All day and every day, some of the stock market's best and brightest traders and money managers share their ideas, insights, and analysis in real-time on Minyanville's Buzz & Banter.
Here is a small sampling of this week's activity in the Buzz.
Monday, August 19, 2013
Natural Gas Surgest Out of Near-Term Base Pattern
Nearby Natural Gas is up 3.2% this morning, as it claws its way to a new recovery high off of the Aug 8 spike-low-reversal at 3.129.
Let's notice that the price structure also has clawed its way firmly above the support line of its May-Aug corrective channel, which argues strongly that Natural Gas is in route towards a test of the upper-channel line, now at 3.850.
At this juncture, only a decline that breaks and sustains beneath 3.32 will compromise the upside continuation.
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We've Seen This Show Before
For the past four days, we've seen a redux of the May/June deleveraging playing out again. Breakeven rates, or the spread between nominal and inflation-indexed bonds (TIPS), have been falling in the midst of falling equities and fixed income assets. This would under normal circumstances indicate that inflation expectations are falling, causing equities to fall and fixed income to rise (as less inflation is priced in). Recently it has meant that deleveraging is taking place and emerging market carry trades are being unwound. However, this time around, we have yet to see the metals move (lower).
Last time I was lucky enough to pick up on the movement in real rates while it was happening, but we didn't figure out the exact reasons until after the fact. This time around it appears that India and Brazil are the matches that set off the movements whereas China and to a lesser extent Brazil and Turkey were the prior time. I had thought that the carry trade unwind had been done, but it's either A) not done yet or B) the damage in emerging markets is a coincidence and there is another cause. Either way, there are a lot of similarities.
Both the Indian and Brazilian central bank have been intervening in the FX and repo markets daily, with only short-term success.
Saving the worst for last... India's 3M-10YR government bond spread is currently -215bps (meaning a severely inverted curve) , something that is never associated with good things. Bill rates are higher than note rates because of the decline in the rupee, which is equally from foreigners as it is the central bank. The central bank has hiked the discount rate and continues to withdraw liquidity from the system, which has done nothing to stem the bleeding. They might have better luck with a tourniquet. As an investor, paying a premium for the longer duration asset over the bills, you are betting that inflation will fall quite a lot in the future.
If all of the above is true then:
- Emerging market equities/bonds have a ways to go lower.
- Emerging market currencies will continue to collapse and the dollar will go higher.
- Metals should fall (note:I have no axe to grind here).
- US equities/bonds will fall.
- US Treasuries should tend to have a positive correlation with US equities.
I've included a chart below of the 2, 5, and 10-year breakeven rates (the ones I monitor) for perspective. From my experience, the further out you go on duration, the less volatile they are.
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Can Gold Crash Up
Scale-in buying of Gold (GLD) was suggested at the late June/early July Selling Climax. That Selling Climax mirrored the 7-week blow-off into the 2011 record high.
Now that GLD eclipsed the big initial resistance at 130 on the dailies, can it achieve a move to our primary projection to 137-143?
Last week's breakout followed a weekly Plus-One/Minus-Two buy pattern. The plus one part of the equation occurs when the 3-Week Chart turns up. This occurred 4 weeks ago for the first time, just prior to the pre-crash pivot high (both point C on the chart below).
Notable is how GLD crashed from a third lower weekly high in March 2013 and that the break of double bottoms around 150 defined the low near 115 because this was the mid-point of the range from the 2011 high to the June low.
Achieving this level confirmed the idea of a Selling Climax in addition to 115 being 540 degrees down from the 186 top.
See weekly GLD chart below from this morning's Daily Market Report.
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Tuesday, August 20, 2013
The Risk of Risk
In my most recent writings and media appearances, I've expressed concern over the way bonds have been acting and explained why spiking yields are undesirable. The parallels to 1987 in terms of the spread between the S&P 500 SPDR ETF (SPY) and iShares 20+ US Treasury ETF (TLT) are very real, with the key difference being central bank paranoia over an end to the wealth effect. The breakdown in long duration bonds over the past several days was enough for us in our mutual fund and separate accounts to rotate fully out of Emerging Markets (EEM), which up to that point we're showing some very nice strength going up on down days for the US.
