The Price Action is Right
Featuring John Roque
Published on: March 29th, 2019 • Duration: 10 minutesJohn Roque, CMT, has developed his own price-based indicators over the course of a 30-year career on Wall Street. Roque sits down with Justine Underhill to make the case that his indicator is signaling huge upside for Chinese equities. It’s also pointing his attention toward gold, and to bank stocks. Filmed on March 28, 2019.
JUSTINE UNDERHILL: Welcome to Real Vision's Trade Ideas. Today we're sitting down with technical strategist John Roque. Great to have you here.
JOHN ROQUE: Thanks for having me.
JUSTINE UNDERHILL: So this is your first time on Trade Ideas. Can you give us a little bit of your background, what you do?
JOHN ROQUE: So I'm a technical strategist, technical analyst. I've been on the street for 30 years. I have an II ranking for six of those years. I spent the bulk of my career on the sell side. And then I spent seven years at Global Macro Shops. And now I'm doing a little consulting, and I have a little Twitter presence, and that's how I'm staying out there,
JUSTINE UNDERHILL: What are you looking at in the markets right now?
JOHN ROQUE: So I'm really keen on China, and the Shanghai Composite in particular. And so I've gone back to 1990, which is as far back as my data will allow, and I've created an indicator. It's a price-based indicator. And we're in the sixth cycle for this indicator to turn upward. The prior five cycles have seen the Shanghai Composite rally as little as 120%. The biggest rally was 500%. And the median advance lasts about 16 months. And since we just started in January, I think there's some time for this thing to continue to work.
JUSTINE UNDERHILL: So what levels would you be looking at, there?
JOHN ROQUE: So we like the Shanghai-- or I like the Shanghai Composite right here, and I would-- down to 2,800. And it doesn't seem crazy to me. I know it may sound ridiculous, but to think that it can get to, I would think, 3,600 or 4,000-- it came from 2,440-- or even 5,000. Now please remember, the last five times, the smallest advance was about 120%. So to maybe conceive that we can get about a double off of this rally might sound ridiculous, but the history says it's really not that crazy.
JUSTINE UNDERHILL: What would be your stop loss on this?
JOHN ROQUE: Well, it came off of a giant bear market. There's been a big turn here. I think there has to be some give here now, because there can be some pullback. But I would say if we got under 2,750, I would reassess. But I think this could be one of those things where we may get a sharp pullback, but we should be using that pullback to buy, not to get worried about the particular turn, especially since my indicator is confirming.
JUSTINE UNDERHILL: So what exactly goes into your indicator?
JOHN ROQUE: All the stuff I look at is purely price based. So as with most other indicators, you go through a period where you try to create something, and normally they end up failing or really stinking. And so I found one that seems to work fairly well. And I know I only have five instances, and that's not admissible in a statistics course, but it's admissible in a portfolio management course. And so this is the indicator I'm going with.
JUSTINE UNDERHILL: What would be your time frame on this trade?
JOHN ROQUE: Well, as I mentioned, the median advance from the prior history was a 16-month move. And since we just started it in January, I mean, I think this has some legs to it and some time, both. So time and price I think is in our favor.
JUSTINE UNDERHILL: And you're looking at this purely from a technical perspective. Are you concerned at all about, let's say, corporate debt in China or other issues going on there?
JOHN ROQUE: I think I have to dance with the girl that I brought to the dance. And the girl I brought is price based. The people who know me, if I started to talk about other things, they might say, John, you know, stick to your knitting. And so I have a metaphor. I wonder if I can introduce it here.
JUSTINE UNDERHILL: Go ahead.
JOHN ROQUE: So Mariano Rivera is going to the Hall of Fame, and he essentially threw one pitch his entire career. Nobody ever said to him, Mariano, you need to throw a change-up, or you need to throw a knuckleball, or you need to work in a slider, or a curveball. He threw a cut fastball pretty much his entire career. I'm not saying I'm going to the Hall of Fame. But if it worked for him to stick with one thing, I'm going to stick with one thing, too.
JUSTINE UNDERHILL: Stick with what you're good at. So what else are you looking at in the markets right now?
JOHN ROQUE: There are a lot of things that I'm very interested in. Some currency trades. But I really like to think that gold has a chance, here. And I'm going to caveat it in quotations by saying "has a chance." Over the last few years, gold has sort of kissed you on the cheek, but hasn't really been anything more than that. And I think if gold can get above 1,380, which would complete a base of some length, I think gold has a chance to go to a new all-time high.
Now, it's not that crazy, because gold, since it came off of being price fixed, really has had two major advances, right? So it had an advance into the early '80s, and then it had an advance into 2011, 2012. These advances tend to last for a long period of time. So I think if gold can get above that level, it can make a new all-time high. And I don't necessarily know if the street or people are conceiving of such a number, but it really has to get above 1,380 to be able, I think, to get out of this base, and have enough momentum behind it to get to that new all-time high.
