Archive for September, 2012

Video: Bonds or Emerging Markets?

Sunday, September 30th, 2012

This week’s stock market outlook video covers:

  1. High probability ETFs at 01:19 mark.
  2. What does a bullish resolution look like?
  3. What does a bearish resolution look like?

The following ETFs and markets are covered: $SPX/TLT at 3:20 mark, AAXJ/$SPX 8:00, AAXJ/TLT 10:03, AAXJ/EEM 11:15, SPY/AGG 12:00, EPI/$SPX 12:40, EWT/SPY 14:21, INP/$SPX 14:45, LQD/$SPX 15:44, SLV 16:51, XLU/SPY 18:10, and IWM 19:02.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video

Video

Technical Analysis: stocks, bonds, silver, precious metals.

Video Coming Soon

Sunday, September 30th, 2012

A new video should be posted late Sunday or early Monday. Please check back soon.

Risk Support Holds, At Least For Now

Friday, September 28th, 2012

Fortunate To Book European Profits Last Week

We felt the risk-reward ratio in Europe had reached an unfavorable level late last week (9/20/12). We took some significant profits off the table on Thursday, September 20. The vertical charts caught up with Europe this week; FEZ was down 5.08% in the last five sessions, EWP was down 6.80%, and EWI dropped 5.65%. It was nice to have them off the books and the profits tucked away in cash this week.

We entered this week with a significant cash position from our profit taking over the past few weeks. From a risk-reward perspective, we like emerging markets relative to the U.S. and Europe. Thus, we did some buying in that region of the globe this week.

Good News…Bad News

The good news this week was risk-on vs. risk-off charts held at logical and important levels, similar to the S&P 500 chart below. The bad news is the short-term strength has been in risk-off (bonds, shorts, currencies, etc.). The charts will give us the info we need one way or another (bullish or bearish). Trendlines are underrated; on September 26 we hypothesized the market was ready to bounce near support. You can see the original version of the chart below here; support has held thus far.

The S&P 500 was up 13.83 points on Thursday, which means Friday’s session “gave back” less than half of the gain. The NYSE Composite finished the week with support in close proximity (see below).

While there is no question risk markets are fragile, it was good to see bonds remain tame Friday; TLT was up a meager 0.06% and IEF was flat. The S&P 500 also closed near support this week as shown below.

Still Booking Gains Until Signs of Life Reemerge

On Friday, we continued to incrementally take profits in the SCHF/EFA positions we established over the summer. If support in the charts shown fails to hold, booking more profits Friday (9/28/12) allowed us to reduce risk a little until the current battle between risk-on and risk-off becomes clearer. Even if support holds, we believe there are better risk-reward opportunities relative to EFA/SCHF. Small caps have four trendlines below price that may act as support (see below).

Markets are either going to hold the support levels shown in this post or another leg down is on the way. There is no need to guess. We just need to pay attention and manage risk accordingly. Any continuation of the corrective process would have us consider some intermediate-term defensive positions, such as bonds or currencies. If the markets continue to fall, the manner in which they come down matters (divergences? strong volume? breadth? etc.).

China, Spain Help Risk Near Key Support

Thursday, September 27th, 2012

The hope for more money printing allowed a key market ratio to hold at a bullish support zone Thursday. Using a familiar script, global markets shot higher primarily based on (A) news related to government debt, and (B) speculation that more stimulus is on the way. From The Sydney Morning Herald:

Stocks advanced and the euro recovered from two-week lows on Thursday after the Spanish government said it would cut spending sharply and speculation grew that China will act to support economic growth. Spain’s Deputy Prime Minister Soraya Saenz de Santamaria announced a timetable for economic reforms and a tough 2013 budget focused on spending cuts rather than tax increases as the country continues to negotiate a possible European aid package to ease high borrowing costs.

If you follow our work, you know we have been concerned about weakness on numerous intermarket charts. One of the risk-on vs. risk-off ratios we track is the performance of the S&P 500 relative to intermediate-term Treasury bonds (IEF). When the ratio is rising, stocks are performing well relative to bonds (see chart below). This week, the ratio is trying to make a stand (see point A). The intersection of numerous trendlines could act as support for stocks relative to bonds. The last four times the ratio held at support, it marked a good entry point for stocks (see 1-4 below). The S&P 500 is shown as a point of reference.