That trade is far from over however. Often times following meaningful corrections, new leaders emerge. If indeed we are in the midst of a bearish environment for stocks due to the way bonds are acting, emerging markets could end up being the next big winner. From a price ratio perspective, there has been no major damage to them, with the exception of India, which may be in a capitulation phase.
If the coming Fed minutes are able to calm markets, I suspect long duration bonds and emerging market stocks stage a strong reversal. These are the trades to pay attention to for those who are debating what to go long in. Some will prefer to go short the S&P 500 (^INX) , but this may he a very risky strategy despite crash risks I have been highlighting. Do not underestimate the possibility that we may be in for a doozy of a correction. Also don't underestimate the Fed knowing that and acting to front run it.
Where to Buy
Yesterday's close was cruel. I was chomping at the bit to buy and even had bids out for some positions. Today, I am repositioning those bids for a nice flush. I am particularly eyeballing the 50% retracement of this move (around 1635 on the S&P 500). If we get there, I will buy heavy against that line with stops on the other side of the 61.8% retrace. This would also give us some nice gap fills that we talked about last week. It sure feels like today could be the day, and as such, I have to keep it brief. Good luck out there my friends!
Additionally, I am loading up on iShares Barclays 20+ Year Treasury Bond (TLT) here. Bonds DSI reached 5% last night, which means sellers are exhausted and shorts are haughty, a great mix for a nice reflex move.
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The S&P is back above the all-important 1650 level -- it is Turnaround Tuesday, after all. Given how some technical oscillators were oversold coming into today's session, this shouldn't come as a surprise, particularly in the back half of August (read: it's a thin tape).
The next technical hurdle? S&P 1658, which is the 50-day moving average, which is coming up quick.
The HFT robots seem to be pegging their equity purchases and sales on the price action in fixed-income land.
This is a fascinating CNN documentary on the risks and rewards surrounding cannabis. I missed it the first time around (when it broadcast) but I'm trying to educate myself on the implications, not just financially but socially and physically, so I'm absorbing as much as I can.
To that end, we will continue to update The Minyanville Potfolio as we educate ourselves in kind.
The bulls will offer that higher rates are part and parcel in a strengthening economy; the bears will argue that the system is so levered up and interconnected that a pebble in the pond can cause a tsunami overseas.
Our nine-year old twins recently discovered fishing and can't get enough of it. While we moved out of New York City for other reasons, I'm psyched they're digging these types of outdoorsy activities. It's a world away from the concrete jungle, and I wouldn't have it any other way, particularly with three kids.
Lemme get this to you -- and lemme get something in my belly!
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Wednesday, August 21, 2013
Tapering, Here We Come
It seems like tapering is coming. The Fed still seems a bit concerned about growth and not at all afraid that inflation is coming in any way.
We will see what is priced in, but I think we will see pressure on the 10-year treasury, possibly driving it to 3%. That will drag down corporate bonds, push CDS wider, and ultimately pull stocks down as well, led by dividend stocks.
The market is giving the best impression that this is priced in, but too many were looking for a bounce into or after the numbers that I just don't think we will get it. The day will end worse than it is now.
The Only Thing That Matters from the Minutes
"Some participants also stated that financial developments during the intermeeting period might have helped put the financial system on a more sustainable footing, insofar as those developments were associated with an unwinding of unsustainable speculative positions or an increase in term premiums from extraordinarily low levels."
Triangulation Station: Performance Anxiety
Some interesting stats floating around today:
1) MarketWatch is reporting that a Goldman Sachs (GS) study of 708 hedge funds shows that less than 5% of hedge funds are beating the S&P 500 in 2013. As of mid-August, the funds were up 4% in aggregate with the SPX up 20%.
This is an excellent quantification of the type of performance anxiety institutions may be facing.
2) Our friends at FactSet noted that Apple (AAPL) saw its third straight decline in institutional ownership in Q2, with 23 shareholders exiting the stock altogether.
That means some folks got out before things got really nasty -- but quite a few also dumped right at the bottom (I had dumped some around $450-ish) Interestingly, Apple put in its summer low right at the end of the quarter on 6/28 at $388.87 -- the stock is up 30% since then.
But are bond investors doing it better?
