I’d been planning to add a ‘Mo Mo! Momentum section, but as all the momentum right now is ‘down’, I think I’ll wait just a bit…
The biggest news is just that Congress, both the Dimocratic part and the Republicants too, managed to sign up for a bigger credit card on the mantra that the debts must be paid and somehow having a larger credit limit means the bills have been paid? “No, Timmy, just because the credit card still has room on it, that does not mean the bills have been paid…” (Little Timmy G. our Treasury Lap Dog in Charge of Money Printing)
OK, so the Dems used the threat of a ‘downgrade if we do not DO something’ to do very much the wrong thing, then got a downgrade anyway. They, of course, are livid as they were sure they could spend any amount they wanted as long as the new credit card could make the minimum payments on the old credit cards… not realizing that in The Real World financial folks (and we are ALL financial folks at some time or other) expect you to have enough income to pay your bills, not just float more.
At any rate, the markets tanked (more) after a long slow drip of dropping on the Dysfunctional Congressional Circus… So S&P held off to the end to announce the Coup De Gras and we’re faced with a “Sloppy Open” on Monday Morning in the USA…
Already Asia has opened (and I’ll need to be in bed before the European open, but it ought to follow suit) down and sloppy. Got that… The implication is that the USA ought to do the same.
I would expect (were I willing to “expect at” the markets) a down open of several hundred points, then a partial recovery toward the last half of the session. THEN we will find out what the Real Direction will be….
Margin Calls are made late in the afternoon. (About 1pm+ IIRC) and if you have a leveraged portfolio with too much margin (borrowed) the Margin Desk starts selling stuff to get the account back in balance. THEY get to choose what to sell, and if something is “sloppy down” they tend to sell what still has stable value in it (to avoid clients screaming about selling them out into a bottom / buy moment…) and right now that’s gold. So don’t be surprised if gold opens UP for a bit, then drops on margin selling.
Sometimes, but the time Asia and Europe have had a whack at it, the major traders and institutional players have already done most of the hedging / dumping they wanted and the USA can open down, then rally to the close. I’d not expect that today ( were I willing to “expect at” the markets…) but it could happen. We’ll have to look at the charts to see what’s more likely…
On CNBC on Thursday (the ‘down several hundred points’ day last week) a rather bright and articulate presenter gave a delightful summary of WHY treasuries were up on the news that the USA was going to be selling $2T+ more of them and buggering the dollar more: “On days like this, all correlations go to one… except treasuries.” Michelle Caruso-Cabrera. Her wiki says:
Life and career
Ms. Caruso-Cabrera graduated from Wellesley College in 1991 with a degree in economics. Prior to joining CNBC in 1998, she worked as a reporter for WTSP-TV in St. Petersburg, Florida, and prior to that, as a reporter and later as a special projects producer for Univision where she won an Emmy Award for a five-part series on children with AIDS. She also received a Broadcaster of the Year (2004) award from the National Association of Hispanic Journalists.
On October 1, 2008, Caruso-Cabrera stated she leaned “very far to the right” on The Rachel Maddow Show on MSNBC.
In 2010, she wrote a book titled You Know I’m Right: More Prosperity, Less Government.
What she was talking about was something usually called “Beta”. The tendency for a stock to have a correlation with the market averages. What she was saying is that in a strongly ‘risk off’ market, everything tanks together, except US Bonds.
The wiki on Beta is not too bad:
In finance, the Beta (β) of a stock or portfolio is a number describing the relation of its returns with those of the financial market as a whole.
An asset has a Beta of zero if its returns change independently of changes in the market’s returns. A positive beta means that the asset’s returns generally follow the market’s returns, in the sense that they both tend to be above their respective averages together, or both tend to be below their respective averages together. A negative beta means that the asset’s returns generally move opposite the market’s returns: one will tend to be above its average when the other is below its average.
The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It measures the part of the asset’s statistical variance that cannot be removed by the diversification provided by the portfolio of many risky assets, because of the correlation of its returns with the returns of the other assets that are in the portfolio. Beta can be estimated for individual companies using regression analysis against a stock market index.
Michelle is, IMHO, something of a “sleeper”. It’s easy to think she is on the set as “eye candy” and just to look nice. That she has a very pleasant personality and easy going social style tends to further lull folks into thinking she’s there to ‘report and look good’. Thinking that is a serious mistake. This is one very sharp cookie…
So what caused me to have a “contemplation moment” (and those are rare on most financial shows where it’s more about ‘juice’ and ‘action’ than “I need to think about that”) was that she clearly was just tossing out this line as a “minor comment” on the state of the market, yet…
First off, it requires that you have clue what Beta is and why it matters.
Second, you have to know to map ‘correlation’ to Beta.