JUSTINE UNDERHILL: And what would you put as your stop loss, here?
JOHN ROQUE: This is a tough question for gold, and I'll tell you why-- because gold's prior advance, which started in 2001-- and I got very lucky that time. In October of 2001, I wrote a report about gold entitled "Totally and Unequivocally Bullish." And so gold went on a 2001 to 2011 move. But in 2008, it had a 38% retracement or pullback. And while that was debilitating and harmful, it was in the context of a 660% advance.
So I'm going to say that-- I'm going to not answer your question, not because I'm being rude, but because I don't think it's appropriate to use a stop just yet, because I'm not really in the trade until it gets above 1,380.
JUSTINE UNDERHILL: Do you see a certain time frame for it to get to 1,380?
JOHN ROQUE: I don't have an answer for your question. I think that gold is improving. It's doing it slowly. It's in tortoise-like fashion. It hasn't really shown any particular momentum thrust to suggest that we can get there fairly soon. And I think it may take a little more time there, because the dollar's showing a little bit of renewed strength. So that may be something we have to consider, which is why I'm giving a level and saying above 1,380. But until then, it's on the come, and I keep paying attention to it.
JUSTINE UNDERHILL: So something to look at, especially even deeper once it gets to 1,380.
JOHN ROQUE: Exactly.
JUSTINE UNDERHILL: Great. What else are you watching in the markets?
JOHN ROQUE: So there are a lot of things that I pay attention to. Like most of the technical guys, we're chart junkies. It's remarkable to me that the banks in the United States act as poorly as they do. So within the S&P 500, the financials, without the real estate, account for 14% of the relative market cap weighting. So if the banks act poorly, there's really a drag on the S&P 500.
And then I think a week or so ago, Jay Powell told investors unwittingly that the banks are not that important. And by doing that, he's made technology and growth stocks even more important. So I created an adjusted indicator, where I took a look at the financial sector, I added back the real estate, and that gives you 17% of the S&P. Now, real estate's fine. Banks are poor. And I think that the bank drag may be a little bit of a compromise here for the S&P 500.
So I'm really concerned about the banks, both the KBE and the KRE, which are the big bank index, and then the regional bank index. And then generally, banks in Japan don't act well. Banks in Europe had a terrible year a year ago. And so I wonder if the banks are telling us something-- I don't have an answer for that, but I'm willing to put a question mark on it-- and give us some sort of a note of caution, just as sort of an amber flashing light-- pay attention.
JUSTINE UNDERHILL: And that would be for the broader economy or specifically for the banking sector?
JOHN ROQUE: I'm not going to make any comments about the economy. I think that the banks' softness is just an amber flashing light with respect to the rest of the market. Now, I know people will say the market can go up without the banks. I would say the market can go up without the banks going down. Now, the banks could go sideways and really do nothing, and I think the market would be fine. But if the banks go down, either they're becoming much less important or they are telling us something about the economy. But that really is something to be determined.
JUSTINE UNDERHILL: Would you consider shorting KBE or the banking indexes?
JOHN ROQUE: Both look good enough to short. I'm not going to give you a level here, because I haven't looked at it in great detail. It's just sort of a concept that I'm working on here to say these stocks and the indexes don't act well at all. The ETFs don't act well. And I have done some studies with respect to JP Morgan, which is, of course, I would guess to be the biggest-- well, of course it's the biggest, but it's the most important bank with respect to the bank index and the S&P 500.
And over the last 20 years, there've been two cycles where JP Morgan has underperformed the S&P 500, and the market has struggled. So I think those are decent inputs to pay attention to.
JUSTINE UNDERHILL: OK, so a little bit of caution in that area.
JOHN ROQUE: With that, yes.
JUSTINE UNDERHILL: All right, can you summarize all three ideas in 30 seconds?
JOHN ROQUE: Yeah, sure. So I like the Shanghai Composite. I like China. Gold above 1,380. And I'm cautious on the banks. And I think that these are not necessarily trade ideas, but I think they are trend ideas. And I happen to believe technicals are more about trend than they are about trade, so that's the way I'm approaching it.
JUSTINE UNDERHILL: Well, John, thank you so much for sharing these trends with us.
JOHN ROQUE: Thanks for having me.
JUSTINE UNDERHILL: So John likes Chinese equities. Specifically, he likes buying the Shanghai Composite Index at current levels or as low as 2,750, and he sees potential upwards of 4,000. He's also watching gold and the banking sector. He's constructive on gold above 1,380, and he believes trouble is brewing with the banks, and that both are key trends to watch.
Just remember, this is not investment advice. You should do your own research, consider your risk tolerance, and invest accordingly. For Real Vision, I'm Justine Underhill.