Sunday, July 6, 2014

World Cup Showmanship

“When judged against current and likely future trends in the terms of trade, and Australia’s still high costs of production relative to those elsewhere in the world, most measurements would say it is overvalued, and not by just a few cents.

…Nonetheless, we think that investors are under-estimating the likelihood of a significant fall in the Australian dollar at some point.” – RBA Governor Glenn Stevens

If managing the perceived imbalances placed on their economies were as easy as the short-term currency reflexes imparted from the monetary pulpits suggest – the RBA and the ECB’s jobs would be considerably less challenging. But, alas – the currency markets are played out on a world stage, with an overarching federation still administered through a dominant US dollar referee – that appears to share the likeness and performance trajectory of the American World Cup team. 

The long and short of things: Despite Draghi and Stevens’s contractual agreements to persuade their respective currencies lower, until the US dollar materially strengthens – the efficacy of their efforts will fail to find much lasting traction. From our perspective, the US dollar does not appear poised to cooperate with these coaches very best intentions. Conversely – and likely apparent to both the RBA and ECB, the dollar still presents a rather weak disposition relative to the Aussie and the euro and a strong tendency to take a fall towards the bottom of its long-term range.

Sunday, April 10, 2011


As we spring from the financial armageddon that was 2008, market sentiment has been swinging as wildly as Charlie Sheen’s public persona. One week the sky is falling in Europe – the next it’s a Fed induced panacea a trader would be foolish to ignore. And yet throughout the tumult and bipolar emotional spasms that have become as commonplace as a Charlie Sheen meltdown, the market continues to demonstrate all the characteristics and innuendo we have come to understand is Winning.

I find myself asking a few basic questions. 

Namely, what can we make out of market sentiment these days, and does it need to be reframed within a broader context to glean any worthwhile perspective, and;

Could market sentiment be far more balanced today than it currently represents, because it has become less of a binary reflection of the market and more of a summation of interests? 

Anecdotally, you could look at the trajectory of Zero Hedge’s popularity within the investor zeitgeist as a testament to the underlying skepticism towards this market. Being a curious fellow, I have checked their estimated market value from time to time (based only on daily pageview analytics) and found it doubles every few months. At the end of 2009 the site was estimated to be worth a little over $100K – a meteoric rise in of itself for a new market site. Today, it’s approaching $1 million.

Google Trends – Zero Hedge
This rise has taken place solely on the backs of skeptical investors that have embraced the bearish dogma Zero Hedge propagates on a daily basis. This is even more impressive considering the market has rebuffed much of their market strategies and perspectives (*with the strong exception to the precious metals sector) over the past two years. You could say the Google Trend chart for Zero Hedge expresses both the market’s literal Wall of Worry – and the double meaning that defines a bear today – I’m bearish towards equities with a big *caveat. 

If the Investor Intelligence survey of the previous week found only 15.7% of advisors were bearish, and yet the majority of those advisors were still riding the strongest market sector, that just happens to be the bearish safehaven of gold and silver – isn’t it misrepresenting the underlying market sentiment?

Considering this has been a rising tide lifts and drowns all asset classes (i.e. commodities, stocks & bonds), should traders simply ignore the previous historical analogs for these data series, or should there be an aggregate sentiment indicator that represents the true market character we find today?

I believe that these weekly market sentiment figures, when applied to the broader indexes, are about as worthwhile as interpreting the monthly BLS employment reports. They typically are not that useful – but everyone still squawks about them and finds their predetermined expectations within the data slices.

With that said, the widely held contrarian perspective towards these sentiment surveys is now overlapping my own expectations for the market in the short to intermediate time frames. I just arrived at those conclusions through different means. 

Monday, April 30, 2012

Window of Opportunity

Over the past month, as the SPX has transitioned trajectories from vertical to range-bound, I have become increasingly pragmatic as the path of least resistance for price, has also been working against the path of the greatest shifts in sentiment. Alas, a contrarian’s trading range – and one that has provided another brick to the Wall of Worry and little collateral damage for the bears to chew on. 

This pragmatism arose from the realization that the downside windows both came and closed throughout the first quarter, which have only emboldened the perspective of the Bears and rattled the resolve of the Bulls. This was borne out in the charts and sentiment surveys with shallow, yet powerfully exhausted corrections that have failed to find traction for more than a session or three. As mentioned in previous notes, these were the first indications to me that the market in the short term had more upside than downside risk and had successfully sidestepped the hazardous divergences that warranted concern over the first quarter.  