And finally, it has a particularly interesting bit of wisdom in it…
Most all discussion of Beta treats it as a nearly fixed quantity. You see things like “Utilities have a 0.5 Beta vs the broad market” or “Brazil EWZ has a 1.5 Beta so moves more” or even “Bonds have a -0.5 Beta vs… so are a good way to balance your portfolio”.
Michelle has a very significant insight hidden in this small ‘throw away’ line:
Beta is a VARIABLE quantity, proportional to PANIC, and as panic approaches one, so does Beta for all assets other than U.S. Treasury Bonds.
THAT, folks, is worth a ponder.
I’d observed the effect, but never put it in such succinct form. I’ve made postings about how markets strongly correlate, about how treasuries are negatively correlated (even put up charts showing it) and had commented on gold and margin calls in earlier postings. But, in comparison, my comments were dilute and scattered. She ‘nailed it’ cleanly and compactly. Bravo!
So why are USTreasuries special?
Well, lets say you are a portfolio manager and things have just gone dodgy. Two effects kick in. First off, there are all those margin calls. Second, as our market tanks, folks in other markets start to be worried and sell too. So selling spreads into foreign markets (Israel had THEIR stock market sell off on the USA debt downgrade… Go Figure…) as folks sell what has value in it and / or sells what they fear (fear is it’s own contagion), they increase their CASH holdings. One Small Problem: Banks to NOT insure an infinite level of cash… So if you want that cash to be ‘safe’ from a bank failure, you need to put it into an instrument that IS backed by a government… Now is the point where that $14 T (soon to be $16 T headed for $20+T) of US Treasuries has a “quantity has a quality all it’s own” moment: If you try to buy, oh, 5 Tons of Gold (as Russia just did) the price spikes up. If you try to buy $100 B of Norwegian Bonds, well, you will have a hard time ‘getting the trade off’.
No, the ONLY thing that is available in the depth and liquidity needed are US Treasuries. So they are an easy, quick, and (relatively) safe “parking spot” for all that cash being generated from the asset sales. This, of course, attracts more folks to them and helps to form a self fulfilling prophecy… As the ‘crash’ deepens, more selling causes more selling in global stocks and more buying causes more buying in US Treasuries.
Eventually that process reaches a necessary end. At that point, shorting Treasuries starts to have “charm” and it’s time to go ‘bottom fishing’ for all the goodies that were dumped that didn’t deserve it and are just Floundering about… ;-)
We saw some of that on Friday as buyers tried to ‘catch a falling knife’. I’d not “go there” as it’s best to wait for the actual turn upward before deciding ‘now is time’. Others like to ‘scale in’ with a series of buys over several days or weeks. That, too, can work. (Though it’s easy to start the ‘scale’ too early and get burned…)
OK, so what about this coming week?
It will have a sloppy open. It will likely have a decent rally off that opening dive. Then we get the answer toward the close. (Wait until AFTER margin calls go out to make a decision…)
Treasuries ought to continue to rise for about 3 days (as ‘settlement’ happens and more money gets dumped into them), then watch for a ‘failure to advance’ on a 10 day Hr chart for traders wanting to trade TBT (or hedge a long bonds position…)
The US Dollar ought to rise (as all the sympathetic sales of stocks in foreign countries get turned into USD and sent off to treasury land.) and gold will be a nice “margin canary” as it will say (via forced sells) where the balance lies… If it slides on through without a hiccup, you have low margin selling of gold (and likely NOT panic levels of margin calls) and you have the likely result of yet more gold buying as a ‘safe haven’ (which gold very much IS NOT… it is a highly volatile commodity subject to bubble and bust and with Central Bank pot stirring… though with Korea, Russia, and a couple of others buying gold by the ton it is likely ‘risky to the upside’ … until they stop, then it plunges. And no, Central Banks do not buy gold forever…)
Commodities in general will sell off on the notion of a ‘double dip’ recession meaning low manufacturing demand. We say oil dip below $90/bbl (even in the cheap Obama Dollars) for just that reason and Natural Gas is back below $4. Even platinum sold off a chunk. So watch out for commodities as they, too, have “correlation go to one”…
(Yes, the notion of Beta as a dynamic function will become a cornerstone idea for me; it is a great foundation on which to build new understandings… That’s WHY it was such a big deal from such a small comment…)
In general, I’m going to continue in the “US Dollars and a few core holdings” that I’ve been in for a while now. I could have made a bundle by owning “shorts” against the market, but I’m just not emotionally engaged enough with short selling to do much of it. Yes, I need to ‘get over it’ and do more; but while I can pretty well ‘call the ball’ on when to do it, something about it is still not “in my nature”… But at this point it’s likely a poor entry point for aggressive shorting. That time is when volatility is low (so options are cheap and short funds that use them are selling cheap too) and near a quite market top; not in ‘mid panic’ and certainly not after two weeks of steady dropping… While it’s a much harder trade, technically, to pull off; I usually do the “counter trend rally” trade instead. ( I ought to do BOTH, with CTRally on the down spike and Shorts at the start of the roll down… but “A man has got to know his limitations”… and right now one of mine is ‘no day trading’ as I’ve got a ‘day job’. So expect more ‘swing trades’ and ‘trend trade’ comments.