3) Before June, TrimTabs reported 21 months of consecutive bond fund inflows. Then in June, funds just started bleeding money with record outflow while rates were still within striking distance of historic lows.
From an equity markets perspective, I suspect a lot of people who never jumped on board the QE Express are still reticent to get in on stocks -- I believe buying at S&P 1800 is a lot more appetizing to the masses than buying here at 1654-ish.
And on the bond side, I would assume the folks that got out with the least damage are probably concerned about the impact of rising rates on the real economy (and where do they put their money? cash?), while those late to the party are frustrated by losses on 'safe' government bond funds. A person that bought iShares Barclays 20+ Year Treasury Bond (TLT) near the top could easily be down 20% -- what does that do to psychology?
So who puts money where? Anyone out there have answers?
I never trade anything macro or broader-market related for a variety of reasons, mostly because I always lose money -- but I suspect the swings in fund flows and broader confusion will create opportunities in individual stocks (and asset classes for ETF/macro traders).
But overall, remember that being confused in this market environment is completely normal, and in fact, people exhibiting extreme confidence are often crazy or stupid.
Thursday, August 22, 2013
Apple Support and Resistance Update
Over the past couple of months, I have written posts on Apple and its unfolding technical setup. From a potential double bottom formation to the recent Apple breakout, I've tried to highlight key Apple support and resistance trading levels where applicable. And considering Apple recently reached my prior resistance target (.382 Fibonacci retracement and January breakdown around $510), it's a good time for a chart update.
Sure enough, Apple found turbulence as it crossed $500. And after a grind to $510, it reached up as high as $514 before turning lower. Consolidation mode. So now what? Let's look at some Apple support and resistance levels (and potential magnets).
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On the support side, August 15 provides a couple of clues. First, the close produced a back-to-back cluster at $497/$498. And second, the daily price bar left a tail as low as $489 before reversing higher into that close. Traders don't like to see reversal tails taken out. So if that is lost, we may see a retest of the pre-breakout highs around $470 and possibly as low as the original .236 Fib (a trend change indicator). In summary, supports are $497, $489, and $470ish.
If Apple can break above its recent highs (now resistance), it will likely have eyes for $520 (Jan 11 gap-fill). Above that comes $545 and $582, the .500 and .618 Fibonacci retracement levels, respectively. Trade safely.
PUT DOWN MORE FLAP!
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"Just Kidding!" Johnny, Airplane
This morning, I shared the following Random Thought: "Robot errors should increase in frequency as HFT manifests." A few hours later, the NASDAQ glitched, producing the flat-liner below.
As the global digital dependency continues--and robotic algorithms take the place of human capital--these glitches will become increasingly commonplace. THE question, of course, is how it manifests through the lens of investor faith and confidence; indeed, we've seen this movie before.
Of all the stock market metrics--fundamentals, structural, technical and psychological--the collective perception is the single most important influence; you can never cage free will.
As we wrote long ago, credit of a different breed--that of credibility--remains the issue at hand for markets at large.
Given the Waning Integrity of US Financial Markets and The Devolution of Social Mood, today's NASDAQ crash is just another straw on the camels back.
A Chimerican Bailout
It has been a few weeks since I last wrote about China, but I've seen a couple of things I thought were worth pointing out. First, here's a look at the SHIBOR curve. I'm looking at curve inversion to the one-year point, which is anchored at 4.4%. One-month rates are still more expensive than one-year, and now 2-week rates are inverted to the one-year mark as well.
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Second, on Project Syndicate, UBS' (UBS) Global Chief Investment Officer Alexander Friedman has a good post out today. You can read it here, but the takeaway is this: China may end up doing the tapering for us. Because China has accumulated so much in US Treasuries, it is often believed that China couldn't sell its holdings.
However, given the growth of credit – and, most likely, non-performing assets – that has occurred, you can't help but come away with the feeling that China really is on the knife's edge at the moment. A new premier who is more Maoist than some of his predecessors and a big sell-off in Treasury holdings in June don't bode well. Interestingly, Japan started selling off Treasuries in October/November as well, as you can see in the second chart. China sold over $21 billion in June alone. On average, it had been buying $11 billion a month over the last year. I don't think the magnitude of this selling can be taken lightly.
