Welcome to Real Vision's Trade Ideas.
I am Brian Price, joined today by Guy Cerundolo, founder and president of Cerundolo Investment
Research.
Guy, great to have you with us.
Pleasure to be back.
So you joined us back in November.
You were shorting the Nikkei.
Turned out to be a good call.
Walk me through what you saw, and walk me through how you applied your proprietary trading
model to this move.
Sure.
So the clients that I work with are long term oriented.
So the analysis for the Nikkei actually started back in 2011.
It's the money flow unit analysis that I use.
It's used on not only the short term time frames but long term.
And back then, I had projections of an upside target of 24,500 on the Nikkei.
We had hit it twice last year, and then as the indicator started to show that there was
a money flow bearish unit developing, that's when I acted on putting out a bearish call.
And since then, it's down 12%.
So with this money flow units in mind, what are you looking at right now?
Well I cover a lot of global equity markets, as well as currencies, commodities, and what
have you.
But in my Tuesday pitch book that I send out to clients, I highlighted back in the end
of the year that a number of the global markets were giving distributive top patterns.
So I saw that not only US markets, but also in Europe.
And so the latter part of 2017 into January of last year, there was a development of a
bearish money flow unit, and it was triggered on February 13.
And that's when they put sells on Germany's DAX, the CAC in France, and Spain's IBEX.
So let's drill down on what you're seeing within your money flow units right now with
those ideas in mind.
Sure.
So once the money flow units are developed on that larger frame, I start getting downside
projections.
So back in February, as I had these negative calls on these markets, I had downside projections
for both of those indices in the neighborhood of 20% to 25%.
And they were both achieved in the last three weeks.
So in the case of both the DAX and the CAC, they came into their target zones.
The CAC was just shy by a couple of percent.
So I started upgrading these indices about 3 three weeks ago.
The other thing that really caught my eye is on a momentum basis, these two indices
were actually making a higher momentum low, which also I thought was a positive thing.
So for the portfolio manager that's allocating billions of dollars, because the range of
people I work with is anywhere from $1 to $70 billion, they need to have a good understanding
of where the possibilities are of a low taking place.
And that's what I'm seeing in those two indices.
So now I've gone on the bullish side.
I think this is the first innings of-- it's hard to say how sustainable the advance is.
It may be months or years in duration.
But to help a portfolio manager start to allocate capital in what I believe are the first innings
of a turn is really what I try to do.
And I use the money flow analysis with that.
You were bearish back since February on this, so this is a recent--
Oh, yes.
--turn for you.
Yes.
So for viewers that maybe are hearing from you for the first time, break down this model
for me a little bit.
How does it work in layman's terms for somebody that is maybe a little bit confused?
Of course.
Well, they may be bewildered for some time because there's only three other people that
know how to use this, and two are them retired.
And one of them is not me.
Exactly.
So the gentleman that I learned this from-- this goes back into the early to mid 90s when
I worked at Fidelity.
And I received his work for quite some time, and we became good friends and mentor even
to this day.
So he is retired.
But I've used this type of analysis over thousands of charts from equities to currencies, commodities.
And what it does is it measures the capital flow in an asset.
Depending on the size of that money flow basket, it will give you a projection in price only,
not time, of what kind of energy-- think of it that way-- is in that basket of money that
could propel prices to a particular price target.
So typically, once this-- no, let's think of it as a high that is unfolding in these
two indices.
What will happen is, when you-- there are different levels of the money flow in terms
of targeting.
When you come to the two level, this is typically a place where you get a strong reaction, a
countertrend rally in the other direction of the trend.
And that's when you start to lever up on the position, whether it be shorting in the case
of these two indices.
Or if it's a bullish formation, you add to the long position.
And then, depending on the cycle you're in, you could either terminate at a 3 or a 4.
And given that the momentum of the last cycle is really strong, a lot of the global indices
were at or slightly exceeded their MFU, Money Flow Unit, 4 levels.
So what I'm looking at now is for the unraveling of this decline to the first indication of
the downside target.
So what I'm looking for now is the-- because we're in the first innings of a low taking
place, it'll take a bit of time to start getting upside projections.
So once we get to the 2, we'll have some type of a pullback.
We will reassert ourselves and get lever long even more than that.
And then, typically, we will have a stronger reaction at MFU 3 or 4.
So at this stage of the game, we're in the early cycles of a turn of some kind taking
place.
And that's where the analysis helps you find these inflection points, is the first innings
of a turn.
All right.
So we understand the model.
We understand how it works.
We understand how you've applied it to broader markets.
Are there any banks within the 2 markets you're looking at now that have caught your attention?
Well, there's 2.