With all that said, it’s time to head to the charts, but we will get there via a few stops at prior commentary from the 16 July WSW posting, about 3 weeks back. Then I said:
It would be great to hunker down in cash, were it not for the fact that the value of our currency is exactly what is “in play”. It would be great to be in non-$US cash, were it not for the fact that the exchange rate is in play. Basically, it’s going to be a volatile mess. Best idea I’ve got on it is to be diversified and hedged to remove the risks. Some gold, some other metals, some Swiss Francs, some Yen, some $US Dollars, some WIP and TIP bonds, some stocks, etc.
Well, I got the “volatile mess” part right, and the diversification was not a bad idea either. The gold and bonds were good, as were Swiss Francs. Yen had a dip down on Bank Of Japan intervention (that is most likely just a ‘buy entry’ point…) but the “some stocks” was a dismal idea. It violated one of my core rules: Do not fight the trend. And the stock charts then showed a trend of rolling over into decline. All I can say in my defense is that the earnings reports were coming in spectacularly and argued for SOME stocks… I then went on to say:
Yet I doubt I’ll do it as the work is just more than I care to do at the moment. Perhaps better to just “seek Alpha” and find things rising fast enough on growth that the rest of it just washes out of the equation…
At any rate, 2 or 3 weeks from now, we have our SHTF moment. I suggest practicing “duck and cover” along with “decontamination drills”.
So that was a bit of a ‘saving face’ moment. It’s been 3 weeks and the 1000 point drop to date and a USTreasuries downgrade is certainly a Stuff Hits The Fan moment… while “duck and cover” was certainly the best possible thing to do.
At any rate, I’m now looking for more “buy a counter trend trade for a couple of days” and then a “go short at the SMA Stack” result. We’ll see if the market gives us that opportunity.
I’d also said:
The Euro Zone continues to lurch toward implosion. Germany will eventually discover that the “other people’s money to spend” is theirs, and it’s being spent as rapidly as it is handed over to the PIIGS. Greece is saying “Send More Money”. If the northern states do not, then Greece defaults and implodes, leaves the Euro, and the Euro Zone starts to unravel. (As Portugal, Italy, etc. follow suit). If money IS sent to Greece, then the others line up for THEIR share of the largess. Repeat until Germany is bled dry; then the Euro Zone collapses.
We saw exactly that playing out. A “great deal” was announced where MORE money was sent to the consumers side, but with the notion of ‘strings attached’ for more austerity and even a balanced budget requirement.
The only way out of THAT dilemma is for the PIIGS to cut back on spending and entitlements. Like that is going to happen…
So now we’re in “Act Three”: Where the PIIGS promise to be better this time and certainly they will go on a diet… right AFTER this one last big meal… So here is where we learn just how gullible IS Germany?
There are already calls to hide this fact by even MORE indirection with “European Union” bonds being floated as an idea. The whole of the EU to back them. That still leaves it as German money and PIIGS debt, but with a nice political indirection rug over the lie-ing over the facts.
As last time:
No, the political will for it just does not exist. Inflating away the obligations is the only way to sweep the lie under the rug. Then it is the fault of “inflation” and not the politicians. They pay the full pension amount, it just buys a lot less. Same effect as cutting the entitlements, but less blame.
IMHO, this drama will run a couple of more years as things get increasingly unstable. Then the Euro Zone starts to unravel, or Germany accepts an inflating currency. One wonders at this point how many current German voters really have a cultural memory of the hyperinflation anymore…
That simple fact will stay. The USA is well on it’s way to a ‘wild inflation’ like that one used by Johnson to hide the Vietnam War costs. The Euro Zone is joining us in a wild ‘race to the bottom’ in currencies. Only recession is keeping commodity prices down as the whole systems slowly grinds to a halt. The Progressive / Socialists will have only the answers of more “fully money” and more “planning” and “social programs”. It is doomed to fail. The only question is how spectacularly (and maybe ‘how soon’).
It’s time to “fish or cut bait” and the Progressive Mindset will simply NOT be able to accept that they were wrong. That they are causal. That spending (or promising to spend) $Trillions that you do not have (and can not make if you suck the prosperity engine dry of fuel) is what causes them to fail. Even though it always has, and always will. No, they will continue to believe that someone else is to blame (thus part of the reason for the constant scapegoating) and that If Only THEY had more power, they could make it all better. Watch out for growing Power Lust and increased Centralization Of Authority as the wheels come off the bus…
And don’t EVER expect a Socialist or Progressive to cut bait. They would rather fish with an empty hook…
Well, there are times I’d rather not be quite so right…
Watch the US Congress. (At least the show will be fun to watch, even if the ticket price is beyond astounding.)
