Manulife Financial (MFC) – “Breaking Out of the Blue”

“When it rains, it pours” financials stocks on both sides of the border, Canada and the US, are “Breaking Out of the Blue”.  (In that, stock prices having positive transits above EBV-3).  During yesterday’s trading MFC traded above the EBV-3.  Manulife Financial (MFC) certainly hurt more in the 2008 financial crisis more than most.  This Canadian insurance company needs both increasing interest rates and rising equity markets to reverse the financial damage over the last 4 years.

Manulife Financial with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Certainly this week the financial markets have been kind to MFC in giving it want it wants.

Why should you care?

A trader/investor should always keep an eye on transits up through EBV-3.  We call this “Coming out of the blue”.  Why?  Subsequent to an upward transit of EBV-3, stocks tend to have powerful moves, price wise, that can take a stock from EBV-3 to at least EBV, or EBV+2.  Sometimes investors, if patient, can ride their winners all the way to EBV+5.

As we have noted in previous blogs we tend to look for “break out/pull backs”, for higher probability trades.  This occurs when a stock transits above EBV-3, then pulls back under, then breaks above again over a period of weeks/months.  To us this means the market is undecided in terms of the price action which zone the stock belongs.  When the market does decide to stay above EBV-3 (for a second or third time), which could coincide with news and/or corporate action, the price action is very positive.  In this situation MFC’s “break out/pull back” is not as clean as we would want it however, it still does qualify in our judgment.

Obviously, if the stock transits down through EBV-3, all bets are off!

Why are we always drawing our readers’ attention to situations that are “Coming out of the blue”? For over fifteen years we have seen this phenomena.  In our minds these are secular trades, trades lasting 3 to 5 years.  In other words, five years from now, an investor will look back to today and wish they had taken a position in anyone of these financials “breaking out of the blue”.  Not only we see this phenomenon all the time, we too kick ourselves for not playing these high probability trades.

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