Video covering numerous ETFs, including SPY, GLD, SLV, GDX, JJC, DBC, EWI, EWG, EWQ, EFA, & VEU coming tomorrow. Weekly “risk-on vs. risk-off” charts will be included, as well as CCM model updates. Information will be of interest to both bulls and bears. Will post here when completed.
Archive for June, 2012
If time permits, we will try to put together a video this weekend showing bullish developments and concerns that remain.
In the chart below of VEU, price is clearly above the upward-sloping trendline near point A. The 20-day moving average (blue line) held and has turned up in a bullish manner (see point B). Point C highlights a new higher high, which is indicative of an uptrend. The 200-day moving average (thin red line) is the next test for the bulls. The chart below was originally posted on June 15.
We have been talking for weeks about stocks showing signs of forming a bottom. A bottom tends to be more of a process than a one day event. On a day like today, it can be difficult to discern a climatic intermediate peak from the early stages of a prolonged move in asset prices. The weight of the evidence supports the bullish case. However, within the context of a bottoming process, stocks may need to backtrack one more time.
We began adding to our long positions on June 6. Since then, we have continued to incrementally add to the risk side of our portfolios as the markets showed improvement. We continued taking incremental steps via purchases today.
We entered Friday’s session with five core long positions and no short positions. We would have been more aggressive in terms of the percentages added, but (a) the 60-minute charts were extended, and (b) some of the thresholds in the table below have not been exceeded yet. The table was originally posted on June 21. The market may need to put another scare into everyone next week. If stocks drop, given what we know today, we would consider adding to our positions. Once the market clears the hurdles in the table below, the incremental buys can occur in larger percentage increments (or on the next pullback).
Late Thursday on the wires - all unconfirmed, but the futures and Asian stocks have reacted positively:
- Europe plans single financial supervisor
- EU: will have direct recap of banks
- Renounced seniority on loans
- Opened bailout funds with little/fewer strings
The initial reaction is positive.
Another story on bond buying, which leans bullish for risk assets. While anything can happen, an announcement confirming this approach could spark a big short-covering rally. From Reuters:
European Union leaders are likely to discuss the possibility of the euro zone’s bailout funds buying Spanish and Italian bonds as they are issued, to help ease funding costs for Rome and Madrid, EU officials said on Thursday. The temporary European Financial Stability Facility (EFSF) and its replacement, the European Stability Mechanism (ESM), have a mandate to buy bonds of euro zone countries directly at the primary auction.
Update: The Treasury ETF, TLT, has traded 3.6M shares today. A typical day sees 9.1M shares change hands. The desire to migrate toward “safe” assets is not strong today.
It is too early to buy. It is also too early to give the bearish case the nod. Possible support exists on 1,5,15,30 and 60 minute charts in numerous forms between 1,307 and 1,317. As long as 1,307 holds, we are inclined to be patient. If 1,307 fails to hold on the S&P 500, we will review the upside potential and downside risk in that light.
The Wall Street Journal published an interview this morning with German Finance Minister Wolfgang Schäuble. Since Germany holds the purse strings, his comments are important. Two potentially positive developments are included in the interview. The first relates to trying to calm markets in the short-term:
Mr. Schäuble acknowledged that Europe might have to take short-term action to stop the exodus of private-sector capital from the region’s bond markets and said there were a number of instruments that could be used, including direct purchases of government debt by euro-zone bailout funds—the European Financial Stability Facility and the European Stability Mechanism.
The second relates to longer-term solutions:
Mr. Schäuble said Germany could agree to some form of debt mutualization as soon as Berlin is convinced that the path toward establishing centralized European controls over national fiscal policy is irreversible. That could happen before full implementation of treaty changes.
Any program that buys Spanish and Italian bonds leans bullish for risk assets. However, the question of firepower may arise soon thereafter. The markets are not confident the European bailout mechanisms have enough capital to calm bond markets the size of Spain’s or Italy’s.