And while I can more than appreciate the logic and structural underpinnings of the Bears thesis today, I fear that the argument has veered into more or less an academic debate when expressed through time and one that has less probability of traction in the near term and balance through the second quarter. Adaptation to price continues to trump dogma – especially in market environments where the visible hand of our monetary handlers continue to provide support to untimely pockets of illiquidity. I may even go as far as admitting that the central banks themselves have adapted their global coordination to a market environment that continues to provide ample opportunities to replenish the liquidity spirits anew.  

As anticipated a few weeks back (see Here), the USD broke through support on the weekly charts last week. Considering the structure of what was support and the stochastic presentment of momentum, a continuation of the downtrend is likely this week.  
In the past I have utilized the relative performance of the banks, contrasted with the broader market – to support the idea that the banks have failed to display a leadership role in the rally over the past several years. This logic still stands. However, the Bulls have the window of opportunity today to break the overhead resistance directly above and embolden the case (similar to 1995) that the rally has the support of one of the most crucial sectors of the market. Furthermore, should the banks break through resistance over the coming weeks, it would support the secular shift I have noted since February away from smaller caps to the larger cap sectors of the market (see Here).
I find the similarities in structure, support and seasonality of the two time periods quite compelling. For the sake of consistency, I utilized the Goldman Sachs S&P 500 Bank Index, simply because the data for the BKX did not go as far back as the GSPBK.
It is amazing to note that although the SPX is significantly higher than in 1995, the banking sector roughly trades at the same valuation. As noted above, this dynamic could be painted both ways, however, should the banks breakout – the broader market would have a very deep well to drink from for further gains. 
As always – stay frosty.

Tuesday, January 6, 2015

Why Gold May Finally Be Turning Higher

We came into last year with the idea that despite a historically low disposition at 3 percent, the 10-year yield had become stretched at a relative performance extreme. In less than two years, yields had run up over 100% above the July 2012 cycle lows around 1.4 percent. Even in context of previous rate tightening cycles, such as the one in 1994 that had caught the market offsides – the move was massive. When expressed on a logarithmic scale, the less than two year rip was the most extreme in over fifty years. 

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Not surprisingly, when viewed in this light, our expectations going into last year were for 10-year yields to retrace a significant portion of the move; hence, strategically we favored long-term Treasuries relative to U.S equities, which by most conventional metrics as well as our own variant methods – were also extended. To guide the arc of those expectations, we referenced throughout the year the complete retracement profile of the 1994/1995 rate tightening cycle – as well as an inverse reflection of the secular peak in yields from 1981 that momentum was loosely replicating on the backside of the cycle. 

With a year of daylight between that extreme, yields are still following both retracement profiles – with 10-year yields just today feathering the panic lows from last October. While respective retracements in both Treasuries and equities may manifest over the short-term, strategically speaking, we continue to favor Treasuries – considering that the U.S. equity markets remained relatively buoyant last year. 

What has been more difficult to handicap is the large differential in performance between durations in the Treasury market, with shorter durations greatly supported by expectations that a more conventional tightening cycle would eventually transpire, as well as the influence of ZIRP – which has muddled the waters from a comparative perspective. Over the past few months we have noted the significant spread in performance between 5 and 10 year yields, as a literal expectation gap in the market has continued to grow. 

Generally speaking, this market mentality also maintained pressure on assets such as precious metals and emerging markets throughout last year, as traders waited for a second shoe to drop with further tightening delineated by the Fed. Our general take has been that the lion share of tightening – both through the posture and then completion of the taper, has already been completed. From our perspective, pivoting on a policy that actively and passively supported the markets to the tune of over 4 Trillion in net assets purchased, is the closest thing you will find to materially “tightening” at this point in the cycle. Actions and expectations are all relative, which is easily lost in this market – especially with the Fed at ZIRP for over six years. We fleshed some of these thoughts out in The World According to ZIRP last October. If and when the Fed eventually gets a window to cut the ribbon and take us off ZIRP, the move will likely be exceedingly modest and ceremonial at best. That said, we continue to be far less confident that even a modest rate hike arrives sooner rather than later and still expect that the equity markets will continue to normalize with current policy (i.e. QE free) – which for better or worst will broadly influence expectations of future policy. 

Needless to say, market conditions are anything but conventional these days, although we do believe that gold – a leading market, has made its peace with policy first as well as digested the overshot from misguided inflation expectations that slammed shut in 2011. Over the past year we’ve posted a version of the chart below that showed gold relative to 10-year yields was at a level commensurate with significant lows in the past. And while 10-year yields played the part last year, the large expectation gap – that is captured below in red in the shorter end of the Treasury market, held gold in place – until now. Gold appears to be finally breaking out of its broad base as the extreme correlation drop between durations that began with the taper in December 2013 exhausts. As we pointed out last year, this same dynamic – to a lesser degree, manifested with the previous tightening cycle that began in June 2004. Once the policy shift was digested, gold broke out of its much smaller consolidation range and correlations were reestablished in the Treasury market. 