“Beyond astounding” was just about right. Couple of $Trillion in new debt, For Now; AAA lost and downgrade to raise all refunding costs; liberty in the crosshairs; poverty spreading as unemployment heads higher; “Double Dip” looming and spreading globally as ‘hunker down’ continues.
Also heard on CNBC that in the next 10 years something like 60% of US Debt comes due. $8.4 Trillion. Somehow I think it’s going to be getting even harder to find folks to take that debt at lower ratings without a bump in interest charges… At present rates, we’re talking about roughly $2 T of combined refinance and new deficit PER YEAR. Unless the central banks suck that up, it’s going to be very hard to do. (And increasingly central banks are looking for non-dollar ‘reserves’…)
But the new summary is just this:
Watch the markets spasm, then bet in the direction of the resolution. Stay hunkered down if unsure. Don’t make any long term bets.
Oh, and watch out as a Very Cranky Congress and Grumpy Administration seek revenge and / or throw rocks at folks as retribution for the downgrade. I’d not be surprised at all to see the ratings agency heads pulled in front of some Barney Franks committee for a spanking. (Barney seems to enjoy spankings…)
Lastly, keep an eye on the non-Euro non-USA part of the world. Russia and China in particular are likely to get tired of this nonsense. Both have shown concern already. Toss in some Arab $Trillionaire Sovereigns and who knows what will happen.
It’s going to be an interesting week.
Conclusions and Likely Actions
What I said last time still holds:
On the sidelines and looking for “duck and cover” or selected protective positions.
At this point I’d add: Thinking of a ‘counter trend rally swing trade, but mostly planning an ‘entry’ to short positions on a return to the SMA stack from below. And maybe picking up some nice commodity or REIT properties on a ‘failure to advance’ to the downside. “Real inherent worth” ought to be the guideline for a while.
Pointer To Other Topics
Some general comments on how long term investing differs from trading and my thoughts on things to do for the long term investor, start with this page:
If you are expecting global warming stuff, it’s under the “AGW” categories in the right hand margin. Things specific to the NCDC data and GIStemp are under categories with those in their names.
This posting is about the other thing I do, looking at investment markets. Prior postings in this series are available here: http://chiefio.wordpress.com/category/wall-street-week/
Posts with some relevance to trades, but not in the format of a full WSW analysis, are available under this category:
The Nature of the Charts Here
The charts in this posting are usually live charts, so my comments will describe how it is now, but in a week it will be showing new data and a new week. If I capture a “static image” I usually label it as such. You can tell by looking at the date bars on the bottom of a graph. I typically use the live charts since I think it is more important to be in touch with what the market is doing NOW than to preserve the historical chart, this is, IMHO, a reasonable choice. Just don’t be surprised if the chart I describe is not the one you see a few weeks from now! If you would like to see the historical chart, you may enter custom date ranges on the charting tool at www.bigcharts.com
Wall Street Week – Sunday, 7 August, 2011
Long Term Context
I’m promoting this chart to the top for a while, as it is now in control. Look closely at what it’s saying.
This is a very long duration chart (5 years) of NYSE. It will not change much from week to week (just one tick mark) so guides longer term attitude.
Last time I’d said:
So this is a ‘hard spot’… not a clear trend. Possibility of a ‘buy the dip’ moment only partly done; but with a ‘head and shoulders’ being printed (but also not done). I’ve managed risk by stepping out; but if it heads up, that confirms to get back in. Frankly, I suspect folks are sitting tight waiting for either the Euro Zone or the USA to stop having Sovereign Risk Issues…
You will likely need to click on the chart to expand it to see the size of that final tick mark down. It’s just a gut wrenching spike down through the lowest SMA line. RSI is ‘stair steps down’ from a ‘near 80′. The ‘bull run’ is over for a while. MACD had a ‘crossover downside’ a while ago. But the more interesting one is DMI / ADX at the bottom. The rid line has had a major breakout upside. We’re in a raging bull phase for now.
Back at the price ticks, we not only have “failure to advance” but the latest ‘hump’ is about as high as the one on the other side of the peak. A classical, if shallow, ‘head and shoulders’ (with the middle peak being the ‘head’). Bonds have also done a spike up. Bonds up, stocks down. Now look back about Jan of 2009 (just after the ’08′ on the bottom legend). Notice anything similar? Long red down spikes on prices. Head and shoulders. MACD headed down. Nice large spike up in the red DMI- line. Bonds having run up for a month or two and with a nice recent ‘spike’ of similar (if slightly smaller) size?
We don’t yet have the blue SMA line crossing over to the downside, but just give it a bit of time… What we are waiting for is simple. Does the chart resolve to look like March of ’09 with an SMA stack rollover and with prices below? Or does it resolve to look like August of 2010 with a price pull back above the stack and the blue SMA line recovering? Does MACD have a crossover ‘upside’ while staying above zero like in October of 2010, or a punch below the zero line and a ‘failed crossover’ as it can’t stay above zero and a ‘counter trend rally’ back to the Simple Moving Average stack fails (as in June / July of 2009) with the SMA stack clearly inverted (with 20 period on the bottom and 60 period on top)?
