more securities, no matter what they are. If you own four U.S. common stocks you have obviously created a portfolio and therefore are a portfolio manager. But in our (Pinnacle’s) scheme of things, any manager who can be benchmarked to one asset class (in this case U.S. stocks) and who is constrained by prospectus to only acquire securities in that one asset class, is better termed as a “money manager.” If you are not a professional investor but your portfolio consists of 30 individual U.S. stock positions, or bond positions, or commodity positions, or whatever, then you are considered by us to be acting like a money manager and not a portfolio manager. Today, portfolio managers manage portfolios that own several different and globally diversified asset classes. For us there is a huge difference between managing a multi-asset class portfolio and a 30 stock jockey who may be a fantastic money manager but by definition has built a lousy, one asset class portfolio. After 27 years in this business I’m still amazed at how hard it is to communicate the nuances of what we do for a living.

Crude Oil Momentum

Crude oil momentum is commonly defined as the rate of change in the price of oil ($/bbl) of a given quality and over a given time frame. Several independent research providers that we read on a regular basis look at the 252-day (or annual) rate of change in the price of WTI (Western Texas Intermediate or Texas light sweet), which is refined mostly in the Midwest and Gulf Coast regions in the U.S. and is the underlying commodity of the New York Mercantile Exchange’s oil futures contracts. Their research indicates that, historically, excessively steep increases in the price of WTI were often followed by poor stock market performance.

Two commonly-watched critical levels for the 252-day rate of change are 33%, above which the stock market tended to trade sideways without offering significant gains, and 100%, above which the stock market tended to suffer significant slumps. The rationale behind these results is simple: given the pivotal role of oil in both U.S consumption and production, a “too much, too fast” rise in oil price may be difficult for the economy to absorb, knocking an ongoing economic recovery or expansion out of sync.

In an effort to keep a closer look on this indicator, we developed a tool that allows us to track the 252-day rate of change in the price of WTI in real time, based on daily closing prices as well as intra-day prices. What follows is our Crude Oil Momentum report, updated as of yesterday morning, when WTI spiked to $113.33/bbl.

The top chart (blue line) plots the S&P 500 and highlights a few major tops. The second chart (red line) plots the 252-day rate of change in the price of WTI and compares it to the 33% and 100% critical levels (dotted lines). From 1983 to date, the 100% critical level was reached only 5 times, which are highlighted and correspond to the major S&P 500 tops highlighted in the top chart. Grey areas in both charts correspond to official recessions, as determined by the National Bureau of Economic Research. Yesterday’s intra-day price of $113.33/bbl corresponds to a 37% 252-day rate of change, which is above the 33% critical level but still well below the 100% critical level.

Concluding the report is a table indicating how often, historically, this rate of change was within a given range, and what the average S&P 500 return was in the following 12 months. As the table reports, from 1983 to date the 252-day rate of change in the price of WTI was between 33% and 100%, as it is now, 20.6% of the time on a daily basis. Observations in this range were followed by an average 12-month S&P 500 return of -0.52%. From this point forward, it will be critical for our stock market outlook to observe whether crude oil momentum stabilizes at or below 33% or keeps climbing towards 100%.

Sector Rotation in Practice

Sector rotation, as defined by Investopedia, is the act of moving assets from one sector of the economy to another in hopes of profiting from the economic cycle. The 10 sectors of the S&P 500 are usually broken down into three categories: Early Cycle, Late Cycle and Non-Cyclical. Each category tends to perform better during different phases of the economic cycle and sector rotation strategies attempt to capture the relative performance moves.

The chart below shows the sector rotation of U.S. equity positions held in Pinnacle’s Dynamic Moderate Growth model from 1/31/07 to present. The green line represents the allocation to non-cyclical sectors, the red line represents the allocation to early cycle sectors, the blue line represents the allocation to late cycle sectors, and the grey shading represents the recession of ’08 and ’09. We built a large position in non-cyclical sectors heading into the recession as we forecast an end of that cycle. However, halfway through the recession we started to sell non-cyclical sectors to purchase early cycle sectors as we anticipated an end of the recession and the start of the next growth cycle. Additionally, by the end of the recession our portfolios held more early and late cycle stocks as the economic recovery got underway.