The pattern has been to buy risk at support (where the ratio hits the blue trendlines). At some point the pattern will be broken, but for now it remains intact. We did redeploy some of our cash today into emerging markets (EEM) based partly on the chart above. The chart above is a weekly chart, which means where it finishes the week is much more important than Thursday’s close. Friday is a big day for risk.

Markets Near Potential Support

Wednesday, September 26th, 2012

It is always a good idea to have a weak market “prove it” by waiting for signs of strength. During the waiting period, it is also a good idea to identify potential areas of support, which keeps our minds open to a reversal in stocks. Thus far, the market has proven very little, but support is in the neighborhood.

On the chart of the S&P 500 below, RSI could bounce near point A. Line B previously acted as resistance; it may now act as support. Line C has acted as support several times. The Commodity Channel Index (CCI) is also near a trendline (to the right of D). Finally, rate of change (ROC) has thus far held above the zero line, an area where rallies have begun in the past (see E and F).

We will continue to play defense until observable proof of strength returns. The chart above tells us a bounce could come soon. If support above does not hold, it will increase our intermediate-term concerns. We will enter Thursday’s session with an open mind and prepared to redeploy some cash if warranted.

Weakness Could Morph Into Stock Correction

Wednesday, September 26th, 2012

Rising Spanish Yields Troublesome

The recent strength in defensive assets, coupled with an uncertain bailout timetable in Spain, tell us to continue to manage risk closely. The “risk-off” trade may be returning to the Spanish bond market, which is not what the bulls want to see. According to CNBC:

Worries about Spain increased as the Bank of Spain said the economy fell “at a significant rate” in the third quarter and after protesters clashed with police in Madrid on Tuesday before the government’s 2013 budget, due on Thursday.

“The more jittery the market gets about when Spain will seek aid the higher yields will go … The key will be whether Spain asks for a bailout before their yields surge,” said Paul Robson, currency analyst at RBS.

On the chart of the Spanish ten-year below notice the higher high in yields made above the red arrow. While it may turn out to be nothing, a higher high is needed for a change in trend. If yields pop back above 6.00%, it would be a red flag for risk assets, such as stocks, commodities, and precious metals.

Defensive Assets Say “Be Careful”

The recent strength in defensive assets has been telling. Twitter acts as a de facto trading diary, allowing us to monitor changes in the market over time. The tweets below from the last four trading sessions refer to strength in defensive assets, such as bonds (TLT), consumer staples (XLP), and healthcare (XLV). These red flags were part of our rationale for taking profits off the table last week in silver (SLV), mining stocks (GDX), Spain (EWP), Italy (EWI), and the EURO STOXX 50 (FEZ). The second tweet below “we are skeptical until this changes” still applies; as long as defensive assets are the best performers, we will err on the side of caution. If defensive ETFs start to lag again, it will send a bullish signal.

In a recent video, we outlined numerous bearish concerns on the chart of stocks relative to bonds, or risk-on relative to risk-off. The chart of the S&P 500 (SPY) relative to intermediate-term Treasuries (IEF) below continues to say “be careful” with risk. The last three times Williams %R, a measure of momentum, broke below -20, it marked the onset of a period of weakness for stocks (see A, B, and C). We have a similar bearish break this week (see orange arrows). The chart below is as of Wednesday at 10:45 AM. Since it is a weekly chart, it could still “take back” the bearish signals before the close on Friday. Thus, it is concerning but some patience/open-mindedness is in order for the next three trading days.

Not A Time For Bullish Complacency

Over the weekend, we outlined our concerns relative to a possible topping process in stocks. After Monday’s session, we described reasons to worry about Spain’s bailout timetable and showed numerous risk markets that looked tired.

