Saturday, 29 November 2014

November 29, 2014 – Weekend Market Comment

November 29, 2014 – The Toronto stock market extended its losses Friday as energy stocks continued to sell off in the wake of a collapse in oil prices while miners and copper prices fell heavily on Chinese economic concerns.

The S&P/TSX composite index dropped 177.74 points to 14,744.70 on top of a 116-point slide Thursday after the OPEC oil cartel opted to leave its daily output unchanged at 30 million barrels a day, rejecting intense lobbying by some of its 12 members to cut production to put a floor under prices.

American markets had been closed for U.S. Thanksgiving on Thursday. But on Friday, the January crude contract on the New York Mercantile Exchange plunged $7.54 from Wednesday’s closing price to a five-year low of $66.15 (U.S.) a barrel and sending the TSX energy sector down 2.25 per cent.  The S&P 500 Energy Sector entered bear market territory with a plunge of more than 6 percent, the biggest since August 8, 2011 following the S&P downgrade of the U.S. credit rating. The sector also had its worst week in more than 3 years with a decline of more than 9 percent. Oil prices now are down about 35 per cent from mid-summer highs because of a higher U.S. dollar, lower demand and most particularly, a glut of global supply.

The S&P 500 lost 5.25 points, or 0.25 percent, at 2,067.58, with consumer staples leading gains and energy falling 6.26 percent as the greatest of the three declining sectors. The Nasdaq closed up 4.31 points, or 0.09 percent, at 4,791.63. The Nasdaq closed up 1.7 percent on the week, its first 6-week win streak since February 2013. The index also posted a second month of gains, but only its 7th in 11 months (it was down in April while the others were higher).

The Dow Jones Industrial Average eked out a record close by 0.49 points, ending the month without having lost ground in back-to-back sessions since Oct. 15-16. Friday was the final trading day of November, and the Dow and S&P 500 posted a second straight month of gains and the 8th in 11 months this year. Both indexes barely held onto their 6th straight week of gains, their longest winning streak in a year. Keep in mind the Exxon and Chevron are part of the DOW 30 stocks so it is impressive to see the DOW up.

What I Think
Well you saw this coming, I wrote about this extensively in 2013 in Pop Goes The Commodity Bubble and in The New Momentum. U.S. oil production has nearly doubled in recent years to 9 million barrels a day, and the Paris-based International Energy Agency (IEA) expects U.S. supply to rise by more than 1 million barrels a day next year. And it is this supply increase that is driving down prices. On the week, oil futures declined nearly 14%. In a week, wow! Saudi Arabia and OPEC have essentially thrown in the towel, surrendering to the inevitability of lower prices from exploding U.S. energy production.

Look at this chart of the price of oil last week:

A friend of mine is a engineering related consultant in the Alberta oil sector. Last week he saw his contract end and the prospects of a new one are slim. The new price of oil may be with us for a while and if you are in an oil economy, Texas, North Dakota, Alberta, Iran, Russia or Venezuela, be ready for a new reality. For example, Friday the Russian Ruble traded at 49.965 against the greenback, its weakest level ever. Who recalls in 1986, when the Saudis opened the spigot and sparked a four-month, 67% plunge that left oil just above $10 a barrel. The U.S. oil industry collapsed, triggering almost a quarter-century of production declines, and the Saudis regained their leading role in the world’s oil market. Whats bad for oil producers is liberating for the rest of the world. Life will get a little better for net oil consumers, in fact this may be the very catalyst that lifts the world out of the global slow down.

Its not just oil . . . commodities in general are in a tailspin. Look at the action in copper. They used to say Dr. Copper has a PhD in the economy . . . that action Friday does not bode well for the long term economy. That said there has been a poor correlation for the market for copper and the equities market since early 2013.

"The problem is not that there are problems. The problem is expecting otherwise and thinking that having problems is a problem."
~ Theodore Rubin

It All Shows Up in the Charts
Of course we a re still in a Bull Market, but as you can see it is probably short term overbought.
There is a CME4PIF School about this chart.
Hmm new record on the slope indicator . . . .

Strange Goings On . . 
Now here is  graph I have been itching to talk about: Folks you will not see this one very often. The red line shows that the momentum is turning away from equities and toward US treasury bonds... often a sign of impending weakness, yet the green line is the consumer discretionary line and it is going up! So people are buying high beta consumer stocks and US government bonds at the same time. Normally this would not work ... but it is all part of the flood of cash heading to America. In an era when the US energy independence means a return to American global power the world is net long anything USA. In another twist both consumer discretionary (high risk) and consumer staples(safe play) equities are moving up together.

