Posts tagged ‘spx’

Technically

Written March 30th, 2012

Technically, I’m not a technician. The idea behind technical analysis is that historical price, time, and volume data has some predictive value, and at least from an empirical perspective I’ve seen some investors who are able to harness that data to gain an advantage. I think the challenge is to find an indicator or methodology that can systematically be used for an advantage, and like fundamental analysis, or any investing for that matter, the challenge is as much in the implementation and discipline as the discovery of the method.

All of that said, I do think charts can help investors gain a perspective rather quickly on potential outcomes or tell a story rather quickly. So here’s a story…

This chart may be rather confusing, so let me give a rundown. One line is the NYSE New Highs – New Lows Index. It very simply tracks how many stocks are making new highs and how many are making new lows. It stands to reason that as more stocks make new highs than new lows, the equity tracking indexes (i.e. the S&P 500) should rise and vice versa. I took this chart back five years, but the chart can be traced back as far as an investor might want, and bring up 2 simple questions: Do you want to invest when new highs – new lows are extremely high or extremely low? and If there is a major divergence between the new high-new low index and the equity indexes, what should you do?

This is a question of mentality. Momentum players will tend to look for trends to continue. If new highs-new lows (NHNL) is rising, they’ll want to buy the equity indexes (we’ll use the SPX for reference). Indeed, that works until it doesn’t. Contrarian investors will tend to want to do the opposite, which obviously fails until the turning points. Here’s the kicker, though, the key is in the divergence.

In late 1999, the NHNL index started turning downwards, and actually became quite negative, while the SPX continued to rise. That should have served as a warning sign. It tells investors that the market is being carried by fewer and fewer companies. Conversely, in 2003, the market was down, but the NHNL index was moving up and making new highs, a signal that there was a move up coming.

Where are we now?

We are not at extremes, but the divergence is growing. Te market continues up this year, with fewer and fewer new highs relative to new lows. I already discussed that Apple has been carrying this rally, while the underlying fundamentals continue to deteriorate. We aren’t at extremes yet, but if nothing else, the growing divergence should give investors pause. If we see the NHNL continue to trend down and into negative territory while the market trends up, it will only relay an ever larger correction coming our way. For now, either we need to see more stocks participating in the rally or the market correct in order to close the gap – my money is on the latter.

Relevant ETFs: SPY, SH, VXX, DIA, IWM, RWM

The Big Squeeze

Written October 10th, 2011

We started off the week with a big, low volume squeeze – but that’s not news anymore. The intraday moves and even the successive day swings have been violent  and the numbers being reported by different mutual funds and hedge funds attest to the difficulty of consistent returns in such tumult. But let’s assume for a second that you fell asleep – choose a time: a month? a year? three years? You then woke up and started looking at closing prices. What would you think happened? A whole lotta nothin’.

Except we  who have been awake know all too well that a lot has transpired. Leadership has changed. Sectors rotated. Margins compressed and then came roaring back. Investments decreased. Debt changed hands. The government got into a weaker position. etc. etc. etc. The list is endless. What I want to bring readers back to though, is that the focus on the daily swings has been difficult to profit from, and focusing on the other, longer term trends has been significantly easier and more profitable. For example, the shift in leadership from financials to tech to energy to utilities. The continued strength in gold. The non-collapse of the US Dollar (so far), contrary to all government attempts to the contrary.

So Columbus Day started with a big short squeeze, with no fundamental news, no big policy changes, and not even a lot of noise (by comparison). The fundamentals haven’t changed and contrary to any technical breakout you read about, the market rally will not be sustained.

Relevant ETFs: SPY, SH

Equity down, CRB up

Written August 2nd, 2011

August 2nd was the debt ceiling deadline, and as anticipated, our leaders came through with a deal that raised the debt ceiling, but has only negative long term implications in terms of fiscal policy. The possible relief rally was nowhere to be seen in equities, but it showed up elsewhere.

First off, the damage in equities was broad.

The current sell-off wipes out any gains for the year, and I haven’t heard any chatter from the channel traders about buying the dip here, so I assume even they are getting scared.