We are at a ‘decision point’ on this very long duration chart. For the next few months you can ‘trade fast charts’ for day trades or swing trades, but can not ‘marry’ a long term position until it resolves. Then you will know if it is ‘buy the dip’ or ‘sell the counter trend rally. (for now, you can look at ‘fast charts’ to avoid missing the dip, OR staying in any rise after it gets back to the SMA stack and falters…) All I can add is that the RSI was a ‘drop to 50′ in the last ‘dip’, but is now ‘stair steps down’ like it was in the summer of 2008…
IFF you ‘trade to the long side’, remember that this chart is saying you are fighting the indicators… At a minimum, hedge any trades with a mix of bond positions so that you get the average of the two lines on this chart. Plot a line 1/2 way between those two lines and it’s “not bad”…
For now, we are still ‘officially’ in a bull market (SMA stack is 20 over 40 over 60) per my rules; but also in an official ‘correction’ (off 10% from the recent high) and prices have violated the 40 week, or 200 day moving average line making it a ‘bear market’ by standard trader rules. At any rate, until MACD is ‘blue on top’ and prices are rising again, you can’t go long as an investor. Trading on faster charts, or sit in cash and hedged positions. With Slow Stochastic pointed down, even faster trades to the long side have to wait until it is bottomed and pointing back up…
The Dollar Lately
Time to measure our Rubber Ruler.
Here’s the same chart with the main ticker being “UDN” the “Dollar Down” ticker and TLT instead of TBT. Note also that the XAU ‘gold and silver stock index’ is swapped for GLD gold metal.
Swiss Franks are way up. I have to wonder, though, at that ‘flat part’ the last few days. There is talk of Central Bank intervention… it’s also “way high” and in something looking a bit like a parabolic rise away from the trend. Probably not a good day to be buying a new position. I’d wait a couple of days… TBT looks like the spike down might be over. We also have a disconnect between gold metal and gold miners. A bit of a worry for gold, or a buy opportunity for miners. Clearly the ‘big win’ of the last couple of weeks was TLT, long duration US Treasuries. I’d expect that “spike” to erode over the next few weeks, so a ‘reversion to the trend’ trade could be done, IMHO. The only question is when does the flood of ‘buy’ orders end. Watch Monday closely for guidance.
And here is the 10 day Euro chart, with BZF the Brazilian Real added. Also notice that the British Pound is showing a bit of life. Up 1% or so
The clear winner was Swiss Francs. Up about 5% in 10 days. That will eventually ’cause issues’ for the Swiss Economy, so their central bank will want to intervene. The question is: Can they get the help of the US and Euro Central banks and the BOJ? As the BOJ is busy trying to sell Yen, it will likely not by selling Francs, and both the USA and Euro are trying to print and spend to stimulate, so will be unlikely to ‘buy dollars and sell Francs’ or ‘buy euro and sell Francs’. I doubt that the Swiss Central Bank can pull it off on their own. So watch for ‘daily dips’ as they try, and then buy them… but if the ‘news flow’ turns to ‘concerted central bank efforts’, then bail out of the Franc.
You can also see how the ‘resource currencies’ got hit, with everything from the Brazilian Real to the Mexican Peso (and with the Aussie and Looney too) down about 3%. “As correlation moves to one”…
So last time I decided I was too tepid about a ‘maybe a bit in base metals’ and so gave a ‘hop in’ just in time for a crunch. My apologies about that. I was “expecting at the markets” and expected that the good earnings reports would indicate more economic growth (what ought to have happened) and not weighting heavily enough the potential for a Sovereign Risk induced quashing.
That was too tepid. I’d not realized the impact Bernanke would have. We’ve got JJP showing a good rise ( a ‘precious metals’ basket) along with JJT Tin, JJN Nickel and even JJC Copper. OK: Metals 1, currency 0. Got it…
Now look at that chart. Yes, we had a nice rise in silver and JJP from the time of the last posting, but the other metals rolled down and then the last 10 days got whacked.
DBB - Base Metals ETF GLD - Gold (physical metal) ETF JJU - Aluminum ETN JJN - Nickel ETN JJC - Copper ETN JJP - Precious Metals ETN ld - Lead ETN JJT - Tin ETN SLV - Silver (physical metal) ETF PALL - Palladium (physical metal) ETF
It’s a ‘risk off’ world right now and a ‘double dip’ for desert… at least in the traders mindset that drives the markets. You can see MACD call the ‘exit’ about August 1 on the crossover to the downside. A very good example of a ‘right idea’ that gets run over by news and I did not post a followup. You simply MUST watch the charts for that kind of stuff if you do enter a trade. The “story” is fine, but it’s the charts that tell you when to change direction.