The above graph is so bizarre, I have never seen this pattern before . . . it leaves me feeling a bit like this bird . . .

 Since equities and bonds can't keep ascending, who is right? Well lest look further in our graphs but before we do here is a thought to ponder . . .
When Bond Traders and Equity Traders disagree, stand with the bond traders, they are generally smarter. 

The idea is that bond traders are professionals who are especially sensitive to changes in economic and financial conditions and adept at weighing risk and reward prospects. Professionals also buy and sell stocks, but so do the man of the street and day traders in their dorm rooms.

The saying may, or may not, be true. But when the paths of stocks and high-yield bonds – which have similar risk profiles – diverge, Wall Street pays attention. High-yield bonds, after all, were the canary in the coal mine in 2007. The extra yield, or premium, they carried over 10-year Treasury issues began to fall in June of that year, heralding the global financial crisis.

Back to the charts.  Well first off we have two graphs looking positive. . .

NASDAQ Summation
shows continued upward momentum on technology stocks.

NYSE New High New Low
The big board also has positive momentum.

However . . . It is not all good news.

Primary Sell
Well as you know this is my favorite graph, and it is often early, there is a CME4PIF school on this chart, but the idea is as the graph drops the number of hedges increases. As you can see the smart money on Wall Street is increasing its hedges. Think of it as stock market insurance is selling better and better and better . . . Oh that could be trouble ahead.

S&P500 Stocks Above 50day MA
Well more weak stocks begin to be abandon, looks like about 5% more of the S & P 500 violated the 50day moving average last week.  This process started two weeks ago when this graph had hit insane levels. There is a CME4PIF School on this chart.

Aggressive Defensive Graph
As you can see from the two top parts of the chart, the shift is toward defensive dividend playing larger cap equities. If you look at the third section the green line is the midcap 400 (MVV) and the brown line (DVY) is the high dividend stocks. I use this as a proxy for risk on and defensive.

Green Arrow Graph
Well my proprietary CME4PIF Green Arrow Graph continues to look weaker. There is a CME4PIF School on this graph. The Green Arrows tell you when to put new money and high risk money to work for best short term gains. Obviously, not now.

On Balance Volume
Although not exactly a stampede for the doors, it does look like the pros are not stepping up to the plate as they did last week. You can learn about OBV here. Ignore this for now (too close to call) but if it stays depressed bolt for the doors. Read this as Red line under blacks = equities under attack.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 13 up from 12 the day before. Notice the bounce in the CCI graph at the top, often a predictor of coming volatility. You can learn more about the VIX index here.

We also have our new experimental graph the VIX evaluator . . heading a tad sideways.

What Works Now
Well I hate airline stocks but when oil drops they do well. Below is Ryan air JetBlue and Southwest airlines but you could look also at Canadian Westjet and all the others. I am not the only one who hates Airline stocks, Warren Buffett, who has shunned the stocks for 25 years, citing their high fixed costs, strong labor unions and commodity pricing. To him they are just plain "terrible businesses." It got so bad that the only all airline ETF under the symbol FAA was liquidated in March 2013, after it failed to attract big inflows. It had been the only airline ETF left; Direxion closed its airline ETF in 2011 after it attracted only $2 million. Since FAA closed, the NYSE Arca Global Airline Index, which it tracked, is up 61 percent. That's more than double the 28 percent for the S&P 500. And while the news about airplanes recently has been unremittingly favorable, investors tend to take a hard-nosed financial view of the industry's longer-term prospects.

As I mentioned long term treasury bonds look good ... here is TLT, I have been accumulating this:

You want stable and still taking advantage of more money in US consumers pockets... how about Macy's for a little ho ho ho, recommend here a few weeks ago, still looks strong.

I am not thrilled with the prospects of the Canadian market, but if you insist on a pick Dollarama tends to be not correlated with energy prices and has been Steady Freddy so far. Don't bet the farm on this one . . .

Think Global . . .

Don't forget the nations that are not commodity producers, are going to do better now too... Looks like as gas price plummets the world will gobble up a few Mercedes-Benz C63 AMG 4-liter twin-turbo V8 coups.  So buy Germany .. here is  the EWG ETF. Yah Wunderbar!