If the S&P 500 closes below 1,435 today, the door may be opened for a key test of support between 1,406 and 1,396 (see support near A below). The Relative Strength Index (RSI) may provide some help for a bounce in stocks (see B). Point C shows waning upside momentum in stocks, which is typically followed by more weakness. From a bullish perspective, MACD on the weekly chart below still has not deteriorated in a significant manner (see D). It is only Wednesday – we need to see how the chart below looks at the close on Friday. The current read is one of ongoing concern for risk.

S&P 500 Push Toward 1,490 Still Possible

If Spain asks for a formal bailout, risk assets could experience a sharp rebound. We remain flexible and open-minded, but with a high cash position until the markets give us signals to buy again. If the charts improve and the news from Europe allows, we are happy to jump back on the reflation train. Our shopping list includes QE2 winners such as silver, oil stocks (XOP), and mining companies (XME). A push toward 1,490 on the S&P 500 could be in the cards if Spanish yields calm down. The need for flexibility is evident in the lack of clarity relative to Spain. Posted on the Wall Street Journal’s site September 26 at 8:00 AM:

Spain’s prime minister, Mariano Rajoy, is still not committing himself to request a bailout. Asked in a Wall Street Journal interview whether his government would apply for a financial bailout from one of the European Union’s two financial-rescue vehicles, Mr. Rajoy said: “At the moment, I cannot tell you,” adding that the government would need to see if the conditions attached to the bailout are “reasonable.”

It is important to understand a topping process could involve a new high in stocks. If risk assets move higher with tepid conviction from buyers, then it is time to be very concerned. Conversely, if the next push higher is accompanied by a “start buying bonds” command for the ECB, strong volume, and confirmation from technical indicators, the QE2 winners may be the place to be.

Weekly Stock-Bond Ratio Concerning

Tuesday, September 25th, 2012

The chart below (via link) could improve before the end of the week, but as it sits now, it is concerning for risk: CLICK HERE for CHART.

Germany May Throw Markets Bearish Curve

Monday, September 24th, 2012

According to the Wall Street Journal (WSJ), Germany wants to delay Spain’s formal request for aid. If Spain continues to drag its feet, stocks, commodities, and precious metals could slip into correction mode. Below are the potentially bearish points from the September 24 story:

Progress on two of the euro zone’s most pressing concerns—containing the crises in Greece and Spain—faces holdups up in Germany, where Chancellor Angela Merkel is reluctant to ask parliament to vote on measures that are likely to raise fierce opposition from within her own coalition.

Spain’s decision on whether to seek bond-market intervention by the European Central Bank, as financial markets are hoping, is also in limbo. That is partly because Germany has signaled that it doesn’t want Spain to make the move.

Ms. Merkel’s aides are searching for a way to close the Greek shortfall without asking German lawmakers for more money. Any request for fresh bailouts would likely spur bruising, and politically damaging, fight in Germany’s lower house of parliament, the Bundestag.

On September 23, we outlined the five fundamental drivers that could spark a stock market correction. The first concern listed was “Spain may choose to delay a formal request for aid.” The news that Germany may be encouraging the delay only heightens our concern on this issue.

Even under a correction scenario, an S&P 500 push toward the 1,487 to 1,550 range may be needed to clear the post-QE euphoria. Silver (SLV) was the best performing major ETF during QE2. On Monday, SLV experienced a bearish MACD cross, which increases the odds of a correction. Trading For A Living by Dr. Alexander Elder provides some insight on this indicator:

MACD crossovers identify shifts in the balance of power between the bulls and the bears. When the black MACD line drops below the red MACD line, it shows that the bears dominate the market, and it is better to trade from the short side. When the black line moves below the red line, it gives a sell signal (see red arrow below).

MACD signals on daily charts are not nearly as important as those that appear on weekly or monthly charts, but the bearish cross on silver’s chart below does show QE-friendly assets are losing upside momentum. We took profits in SLV last week, but are not advocating shorting silver. Another push higher is possible, but any subsequent gains in SLV may be hard to sustain unless MACD improves.

Williams %R is another valuable tool to track momentum. On the daily chart of the S&P 500 below, the indicator is showing a discernible decline in bullish conviction. A move back above -20 would alleviate some of our short-term concerns.