Last time I’d said:
Gold has started a new run higher, with ADX rising toward 20 or so. MACD above zero and ‘blue on top’. We had a spike up in the miners on The Bernank speech. Last time I’d said:
and the high real gold price will give them great earnings reports. At this point I’d be in the miners rather than the metal itself.
If only I’d taken my own advice, but I was traveling, so not trading. GDX, the miners, just rocketed up.
And now we see them just rocketing down… Gold has continued the rise, though. I do think it’s ‘due’ for a correction (things can not hold parabolic rises away from the SMA stack forever, but the central banks buying by the ton makes it sporadically irrational and for unknown durations). At this point, I’d not be in either. Miners are going to move with the stock market for a while, and that’s going to be a very rocky ride. To the extent margin calls start hitting GLD and similar ETFs, gold sales can suddenly increase. Too much risk for me.
All the commodities have turned down. Even sugar. Good news for consumers. Bad news in that it indicates expectations of economic downturn.
The close up view of sugar and Brazil shows a lot of news driven effects. It’s hard to see, but the Real has had a bit of drop the last few days. The “melt up” is ended. Sugar just fell off a cliff in the prior chart, here you can see how that impacted the major sugar grower.
You can also see how when the USA catches cold, Brazil gets pneumonia… Quite a plunge.
When things are looking bad for the USA, stay completely out of Emerging Markets…
Monthly Running Stock Sectors
So what “won” and “lost” over the last month? (though remember, they may not be the winners next month… it’s just to provide ‘context’).
10 Best Performing Industries Industry Name Percent Change (over time selected) Dow Jones U.S. Internet Index 1.34% Dow Jones U.S. Gold Mining Index -0.12% Dow Jones U.S. Tobacco Index -0.93% Dow Jones U.S. Computer Hardware Index -2.04% Dow Jones U.S. Food Products Index -4.77% Dow Jones U.S. Computer Services Index -4.87% Dow Jones U.S. Broadline Retailers Index -5.26% Dow Jones U.S. Soft Drinks Index -5.40% Dow Jones U.S. Restaurants & Bars Index -5.48% Dow Jones U.S. Brewers Index -5.49%
Well, your first clue is that only ONE sector had gain, and that’s only a 1.3% gain. Looks like that “sit out” and “duck and cover” was not a bad strategy…
How about the losers?
10 Worst Performing Industries Industry Name Percent Change (over time selected) Dow Jones U.S. Real Estate Services Index -28.38% Dow Jones U.S. Tires Index -27.75% Dow Jones U.S. Consumer Electronics Index -25.98% Dow Jones U.S. Airlines Index -25.30% Dow Jones U.S. Coal Index -24.32% Dow Jones U.S. Industrial Machinery Index -22.76% Dow Jones U.S. Real Estate Holding & Development -22.42% Dow Jones U.S. Electrical Components & Equipment Index -21.53% Dow Jones U.S. Hotel & Lodging REIT Index -21.42% Dow Jones U.S. Electronic & Electrical Equipment Index -20.82%
Can you say “Brutal”? I knew you could…
So if you ‘guessed wrong’ and were in, say, Airline Stocks or Tires, you were whacked by 25% to 27%. Mostly real estate services, equipment, and consumer related. Guess those unemployment and retail sales numbers were not so good… while the ‘least down’ in the ‘ups’ were mostly things we just keep on buying, like tobacco and food.
OK, if you like bottom fishing you can watch some of those ‘very whacked’ sectors. Me? I’m not bottom fishing just yet…
Any change vs. “lately”?
Weekly Running Stock Sectors
The best and worst of the week? Do they tell a different story on the short term trade? What moved up the most in this recent rally, and what was left behind?
0 Best Performing Industries Industry Name Percent Change (over time selected) Dow Jones U.S. Mortgage REIT Index 0.85% Dow Jones U.S. Soft Drinks Index -0.89% Dow Jones U.S. Beverages Index -1.32% Dow Jones U.S. Water Index -1.58% Dow Jones U.S. Nondurable Household Products Index -1.93% Dow Jones U.S. Tobacco Index -2.17% Dow Jones U.S. Fixed Line Telecommunications Index -2.48% Dow Jones U.S. Gold Mining Index -2.56% Dow Jones U.S. Food & Beverage Index -2.60% Dow Jones U.S. Food Products Index -3.11%
Well, that’s pretty dismal. Even beverages and tobaccos losing. Mortgage Reits only gain a tiny, and likely due to the high dividends. Having a 3% loser in you ‘best’ bucket is NOT a time to be owning stocks… IMHO.
