[MUSIC PLAYING] Welcome to Real Vision's Trade Ideas.
Today we're sitting down with John Kolovos of Macro Risk Advisors.
Great to have you here.
Thank you for having me.
Now this is your first time on Real Vision.
Could you give us a little bit of your background and what you do at Macro Risk Advisors?
Sure.
I've been doing this for about 20 years now as a technical strategist.
Early on in my career, I was at Lehman Brothers.
Found my way over to ISI Group.
And during that beginning part of my career, I developed trading strategies based off of
trend momentum and sentiment.
Later on, I found myself on the buy side, most recently at Fidelity up in Boston where
I was their global technical strategist, working very closely with the portfolio managers up
there, whether it be portfolio analytics or helping with stock selection ideas.
Currently I'm at Macro Risk Advisors as their chief technical strategist.
And what we do at Macro Risk Advisors-- first of all, we're based here in New York.
And we are a boutique derivatives broker dealer where we have multiple disciplines in terms
of the strategies that we offer.
So we have energy strategy.
We have technical strategy.
We also have quant and derivative strategies.
So you're mostly focused on the technical side of things.
Oh yeah, for sure.
Yeah.
Great.
So what's your trade idea for today?
Well, I think a good way to start would just to have a discussion about equity markets.
I think stocks are in a secular advance.
So if you think about what that means, that's a structural, a multi-decade bull market.
We're in that.
The low is '09.
When we broke out in 2013, that confirmed that we are in a long term bull market.
So if we frame everything in that regard, then stock should be higher over time.
So my first trade's going to be around what I think the S&P is going to do this year.
I do think the S&P 500 gets up to 3065.
OK, so what are the technicals that you're looking at specifically there?
Right.
So first, let's take another step back.
2018 was a cyclical bear market.
That decline had all the markings of what a bear market looks like.
You had significant internal deterioration.
We eventually saw the end with a panic bottom.
Coming out of that low to make the distinction between being it being a bull market rally
or a bear market rally, you need to look for breadth.
And I'm a huge proponent of looking at breadth indicators.
What do I mean by breadth?
The percentage of stocks advancing, let's say, over a 10 day basis.
Coming off of the low, we saw readings-- I mean, almost through the roof to levels we
haven't seen basically to the 1930s.
When that happens, if you do get a pullback-- if you do get a pullback, they're very, very
shallow.
So coming off the low I was very confident that this is the real deal and that the long
term uptrend that has been in place since '09 is in place.
If we were to look at the chart of the S&P 500 going back to 2009 and draw a trench handle
on it, we could see that at multiple points support was held back in 2011, also back in
2016, and then again in 2018.
What's also interesting about this trend channel from '09 is this, that it actually acted as
resistance back in 2000, 2011, and again in 2015.
So under the assumption that the S&P 500 is in this long term uptrend, where do I think
the market will go?
So one exercise that us sell siders do and that we hate is to come up with the year end
target.
So in December I said, all right, we're going to do 3065 as the year end target for the
S&P 500 for 2019.
How did I get there?
I used this trend channel.
Keeping it simple.
There's no double bottoms.
There's no early wave counts.
You just say, if trend is your friend, where is the market going to go in 2019?
And 3065 is the level that I call the central tendency for the market.
Now, do you see, going further out, any potential problems as the market keeps going higher?
Sure.
There are definitely issues out there, one of them being the percentage of stocks above
the 200 day moving average.
While it is above 50%, when you're in a bull market and a strong advance, you should be
closer to 65%.
So we're still a little bit underneath that level where I feel comfortable.
And that's primarily being held back by small cap financials.
So they do need to improve a little bit.
So I'd like to see financials to catch a bid and such, to rally a little bit more to feel
more confident about my call.
But I'm pretty sure we're going to get to that 3065 area.
And again, it has to do a lot about the breadth off the low.
Those breadth thrusts that I mentioned earlier are a sign of strong demand.
You just don't get these signals for no reason.
People were buying in earnest.
And I believe that if we do get a pullback, whenever it is, people are going to be buying
it.
What is my stop level?
I'm a big proponent of trailing stops.
And the reason being is that these moving averages-- I call them adaptive risk metrics.
Each day the moving average changes.
So if you're in a rising trend, the moving average will continue to go up each day.
So I like to use the 50 day.
That's how I would stop myself out on, let's say, the 3065 call.
We're not going to be seeing a sell in May and go away sort of thing happening?
You know, it's interesting you say that.
That is a risk that we could get that.
I don't think so.
And historically, the market won't sell off in May.
It kind of is a little bit later on.
It's closer to end of June.
So the sell in May phenomenon is there.
How I look at it is a little bit different.
If you actually combine the one year cycle, which is what you're referring to, with the
four year and the 10 year cycle, it's only like a four week period for what would be
2019 that will be weak.