Be defensive, take profits on your high fliers, move out of commodities and commodity related nations. Tight stops, increase cash. Lighten up on financials. Buy some U.S. treasury bonds and look at the global macro picture.

You can learn more about my indicators by visiting the CME4PIF school by clicking here.
You always can make any graphic larger, for a better look, by clicking on it. 

Saturday, 22 November 2014

November 22, 2014 – Weekend Market Comment

November 22, 2014 – U.S. stocks ended the week at highs as markets rallied on overseas central banks' stimulus efforts and an encouraging domestic outlook.

Early on Friday, China's central bank made its first interest rate cut in more than two years and the European Central Bank took action to stimulate the economy. 

In a surprise move after the close of the Shanghai exchange for the week, the People's Bank of China cut its benchmark interest rates on Friday for the first time in more than two years to lower borrowing costs and lift a cooling economy back on track. The one-year benchmark lending rate has been trimmed by 40 basis points to 5.6 percent.

The Dow Jones Industrial Average closed at a record for the 28th time this year but failed to regain the intraday record it set in the morning of a more than 170-point gain, with most blue chips trading higher. The S&P also lost some of its early gains in its 45th record close for the year, with the materials sector continuing to lead sector advancers, up more than 1 percent. The Nasdaq lost most of its morning gains but recovered slightly in the close. 

Crude oil futures for January delivery gained settled up 66 cents at $76.51 a barrel on the New York Mercantile Exchange, with gold futures for December settling up $6.80 at $1,197.70.  The Dow Jones Industrial Average closed up 91.06 points, or 0.51 percent, at 17,810.06, with Caterpillar leading gains and Microsoft the greatest of six blue-chip decliners. The S&P 500 closed up 10.75 points, or 0.52 percent, at 2,063.50, with materials leading gains as all sectors rose. The Nasdaq closed up 11.10 points, or 0.24 percent, at 4,712.97.  Two stocks advanced for every decliner on the New York Stock Exchange, with an exchange volume of 994.8 million and a composite volume of 3.8 billion in the close.

What I Think
OK this is one of those weeks where I was not really sure I was on the right track or at the very least a tad early. It was a nice surprise the market rallied, because we were long. Obviously this was a strong up week and I said last week it was time to be long but lighten up especially high beta speculative positions. Well its true the Dow did hit a fifth record up week, but the small caps and speculative stocks did not. It still might be early for taking the foot off the peddle, but don't forget that without those announcements of monetary stimulus it probably would have been a slight down week for all the indexes. Fundamentals always trump technicals and so it was not a perfect call, but maybe a better call than it first appeared. 

The fact is the reason that Europe and China are doing stimulus measures is not positive. Why are these central banks stimulating now and what are they worried about now that they ignored four years ago? If you want to know then read Bob Davis's excellent story in the Wall Street Journal that everyone should read. 

The signs are everywhere. For starters, China's largest corporate bankruptcy this week - Haixin Iron & Steel Group.

Distressed debt funds are starting to circle in preparation for what they expect to be a bloodbath as Bloomberg reports, bad debts in China are well underestimated because authorities persist in propping up weak companies and bailing out local investors, according to DAC Management, "we've yet to see it because if you look at corporate defaults, they keep getting covered by the government. At some point, they can’t cover every single one.

Most worryingly though, as KPMG points out, "when you see restructuring advisers getting hired by SOEs... you know it's coming."  Or as one New York trader I know said referring to the KPMG report, but instead quoting President Clinton to Monica "You know its coming".

The Friday close was very interesting because many people wanted to get out of their positions (to limit risk next week). 

Here is a chart I don't generally post ... This is the real time chart in 10 min bars on Thursday and Friday -- it shows what happened to the high beta stocks for the NASDAQ in a slow orderly heading for the exit day on Friday. That red line is VWAP, and market makers don't get their bonus if they don't hit it, they missed Friday no matter how they tried to bring up the order flow. Also classic head fake running up 2PM to 3PM for the RYDEX players. 

Ok well lets go visit our analysis.

Long Term Bull Bear Lines
Well it is nothing but a Bull Market, be sure you are long. No counter trend moves allowed. 

Primary Sell
Well this was the big give away last week, we should have listened and the experts continue to take off insurance and bet for the long side. This says be long -- the market is strong.

NYSE High Low
Again as long as you are playing the big names the party is on.