By overweighting non-cyclical stocks entering the recession and overweighting cyclical stocks exiting the recession, we were able to capture the relative outperformance of certain sectors at different parts of the cycle. This is a big part of the investment philosophy here at Pinnacle and we’ve used sector rotation to create significant alpha. Alpha is a measure of risk adjusted returns over a benchmark, and we have delivered very strong risk adjusted returns since inception of our models.

First Quarter Market Review

Please click here to read our first quarter market review and outlook, which was recently posted on the main Pinnacle website.

Point and Figure of Natural Gas

Most people are familiar with a standard bar chart or line chart showing price versus time, but there are many different charting techniques that are used in Technical Analysis. Additional price and time charting techniques include Candlestick charting and EquiVolume charting but there is also a technique that ignores time. The technique is called Point and Figure, and it started hundreds of years ago as a way to easily record price movements. Without getting into the minute details, a chart is constructed by marking an X when prices rise and an O when prices fall, and when there is a change in the price direction a new column is started. We have never written on Point and Figure but I thought it would be interesting to show how the charts can be used as a guideline for price projections.

Natural Gas has been in a monster bear market since 2007, mired by oversupply as the new fracking technology has opened massive fields. However, using the charting technique of Point and Figure, it is possible that Natural Gas (using the ETF UNG) put in a temporary bottom earlier this year. The chart below is a UNG Point and Figure chart from 12/31/10 to 4/21/11 ($0.10 x 3 for those familiar with P&F). The high price for UNG this year was $12.90, marked by the highest X, but then the price had a big sell off and fell down to $10.10, marked by the lowest 0. Moving right on the chart from the low, price found support at $10.20 since the O’s could not move lower and bulls took control as the column of X’s moved successively higher.

We can also use this chart to approximate an upside price target if the bulls stay in control. The columns marked off by the purple line are called a congestion zone and using this congestion zone we can project price upwards after the long column of X’s broke above $11. The price objective for this congestion zone is (8 columns x $0.10 box size x 3 reversal) + $10.10 (the lowest price in the congestion zone). That is a price objective of $12.50 for UNG or a gain of 9% from current levels. For an asset that’s as unloved as Natural Gas, that’s not a bad gain for a trader and this may be the beginning of something bigger.

Is the U.S. the Next Greece?

Yesterday Standard and Poor’s issued a warning about the health of the U.S. economy when they changed the outlook on U.S. debt from stable to negative. This created some big headlines, and no doubt contributed to some of the volatility on the day. So what does this mean, are we the next Greece?

No one should debate that the U.S. has too much debt, and it may be that Treasury yields need to rise just to normalize with the pickup in the economy. However, investors should not forget that the U.S. is still home to the largest and most liquid capital market structure in the world. There may not be much value left in the Treasury market, but in my opinion we are still a long way from becoming the next Greece. While we don’t treat this announcement as good news, we don’t believe it will be much of a factor for the cyclical time frame we invest, and therefore it is not a game changer to our current forecast that the cyclical bull market is still intact.

One of the interesting aspects to the day was that risk assets lost ground and talking heads blamed the ratings warning as the key catalyst, but market action seemed to imply that other factors may have been at work. We couldn’t help but notice that the U.S. dollar actually went up during the day, and though Treasuries started the day lower, they rallied as money came out of high beta sectors and fled to safety in bonds. If markets were worried that we will go the way of the PIIGS (Portugal, Ireland, Italy, Greece, Spain), then the bond market vigilantes would have likely given us a much bigger wakeup call in the form of higher, not lower, bond yields.

