FXI China vs FXE EU vs USA

There are long term patterns in charts. Old friends who’s presence you can see with just a glance. Familiar roadside inns that remind you this road has been traveled many times before and nothing to worry about, just the usual bends in the road.

Things like the way SPY, DIA, RUT, and QQQQ all move together. Usually QQQQ leading / rising a bit more as it is the “Tech Engine” of US Growth, with DIA lagging a bit (both up and down) as the established “staid” industrials (that now include drug companies, banks, and other non-industrials… along with old growth companies past their growth phase). SPY is my usual “benchmark” since, as the 500 largest companies in America, it represents the successful core of the nation. (Losers tend to leave the bottom, new growth industries get elevated into it early enough to still get some of the glory and growth.) Then there is RUT, the 2000 Small Capitalization companies. Most of them too small to make it into the SPY, and some of them not part of the 100 Nasdaq Tech Companies in the QQQQ (that is dominated by Apple Computer anyway).

So typically when things are running hot, RUT gets the “spill over” money as folks look for small “up and comers” to bet on. DIA tends to hold up better when folks are looking for mattress stuffers. QQQQ shows new Tech Fads and increasingly is an Apple Barometer. (At one time AAPL was 20% of the QQQQ index. Now that AAPL is falling, expect a ‘rebalance’…) SPY is the best all around benchmark for the USA overall. In new ‘up runs’, SPY gets out the gate early (having never been pulled down as much as RUT or sometimes QQQQ) but as the run ages, more speculative bets go into RUT and QQQQ. Near tops, they have tended to ‘overshoot’ DIA and SPY; demonstrating the “risk taking” and enthusiasm. Just like at bottoms then tended more the other way, showing the move from “risk on” into “risk off” and those Pfizer and Proctor & Gamble “safer” stocks.

So one of my “usual” things to look for is those “outside” moments. When RUT & QQQQ are “outside” of DIA and SPY. They often show extremes about to take a break. Inflection coming. Yet in a chart in the prior posting:
https://chiefio.wordpress.com/2013/04/17/rollover-rut/

We saw that QQQQ was way under SPY while RUT was rising nicely. I mostly attributed that to the collapse of the AAPL share price; but it likely also reflects some broader bad news. All those Apple Suppliers, for example, seeing lower sales as the Samsung Galaxy is seen, increasingly, as “Good Enough” compared to the iPhone, and a lot cheaper. The “Tech World” tends to be an “ecology” that moves together for many players.

But it left me wondering: Was there more here?

There are other “old friends” in the patterns. Globally, most stocks move together. (The notion of ‘diversification’ by owning a bit of emerging markets or European vs USA stocks is really not a good one. It is more owning different volatilities in the same movement profile). Then there are things like the Japanese Yen that have been steady basically flat things, but with a bit of upward bias. With some work, you could ‘read the tea leaves’ of the “Carry Trade” in the minor movements. Folks borrowing $Billions or €Billions in ¥ Yen terms. As stocks would have a spike up, the ¥ would dip just a touch, as stocks would dive, the ¥ would rise. The JCB Japanese Central Bank generally holding up a “Strong Yen”, but taking a bit of time to respond to folks like Soros flipping $Billions into ¥Trillions and back again in days or hours. With ‘near zero’ interest rates, it was the place to borrow cash for ‘the big boys’.

So I ran one of my “compare and contrast” charts. It came out a bit ‘complex and hard to read’, but with very interesting things on it. THE biggest one is just that a lot of old friends have died or run off somewhere… On the left side, global stocks move generally together when they move. On the right side, there is a giant divergence. Just strange.

FXI China vs EU USA Yen

Since it is so hard to read, I’ve made it the really big version from Bigcharts. You can get a live version to play with at Bigcharts.com by clicking here or ’embiggen’ that static one by clicking on it.

I’ve generally been just sitting in the corner in cash the last few months as “things were strange”. As my home currency is $US and it gets a big lift in the ‘flight to safety’ movements, that’s been a benefit to me. There have been a great many trades I could have made, some with large gains, that I’ve let go by. Partly from sloth (it is one of my major faults). Partly from simple risk avoidance. Partly from not being “on top of it” enough to do things like put on a “Long EWJ short ¥” trade fast enough, even though it was clearly coming once BOJ decided to bugger the ¥ and join the USA and EU in printing currency like crazy. But life is like that some times. Sometimes you have other things to work on, it looks like an ok time to push back from the trading table. Sometimes it is and sometimes it isn’t. And sometimes it turns out that the whole game is having a reshuffle then, so maybe having been ‘out of the fray’ was a good thing.