So I believe while we maybe could pull back and maybe consolidate, I'm not anticipating
anything yet that will be extremely detrimental to the trend of the market.
Are you concerned at all about the rise in the wedge pattern that we're seeing?
And we saw that before in October before the sell off.
So wedges really represent a slowing of momentum.
Doesn't mean momentum is negative.
It means that it's slowing.
So think about a car.
We came out of the gates going 100 miles an hour.
I think now we're just starting to slow it a little bit.
I don't think it's anything to be too, too worried about at this point.
And then like I said, if we do pull back, and let's say we do break down from that wedge,
I don't think that will be it.
I think that will be just an opportunity for people to be reengaged in the market.
What other factors are you looking at that make you bullish here?
Sure.
Global markets are incredibly strong in my opinion, either being the emerging markets,
or the EAFE index.
So being Europe, Japan, Australia.
I think those markets are quite strong.
And the way I look at the charts, I see about another 6% or 7% higher just in those markets
as well.
So we have global breadth.
And we have breadth within the States.
We also have breadth within the global context.
So I see EAFE and EM with another 6% or 7% higher.
Sentiment I think is very bearish.
Most of my clients-- the most bullish of my clients are neutral.
None of them are screaming bulls.
So to me, I'm just like, OK.
This is a contrarian moment.
This is not a well discounted advance.
So I think sentiment is on the side of the bulls.
And then finally bellwethers.
I created an index called the IFS index, which has Industrials, Financials, and Semiconductors.
They look pretty good here.
Semis have been incredibly strong.
Granted, due for a pullback.
But they're on all-time highs.
You can't really argue with all-time highs.
The industrial sector, hanging in there.
Looks pretty darn good.
And financials just recently broke out of a bottom formation.
So when I combine these three important economic bellwethers, that keeps me constructive.
And overall somewhat rosy picture right now?
Technically, yes.
Now, let's move on to commodities.
What are you looking at in that space?
So commodities.
The way I look at commodities-- and I'm going to start it very similar to how I was talking
about with the equity markets.
Let's think about the long term trend.
So even with commodities, I like to look at the long term trend as well.
So today I brought a chart of the commodity index going back to about 1900.
Very long term chart.
And to me, this speaks volumes to how the commodity complex behaves.
And one thing that stands out to me is this.
When commodities peak, they peak in a parabolic fashion.
They become like a speculative bubble, if you will.
And then they decline quite severely.
The declines tend to be front loaded, about five to seven years.
And then after that, they go through a period of dormancy, like a lost decade, if you will,
ranging anywhere between 18 to about 10 years.
And we can see that it happened in the '20s.
It happened in the '50s and also happened in the 1980s.
I believe we're doing that right now.
So for instance, oil.
I'm bearish on oil.
I think oil will work its way lower over time.
However, I do believe the low in 2016 was the low.
I believe that around $30, $26 is the low for WTI.
But going forward, it's going to be a very wide range for about a decade if so.
So I'm bearish on oil.
I'm bearish on commodities in general.
And I believe the environment we're in is very similar to the secular bear market that
we had in the 1980s.
Is there a reason that you're singling out oil here, specifically?
Yeah, it's in the forefront of a lot of our clients' minds, whether it be inflation, whether
what's going on with OPEC.
It's definitely forefront on everyone's minds.
I have a lot of global investors as well.
The energy complex is a lot more important overseas than here, particularly from a market
cap weighting standpoint.
In the S&P, the energy sector is very small.
But when you look over at EAFE and emerging markets, a lot more important.
So I like to keep a very close eye on what's going on in energy.
Do you see that potentially being a drag on some emerging markets?
It could be.
It could be over time.
However, the emerging market complex has changed over the last decade or so.
It used to be very dependent on commodities.
But now the way the EM index is weighted, it's actually mostly towards technology companies.
So kind of, but not really.
So in terms of oil, what levels are you looking at, and what's your frame?
Sure.
OK, if we take a look at oil going back to about 2001, it's quite clear that it peaked
in '09.
And if you draw a downtrend channel since '09, you could see that there's resistance
up at that 90 level.
And then again we saw failure again around the $70 level last year.
So what am I looking for?
I believe over time we'll see WTI get to about 240, but eventually closer to 30.
So this is my longer term view on oil.
So where are we trading right now?
Somewhere around $63 or so.
So longer term, I'm looking at 40, and then eventually getting closer down to 30.
On a shorter term basis, I'm seeing in the chart even right now an opportunity to sell
or to lighten up on your oil exposure, be it the commodity or the USO, or even if you
have some exposure on the energy sector complex, be it in the US or overseas, to lighten up
a little bit.
So resistance on oil, in my opinion, is somewhere closer to around 70.