Interestingly, the two other occasions where the Treasury market dropped out of tune with respect to durations and gold was during the 1970’s bull market, where the dynamic with the Fed was the polar opposite of how it reacts with policy shifts today – as well as in the Treasury market. Back then, when the Fed raised rates – gold rallied. When the Fed eased – gold corrected.  As such, gold trended with the relative performance between 5 and 10-year yields. 

That said, we continue to see the closest parallel with a broader cycle continuation period – such as the mid-cycle retracement in the 1970’s, that shook the tree strongly before another set of branches completed the larger move. While the saplings in this cycle have taken their sweet time to germinate over the past year, we like the long-term prospects for the sector – especially relative to the U.S. equity markets. 

Monday, February 27, 2012

Where the Wild Things Are

“And now,” cried Max, “let the wild rumpus start!” – Where the Wilds Things Are – Maurice Sendak

For many different reasons, silver has been an important asset to follow and contrast over the last decade. From appraising inflationary and disinflationary pressures, to the respective risk appetites of the collective – silver, and more importantly, silver relative to gold – has been a key asset and relationship to follow. I went over a number of these and my variant perspective on them in my last note of 2011 (see Here).  

I often use ratio charts because it gives you more information than just price. And while price alone has paid in spades lately – there’s still a great deal of truthiness in determining the underlying asset’s risk profile and trajectory based on price alone. Ratio charts, when used appropriately – can add another dimension to the picture. 

As apparent in the chart below, silver gave the impression (through price) last summer of breaking out of the consolidation range that developed after the May crash. And although things looked promising for the silver bulls for the balance of the summer, the ratio charts told a different story and foreshadowed the eventual swoon that followed in September. 

Eight months later, the set-up, both viewed through price and the ratio – looks very much the same.
For a little more perspective, here is the same contrast for 2010, which included the breathtaking breakout for silver and the ratio that coincided with the hint and then deployment of QEII. 
So goes silver (relative to gold)… so goes the SPX.

Monday, April 4, 2011

Where the Rubber Meets the Road

As the Fed chatter crescendos with the approaching conclusion of QE2, and the ECB widely expected to raise interest rates this coming Thursday, stormier seas are forecast to arrive in the financial markets at any moment. And while asset prices have continued their collective ascent on the backs of an accommodative Fed, the box has only gotten smaller in terms of their respective maneuvers within it.

This could be where some rubber meets the road for the inflationistas. 

It also may be a good time to look back at 1994 as an analog to understanding risks within the bond, currency and equity markets. In 1994, central bankers were widely seen as falling behind the curve in terms of managing inflation expectations. To neutralize the risk, they had to adjust interest rate policies in a synchronized fashion to get out ahead of it. The result was a brutal bond sell-off (will the vigilantes ride again??) and an equity market that traded sideways for the better part of a year. I believe we may be looking at a similar market scenario (congruent to 2004 for equities) that could have pronounced effects towards the bond and commodities markets and the dollar. 

The chart below has been constructed to illustrate a few key points. I chose to utilize the Transportation Index relative to the S&P 500 as a proxy of the overall animal spirits within the system. As you can see, the transports have outperformed the S&P by the widest margin since the start of the secular bull market in 1982 (apologies – the chart only goes back to 1992). And while generally speaking, it is healthy to see the transports leading the broader market higher, the spread differential articulates a cautionary tone in the near to intermediate time frames. 

Throw in a rising 10 year yield and a central banking system approaching a monetary policy inflection point, and voila – friction. 

…or the road. 

Tangentially, this could prove to be a significant top for the commodities market and a important low for the dollar.

My broad brush framework for trading this approaching dynamic will to be:

  • Short Transports relative to the S&P
  • Long USD
  • Long Gold relative to Silver
And while my work and suspicions lead me to believe it will just be a rather large skid mark in the reflationary road, you never really know how fat the tail is – until it has either run you over or is in the rear view mirror. 

So stay frosty traders. 

Tuesday, April 9, 2013

When You Come To a Divergence in the Road…

Back in the beginning of the year, we had initially cautioned that the yen was unwinding in such a fashion that traders should qualify the large positive RSI divergence as suspect, although the set-up typically results in powerful countertrend retracement moves. In our experience, the structure and momentum profile that the yen was exhibiting still had room to run, replicate and lure traders into believing a reversal was imminent. We have found – and have the scars to prove it, that pronounced positive RSI divergences that fail to gain traction in the short-term often have considerable inertia to sterilize mean reversion strategies over time. In these occasions, the positive divergence will become present on the hourly timescale, move through to the daily, the weekly and eventually the monthly timeframe. 