10 Worst Performing Industries Industry Name Percent Change (over time selected) Dow Jones U.S. Coal Index -23.81% Dow Jones U.S. Tires Index -18.90% Dow Jones U.S. Real Estate Services Index -16.89% Dow Jones U.S. Consumer Electronics Index -15.93% Dow Jones U.S. Hotel & Lodging REIT Index -15.47% Dow Jones U.S. Mining Index -14.79% Dow Jones U.S. Real Estate Holding & Development -14.34% Dow Jones U.S. Steel Index -14.04% Dow Jones U.S. Basic Resources Index -14.01% Dow Jones U.S. Industrial & Office REIT Index -13.99%
One week, dump 23% in coal stocks and 14% in a bunch of industrials. Someone is betting that the consumer is NOT going to book a lot of hotels this summer nor will industrial production do well. (Given the lousy industrial numbers reported, not exactly a leap…)
Shorting The Broad Market
Last time I’d said:
Not seeing a reason to short, but as ‘tactical protection’ of long positions it has it’s uses. If that MACD crosses above zero and / or gets a strong ‘blue on top’ a short term tactical short could be useful. For now, I’m more inclined toward “long side” swing trades than “short side”.
Decent advice. Not great, but decent. That giant spike in TWM is partly from option volatility raising option prices, so I’d sell out of it at this point (mid morning tomorrow on a down dip if we get one). That “if that MACD crosses above zero and /or gets a strong ‘blue on top’” would have put you in for a nice 20% gain. Having 1/3 of your portfolio in a mix of this and bonds would have protected about a 2/3 mixed stock portfolio. That’s how to use ‘protective hedges’…
For now, I’d ‘cover the shorts’ and then wait to put them back on during a low volatility time (when the price bars are short, like in the last weeks of July…) and at the same time sell any ‘accidentally held’ long positions at a return to the SMA stack…
10 Day Hourly Fast Trader Chart
Shorts winning, by a lot. Things are so ‘out of whack’ I’d expect Monday to be down / mixed, then a ‘return to the trend’ over following days. News flow likely to drive it, though. For now the fast trader chart indicators are still calling for ‘more down’. But watch for a turn with MACD going above zero and DMI getting “blue on top” as a ‘counter trend rally’.
What about Brazil? Also India and China.
A ‘data artifact’ has one price quote distorting the chart. Almost certainly a bit of bad data. At any rate, reading around it…
EWZ - Brazil GLD - Gold fund BZF - Brazilian Real currency FXA - Australian currency FXI - China EWA - Australia EPI - India - WIsdom Tree fund EWC - Canada EWW - Mexico GUR - Middle East Fund
As you can see, Emerging Markets sell off when the USA sells off.
Closeup on Gold
As I said last time:
Continued on it’s run from lower left to upper right.
BUT with some margin call sales causing that ‘red tick mark’ last week. Given how far it is from the SMA stack, it’s time to edge out. RSI ‘near 80′ and DMI+ (the blue line) about to cross over ADX (the black line). It’s just looking a whole lot like last April / May. Better to buy when it is AT the SMA stack, not pulled away from it…
VIX the Volatility Index
VIX - Volatility Index (not a ticker, you can't trade it) VXX - Short term VIX futures ETN (a ticker you can trade) VXZ - Medium term VIX futures ETN (a ticker you can trade) FXY - Japanese Yen SH - "Short" sell of SPY SPY - S&P 500 benchmark IYT - Transports, a leading sector XHB - Homebuilders, a leading sector and "canary" XRT - Retail
On spikes like that, we usually are near a bottom. Expect a ‘bounce’ later in the week. Maybe as soon as Tuesday / Wednesday.
Ideas of the Week
Preserve assets in cash and hedged positions. Wait for the Dancing Elephants and Donkeys in DC to finally get done breaking things… Maybe buy some oil if we get ‘stair steps up’ on the RSI, and have a MACD go ‘blue on top’.
Oil And Fuels?
All getting crushed in the dismal news. With RSI ‘near 20′ we ought to have a ‘buy soon’. For now, though, it’s a ‘bear market’ in oil.
The 10 day chart is looking like a short term ‘oversold’… maybe a nice day trade bounce.
So what happened in the Tech Market relative to world markets?
QQQQ Nasdaq 100 mostly Tech companies DIA Dow Jones 30 Industrials SPY S & P 500 largest companies in the U.S.A. MDY Midcap (Middle sized in terms of market capitalization) RUT Russel 2000 - a collection of 2000 companies from small to large. EWZ Brazil fund EWA Australia fund EWO Austria fund EWW Mexico fund
So whacked too, but a little bit less so… Not enough to matter.
Last time I’d said:
To me, it all just looks like the slop and jump you get in a topping market. MACD is above zero and headed sideways. Slow Stochastic is setting up for a ‘buy in’ crossover. DMI is muddled with ADX at a low 21 or so (so Slow Stochastic and faster trades are in order) and with the red and blue DMI lines nearly equal and low.