Worrying About the Wrong Risk

Sometimes stuff happens to make you rethink the basic premise behind whatever you are doing. At least it happens to me all of the time. The latest “stuff” is my recent Op-Ed in the Baltimore Sun regarding the investment portfolio for the Maryland State Retirement Plan, and my upcoming speaking engagement for the “X-Conference,” a gathering of some of the largest family offices in the U.S. and Europe. It occurs to me that both groups are investing portfolios that are so large that the industry’s status quo method of risk management, asset class diversification, should provide the participants sufficient protection against risk of loss. By that I mean the loss of their capital, as opposed to the risk of relatively underperforming a risk benchmark. I have written before about the status quo “playbook” for building quality portfolios, which is to craft a globally diversified portfolio consisting of multiple asset classes using no leverage. For institutional investors of state pensions, or managers of billion dollar family office portfolios, the diversification provides all of the risk management needed.

For Pinnacle clients whose portfolios typically range from $1 - $10 million, they have other risks to consider. Yes, we invest in globally diversified multiple asset class portfolios that are unleveraged, and yes, I believe this adequately defends against the absolute loss of their capital. When individuals are dealing with millions instead of billions the risk to their principal is more important to them than it is for billionaires, for the obvious reason that they have less to start with and so they can afford to lose less. But I think the real risk that Pinnacle clients need to focus on is not the risk of losing their capital, but the risk of persistently generating less than expected returns. As year-to-year gains and losses are strung together in a secular bear market, the high probability is that the portfolio will make money, not lose money, over time. The real problem is that the portfolio will earn much less than expected. The result of this past decade of stock market under performance is not that investors lost huge amounts of money in stocks. Trailing ten year returns including reinvested dividends are about flat. The real issue is that investors planned on 11% annual returns at the beginning of the decade and not 0% returns, and the resulting portfolio performance has been terrible versus expectations.

Institutional pension plans and family offices don’t pay much attention to year over year portfolio returns…they are instead focused on the returns of the money managers they employ to invest the asset classes in their portfolio. If their stock managers lost 20% in a market that lost 23% they are happy. Most folks with million dollar, rather than billion dollar portfolios, need to be concerned with absolute portfolio returns. When markets fail to deliver expected returns, some element of tactical asset allocation is required. As it happens, tactical asset allocation is our “bread and butter” around here. We are happy to wait for the rest of the industry to catch on.

Defensives Starting to Lead

We spend a lot of time monitoring relative sector trends, since sector rotation is a big part of our investment strategy. One of the things we’ve been noticing lately is that traditionally defensive sectors like Consumer Staples and Health Care have really started to outperform. Back in February and March when the S&P 500 declined by -6.5%, it made perfect sense to us when defensives relatively outperformed by declining less than some of the high-flying cyclical sectors. What’s been particularly notable recently is that they’re also now outperforming to the upside during this latest bounce since mid-March.

Defensive sector outperformance could mean a couple of different things. It could be a troubling indication that investors are starting to prepare for a larger downturn, possibly even the imminent desmise of the current bull market, and are taking profits in their cyclical holdings and rotating to defensives to ride out expected market volatility. Or, it could mean that the bull market is just entering a more mature phase where leadership is being passed along to the higher quality stocks that happen to be members of defensive sectors, which would be a less ominous scenario for the market as a whole.

Currently, we have what we believe is a healthy balance between select cyclical sectors that we feel are still well positioned for the time being, coupled with a material allocation to attractively valued defensive sectors. We’ll continue to keep a close on relative trends, and won't hesitate to make adjustments if we believe the market is undergoing some sort of larger transition.

A Lot of Speculative Money in the Oil Pits

Rising oil and gas prices are a hot topic at the moment, and we are following the action very closely. Oil prices have spiked recently based on developments in the Middle East, a lower dollar, and what looks like a healthy dose of flat out trading for profit. We believe that oil over $100/barrel is worrisome, but that the rate of change in price is the metric that will likely be the difference between cracking the economy and simply being a temporary nuisance. Currently the rate of change in oil is close to +30% on a year over year basis. Some analysts we follow believe this is close to the cracking point for economic growth and others believe it’s somewhere closer to +100% year over year, so there is room to debate exactly what the choke point will be. We are concerned, but don’t think we are there quite yet.

