Wednesday, November 23, 2011

You Say Tomahto I say Tomato


I typically laugh out loud when I hear a pundit refer to technical analysis as voodoo. Am I offended because it’s one of the tools in my approach? 

Certainly not. 

I really could not be bothered, as long as I am on the right side of the market. If I didn’t use TA, there’s no way that I could be consistently profitable in a market such as this. When you think about it – broadly speaking, the way I approach technical or relationship analysis is no different than the fundamental guys philosophy. We both contrast current data to past performance to make an estimation about future expectations.  

It’s just in this circumstance their PEG Ratio is my U.S Treasury/Equity Ratio – and in my experience I can’t predict with any probability where the market will trade next week, month or year based on PEG ratio’s. 

Maybe it’s just me.

Judging by this chart, we are very close to a short-term low – which will likely be SPX 1125-1135 over the course of the next several sessions. 

With that said, have a wonderful and warm Thanksgiving for those American’s here and abroad. 

For everyone else, stay frosty – this market is very dangerous. 

Wednesday, March 12, 2014

Yield Notes

Since testing and ultimately being rejected by the upper limits of last September’s highs, 10 year yields have consolidated in a narrow 20 basis point range between ~ 2.6-2.8%. 

Our general take on long-term yields has been that despite their historically low disposition, they became comparatively stretched to an extreme last year after the Fed pivoted their policy posture with respect to QE. We have been looking for a long-term range to develop between the extremes of the past two years, naturally with yields working their way lower through the balance of this year. 

In the near term, we see the prospects for an acceleration of trend lower – should yields breach the recent lows from early this month. 

The banking sector, which has benefited from a strengthening yield environment over the past few years, looks particularly vulnerable and at a curious retracement position. 

Gold, which took the brunt of collateral damages from a rising rate backdrop last year has been leading the reversionary charge higher. 

Wednesday, October 16, 2013

Yield – at the Fork

After breaking down in September, 10 year yields have crept up and kissed the backside of their 50 day moving average. From a reference perspective to the two previous cycles (94′ & 04′) in which the Fed rattled the markets with motions to withdraw monetary accommodations – there lies a fork in the comparative road. 

Although the kabuki theater in Washington has muddled the intentions and postures of the Fed, we continue to work from the perspective that most of the heavy lifting has already been done in the bond market this year. 

From an intermarket and momentum perspective we very much prefer the route taken by yields in 2004, but will keep a close eye on the 94′ roadmap which would push a prospective high well into 2014. 

Monday, April 18, 2011

Y2K=QE2

History shows us that each bubble needs a tragic muse. 
The Nasdaq Bubble had both the allure and fear of a new millennium. Y2K was on one hand a software and infrastructure motivator, as well as a philosophical romance; drunk on the notion of a new era that would transform all that we understood and perceived about the world through technology. 

With gold and silver today, it’s just as manic, evermore disturbingly romantic – and really just plain dark.


It’s a bubble with a raging mood disorder. 


At once both manic and depressive. Currency debasement! Manipulated markets! The experiment that was the fiat monetary system is over! Raging inflation is coming! 

Protect yourself! 


In the end, the inflation debate is a matter of relativity and coordination. We are not the only ones intervening in the marketplace with a monetary policy stopgap approach – it is entirely a global effort. And while it does make for a juicy soundbite (that is typically 9 times out of 10 either politically motivated or borne out of ones position in the market), there’s a lot less hyperbole and a great deal more logic behind the Feds efforts than most give them credit for. Here’s the byline for the Financial Crisis for Dummies softcover:


The private sector stopped spending – the government filled the gap. 


And although it is quite true that our current fiat monetary system is inflationary over the long run, the degree of distortions that are currently being reflected in both the precious metals market, the commodities market and the currency markets – likely do not reflect a representable correlation to inflation today, but more of a serious bubble in the commodities sector. I believe this minority opinion will prevail in the not so distant future as we emerge from the crisis relatively intact, albeit bruised nonetheless.


FT/Alphaville had a very interesting piece detailing the work from the boys at Deutsche Bank – that succinctly describes what I believe has been a massive misinterpretation by the risk trade into the commodity and currency markets. 


“The $2 trillion in purchases have literally gone down a black hole. Required reserves haven’t been required to increase and the Fed reserve add has literally simply been hoarded as cash. Excess reserves at the Fed have subsequently soared by the same. In short, QE has been a spectacular disappointment in its impact on bank lending, whether via whole loans or securities. It was as if the banks conducted the very sterilization of QE that many thought perhaps the Fed should do to “contain” inflation expectations.


Risky security prices have risen since QE but not Treasuries, the main instrument of QE2. Yet banks’ balance sheets have gone sideways. Effectively investors have marked asset prices higher by the Fed from an investor simply triggered a series of deposit for security switches through the investor base with banks never making an additional loan. This is consistent with a greater concern for risky asset post QE2 end, than Treasuries. The danger for investors is that they confuse the result of higher asset prices as reflecting excess liquidity rather than “irrational” exuberance given that actual liquidity (as broadly defined by the banking system) hasn’t gone up at all


– Dominic Konstam and Alex Li, Deutsche Bank”


While I agree with their descriptions of a rather large miscausation within the risk trade, I disagree with their disappointment with bank lending. Once critical mass arrives in the economy – bank lending will resume a glide path towards normalcy. Post financial crisis, both the private and government sectors perceive critical mass through the lens of the stock market – not lending. To their detriment, economist always seem to forget the psychological perspective to the argument. It is why accurate market forecasts are a hybrid discipline of both art and science. 