Yes, some opportunities missed. (“There is always another train leaving the station.” -E.M.Smith but lifted from someone else so long ago I’ve lost the pointer to the original) But when your usual guideposts are being mowed down and your “old friends” are acting strangely, just how good would the execution on those trades have been? Unknown, but worse than the usual level of performance. Learning new tricks takes time.

Now look at the “dispersion” on the right, vs the ‘march together’ on the left. (Remember that TLT, the long term bonds, tends to move in opposition to stocks). Look how FXY Yen is nearly dead flat on the left, dropping like a stone on the right.

Some kind of “pivot” happened last Oct / Nov. I would guess it was EU related as that’s what we were all worried about then. There was also a USA election. Good luck sorting out just which bit of ‘news flow’ was causal and just which bits of Whale Global Apparatus drove that pivot. The Elephants Dance is a private ball and we are not invited. So no telling who stepped on what toes. Yet we can hear the noise of the trunks trumpeting and feel the stamped for the doors…

It looks, to me, like that is the point where the thin grey line of FXY ¥ pivots down. Where the JCB decided to Bugger The Yen. At that point, too, a lot of Whales will have looked to park their winnings in banks not in ¥ terms. Giant money would flow. There looks to have also been some ‘enthusiasm’ for the EU going on. Like “this time for sure” they were going to “fix it”. That bright yellow EZU fund of EU stocks, rising nicely for months (until Feb and “Screw Cyprus” hits…)

Harder to see are things like copper (the gold line in this chart – it is usually used for GLD but they both moved similarly in this time period, and copper is an indicator of economic activity / production.) Moving nicely with stocks on the left. Plunging with the Yen on the right. Hmmm… So I added the main ticker. FXI China 25 big stocks. China now buys most of the copper as they do most of the making of things. What happened with them?

A nearly ‘text book’ bottom last September. After 4 nearly identical ‘failure to advance to the downside’ (sometimes called a ‘retest of the lows’) the SMA stack merges, price crosses it, ‘retests’ from above and fails to penetrate, then it’s ‘off to the races’ in October. So China moved a bit early. Ploughing right through whatever happened in November. Ignoring the EU issues. Right up until a ‘go flat’ failure to advance in January. Price rolls over, starts tracking the 24 day line SMA down, doesn’t even bother with a ‘retest’ of the SMA stack, and is in a strong down trend ever since. Parallel to that plunge in copper that started just a bit later. Copper prices lead coming off the bottom. China leads leaving the top. I suspect that is due to inventory issues. At the bottom, folks need to buy copper to start making things THEN production numbers show up. At the top, they have been buying copper and slow production, but it takes a while for the lower copper buys and inventory of finished goods to show up. First the sales of finished good drop, then the copper buying slows as stock of copper builds up.

Also of interest is that blue line. EEM the Emerging Markets broader basket. It leads China off the bottom, and rolls over and dies first too. The more “dodgy” E.M. stocks get abandoned early, but also get a faster rise on small amounts of money flowing in off of a bottom. Even if not investing in Emerging Markets, they look like a decent canary…

We can also see that FXE the Euro and EZU the EU ETF rollover together on Cyprus and the “Bank Raid” behaviors. Folks bailing on the EU, but unable to put money in ¥ and with the E.M. tanking. So it flows to the last “safe haven”, propping up the US Stock Market and $US Treasuries and major corporate bonds. The green SPY and raspberry RUT lines just keep on rising as others tank. The dark TLT line (middle of the pack on the right edge) rising against the tide too.

Another interesting “tell” that I’ll break out into a separate chart is that black line for the UK. EWU wobbles a bit with the other tickers around it, but mostly just looks like it is ‘standing aside’ as stability. Not part of the US election. Not part of the EU € Banking debacle. Not part of the E.M. or China manufacturing slump. Probably wondering what all the fuss is about ;-)

OK, the “indicators” on that main China ticker are pretty dismal. RSI on the low side and laying there. Not even doing the usual ‘touch the middle and drop again’ as a dropping stock usually returns to the SMA stack. Just straight dropping. MACD moving in a sideways weave, well below the zero line. “Just dropping” is what it says too. DMI has hard “red on top” with blue looking dead on the bottom and a rising ADX line saying strength of the move is picking up. Just dropping.