For those looking for an oil correction to refresh market enthusiasm, one data point analysts have been pointing to lately comes from the Commitment of Traders (COT) report. The report separates commodity trading activity into different categories. Generally large businesses that deal in oil commodities are called hedgers/commercials, and they are considered the “smart money” that hedges their exposure to the physical commodity as trends become stretched and euphoric. Another category is called large speculators, and they are typically considered the “dumb money” that will chase a trend and get most bullish right before the trend ends. The good news is that the latest look at the COT report for oil shows the dumb money has loaded up, and the smart money is very bearish. Let’s hope for economy’s sake that the smart money is indeed smart again...

Wow, Silver

The last time we wrote about silver was in January and at the time we warned that precious metals may be due for a breather. It turned out to be correct – in the very short term – as silver dropped roughly 13% during the month of January. However, that proved to be an extremely valuable opportunity to add or initiate a position in silver as the price has skyrocketed to $40/oz in two and a half months. That would be a gain of 50%, or an annualized gain of 620%! It has certainly been a very powerful move up but is it time to catch a breather, again?

The chart below shows the price movement of silver (represented by SLV) over the last year and a half. The price has climbed from $15 a share in early February 2010 to over $40 a share yesterday which amounted to a gain of 167%. That move can actually be broken down in to three intermediate trends marked by the white, red and green lines on the chart below. As you move from the white line, to the red line, to the green line the slope of the lines becomes much steeper which indicates that the trend has been accelerating. This can also be called a parabolic rise in the price of silver.

A parabolic rise is certainly fun for an investor invested in that financial asset. However, parabolic rises usually mark the end of outperformance for that asset as investor euphoria settles down and no more buyers are left to drive the share price higher. This may or may not be the case for silver right now but it seems like a dangerous place if you are thinking about buying, especially with QE2 ending in June.

The Proper Investment Time Horizon

I have been studying the Maryland State Pension and Retirement Savings Plan just because I’m interested in how professionals go about investing $36 billion of assets. It’s difficult to evaluate the plan’s asset allocation without considering the investment time horizon that is used to evaluate success. As you might imagine, the plan seems completely uninterested in short-term returns if defined as periods of less than 5 years. In fact, the plan uses actuarial methods that smooth the plan’s returns for very long periods of time. For example, the plan’s unfunded liabilities are smoothed under an actuarial convention called the “corridor method” that amortizes the plan’s pre-2000 unfunded liabilities over 20 years and then each subsequent year liability over distinct 25 year periods. In addition, the value of plan assets is “capped” to be 20% above or below the plan's target actuarial return of 7.75% and can be amortized over five years. As it says in the plan’s annual report, any one year’s investment performance can take up to 15 years to be fully recognized under current plan accounting conventions. Fifteen years is a long time to fully recognize capital gains and losses, and it provides a powerful incentive to not be overly worried about short-term investment performance. We certainly don’t have the same luxury at Pinnacle where we have to mark our client’s investment performance to the market every day.

The Maryland plan sets up a series of performance benchmarks that also promote very long-term thinking. For example, one benchmark is to outperform the 7.75% actuarial return assumption over time. Another is to outperform inflation by 4% over time. Another is for the plan to outperform “the plan’s” performance benchmarks, which careful reading reveals to be individual asset class benchmarks. If there is a single benchmark to evaluate the total portfolio I can’t find it. It is the latter benchmark that is potentially short-term in nature, but it doesn’t incentivize plan managers to be concerned about short-term absolute returns. For example, if the plan’s equities lose 35% and beat the equity benchmark by 3% then they will have accomplished the goal of outperforming, even though they lost 35% on the position. The plan is obviously tilted in every way to succeed over the very long-term and investors will not find any reason to be concerned about short-term performance either in the plan’s asset allocation or performance evaluation.