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Friedman's point, which I agree with, is this: If there is a credit crisis looming in China, the government can't just float more debt to inject cash into the economy, the country already has a debt/GDP ratio of 70%. The next best place for them to raise cash is to sell off their Treasuries, which will cause rates to rise without any tapering. If you're the Fed, what will you do? The economy has improved since 2009, but it has been a long, hard slog. And at this point, it looks and feels more sluggish now, which is saying something.
My suspicion is that the selling we saw by China has only been the beginning. With Treasuries still selling off, the timing of tapering is going to be a lot harder to forecast.
Friday, August 23, 2013
The Third Mouse
"The early bird may get the worm, but it's the second mouse gets the cheese."
-Jeremy Paxman, English journalist, broadcaster and author
For years, it has been said that the "second mouse gets the cheese." The implication is that the first mouse gets slammed by the mousetrap, which allows the second mouse to get the cheese. In this business, however, sometimes it pays to be the third mouse. I first used this "third mouse" analogy during the bottoming process that occurred between August 2011 and October 2011. If you will recall, there were a number of mice that kept trying to pick the bottom over that two-and-a-half month bottoming process only to get slammed by the various mousetraps. I likened that bottoming process to the sequences of October - December 1978 and October - November 1979. During those bottoms the S&P 500 (SPX/1656.96) collapsed out of the blue and then spent 6 to 8 weeks bouncing up and down frustrating all the first and second mice. In both of those cases, before the SPX was ready to rally, it broke marginally below that series of bottoms and made a new reaction low. On that new reaction low, most technical analysts chirped about a fresh breakdown that would lead to another massive leg down for the equity markets. But, it turned out to be a false breakdown, just like the pattern we identified at the undercut low of October 4, 2011 (see chart).
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At the time, I was the third mouse, having husbanded cash for what turned out to be THE bottom on October 4, 2011 that was followed by a massive rally. In fact, I likened the March 2009 bottom to that of the nominal price low for the SPX in December 1974 and the October 4, 2011 low to the valuation low of August 1982. To be sure, in October 2011, the SPX was trading at a single digit PE (based on forward earnings estimates), and it had an earning's yield of over 10%, which produced an equity risk premium approaching 9%. Such valuation metrics had not been seen in decades. Verily, the chart patterns between the 1966 - 1982 trading range market and the 2000 - 2013 range-bound market are remarkably similar. And that only raises my conviction levels that we are likely into a new secular bull market.
As for today's "third mouse," on Tuesday the first mouse tried to get the "cheese" and got slammed by the mousetrap, while yesterday the second mouse tried. We'll see if he succeeds. But, I think the most we will rally is back to my 1684 "pivot point," which would correct the deeply oversold condition of the stock market. Like in October 2011, I hope to be the cautious third mouse. As Charles Dow said, "The successful investor has to be willing to ignore two, out of every three, money making opportunities."
Steve Ballmer to Retire, Microsoft Shares Rocket Up
Microsoft (MSFT) just announced that CEO Steve Ballmer will retire within 12 months, as has been speculated for some time. The stock is popping 6.5% on the news, which incidentally probably puts a couple hundred million bucks back in Mr. Ballmer's pocket.
New Home Sales vs. Existing Home Sales
Existing home sales came in better than expected and what was a decent outright number. New Home Sales were a big miss. It is possible that homebuilders aren't building homes as fast as people need to buy them. It could be this "inventory" effect I hear so much about. It could be that building new homes in locations where people want to live isn't happening.
Or it could come down to closing versus contract.
Existing home sales are recorded at time of closing. So that number is homes closed in July. That is possibly the final wave of buyers who had locked in mortgages or saw higher rates and finally pulled the trigger on a decision that they had been close to making for a long time.
New home sales are recorded at time of contract. It is possible that everyone was on vacation, or it could be the first sign that higher mortgage rates will have an impact on the housing rebound.
While existing home sales help the "wealth effect" new home sales seems to provide a bigger boost to the economy as that is the one real area that creates good jobs and demand for Ford (NYSE:F) F-150 trucks because you can't go to a work site without one.
These data are always spotty and based on a small number of homes, seasonally adjusted, and annualized. So, the current number might not be a valid number, but we are taking it as support that the multi-family rental market is robust. Traditional housing is less so and more exposed to rates than people have realized.