On the other hand, we have a raging top in treasuries, and while I’m pretty confident we’re coming to the end of the bond bull, I’m not confident enough to add to my TBT position. It’s not a great vehicle to begin with and I’m hesitant to see what monetary policies will follow. There’s a chance that the old 37′ers will emerge unexpectedly under Bernanke, a cruel irony for him, since his greatest fear is to be remembered as the guy who didn’t provide enough liquidity in the face of a depression. However, the Fed’s hands may be tied politically here, so bonds might still catch a strong bid.

Across the investment landscape, we have gold and commodities.

Gold is an old story for me and my clients, so I can not say I’m surprised by the moves to new highs. Commodities, though held up well, despite a stronger dollar and a global slowdown. It’s interesting to note that the flows are contradictory: bonds up imply deflation, commodities up imply inflation. Again, not too surprising given my world view of bi-flation, where stores of wealth lose value (equity and real estate) and expenses increase (commodities). Unfortunately, my exposure to commodities is through the equities, not directly, so those were hurt in the current sell-off, but the underlying stability of commodity prices makes me confident that eventually the equity will follow and outperform.

Relevant ETFs: GLD, SLV, CROP, UUP, TLT, TBT, SPY, SH, VXX

Ever wondered what 1987 looked like?

Written November 4th, 2010

I thought this was interesting. Here are a few charts that might give you a picture of what that famous year looked like. The danger, of course, is that it’s already in the distant memory for most investors.

The S&P 500 hit a new YTD high in August, then…

Gold meandered it’s way up:

The USD was on its way to making a new low byt the end of the year:

I’m not drawing any comparison, since I think we are in for a much more difficult period, more closely related to Japan’s experience than to the 1987 experience, but I always like to go back and revisit, especially when thinking through different scenarios and outcomes.

And I’ll end with a quote from John Murphy (Intermarket Analysis, 1991):

Consider the sequence of events going into the fall or 1987.  CRB prices had turned sharply higher, fueling fears of renewed inflation.  At the same time interest rates began to soar to double digits.  The USD which was attempting to end its 2yr bear market, suddenly went into a freefall of its own (fueling even more inflation fears).  Is it any wonder, then, that the stock market finally ran into trouble?  Given all of the bearish activity in the surrounding markets, its amazing the stock market held up as well as it did for so long.  There were plenty of reasons why stocks should have sold off in late 1987.  Most of those reasons, however, were visible in the action of the surrounding markets and not necessarily in the stock market itself.

What happens when everything happens?

Written October 27th, 2010

The past couple of days have been a little odd, and they’ve left me less time to put pen to paper (keyboard to screen?) – what happens when the very things we anticipated start happening?

Let’s start with yields…For months we’ve been discussing the historic levels of the 10/30 spread:

It’s couldn’t get wider forever and as a value-guy at heart, I like finding these types of extensions and looking for reversions to the mean. We’re getting it, but there’s more to go.

What about on an absolute level? 10 year yields could go down to 2%, but the risk is definitely to the upside (for yields, downside for prices).

What about currencies? The USD index is finding some support, and I think it’s found a floor. There is a lot of speculative money that is short the USD (short USD/long equities was THE trade for the past few months).

Lastly, what about equities? Equities are overvalued on a fundamental basis. No matter what justification is used, bull markets do NOT start from these valuations. There could be rallies, and powerful ones at that, but we are looking at 10%-15% upside potential with 30-40% downside risk. That’s a bad trade and a recipe for permanent investment losses.

The arguments floating around that QE will push assets up are valid. I get them. The arguments that USD debasement will continue are valid. But they are flawed. The Fed believes these arguments and is basing their decisions on them. The idea is push asset prices higher to stimulate spending (the wealth effect) and get the economy going.

It will fail due to two gaping flaw: the market has already discounted the efforts and is valued based on those assumptions. In order to get prices higher, the Fed would need to surprise the market with ever increasing levels of QE. The second gaping hole is the assumption that prices will actually rise. Prices of real estate are poised for 20% more downside based on various valuation methods, or more in certain areas with excess inventory of up to 18 years worth of homes!! Prices of stocks are 30% overvalued based on the q-ratio, and at best fairly valued, so room for upside is limited. Prices of bonds are already extended and have no place to go but down. So you have the 3 main stores of wealth poised for declines. There is nothing the Fed can do to change that.