The question I have is, so what’s wrong with that? The investing we do for Pinnacle clients is also long-term in nature when stated from the perspective of matching investment strategy to our client’s objectives. Retirement planning is a decidedly long-term endeavor, and investing to meet retirement goals should require a long-term perspective as well. Yet Pinnacle clients have access to return information every week and every quarter, as well as every year. The investment team earns part of their bonus based on quarterly performance. We read daily and weekly research, trying to discern how and when trends may change in the very short term. I doubt that we will ever resolve the conundrum of investment time horizon to my satisfaction. Good consumers want performance information in “real time.” I can only be envious of pension plan managers who seem to totally ignore short term market volatility.

Dollar Breaking Down

This big news this week was that the European Central Bank (ECB) raised interest rates on Wednesday. While it was only a 0.25% increase, from a very low level (1% to 1.25%), it has had a big impact on currency markets. The euro has certainly gotten a big boost, and as a result, the dollar has been under renewed pressure, falling through an important technical level. The next critical threshold for the dollar is the low from late 2009, which is only another -1.5% from here. If that fails to hold, then the 2008 lows might come into play.

Why does this matter? Well, a falling dollar will only exacerbate recent inflation pressures. It will drive commodity prices even higher (since they’re priced in dollars), threatening the economic recovery. A lot of blame for the dollar’s weakness has been placed at the feet of the Fed. They currently aren’t even officially considering raising interest rates from their ultra-low level; instead, they’re still furiously pumping credit through their QE2 program.

Critics wonder about the necessity of such stimulus when the economy is supposedly almost two years into a new expansion. The Fed has countered that they’ll be able to successfully remove the excess stimulus when the time is right and prevent inflation from really taking hold. The action in the dollar seems to indicate that the market isn’t buying it.

Chart: Trade-weighted dollar index w/ underlying support levels

Review of Global Central Bank Policy

In this morning’s daily report, Ed Yardeni provided a useful review of Central Bank policy around the world. Since one of the biggest risks to the current bull market is a reversal of policy from being accommodative to being restrictive, I thought it was worthwhile to share some of the information in Yardeni’s report.

The big news in the U.S. is the presumed end of the Fed’s Quantitative Easing (QE2) policy this June. The Fed has been buying securities through their permanent open market operations (POMOs). This money has been finding its way into risk assets, especially the stock market. Investors are worried about what happens when the Fed stops buying. In the meantime, the Fed Funds rate remains at zero and the expectations are that it will remain there “for an extended period.”

The European Central Bank is pursuing a different course. They are expected to raise their lending rate from 1% to 1 ¼%, and investors seem to be anticipating an additional ½% to ¾% raise before year-end. The EU is struggling to “normalize” interest rates even though higher rates will penalize the PIIGS (Portugal, Ireland, Italy, Greece, Spain) by driving the euro higher which is a headwind to growth. The euro has already risen from 1.29 in January to 1.43 this morning.

The Bank of England is on hold at 0.5% and recent economic data is not encouraging.

The Bank of Japan has injected huge amounts of liquidity into the banking system since the natural disasters last month. Their bank reserve balance jumped 53% from 15.9 trillion yen to 24.4 trillion yen.

The People’s Bank of China yesterday raised interest rates to 6.31%. The have raised their bank reserve rate six times since last October, all in attempt to slow inflation that is expected to be 5.1% year over year when it is reported on April 15th. Like other emerging markets, China is struggling with food and energy inflation problems.

Brazil’s central bankers yesterday proclaimed that they will fight inflation next year. While their target inflation rate is 4.5% current inflation is running 6.13% YOY.

The bottom line is that investors who are worried about central banks “normalizing” or raising rates to historically normal levels probably have good reason to worry. Yardeni thinks that the bull market is being driven by higher corporate earnings and that the market will adjust to higher rates and the bull market will continue. However, even he is again warning about the risks of a correction.

Pharmaceuticals Beginning to Show Some Life

Sector rotation is one way we attempt to add value in client portfolios. We rotate within both the equity and fixed income allocations, as we continue to look for good values across asset markets. Currently our equity portfolios have employed a barbell, with cyclical overweight positions in the Energy and Technology sectors, as well as defensive overweight positions in Health Care and Consumer Staples.