  • From Lemons to Lemonade 

Personally, I would never advocate the path that the Fed and Treasury have embarked on in the last 40 years. However, to the best of his ability, Bernanke has utilized the tools at his disposal to mitigate the collateral damage to the broader financial system.

I like Ben Bernanke, I really do. 

There, I said it. 

Don’t hate me because I chose the unpopular position – it’s an inherent character trait. 

During these contentious times, I think he is about as balanced – without ego, smart and creative as we could hope for in a central banker. The pundits will always use every opportunity to argue his ignorance towards what they perceive as practical banking methods and how they should function during ideal market conditions. They will cite example after example, such as his downplay of the subprime crisis right before the broader credit crisis erupted, as proof that he is unfit to lead the worlds largest economy. And although he surely deserves criticism towards aspects of his communications and transparencies with the market, the net result of his bold monetary approach has been a system that avoided catastrophic failure and recovered much faster than almost anyone predicted.


And while I would never willingly choose the Too Big To Fail paradigm, it has facilitated the efficiency and efficacy that the Fed could respond to illiquid market conditions. Granted, the crisis was magnified by the Too Big To Fail model, but the rapid recovery was also a direct result of their size and scope and considerable bandwidth within the global economy. Dealing with only a handful of mega banks with very similar infrastructures is infinitely easier to navigate and dispense stopgap capital, then thousands of separate and smaller entities with disparate business models and means of capital conveyance. No doubt about it, it’s a house of cards in the right market conditions, but it also can be utilized to neatly reflate a deflationary market environment in a crisis. 


With that said, there can be some rather large side effects of operating capital within such a dynamic system – even if they are just figments of the markets imagination (see below). 

  • The Bubble that is Silver
Since I last checked in on the state of the precious metals market (a whopping three weeks ago – and 400 posts before Silver Bubble Mania hit the blogosphere), the silver bullet train has continued its ascent higher – in what I like to refer to as its quest for its ephemeral peak. 

It’s not a matter of if, it’s a matter of… yada, yada, yada – you’ve heard it all before. 


It is a very crowded topic to broach these days. Definitely a bit disconcerting from a contrarian perspective, if you are positioned on the opposing side of the plate. You may ask, why would anyone ever willingly step in front of a train such as silver?


(thick BBC english accent)


Purely Ego. 


I’m smarter than the market; I’m smarter than you; therefore…(insert tragic personal anecdote here). It’s typically a widow maker towards your net worth. Trust me. 


We all know, as so eloquently stated years back by the godfather of our modern fiscal debate, John Maynard Keynes,  “that market’s can remain irrational longer than one can remain solvent.”.


Truer words have never been spoken. 


With that said, there are a number of reasons – both fundamentally, technically and psychologically speaking that silver’s historic rise is running out of motivational propellant. The crescendo of central bank fedspeak towards quantitative easing exit strategies and inflation concerns has reached a dissonant pitch in the market. What’s the old market axiom, “Buy the rumor, sell the news”? Well the news flow has been absolutely tidal towards inflation expectations as of late. 


Internationally, the drumbeat from China has been as steady as Ringo’s right foot in Come Together. They have raised rates twice since October, and just yesterday, their central bank governor declared they would continue to raise rates, “for some time”. Meanwhile, the ECB has eschewed Bernanke’s willingness to give the markets the benefit of the doubt and have followed rhetoric with action. 


Domestically, the inflation debate has intensified, and although the governing powers that be have yet to align a concerted approach towards addressing inflation expectations – the wheels are in motion and proceeding along that path. 


Two days ago, it was Fed Governor Plosser declaring his concern with “choreographing” an exit strategy towards quantitative easing. Moments before, it was Federal Reserve Bank of Richmond President Jeffrey Lacker stating his concerns with the, “need to heed the lesson of the last recovery that inflation is capable of rising even if the level of economic activity has not returned to its pre-recession trend.”.  


First rhetoric then action. 


Technically speaking, the silver market is as exuberant as the Nasdaq was in March of 2000.



I also like to look at the monthly charts as an apples to apples comparison of these two historic bubbles. For comparison, I bracketed both the Y2K hysteria trade in the Nasdaq and the current QE2 trade in silver. 


The RSI, MACD, Full Stochastics and CCI have all exhibited very similar artifacts of manic market conditions. Namely, a slope as steep as the current monthly MACD for silver is almost always immediately followed by only one phenomenon. 



Exhaustion.



Not a correction or consolidation of trend. 


Exhaustion. 


The Nasdaq had Y2K as its tragic muse. Silver, and by extension the entire commodity sector, has QE2. It’s ending in one month. Best look for a seat before the music stops. 


Just remember, Y2K=QE2

_______________________________


I just joined Twitter, you can find me here

Tuesday, November 8, 2011

XLF Comparative Study – Update

Here’s an update of the XLF comparative study from after the close today. While the market followed the script of strength over the past two sessions, it was actually weaker than I anticipated. Perhaps tomorrow it will fulfill the proportion of the analog, but there were more than a few cracks in the markets short term technical picture that it looks increasingly unlikely. 

For that reason, I included an additional study that is a little further down the road in the financial crisis – where the rebound failed to exceed the previous highs. 

Sunday, April 10, 2011

Winning

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. 

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. 

Click to enlarge images
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. 

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 www.stockcharts.com 

   – 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.