Sideways roller swing trades, not investments, is what that says. None of the other markets particularly stands out either.
That first sentence was worth far more than all the others combined.
Were Bonds a good idea?
OK, lets take a peak at the Bonds Race but with TBT (the “long term bonds” short sell ETN – that is, the thing that “shorts bonds”) as the main ticker symbol:
Bonds were the place to be, and longer term more than shorter. That TBT chart took quite a plunge, but with RSI ‘near 20′, we just need ‘stair steps up’ to have a TBT counter trend trade to the long side. DMI- (red) has inflected down; a crossover of the black line would be good to have too, but mostly we need MACD above zero and blue on top. For now, it just not looking attractive enough. It’s mostly saying bonds will drop some in the next few days, but maybe not enough to be worth shorting, and not for very long.
Some Selected Global Oils:
XOM Exxon Mobil - Largest, U.S. / Global COP Conoco Philips - U.S. with Russian exposure CVX Chevron Texaco - U.S. PBR Petrobras - Brazil PCZ Petro Canada HAS NOW MERGED WITH SU SUNCOR BP British Petroleum STO Norway E Eni Italy TOT Total - France RDSA Royal Dutch Shell IMO Imperial Oil - Canada Oil and Oil Sands SU Suncor - Canadian Oil Sands SSL Sasol - South African Synthetic Oil Company
Tanking with everything else and with the oil price.
What about oil service companies? Or that Sugar and CZZ?
Ag and Ag support / Input companies
TNH took a dip, but not much, and is holding up. Everything else is dropping.
Look at the range of that daily price bar, though! Gigantic. With RSI ‘near 80′ and in the context of a falling general market, I’d likely edge out of this position (or, more likely, hedge it with a bit of TWM while still collecting the dividends…)
SEE the SEA!
And as you can see, just like a ‘rising tide lifts all boats’ and falling side sinks them all…
Last time I’d said:
If MACD goes to “blue on top” and “over zero” after a failure to advance to the downside, we’ve got a good ride ahead for a few months at least. It will likely take until mid August to fully form the bottom.
At this point, we’re likely talking October… That’s the problem with bottom fishing… you have to wait so long for things to prove they are not going to fall further… with lots of ‘false starts’…
Here we again see that they all fall together when they fall. So, on a return to the SMA stack from below, sell out or hedge with a bit of a short ticker like TWM if you want to keep collecting the dividends. With MACD “red on top” and “below zero” and DMI “red on top” it’s an official ‘be out’ indication, though…
PEI Pennsylvania Real Estate - Mall REIT (REMOVED to make better graph) VTR Ventas - sr. care, nursing homes, hospitals PSA Public Storage - junk storage units BXP Boston Properties - office REIT on BosWash corridor HCN Health Care REIT - extended care, senior care, medical offices HCP Health Care Properties - ex. care, senior living, Dr. offices PCL Plum Creek Timber - lumber and trees REIT SPY S & P 500 broad stock market benchmark RPT Ramco Mall REIT PLD Prologis - logistics
The Long Term Context
SPY isn’t much better. W%R saying “be in”. RSI saying “just had a ‘buy the dip’ moment”. Rate Of Change saying “gone flat”… RSI also saying “lower highs – be afraid…)
I’m adding another chart of SPY, as the S&P 500 is the basic investment vehicle for most folks (unless you really want to pick sectors or individual stocks, you ought to start with a “SPY / Bond” oscillator on this long term chart.
Here is another interesting chart where you can see how volatility spikes at market bottoms and drops lower during times of topping actions. It also as “momentum” no it which can act as a reminder of how much force a trend has, and which way. Slow Stochastic is better for a faster trade behaviour when ADX (of the DMI / ADX indicator above) is below 20 or so.
If this all looks like “too much”, just remember that you don’t need to look at more than the one basic chart. The rest of these indicators give more depth of insight into “why”, but not better answers as to when to be in stocks vs bonds.
So when the long duration charts say "maybe making a top, but perhaps a 'buy the dip' moment", I look at the faster charts and faster indicators and move to a faster time scale with faster trades. But I'm a trader. For long term investors, you just ride the ride until the chart says "top is definitely in" and "buy the dip" until proven otherwise by a confirmed roll over (price below SMA stack). In general, I'd put very long term bias as "be in". Trend is up, dip happened. Be in. But you just can't ignore that the price plot looks very "rolled flat" at least... and we're all waiting for DC and Germany to "make their moves"... So you must WATCH the chart each week, even if not acting to be out of the market yet. I've been 'stepped out' for some vacation time. Now I'm 'reengaging'. Probably start with short swing trades and work into longer positions.
If all this talk of indicators is leaving you wondering what the heck I’m talking about, hit the link in the heading of this paragraph and there is a bit of an explanation.
Remember that on any stock or ticker I say I’m looking at, you don’t just go buy it. You wait for a stock entry indication to get the best possible entry into the position.