For many months the broad Health Care sector has not done well when compared to the broad market, even though many of the industries we own have done quite well (such as Managed Care and Medical Devices). Within the sector, the main industry laggard in Health Care over the last year or so has been the ultra defensive Pharmaceuticals group, which we’ve owned along with the higher flying industries mentioned above. Pharmaceuticals companies are very cheap, have pricing power, and just recently may be showing some signs of turning the corner. In fact, though they are considered a low beta play, it’s interesting that Pharmaceuticals have actually been outperforming the broad market during this rally off the March lows. After a very nasty underperformance period, perhaps Pharmaceuticals are about to look a whole lot healthier.

Life Isn’t Always Linear

Being an Investment Analyst often involves looking at a vast array of indicators that are supposed to be correlated to different degrees with some relevant financial variable. When a given indicator is said to be either positively or negatively correlated to a variable, in most instances this refers to linear correlation. However, two variables may very easily be non-linearly related in which case testing for linear correlation alone will produce misleading results. Responding to this issue, we developed a tool that applies a number of different non-linear transformations to the data in order to test for non-linear relationships between an indicator and a financial variable of interest. In addition, these transformations are applied on different moving averages and percent changes of the raw data, and the correlation is measured not only concurrently but also using different lags from 1 month to 24 months. In the chart below, the black dashed arrow represents a simple linear transformation while the other data points represent the different non-linear transformation that we also consider.

Each time this tool is applied to a single indicator, it produces over 1,500 data series derived from the original one and estimates the correlation of each one of them with the relevant variable. When performing such a massive data mining exercise, we are bound to find some significant correlations simply by chance. If statistical inference doesn’t betray us, for each one hundred correlations that we estimate we would expect, on average, to find at least one of them to be significance at a 99% confidence level. In these instances, it is important to remember that correlation does not necessarily imply causation, and the latter is what we are looking for. A good example is the famous Super Bowl Stock Market Indicator, based on the observation that in 29 out of the 36 years from 1967 to 2003 an NFC victory preceded positive stock market returns while an AFC victory preceded negative stock market returns. Even though it is undisputed that such a correlation existed historically, it would be foolish to expect this phenomenon to repeat itself in the future, unless there is a valid reason to believe that an NFC victory caused the stock market to rise and an AFC victory caused the stock market to fall.

This is where the big brains of Pinnacle’s Investment Team come into play: each time we run into a variable that seems to have a strong predictive power based on empirical tests, it is a team effort to determine whether we believe an underlying causation effect based on sound economic theories actually exists. If the conclusion is negative, then the indicator is discarded as there is no reason to expect the historical correlation to repeat itself in the future. In conclusion, let’s hope that the current NFL lockout gets resolved, otherwise the stock market may not move at all next year.

Coal a Winner on Nuclear Concerns

The ongoing crisis in Japan has cast a shadow on the nuclear industry, and even China has announced plans to look for alternative energy sources. There have been many perceived winners including solar energy and natural gas; however, the coal industry has become a major beneficiary due to current energy infrastructure. The nuclear industry is a major contributor to global electricity generation and this crisis will diminish that contribution. Coal, which already accounts for nearly 45% of electricity supply, is in a good place to make up for the slack left in the nuclear wake.

The coal market has started to anticipate the increased demand as global coal prices have risen since the nuclear crisis. Additionally, the supply side of the equation has been adversely affected due to the flooding in Australia which forced mines to close. This combination is reflected in the great performance in Coal stocks (represented by the KOL ETF).

From the end of June the stocks are up almost 70%. From December to March, as marked by the upper red line and the lower white line, the stocks took a breather in the form of a rectangular consolidation pattern. However, over the last few days the KOL has broken above the red resistance line which signals that the uptrend is likely to continue. Additionally, this breakout occurred on very big volume which is shown at the bottom of the chart. The huge green spike is great confirmation that the breakout is strong and we are happy owners of this position in our aggressive model.