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This same dynamic has been running over the last two years through our comparative of the precious metals miners to the last large value trap of the previous cycle – the financials. Below is an update (from last month, see Here) of that long-term comparative that describes how a derivative sector (BKX & XAU) capitulates – relative to its eroding and denominating backdrop (SPX & Gold). 

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As shown in the long-term series with the XAU gold and silver index, as well as our shorter-term comparative with GDX – the ratio expression should begin to firm over the next week before turning down again into May. This approximate timeframe is also pointed to with the 92′ Nikkei/Silver series (see Here), which would see momentum in silver firm over the next week before taking a few stairs lower into May. 

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Not surprisingly, the yen has followed a similar divergent profile and appears to be on the cusp of changing courses. While we have been reticent to embrace the set-up, we would agree with the great philosopher Yogi here, “when you come to a divergence (fork) in the road – take it”. 
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*  All stock chart data originally sourced and courtesy of 
*  Subsequent overlays and renderings completed by Market Anthropology

Monday, March 4, 2013

When it Comes to Gold – It’s All Relative

As of this morning, the precious metals miners (GDX, XAU) continue to trade under significant pressure. Across the daily timeframe, we have followed the structure and momentum signatures of capitulation in the BKX relative to the broader market in the first quarter of 2009. Similar to my note a few weeks back in Apple, the ratio’s TRIX indicator is on the cusp of breaking its previous low this past July. Quite similar to the 09′ comparative, relative price led lower – with momentum (as expressed by the TRIX) eventually exceeding the previous summer low. This dynamic marked a phase transition for the sector – relative to the SPX – of finding a low. Should the comparative continue to be prescient – we would expect volatility to increase on the downside as relative price searches for exhaustion.    

Widening our view, here is an update of my note from the end of January (see Here) that takes a broader look at the performance relationship between the miners and spot prices. As expected, the performance series of gold and the XAU index continues to follow the previous cycle’s value trap footprints. 

While we have utilized the daily BKX:SPX ratio from 2009 to appraise momentum in the sector across the short to intermediate time frames – the longer-term performance comparative puts into perspective what my work continues to point towards:

Spot prices will likely start catching up on the downside.    

*  All stock chart data originally sourced and courtesy of 

   – Subsequent overlays and renderings completed by Market Anthropology.

As I mentioned before, this is not an apples to apples comparison, but an expression of how a derivative sector capitulates – relative to its eroding and denominating backdrop. While the miners, relative to gold, are now searching for an intermediate term low – spot prices likely have a ways to go. 

Wednesday, May 15, 2013

When Doves Cry

While we don’t expect the Fed to actually slow QE with inflation running around 1% rather than 2%, we could believe that a “taper” of some of the equity markets animal spirits might have been their best intentions last week. After all these years – and with enough glycerin on their faces, we doubt Bernanke needs a technical brief on what an unhealthy market looks and feels like. With that said and considering the disinflationary winds that have only grown stronger, the thought of applying the brakes while core PCE flirts with record lows is enough to make the doves cry. In the meantime, they’ve floated another trial balloon – which in contrast to last years failed dollar breakout and whispers of QE3 frames an interesting juxtaposition. For better or worst – they (the doves) are getting boxed in by an ebullient equity market. Having their cake and eating it to will likely prove a difficult task once again.   

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Below is the 97′ dollar breakout comparative we have been following for some perspective on the last time the dollar actually broke out. 

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Thursday, December 20, 2012

When Denial – Turns to Fear

A few thoughts on silver – as the sector continues to flush. These charts were prepared last night, hence, they do not reflect today’s large decline. 
As of this morning, silver has broken the early November lows – completing the equal retracement move of this leg of the 91′ Nikkei comparative. 
However, as you can see in the comparison of price structures below, silver is still considerably higher than the lows put in this past June, when I initially introduced the comparison in the Trilogy  and recommended precious metals as a perspective long trade.  As of this morning, the trend support from late June – which one could argue represents the psychological threshold of denial – has been broken. 
Because silver and its less emotional cousin – gold, had not confronted their more existential issues of purpose and value earlier,  an upstream comparative to the Nikkei may be more appropriate through this window.   

With that said, sentiment has eroded considerably as the market has grounded lower over the past several weeks, so – Stay Frosty