Overall, this chart looks to me like it is saying actual sales and production are a bit dismal. Folks in the USA are a bit ‘tapped out’ and with rising tax burdens, so not buying a lot of stuff from China. The EU in the dumper and not buying much either. Capital flight out of ¥ and from the EU propping up the US Treasury Bond market and US Stocks, but even RUT is fading (so maybe foreign money favoring big cap stocks and RUT is indicating the real economic condition). The UK standing on the sidelines watching it all (and waiting for a proper spring / summer). All while the Central Banks of the EU, USA, Japan and who knows what all else are trying to fix Fiscal Spending problems with Monetary Printing solutions (that simply can’t do that job; but can bugger up all sorts of markets and prices while “bubble and bust” runs rampant.)

Sheesh. What’s a fella to do… In a way, I’m glad to be ‘sitting in cash’. OTOH, with lines moving that steeply, there have been great opportunities to short some things against other things. ( China against the USA, for example, or Yen against the Japanese stocks). So either “complex trades” or “sit it out” looks viable.

But with all of it Central Bank Driven, and news flow dependent, it’s a risky trade. You just don’t know what any given Central Bank will announce tomorrow. For example, shorting ¥ could get you creamed if tomorrow the JCB announces a change of policy to a higher Yen and yen buying to commence at $20 Billion…

So if you can watch the news flow daily, there are some decent trades. If you can’t, we saw in the other posting that TIP was a nice safe haven. For now… It also looks like some ‘wandering the globe’ to more “uninvolved” countries is likely in order. Places like New Zealand and Australia and Indonesia, not connected to the EU. Not in the ‘carry trade’. Not part of the USA political & printing mess. Heck, even Russia might be a better place. So that’s what the next postings on money will look at. The ROW Rest Of World.

I’ll also put a few live ‘break out charts’ of the above tickers where you can see a bit better what the lines are doing (now) and also watch them move over time going forward. (Or you can just go to Bigcharts.com yourself and ‘roll your own’ charts).

Here is China FXI vs Gold GLD, Copper JJC, ¥ FXY, and € FXE

China FXI vs Gold, Copper, Yen, and Euro

The UK EWU and £ FXB, vs Australia EWA and $A FXA, vs EU EZU and € FXE, vs Swiss Franc FXF

UK vs EU vs Australia

You can see where all four currencies move down together in Feb Mar what is most likely really a $US strengthening move on flight out of the EU and into $US. It also looks like Australia has at least ‘gone flat’ with ‘failure to advance’ lately and is likely starting a ‘roll over’ on weakening China demand. A “Dig Here!” for another posting.

Interesting chart of Russia RSX, Gold GLD, Oil USO, Brazil EWZ, Emerging Markets EEM, China FXI

Russia, China, Brazil, Emerging Markets vs Oil and Gold

Brazil and oil moving strongly together (not too surprising as Petrobras is a large part of EWZ). Russia, E.M., and China more or less in sync. Not all that surprising, I suppose, as the $US swings will be reflected in all of them, and as we have a mix of resource based economies with the major resource user. Demand for end products swinging all of them together. Russia does surprise me a bit. I’d have thought them a little more disconnected from the others. Still, with both oil and gold dropping, their major cash exports drop.

In Conclusion

Hopefully the break out charts help make it a bit easier to see some of the details.

In general, it looks like until the EU gets it’s act together and / or demand for Chinese manufactures pick up; the ‘hiding place’ is $US bonds like TIP Treasury Inflation Protected Securities and in the UK (though in exactly what is a bit hard to say). Until the JCB decides what their money is worth, Japan is a trading vehicle only. It also looks like a fair amount of the ‘wobbling’ in those chart lines is really $US flux, so folks OOTU (Out Of The USA) might have smoother charts and a smoother ride.

It is also pretty clear that the Resource Stocks and China Manufacture cluster get a lot of volatility as folks stop spending and hunker down, or get euphoric and open the wallet. With present global conditions, there’s a whole lot of hoping that “easy money” will get folks spending like crazy again. Yet the facts on the ground, and in the charts, says that money is not ending up in the pockets of ‘spenders’ but in the pockets of folks stuffing it into investments. Basically, Big Bank Money doesn’t fix a low consumption rate, it fuels an over investment bubble (probably in real estate and resources) and easy Monetary Policy doesn’t fix an over spending Fiscal Policy problem.

I expect this mess will continue until the Central Bankers of the world are run out of town (or “see the light after feeling the heat…”) I’m not seeing a lot of income / spending power growth in the ‘consuming class’, so not seeing what’s going to ‘fix it’. Just more pressure to unemployment and higher taxes making things worse and inflating prices with relatively flat incomes. I also suspect the US Stock Market can not long be sustained on ‘flight to quality and safety’ fear trades.

Well, at least it’s fun to watch…

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