70 would be a level where I would stop out, temporarily, on a bearish oil call.
So that would be for the short term?
Yeah.
So short term is like-- would you say one month, or three months, six months?
So a short term-- when I define short term, within the three month window.
I wish there was a right answer for that.
But I would say within a three month window.
And the longer term going down to 30?
This would be years.
I mean, it could be one year.
It could be two years.
Kind of think longer-- just, I don't know.
To me, longer term is about a year or so.
What do you see as the biggest risk to this thesis overall?
The biggest risk to the commodity thesis and/or the oil thesis is this.
I don't have an answer for that.
Yeah, you don't need to have an answer.
I don't know.
I don't think-- I am so confident in that.
Sorry.
[LAUGHTER] You can keep that, or as an outtake.
I just think that-- I think it's going down.
I like that.
I just think it's going down.
That's probably why it's going to go straight up.
All right, so what exactly are your levels for the three month time period and then the
multi-year?
And then longer term.
Fair enough.
So on a shorter term time frame, I'm looking-- oil can get down to about $60 or so.
That's approximate with the rising 50 day moving averages.
I think that's a logical spot for oil to go to over the shorter term, over the next one
to three months or so, with resistance somewhere around $70.
I think on a shorter term basis, getting down to around $60 would be about right.
Now, longer term I see oil getting down to 40.
And then once 40 is broken, we'll put one more leg lower closer to 30.
And eventually it'll evolve into a wide range for oil prices over time.
But like I said early on in the interview, I see the low in oil having been made back
in 2016 around that $30 area.
I don't believe we'll get much underneath that.
And then your stop, at least for the short term, would be at the $70--
Oh, yeah, my stop would be just about $70.
Now, moving on to your final trade for today, let's talk about palladium.
There's been quite a bit of price action going on there.
What do you see going on in the market?
All right, so not surprising.
I think palladium can work its way lower here.
Palladium has been resilient.
And it finally just peaked back in March with a severe decline.
One of the things that I watch very, very closely are swift moves through moving averages.
Moving average is really just an approximation for trend.
So when you see a severe decline over two or three days, gets priced underneath the
trend line, you need to stop and take pause.
So I believe palladium is correcting right now with the objective somewhere around the
1210 area for the commodity.
And how do I get there?
Well, palladium is actually in what is known as a bear flag.
Bear flags are consolidations.
They tend to highlight the midpoint of a move.
So if palladium peaked in March and we went through this bearish consolidation, the next
leg lower is about to commence.
And that should get you down to around the 1208 level.
I would stop myself out on that idea somewhere north of 1470.
What is your short term time horizon for palladium?
So for palladium, I'm saying within the next three months or so.
Could that affect your S&P thesis at all?
Could it impact my S&P thesis?
No.
I have a great chart I'm happy to share with you.
Is that-- when commodities are in a secular bear market, like I mentioned earlier, and
stocks are in a secular bull market, the relationship eventually-- it flips.
So we saw that in the '80s.
And we also kind of see it right now.
Oil peaked in '08, '09 area.
Going down.
Stocks are going up.
So you can have that relationship.
Same in the '80s.
Oil was just devastated during the '80s and stocks wrapped up higher.
So I do get that question.
Like, how can you be bullish on stocks but bearish on commodities?
And I say, OK, yeah, if oil were to rollover hard, like very fast in the next couple days,
yeah, I could see the stock market go down a little bit.
But I don't think it'd be enough to change the structure of the equity markets.
All right, can you break down all three of these trades in 30 seconds?
30 seconds.
I'll try.
OK.
So S&P 500, 3065 is my longer term objective.
I would maintain being long the S&P 500, so long as we stay above that 50 day moving average.
Keep it really simple.
Use the 50 day moving average.
As for oil, I believe oil will move its way lower over time, 40 being one level.
Eventually getting closer down to $30.
In terms of resistance level, anything above 70, like I mentioned earlier.
And as for palladium, I believe palladium can get down to 1208, given the bear flag
that I believe is being resolved to the downside.
Great.
John, thank you so much.
Thank you for having me.
[MUSIC PLAYING] So John is bullish on equities.
Specifically, he suggests going long the S&P 500 with a trailing stop loss at the 50 day
moving average with a target price of 3065 by the end of the year.
In addition, John is bearish on commodities.
Specifically, he recommends shorting oil with a stop loss at 70 and target price of 60 over
the next one to three months.
He thinks oil could reach as low as 40, and then $30 over the next few years.
Finally, John suggests betting against palladium.
He would have a stop loss at 1470 and target price of 1208 over the next three months.
Just remember, this is a trade idea and not investment advice.
You should do your own research, consider your risk tolerance, and invest accordingly.
For Real Vision, I'm Justine Underhill.