On Balance Volume
This shows the big money like hedge funds continue to enter the market.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded just above 13. The classic VIX graph confirms that fear is falling and confidence continues. 

VIV Evaluator (Experimental Version)
Well the VIX evaluator is not happy, but might be changing its mind . . . Don't forget we are still learning if this thing works . . .

Green Arrow Graph
My tried and true green arrow graph continues to decay, in the past this has never been a good sign. 

What my Green Arrow Graph is showing you, is part of a deeply troubling move from small caps to big caps. In fact the really small cap stocks have not participated this year at all.  Not to sound paranoid... But normally when small caps will not perform their is some underlying concern. Somewhere that is fear sneaking in to the market. They talk of memes, ideas that get hold slowly.  I don't like it when the big money has one foot out the exit door. Heck look at this evil raccoon,  he is a global macro fund manager that has been playing vix calls, short the NQ and buying QID calls . . . creeps me out.

Aggressive Defensive Graph 
Shows that the smart money was in high beta, but the party looks over. Continues to decay, also not a good sign.

Nasdaq Summation
Index hit new highs, while underlying strength seeps out. I would say it, looks a bit like the second week of January 2014, that was not good. . .

S&P 500 Percent Over 50 Day
Also topping out, as the weaker stocks are getting the punt. This graph says: caution, wake up call time . . . coming very slowly.  

Bond vs Equities
This week the U.S. 10-year Treasury note yield edged lower to 2.31 percent and the U.S. dollar lost its gains against major world currencies to trade flat. No flight to safety yet, but their is little room for continuing. Looks like sideways consolidation for now. The way this works is as the red line falls returns are better in stocks, when it rises the focus is on government bonds.  The grey green graph is consumer discretionary, normally rising in a bull market. 

Party is on, market is strong, be conservative long, low beta. Its late and the really big money has gotten the tarps off a few life boats. Lower risk, protect your capital. Suckers worry about returns, market veterans worry about risk.

A Call Out To London
A special thanks to Paul Wallace and all the other good folks who bought me a pint and shared trading stories last week at the London Traders Network meeting at the New Moon Pub.

You can learn more about my indicators by visiting the CME4PIF school by clicking here.
You always can make any graphic larger, for a better look, by clicking on it.

Sunday, 16 November 2014

November 16, 2014 – Weekend Market Comment

November 16, 2014 – U.S. stocks were little changed on Friday, with the S&P 500 rising a fraction of a point to notch another record, as investors tracked the price of oil and after October retail sales rose 0.3 percent, just above expectations, along with a November jump in consumer confidence.

Up 0.4 percent from the week-ago close, the Dow Jones Industrial Average dropped 18.05 points, or 0.1 percent, to 17,634.74 on Friday. Also tallying a 0.4 percent weekly gain, the S&P 500 rose a fraction to 2,039.82, lifting it to a record finish, with consumer staples the worst performer and energy the best among its 10 industry groups. The Nasdaq advanced 8.40 points, or 0.2 percent, to 4,688.54, up 1.2 percent from last Friday's finish. All three indexes advanced for a fourth week, with the S&P 500 up just over 10 percent for the year. For every seven shares falling, roughly eight rose on the New York Stock Exchange, where almost 705 million shares traded. Composite volume surpassed 3.2 billion.

The U.S. dollar declined against the currencies of major U.S. trading partners; the yield on the 10-year Treasury note fell 2 basis points to 2.3213 percent. After the prior session's fall to a four-year low, crude-oil futures on Friday gained $1.61 to $75.82 a barrel on the New York Mercantile Exchange. Gold futures rose $24.10 to $1,185.60 an ounce.

If you look back to last week I talked about the markets running too far to fast and to stay long but get smaller and get rid of high beta plays. This week the sidways consolidation continued. Most days the markets were up but often by less than a tenth of a percent.  I bet this patteren contnues this week.

On Thursday, U.S. stocks fluctuated after the S&P 500 and Dow rose to records, with energy companies slammed as the price of oil fell, countering upbeat earnings from the world's largest retailer and data showing jobless claims holding at a 14-year low.

Investors are currently viewing the decline in crude as a read on the global economy rather what it truly is, which is a read on global supply manipultion in the middle east to starve the money supply to islamic radicals and to squeeze out the small US horizontal drillers. The Saudi royal family is forgoing a little revenue now to cut off future problems later.  As I said before, the real trade will be when everybody wakes up and realizes lower oil prices are helping the consumer. Increased consumer confidence, higher levels of employment and lower gasoline prices, this could be a great Christmas season. 