Looking around the globe, numerous ETFs have waning upside momentum, which increases the odds of a more substantial correction.

On Monday we learned an index of business confidence in Germany, the biggest economy in Europe, fell for a fifth straight month. The FEZ ETF below dropped 0.70%.

According to Reuters, about 2,000 Chinese employees of an iPhone assembly company fought into the early hours of Monday, forcing the huge electronics plant where they work to be shut down. EEM was able to stay nearly flat on Monday (see below).

In a recent video, we outlined numerous ways to monitor the battle between risk-on and risk-off, including tracking the performance of stocks (SPY) relative to bonds (TLT). For the balance of the week, the primary driver of risk assets will be Spain. If Spain (EWP) outlines new measures as expected on Thursday and simultaneously requests help from the European Central Bank, stocks and QE-friendly ETFs could shoot higher again. But if Spain disappoints on any front this week, tired stocks and commodities could experience a “give back” period similar to what occurred in November 2010 (see two charts below).

We are currently maintaining a relatively high cash position. If the charts improve and the news from Europe allows, we are happy to jump back on the reflation train. Our shopping list includes QE2 winners such as silver, oil stocks (XOP), and mining companies (XME).

Are Stocks Beginning To Peak?

Sunday, September 23rd, 2012

The five fundamental drivers that could spark a stock market correction are:

  1. Spain may choose to delay a formal request for aid.
  2. An increasing demand for safe-haven assets.
  3. Global growth is slowing.
  4. Earnings may disappoint.
  5. The approaching ‘fiscal cliff’

Just as more money is coming off the sidelines, stocks appear increasingly susceptible to a reversal. An intermediate-term peak in global markets could come sometime in the next two weeks. Positive developments in Spain could alleviate our concerns, but for now the current path of risk assets appears to be one of a topping process.

Before we outline some concerns, it may be helpful to know we used a similar analytical approach to warn of slowing stock market momentum on May 7, just before the S&P 500 dropped another 97 points. On May 25 or four trading sessions before the S&P 500 staged a massive 208 point rally, our models told us to be open to a bullish reversal in risk assets. Paying attention with an open mind can be profitable. Over the last few weeks, we have booked gains in oil (DBO), oil stocks (OIH), Germany (EWG), tech stocks (XLK), small caps (IWM), Spain (EWP), Italy (EWI), gold stocks (GDX), foreign stocks (EFA), Europe (FEZ), and silver (SLV).

Spain Still Playing Games

Europe has been the major drag on global growth and the financial markets for the last thirty months. While the European Central Bank (ECB) announced a game-changing bond buying plan in September, Spain must formally request aid before the ECB begins to print money or assist in bringing down bond yields. From Reuters:

“I think we’re in a bit of political limbo where markets are just waiting for Spain to ask for help, because ultimately if Spain doesn’t ask, the verbal boost from the ECB is going to fade away,” said Jo Tomkins, an analyst at consultancy 4Cast. “The longer Spain holds out, the more impatient markets are going to get and the more frustrated markets are going to get.”

The waiting game is a typical gambit for the cautious Prime Minister of Spain, Mariano Rajoy, who is known for dragging out decisions as long as he can, both to seek the best political timing and to tire out opponents. Some analysts believe he may now be waiting until after October 21 regional elections, including in his home state of Galicia and the Basque Country, before taking a decision.

Defensive Assets Say “Pay Attention”

Just as mathematics helps us understand the spirals in a seashell, financial markets tend to rise and fall in parallel and symmetrical patterns, which is why something as simple as a trendline can provide valuable insight to investors. The video below examines the current patterns in global stocks (VEU) and an easy to understand risk-on/risk-off ratio (SPY/TLT). The results tell us stocks may be vulnerable to a reversal sometime in the next fourteen trading sessions, with the S&P 500 stalling between 1,487 and 1,500. You do not need to understand technical analysis to see the current patterns in play and what to look for in the coming weeks to gain bullish or bearish insight. We do not need to forecast what will happen, but only pay attention to what is happening. The video explains what we will be watching in the coming trading sessions.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video