We have no idea about: (a) what will happen in Europe over the next four days, and (b) the market’s reaction. We do know the DeMark exhaustion setups discussed at the 12:17 mark of the June 22 video below remain viable. Numerous markets could see exhaustion counts in the coming days. Stocks have not made a new high since early April. Even if the bears win in the end, counter-trend rallies can be strong and last several months. We have to be open to all outcomes, including another pullback followed by a respectable rally in risk assets.
We sympathize with Germany’s position in Europe. They understand it will be much more difficult to see over-extended budgets brought back into line after checks have been passed out (again). Germany’s bargaining power remains strongest when bond market pressures are high in Italy and Spain. If your house is on fire, a guy with a bucket of water is in a good bargaining position.
The recent spike in Spanish and Italian bond yields has moved Germany’s leverage into “playing with fire” territory. The Germans are living in fantasy land if they think their current path will calm bond market investors.
At the 13:27 mark of a popular December 2011 video, we explain why rising bond yields can create an unsustainable situation or crisis. In the long run, we believe Germany is taking the proper approach to create sustainable growth. However, as we noted on June 15, Germany’s timetable is radically different from Wall Street’s, which is where the fantasy land analogy applies.
Prior to the next in a long series of “make or break” summits, Europe looks like two rams competing for an attractive mate, rather than an united market-friendly union.
European leaders sound unusually divided before a high-stakes summit, with Germany’s Angela Merkel saying total debt liability would not be shared in her lifetime and giving little support to Italian and Spanish pleas for immediate crisis action.
Shortly after being appointed to lead Italy from the financial abyss, Mario Monti was dubbed “Super Mario” by the Italian press based on his ability to get things done. The Bloomberg excerpt below highlights why the bond market continues to shy away from Italian debt despite Monti’s progress:
Unfortunately, Monti has inherited an accumulated public debt large enough — at 120 percent of GDP — to overwhelm his efforts to close the gap between current revenue and outlays. With investors’ confidence rattled, the cost of rolling over the debt is becoming prohibitive. If the bond yield — currently hovering around 6 percent, up from 4 percent two years ago — stays high enough for long enough, the country will be insolvent.
Germany’s current approach will most likely need to be supplemented with some less-than-desirable moves in order to get the burning bond market back under control. Reuters summarizes Italy’s position heading into this week’s meetings:
Monti said he would repeat his call for the European Financial Stability Facility and the European Stability Mechanism, the two funds set up to provide a “firewall” against the spreading debt crisis, to be used to help ease the pressure on Italian debt. Italy is proposing to use the funds to help limit the spreads over German Bunds on bonds issued by countries that respect EU budget rules. The proposal has run into stiff opposition from Germany, the largest economy in the European Union and the bloc’s effective paymaster, and has been rejected by Jens Weidmann, the powerful head of the German central bank, the Bundesbank.
Spain and Italy are both under extreme funding stress. Therefore, it is not surprising they are pushing for similar assistance, which falls outside of Germany’s comfort zone. From Reuters:
Spain is determined to retain access to market funding and will push for European institutions to use available options to stabilize financial markets, premier Mariano Rajoy said, maintaining his policy stance ahead of an EU summit.
To keep market expectations low, Angela Merkel restated Germany’s position. From The Telegraph:
Ms Merkel told the German Parliament on Wednesday ahead of a European Union summit there is no “magic formula” that will make the crisis immediately go away. She insists that Europe must tackle its problems at the roots - which she says are a lack of competitiveness and high debts - in a step-by-step process. Ms Merkel says any other approach is condemned to failure. “It is imperative that we don’t promise things that we cannot deliver and that we implement what we have agreed,” Ms Merkel said to loud applause in the chamber. “Joint liability can only happen when sufficient controls are in place,” she added.