There's actually 1 bank and then 1 defense name-- aerospace defense in France.
So Commerzbank actually caught my eye.
And what was interesting there is the stock had, first off, a 63% decline off the 2014
high.
And at that point, it made what we call an ABC low-- just simple technical terms.
So a rally off the high, then a pullback that held the low, which was interesting back then.
But now, what we've had is after the high in 2018, we had a bearish money flow unit
that developed, and it gave a downside projection of 6 EUR.
We slightly undercut it just last month, but the thing that really caught my eye is that
it held at the prior low that we had a couple of years ago.
And this last leg down the stock did not make a lower low.
So in terms of a momentum backdrop, that's constructive.
But the first thing that really caught my eye is how it came down to a target zone.
It's never really that precise, and at times it can be, but this was close enough.
And given the other technical indicators, I think this is in the first innings of establishing
a low.
Because we've just had about a 6% rally in the stock over the last week or two, I'm expecting
an ABC type information like we had recently.
And it'll be hopefully a high or low, and that's when I'll start to have PMs engage
in adding to a long position.
Now I know your analysis is strictly technical.
But I want to ask about one fundamental idea, which is the potential relationship between
Deutsche Bank and Commerzbank and what could happen.
Is that something you've considered within your analysis?
For the work that I do and for most technicians, if you're true to what you do-- and I've known
people over decades that will say just cover up the name of the stock and treat it independently.
Because you could think of 1 stock having strong fundamental characteristics than another.
Therefore, think of the money flows coming in and out are going to be totally different.
So we can see that discrepancy.
But to do a comparison, right here and now on the two, I couldn't add any technical color.
Whether it's M&A, whether it's any-- OK, so that's just not even in your viewpoint.
No, not at all.
Fair enough.
What's the last name you're taking a look at right now?
The other name that caught my eye is Safran in France.
The thing that I really liked about that is I have a multi-factor model that I score large
lists of stocks for portfolio managers, whether it be their benchmark or holdings.
And this has a very strong score.
And because about 98% of the people I work with are all benchmark oriented, a stock relative
to its benchmark is extremely important, so they have to be fully invested.
They have to be involved with a name.
So with the chart that I provide, you can see that this stock has had extremely strong
relative performance versus its country, the CAC.
And then if you look at it versus the ACWI, the All Country World Index, which is a common
benchmark for global PMs, it scores extremely well.
So the model actually has a strong weighting in the relative scores.
And momentum and trends are relative.
So that was the first thing that caught my eye.
And secondly, it was MFU 2, Money Flow Unit 2, off of the most recent high, but it was
within the context of a 1-year regression channel off of its low.
So with it pulling back to support-- and then it had an existing longer term target, which
is about 15% higher from here, I thought it's a great spot right here, right now for someone
that wants to get involved with a name that has good absolute trend, very strong relative
performance, and a projection that's at least 15% higher from here.
So you mentioned your clients before.
Is this action you're putting on behalf of yourself or your clients or both?
Clients only.
So we have four bullish ideas.
As we close, walk me through the trades on each of them.
Well, for the DAX or the CAC, if PMs want to play the futures, that's one way to do
it.
But I thought it expressed the trade in 2 stocks.
I think if the markets are going to start to get some improvement, I like the risk-reward
of Commerzbank right here.
And in case of something that's already established-- a large cap name with excellent relative performance.
And in France, I think the Safran is an exceptional buy right here as well.
So really, it's 4 bullish ideas but 2 bullish trades within those concepts.
Exactly.
So with these 2 stocks in mind, Guy, give me your upside price targets or your upside
percentages that you're targeting right now.
So on Safran, I think the risk reward is really good right here, and I do have an upside target,
which is 15% from the most recent low.
And also, on Commerzbank it's early stages because I'm still looking for a retest of
the low-- hopefully a higher low.
But once we get going, I think the initial upside target could be anywhere in the 20%
to 30% area.
And what's your frame on these moves?
I think over the next 3 to 6 months.
Where would your stop losses be on these 2 names?
I think for each one I would have a stop of around 5% from the most recent low, just to
make sure that if we are not engaging on the upside right now, we'll get out quickly.
And then we'll reassess in the following weeks and months to come.
Guy, thank you so much for joining us again on Real Vision.
Hope to have you back again soon.
Thank you.
So Guy's bullish on Commerzbank and Safran.
Specifically, he suggests buying Commerzbank at 20% to 30% upside potential.
Additionally, he likes buying Safran at current levels with 15% upside potential.
His stop loss for the 2 trades is 5% below the recent lows, and his time horizon is 3
to 6 months.
That's Guy Cerundolo, and I am Brian Price for Real Vision's Trade Ideas.
Thanks as always for watching.