Video


Synchronized Economic Slowdown

Last week, the HSBC Flash China manufacturing purchasing managers’ index showed manufacturing in China shrank for the 11th straight month in September, with the headline reading remaining below the 50 mark between contraction and expansion. In Europe, the news was not much better. Markit Economics said that the eurozone composite PMI, which includes data points on both the manufacturing and services sectors, declined to 45.9 from 46.3 in August, the lowest level since June 2009. Back in the United States, the Federal Reserve expressed the following concerns in their September statement:

The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.

First Quarterly Earnings Decline In 12 Quarters

While it is often lost in our central-bank driven world, company earnings still matter. According to NASDAQ.com:

If we do get negative earnings growth this quarter as currently expected, that will be the first decline in quarterly earnings since the earnings recovery got underway after the end of the Great Recession in 2009. The earnings weakness is quite broad-based, with half of the 16 Zacks sectors expected to have negative earnings growth.

Watch Out For The “Fiscal Cliff”

The vast majority of Americans have heard of the approaching “fiscal cliff”, but many may not know exactly what the term means. According to About.com:

“Fiscal cliff” is the popular shorthand term used to describe the conundrum that the U.S. government will face at the end of 2012. U.S. lawmakers have a choice: they can either let current policy go into effect at the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – or cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The oncoming fiscal cliff is a concern for investors since the highly partisan nature of the current political environment could make a compromise difficult to reach.

Defensive Bias, But An Open Mind

While we have remained bullish for over three months, we have also constantly advocated maximum flexibility and open-mindedness. The fundamental bullet points outlined above are not particularly new to the markets. Our concern is weak fundamentals appear to be aligning with deteriorating technicals, which often results in unfavorable conditions from a risk-reward perspective. Investors can make money with strong technicals and questionable fundamentals (see last three months). However, a combination of weak fundamentals and weak technicals make it difficult to produce stock market profits.

With the Fed already committed to flooding the financial system with freshly printed money, and the European Central Bank on the verge of joining the party, the longer-term outlook, for now, remains bullish. It is the short-to-intermediate-term that concerns us. Even after QE2 was announced on November 3, 2010, stocks and commodities had a considerable “give back” period (see below).

Over the same post-QE2 announcement period, silver experienced a painful short-term decline. In the present day, Silver, like Spanish bonds, could rocket higher if Spain formally requests aid from the ECB. However, silver could also have a sharp correction if Spain continues to drag its feet. We took an 18% profit last week in SLV. We still like silver, but the short-term risk-reward is not nearly as favorable as our entry point in August.

Spain, ECB Hold Key Short-Term

Why have the markets been bi-polar in recent years? Unfortunately, financial assets have become overly dependent on money printing from central banks. The bull run could resume in a forceful fashion if Spain clears the way for the ECB to join the Fed’s money printing party. However, as outlined in the video above, the charts are telling us to be cautious.

Should the charts stabilize in the bulls’ favor and if we can avoid another spike in Spanish yields, we are happy to redeploy our cash. Notice the last sentence pairs “should” and “if” with bullish conditions, which means unless something changes a correction may take hold sooner than many believe. For now, we are happy to keep some converted profits in cash.

VIDEO: Are Stocks Beginning To Peak?

Sunday, September 23rd, 2012

Just as mathematics helps us understand the spirals in a seashell, financial markets tend to rise and fall in parallel and symmetrical patterns, which is why something as simple as a trendline can provide valuable insight to investors. The video below examines the current patterns in global stocks (VEU) and an easy to understand risk-on/risk-off ratio (SPY/TLT). The results tell us stocks may be vulnerable to a reversal sometime in the next fourteen trading sessions, with the S&P 500 stalling between 1,487 and 1,500. You do not need to understand technical analysis to see the current patterns in play and what to look for in the coming weeks to gain bullish or bearish insight. We do not need to forecast what will happen, but only pay attention to what is happening. The video explains what we will be watching in the coming trading sessions.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video

Video