Charles Dallara, managing director of the Institute of International Finance (IIF) and a key negotiator in the restructuring of Greece’s debt, represents the view of large buyers of sovereign debt. From Reuters:
“This is about winning back the confidence of long-term oriented investors such as pension funds and insurance companies - and I fear that they will be convinced only by comprehensive solutions.”
We often read that financial markets are addicted to stimulus and policy intervention, almost implying something is wrong with the markets. Unfortunately, the markets are acting in a very rational manner. Markets know the entire financial system has been propped up with deficit spending, printed money, manipulated interest rates, and taxpayer bailouts. For those who point to strong earnings and fundamentals, we invite you to answer these questions:
- If the global economy was fundamentally sound, why have policymakers kept interest rates at near zero levels? Why are they willing to commit to keeping them low for a long period of time?
- Why have historically low rates not sparked more growth or inflation?
- What would growth and corporate profits have looked like without unprecedented global stimulus (spending money we do not have), money-printing, and near-zero interest rates?
The answers to many of the questions above relate to unhealthy balance sheets. As we outlined in an October 2010 video, rather than purging bad debts from the system, policymakers have attempted to repair the asset side of balance sheets. The process of “stimulating” asset prices works for a time, but the markets eventually come off their sugar high and realize no one wants to deal with the debt, with the exception of Germany. Germany is often cast as the hard-line villain in the media. The harsh reality is many debts around the globe must go through a restructuring process. It is and will continue to be very painful, but on the other side, confidence will return and sustainable growth will follow. We will have sluggish growth for a long time unless the debt is purged from the system.
Mario Monti has stated he is willing to work into Sunday night in an effort to make progress before the markets open on Monday. Therefore, investors hoping for some significant news this week may be disappointed. Our investment approach remains unchanged:
- Remain flexible and nimble
- Lower lows could be coming and may represent a buying opportunity
- Have contingency plans for bullish and bearish outcomes
If key levels above 1,240 are breached on the S&P 500, a deflationary decline could move fairly rapidly toward 1,160, just as stocks moved rapidly in a bullish manner from 1,260 to 1,320 in early 2012. The bull/bear demarcation lines are outlined in a June 22 video. As shown below, from a short-term perspective, the bulls have made some progress.
Since some technical strings remain untied, the most difficult scenario to deal with from a probabilistic perspective is that stocks have already put in the low for 2012. This scenario will gain traction if the S&P 500 can close above 1,325 followed by 1,354.
This is the first article we have read in some time that lends hope for European progress. Below are excerpts from a CNBC/Financial Times story posted on Monday night:
- The European Union would gain far-reaching powers to rewrite national budgets for eurozone countries that breach debt and deficit rules under proposals likely to be discussed at a summit this week, according to a draft report seen by the Financial Times.
- The European Commission would present detailed adjustments for a country in breach of its commitments. The changes would be put to a vote of all other EU countries.
- The measures move well beyond plans presented by the commission last year, which give Brussels the power to review budgets before they are submitted to national parliaments, but not the authority to dictate changes.
- In addition to the new powers for Brussels, the draft includes a proposal requiring eurozone governments to collectively agree their debt levels and the “upper limits” of their national budgets annually. If a country needs to increase its borrowing, it would be forced to go to other eurozone governments to get prior approval.
- Although the draft does not call for immediate moves towards full-scale eurozone bonds, it does suggest interim steps, including studying limited mutualization of short-term debt, known as “eurobills”. A redemption fund – first proposed by a panel of German economic experts that would only mutualize current debts of eurozone countries in excess of 60 percent of their economic output – is also presented as a possible interim step.
We were ready to add a hedge against our long positions today, but the 30- and 60-minute charts called for some patience. The lowest level of horizontal support is at 1,306 or 7 points below Monday’s close. Possible upside on a 60-minute DeMark chart is 44 points higher than today’s close. With a short-term risk-reward ratio of 7-to-44, we’ll see what tomorrow brings. We could blow right through 1,306 on Tuesday’s open, but there is little to support that as of Monday’s close.