Cute graphic from perma-bear Zero Hedge:

On the flip side we are over 5 years in this bull run, China is much wrose off than the press says, and Europe is weak too. In both cases corruption crack-downs are raining on the party. Since China is not buying or even trying to pretend all is fine, the commodity economy countries, who need demand from China are dead meat. So who does the USA have left to trade with?

You can see the signs of the end of the global coruption party everywhere. Stories of jail time for goverment big shots fill the nightly news in France Greece and Spain. But China is worrse, on a recent investor call for Wynn Resorts, the outspoken CEO Steve Wynn took an unusually cautious stance on his empire in the Chinese gambling mecca of Macau. Wynn called out the recent turmoil in neighboring Hong Kong, smoking restrictions and a crackdown on indulgences by the Chinese government. He didn't venture to predict how soon things might get better. "It's worse in October than it was before October" Wynn said. Particularly worrying is the crackdown on luxury spending and indulgences, which appears to be having a widespread impact on China. Wynn pointed out that the likes of Channel and Cartier are noticing the same trend as his casinos. Even coach which sells goods at a lower price point is reported a big slow down in its quarterly results from China.

I have previously pointed out how the high end liquor gift business is a declining market in China and a wine exporter I know, who trades wine globally, is getting very bad news out of Asia these days. 

Of course it a shows up in the charts. . .

Lets begin by looking at if the market is buying safe big stocks or little tiny stocks. This is important, because small stocks are only appealing when people want to speculate. For fun (whooohoo) we will use two different ways to get at the same picture.

First just the ratio of small cap to the huge companies in the DOW30, notice the rotation since the start of November ...even as the broad market indexes are reaching new highs.

You can also look at the S&P500 equal weight vs the normaly weighted version. Since the normal S&P500 index does not rebalance the bigger compoanies become more and more of the index. Apple and Exxon have a huge effect on the wholeS&P500 index. RSP is the equal weight version, every stock is just one 500th of the index. Read more here.

In both graphs you get a similar message, a decline of interest in speculation starting in March of 2014. A bit of a bounce in mid October, and back to a softening of interest. The point is watch out, it is at turning points in speculation interest that were often predictions of a coming pull back. 

Let begin by looking at some good news, most of the indexes of American optimism, such as the transportation index, industrial production, employment and consumer confidence are hitting 52 week highs. The world predicted in my posting called the New Momentum is all coming ture and the world has little place avalible to invest except in US equities.

The long term bull market is on, green over red is a bull market, but this looks a tad tired, the light green 4 day average is way too far above the dark green. 

The Primary Sell tells us the smart money is still getting long. In fact this is a problem because normaly with a primary Sell like this ...I would be staying very bullish.

The NASDAQ summation index is still bullish but also a tad tired looking:

The OBV line shows us the institutions are still buying.

As far as I can see the brain trust as Goldman Sacks does not see a problem, the pros are still in the game. Historically this is also a great time to be in the market in the final two months of the year. 

However . . .

The Aggressive Defensive graph continues to ask us to use this as a chance to "Pull in our horns"


The Green Arrow graph says to stay long, but the market is now less strong.

My tradtional VIX chart show no fear yet and that the pros are still long. Although a tad less firm in conviction/direction. Notice how the bottoming moves are less deep, perhaps VIX at 13 is the new bottom and will not see 11 again for a while. Logical considering the increase in volatility, also a recent over 20 spike and a S&P only up 11% in 2014.

I am also experimenting with a new look at the VIX called the VIX evaluator. In this case I am looking at short term VIX future vs medium term. The idea is that this might give a faster reaction based on a deep look at what the fast money is doing. 

According to the VIX evaluator... the fear will return to the market in the coming weeks. Well that interesting but this graph is still in testing, not sure how predictive it is. 

Continue to stay defensive, long but warry. Set your stops closer, take profits on your high flyers.  Long term trend is up, short term trend is overbought expect at best a sideways consolidation or at worst a pull back. 

Coming to you from the beaches of Las Palmas Spain, where I am at the 250 boat strong ARC sailing regata from here to St. Lucia. Next week off to London to speak at a traders workshop and home to Canada, I better get in some red wine and sunshine.  

You can learn more about my indicators by visiting the CME4PIF school by clicking here.