10 o’clock check up

Written October 12th, 2010

We’re constantly trying out new ways to update our subscribers, so we’ll start with a few charts to review:

The USD was due for a bounce and it’s lucky we’re getting one. Why? Because holders of US assets, specifically bonds have been taking it on the chin. Even though bonds have stayed strong, they’ve been losing on the currency translations. How long would they be willing to pour money into our treasuries? Probably not long. The Fed recognizes this and is stepping in as the purchaser of last resort. Fine for US investors, not great for the bulk of our treasury holders who need the USD to strengthen or we’ll see massive dumping. Its the world vs. the Fed in trying to determine USD strength and I’m not sure any of the outcomes are good.

Commodities are hot and they’re all over the news, and I live my wheat as much as the next guy, but these things look stretched. How much of this move is fundamental, demand-driven and how much is a reflection of a weak USD? Not sure, but Dennis Gartman postulated that the recent corn report may have been the result of some government shenanigans to drive up prices:

The farming communities in the Midwest are going to be resurgent, and the equipment manufacturers, the fertiliser sales organisations, the grain elevators and perhaps most of all the small local banks will benefit manifest and continually. After a decade of weakness, strength returns to the farming Midwest.

Read about it in the FT.com here.

I wouldn’t be surprised, but regardless, I’m wary of taking new positions in the space.

And a last couple of notes:

  • Pfizer buys King Pharma (KG) for $3.6 billion cash. Nice.
  • Fed minutes come out today at 2PM.
  • Thailand tried to cool their currency by imposing a bond tax.

Around the markets in 6 charts or less

Written May 6th, 2010

Markets have been moving so fast and long standing relationships and correlations are being called into questions, but we’ll try to highlight a few of the areas we think are worth watching

CHART 1 SPX

Today intraday, the S&P broke 1185 support and fell directly to the top of our target area. The euro is driving the global markets on an absolute level, but the S&P continues to OP most global mkts. It’s now testing 50dma, while volume and $$ traded are inline from yesterday. The good news (so far) is that we held ABOVE panic opening lows. Rotations were clearly evident from the opening print – XLU XLV XLP were all positive out of the opening gate.

CHART 2 IWM

Meanwhile, the Russell 2000 intraday broke 72 support level and touched first target at 70.  This “SHOULD” act as a support area. If we bounce towards the 72-73 range, it will provide a great shorting opportunity. We believe that if global markets bounce (and that’s a big IF), EU may be the receiver of investable funds and the EZU/IWM spread should close up.

CHART 3 TNX

The 10-year yield closed below the 3.6% support level. We believe that the UST is no longer a safe haven on an absolute basis. In a world of competitive devaluations, we expect the US government to issue debt at unprecedented levels, yet, interestingly enough, they announced that they’ll be cutting issuance. We believe this will be temporary. Should the euro bounce on new bailout talk, we expect UST will weaken.  For the time being, safe haven bid remains.

CHART 4 DXY

The US dollar index is up 3.7% QTD and 8% YTD. Simultaneously,  secondary FX starting to get thrown out as EU problems spread. Safe haven bid in USD remains – Target seems to be 85-87 area – its anyones guess. Should we get to those levels I would recommend buying AUD, CAD, and the other resource based FX, but only after the euro has a bounce toward 1.32-1.35 area.

CHART 5 Gold: S&P

Bounced off the lows and continues to move north: Gold is THE safe haven in a global. Resistance in spread 1.5% away. GLD above 116 – 120 would signal new highs with a 135 tgt.

CHART 6 SPX vs IWM

YTD, we see IWM strengthening vs SPX (big) – rotations within SPX are starting to favor lagging sectors. Still, we have time before the all clear signal. We believe any rally in the EUR which causes Europe to rally will most likely come at the expense of IWM.

This market has absolute moves that are making headlines, but it is the RELATIVE moves that are the keys to understanding the markets. Rotations between regions, rotations between laggards/leaders, and rotations between large and small continue to drive turbulent moves. The Keynesians running the show didn’t account for sovereign defaults, but the CDS markets continue to offer clues. Tomorrow, Spain and Britain may be in the crosshairs. Again, the questions are no longer whether one is short or long, but what one is short or long.